Mortgage Concepts is a recurring video series covering best practices and compliance education for California mortgage loan originators. This video discusses the factors which compel delivery of the Loan Estimate. For course credit toward renewing your NMLS license, visit firsttuesday.us.
Introducing the Loan Estimate and Closing Disclosure
In 2010, Good Faith Estimate (GFE) regulations attempted to limit the amount of changes made on a loan originator’s revision of costs itemized on the GFE disclosure.
However, regulating GFE limitations did not curb unethical practices since:
- The GFE disclosure was not triggered until the loan originator received a borrower’s completed application; and
- a completed application was loosely defined as including “any other information deemed necessary by the loan originator.” [12 Code of Federal Regulations §1024.2(b)]
Well, loan originators began providing borrowers with cost estimates on “informal worksheets,” claiming the application was incomplete as they needed further information before the GFE was to be delivered to the borrower. Thus, since no formal GFE was delivered to the borrower until the loan originator deemed the application complete, the loan originator changed costs amounts in the informal worksheets without regard to revision thresholds set by the GFE regulations.
All that conduct ended in 2015 with the introduction of two replacement forms – in place of four forms – by the rulemaker in charge of Reg X, the Department of Housing and Urban Development (HUD):
- The Loan Estimate Form replaced the GFE and initial TILA Disclosure forms.
- The Closing Disclosure replaced the final TILA Disclosure and HUD-1 Settlement Statement.
These rulemaker replacements for cost of mortgage disclosures are embodied in HUD’s Truth in Lending Act (TILA) / Real Estate Settlement Procedures Act (RESPA) Integrated Disclosures (TRID) regulations. [12 CFR §1026.19(e)-(f)]
Factors initiating delivery of the loan estimate
Further, these TRID disclosure regulations compel delivery of a prepared Loan Estimate form when six pieces of borrower’s information are all known to the loan originator:
- the borrower’s name;
- the borrower’s income;
- the borrower’s Social Security number, to obtain a credit report;
- the property address of the security for the mortgage;
- an estimate of the value of the property as security; and
- the mortgage loan amount sought by the borrower. [12 CFR §1026.2(a)(3)]
While the loan originator controls when they might ask for these six pieces of borrower information, it is the originator’s knowledge of all six pieces of information that triggers the need for the loan originator to prepare and deliver the Loan Estimate to the borrower.
Delivery of the Loan Estimate to the borrower applicant is to take place within three days after the date the loan originator is deemed to have received the six borrower items triggering disclosure. Cost figures entered in the Loan Estimate form include the amount or range of charges for specific settlement services the borrower is likely to incur in connection with the mortgage origination. [12 CFR § 1024.7(a); 12 § CFR 1026.19(f)]
Further, before the originator may start processing a borrower’s mortgage application, the Loan Estimate must have been previously delivered to the borrower.
Thus, the loan originator may not require the borrower to submit documents for verifying information related to the loan application until after the borrower has received the fully prepared Loan Estimate form. [12 CFR § 1026.19(e)(2)(iii)]
Related video:
When loan cost estimates change
A revision of the initial Loan Estimate received by the borrower is permitted for use to change loan cost estimates. However, revisions are limited to only those changes arising out of specific changed circumstances.
The changed circumstances which may trigger an authorized revision of costs listed in a Loan Estimate form are limited to:
- an extraordinary event beyond the control of any interested party, e.g., war or natural disaster;
- an unexpected event specific to the borrower or the transaction, e.g., the initial Loan Estimate includes an amount for title insurance costs, but the title insurer goes out of business;
- a change or inaccuracy in the information the borrower provided and the loan originator relied on to prepare the Loan Estimate form which the borrower received, e.g., the borrower indicated their income was $90,000 but an underwriter determines their income is only $80,000; and
- new information specific to the borrower or transaction, e.g., a claim is filed against the property which affects its value. [12 CFR §1026.19(e)(3)(iv)(A)]
Delivery of a revised Loan Estimate to the borrower is to take place within three days after the loan originator has information sufficient to establish changed circumstances.
