Let’s take a trip in the way back machine. Actually, we really only need to go back about 10-15 years. That was a time when the terms and conditions of a loan (the interest rate, amortization rate, early payoff, etc…), the associated loan fees (underwriting, title, escrow, appraisal, etc…), as well as compensation (to the lender, realtor, and/or the appraiser), weren’t very clear. Actually, there were a lot of times when those costs weren’t just unclear they were downright misleading. Oh and then everything (terms and conditions, fees, and compensation) might change unexpectedly at the closing and cost the consumer more money.
Then came Dodd Frank.
Regardless of your feeling about the additional regulation imposed on the Mortgage Industry by Dodd Frank, there were some clear benefits to the consumer. Those benefits came in the form of more transparency and disclosure.
The Loan Estimate (LE)
The Loan Estimate is a document that combined the Good Faith Estimate and the Truth in Lending Statement. The purpose of the Loan Estimate is to provide consumers with one easy to read disclosure outlining all the estimated costs and fees to secure a mortgage loan.
Lenders are required to provide the borrower with a Loan Estimate within 3 days of the borrower submitting a complete loan application, or no later than the seventh business day before loan consummation (the date the borrower becomes legally obligated for the loan). A complete loan application includes:
- Name of the borrower(s)
- Social Security number for each borrower
- Gross monthly income of each borrower
- Loan amount
- Property address
- Estimated property value
Some of this information (name, social security numbers and gross monthly income) will probably have been provided during the Arizona Prequalification. The remaining information is generally provided as part of the Real Estate Purchase Contract (REPC) or provided directly by the homeowner.
The Lender will work with the Title/Escrow and Insurance companies to complete the Loan Estimate which will include information like:
- The interest rate (estimated until locked)
- The Annual Percentage Rate (APR)
- Monthly payment including principal, interest, taxes, and insurance
- Mortgage insurance
- Estimated closing costs
- Estimated cash to close
- Total Interest Percentage (TIP)
One of the biggest issues during the Real Estate melt down on the mid-2000’s was that the estimated costs provided to the consumer early in the loan process varied greatly, often increasing tremendously, by the time the borrower sat down to sign the loan agreement. The result was a loan that cost the borrower a lot more than they had initially anticipated.
Many of the rules surrounding the Loan Estimate and Closing Disclosure were put in place to address this issue specifically.
The costs identified on the Loan Estimate should be the same costs reflected on the Closing Disclosure when the loan closes. There are specific tolerance limits for increases in cost to the borrower from the time the Loan Estimate is provided until the Closing Disclosure is provided. In fact, if the actual charges on the CD exceed the specified tolerance levels the lender is required to refund the excess to the borrower.
Costs on the Loan Estimate and Closing Disclosure fall into one of three categories:
|Costs that can change by any amount||Costs that can change by a cumulative 10% tolerance||Costs that may not change at all|
Keep in mind the following:
- All costs associated with the interest rate can change by any amount until the rate is locked. Once the rate is locked those costs become fixed unless:
- The borrower decides to choose a different type of loan
- The borrower changes the amount of down payment
- The house doesn’t appraise
- There is a change in the borrower’s credit report resulting from adverse actions like missed payments or new loan activity
- There are valid change circumstances to address charges or costs that exceed the specified tolerance limits due to: events beyond the control of the creditor or borrower, borrower requested changes, and circumstances change and/or new information is discovered.
- The estimated charges for all settlement services (loan origination, processing, title services, etc…) must be valid for 10 business days from the date the LE is provided.
The Closing Disclosure (CD)
The Closing Disclosure (CD) is the final accounting of all the actual costs, fees, and services required to secure the loan. The Closing Disclosure will also contain the actual terms and conditions of the transaction.
The creditor is required to provide the Closing Disclosure three business days before loan consummation. If costs on Closing Disclosure vary from the original disclosure the lender is required to issue a new Closing Disclosure and the borrower receives a new 3 business day waiting period during which the loan cannot close.
This means that the earliest a loan could legally close is the seventh business day after initial disclosures are provided.
These mandatory wait times are designed to ensure the borrower/consumer has time to think about the transaction and isn’t pressured to sign the agreement.
Again, unless there are valid change circumstances the costs on the Closing Disclosure should be the same as the costs originally listed on the Loan Estimate. If there are discrepancies, without a valid change circumstance, the lender is responsible for those costs.
For more information contact Aaron Walker or Jay Rapson at Aaron Lending, LLC.
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