Further, a revised Loan Estimate may only be delivered to a borrower when:
- a changed circumstance affects the borrower’s eligibility for the terms applied for, or the value of the property;
- the borrower requests a change to the mortgage terms;
- the interest rate was not locked when the Loan Estimate was provided, and the later locking of the rate causes the points or loan originator credits to change;
- the borrower indicates their intent to proceed with the transaction more than ten business days after the Loan Estimate is delivered; or
- the loan is a new construction loan, and settlement is delayed more than 60 calendar days, as long as the original Loan Estimate states that the loan originator may issue a revised disclosure 60 days before loan closing. [12 CFR §1026.19(e)(3)(iv)]
Loan originators may not make revisions to items entered on a Loan Estimate form due to technical errors, miscalculations or underestimations of charges — whether the loan originator is making the disclosure, or a mortgage broker is making a disclosure on the loan originator’s behalf. [12 CFR §1026.19(e)(3)(iv)]
Items disclosed on the Loan Estimate under “Services You Can Shop For” are also to be disclosed under “Services Borrower Did Not Shop For.” This rule is due to the requirement the loan originator delivers to the borrower a written list of settlement service providers from which the borrower selects a service provider. [12 CFR § 1026.38(f)(2)]
The loan originator enters accurate closing cost details and information for both settlement services sections. [12 CFR § 1026.38(f)(3)]
Timing for delivery of the Revised Loan Estimate
The timing for providing a Revised Loan Estimate to the borrower requires the estimate to be:
- delivered no later than four business days before closing; or
- placed in the mail no later than three business days after the loan originator receives information sufficient to justify a revision. [12 CFR §1029.19(e)(4)(ii)]
Additionally, before closing, seven business days must pass between delivering or mailing the Loan Estimate (or revised Loan Estimate) before the loan may close. [12 CFR §1029.19(e)(1)(iii)(B)]
The loan originator is mandated to refund to the borrower amounts paid by the borrower at closing which exceed the amounts itemized in the Loan Estimate or exceed tolerances permitted by regulations. The overpayment amount is to be refunded within 60 days after closing.
When the loan originator cures a tolerance violation by a refund to the borrower, the loan originator must prepare a corrected Closing Disclosure that reflects the refund and deliver it or place it in the mail within 60 calendar days after closing. [12 CFR §1026.19(f)(2)(v)]
No waiting time for closing disclosure changes
Since use of a Loan Estimate is designed to ensure the estimated costs were made in good faith, determined by comparing it to the Closing Disclosure for any excess payment on closing, the Revised Loan Estimate must be delivered before the day the Closing Disclosure is delivered. [12 CFR §1026.19(e)(4)(ii)]
Thus, when the Closing Disclosure has been delivered to the borrower, any significant changes in closing costs require the loan originator to prepare and deliver a Revised Closing Disclosure since the Loan Estimate may not be revised to reflect changes.
It is the Closing Disclosure which shows any revised costs and delivery of a Loan Estimate, but no restriction exists on when it is to be delivered prior to closing.
For example, consider a homebuyer entering into a mortgage and preparing to close on the purchase of a home.
The loan originator delivers the required Closing Disclosure three days before the scheduled closing. After the homebuyer receives the Closing Disclosure and before closing, they request closing be pushed back more than seven days.
They also request a change in the mortgage terms which results in a higher APR, increasing closing costs by more than 10%. While a change in these costs is a Loan Estimate revision issue, the loan originator is prohibited from sending a Revised Loan Estimate on or after the day the Closing Disclosure has been delivered. [§1026.19(e)(4)(ii)]
Here, the loan originator simply prepares and delivers a revised Closing Disclosure. [12 CFR §1026.19(e)(4)(i)]
When a valid reason causes the Closing Disclosure costs to change, the loan originator delivers a Revised Closing Disclosure without concern for the timing, and regardless of when the homebuyer receives the revision in relation to closing. [Official Interpretation of 12 CFR §1026.19(e)(4)(ii)-1]
Related RPI Form:
