Chapter 5:
Loans: Finance Disclosure & Other
Real Estate Disclosures
By Dr. D. Grogan
M.C. “Buzz” Chambers
©2011 Cengage Learning
Preview
The purpose of this unit is to familiarize
the learner with the legal regulations
governing required disclosures in a
transaction for a real estate loan. The
American Association of Residential
Mortgage Regulators (AARMR)
http://www.aarmr.org/ address the need
for shared information at state agency
level
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Federal level laws
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The Federal Truth-In-Lending Act (TILA), referred to as Regulation Z
 www.occ.teas.gov/handbook/til.pdf
The Real Estate Settlement Procedures Act, known as "RESPA“
 www.hud.gov/offices/hsg/sfh/res/respa_hm.cfm
Regulation X, called Reg X
 www.federalreserve.gov/bankinforeg/regxcg.htm
Home Mortgage Disclosure Act (HMDA)
 www.hmda.net
The Home Mortgage Disclosure, Regulation C
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www.ffiec.gov/hmda/RegC.htm
©2011 Cengage Learning
Student Learning Outcomes
1.
2.
3.
4.
5.
Indicate the components of the Federal TILA, HMDA, Regulation Z,
Regulation C compliance requirements.
Describe APR.
Discuss the elements of federal HUMDA RESPA provisions,
Regulation X.
List California disclosures used for a real estate loan transaction.
Distinguish between federal and state laws involving the loan
broker and the loan originating lender.
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5.1: Federal Law
Truth-in-Lending Act (TILA) - Regulation Z
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Enforced by the Federal Reserve Board.
1. Applies to all federally-related mortgage loans that meet
certain requirements.
Loans must be:
a. made by any federally-regulated or insured lender.
b. made, insured, guaranteed, supplemented or assigned by
a federal agency.
c. in connection with a housing or urban development
program administered by a federal agency.
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5.1: Federal Law TIL-Reg Z (Cont.)
d.
e.
f.
g.
intended to be sold on the secondary mortgage market to
FNMA, GNMA, FHLMC or other financial institution that will
do so.
made in whole or in part by a creditor making or investing
in residential real estate loans totaling more than $1 million
per year.
originated by a dealer or mortgage broker
the subject of a reverse mortgage created by any maker of
mortgage loans specified as above.
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5.1: Federal Law TIL-Reg Z-Purpose
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to promote the informed use of consumer credit by requiring
disclosures about its terms and cost.
to protect consumers in credit transactions, by requiring clear
disclosure of key terms of the lending arrangement and all
costs.
to give consumers the right to cancel certain credit transactions
that involve a lien on a consumer’s principal dwelling.
to regulate certain credit card practices.
to provide a means for fair and timely resolution of credit billing
disputes.
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5.1: Federal Law TIL-Reg Z-Purpose (Cont.)
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It imposes limitations on home equity plans and credit where the
finance charge is payable by a written agreement in more than 4
installments.
Subpart C relates to closed-end credit. It contains rules on
disclosures, treatment of credit balances, annual percentage rate
calculations, right of rescission requirements, and advertising.
Subpart D contains rules on oral disclosures, Spanish language
disclosure in Puerto Rico, record retention, effect on state laws,
state exemptions and rate limitations.
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The Federal Reserve regulations amended TILA
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The requirement that the loan cost disclosures must now be that:
 The borrower must be given AT the time of loan application, OR within
three days of loan application.
 The borrower must be given the disclosure BEFORE any fees are
incurred, except a reasonable credit report fee.
 This is a change from BEFORE credit is extended.
 This regulation puts limitations on “higher priced loans.
 This regulation prohibits deceptive loan advertising.
 Amended May 2009: requires at least a SEVEN (7) days period
between loan application date and closing date.
 http://edocket.access.gpo.gov/2009/pdf/E9-18119.pdf
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Home Ownership and Equity Protection Act
(HOEPA)
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Requires special disclosures and substantive protections for
home-equity loans and refinancing with APRs or points and
fees above certain statutory thresholds.
In 2007 the Federal Reserve Board proposed rules under
HOEPA for higher-priced loans to prohibit certain unfair or
deceptive lending and servicing practices in connection with
closed-end real property loans.
The final rules in July 2008 require creditors to provide
consumers with transaction-specific disclosures early enough
in the transaction to be able to use the information to shop for
a loan.
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Mortgage Disclosure Improvement Act of 2008
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Implemented the final rules for the timing of the
disclosures for closed-end real property loans.
Loans secured by dwellings, even when the dwelling
is not the consumer’s principal dwelling, requires a
waiting period between the time when the loan
disclosure fees are given and when the loan may be
consummated specifically to allow consumers time
to check loan fees with other loan providers.
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18 Reg Z Disclosures
1.
2.
3.
4.
5.
6.
7.
8.
9.
Identify of creditor
Amount financed
Itemized amount
financed
Finance charge
APR
Variable rate
Payment schedule
Total of payments
Demand feature
10.
11.
12.
13.
14.
15.
16.
17.
18.
Total sales price
Prepayment penalty
Late fee
Security interest
Insurance
Security charges
Contract terms
Assumption fee
Require deposit statement of
billing rights
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5.2 APR
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Consumer Credit Protection Act (TIL) requires APR disclosure.
APR combines interest rate with other loan costs
APR gives prospective borrower a standardized figure to compare
financing from different sources.
The Good Faith Estimate (GFE) statement of settlement costs
must be provided within 3 business days of loan application.
The servicing disclosure statement must be given in writing when
the lender expects that someone else will be collecting the loan
payments.
Affiliated business arrangements must be disclosed.
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APR
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Lenders are required to make 4 disclosures:
1. Amount financed—the amount of credit provided to the borrower.
2. Finance charge—the total dollar amount the credit will cost the
borrower during the life of the loan, including interest, borrower
prepaid discount points, loan fees, loan finder fees, loan service fees,
required life insurance, and mortgage guarantee premiums.
3. APR—the cost of credit
4. Total payments—the amount in dollars the borrower will have paid
after making all the payments as scheduled. This amount does not
include actual payments made during the life of the loan, which may
include late fees or other costs.
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Federal Law
Home Equity Loans
• the Home Equity Line of Credit booklet must be provided to the
borrower at or before submission of the loan application, or when a
nonrefundable fee is paid, whichever is earlier.
Adjustable Rate Loans
• the Consumer Handbook on Adjustable Rate Mortgages must be
provided to the borrower at or before submission of the loan
application or when a non-refundable fee is paid, whichever is earlier.
Reverse Mortgages
• the disclosures must be made at least three days before closing.
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For All Loans
 Truth-in-Lending Disclosure Statement must be provided to the borrower
within three days of the loan application.
a. Statement includes the interest rate to be charged, including up-front loan
costs, computed as the annual percentage rate (APR) to be paid.
b. The APR does not include fees for a credit report or property appraisal.
c. To estimate a loan’s APR, 1% of a loan paid up-front = 1/8% increase in
interest rate paid over life of a loan.
 All loan charges must be included in the final statement at the time of closing.
 At closing, the borrower is informed of the three-day right of rescission
available on an existing loan 1) refinance or on a home 2) equity loan taken out
after a home purchase, 3) but not on a purchase money loan.
 TILA enforced by the Federal Reserve Board
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5.3 Section 32 Loans
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Applies only to refinance of loans secured by the
borrower’s principal residence and:
 APR Test: If the APR on the TIL exceeds the
Treasury security rate by 10% or more; or,
 Points & Fees Test: If the points & fees exceed 9%
of the amount financed
Includes: original fee, points, processing fee, doc
prep fee, courier fee, escrow fee, underwriting fee,
tax service fee, recording fee, flood certification, PMI
& impounds
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5.4 Federal RESPA, Reg X
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Enforced by HUD
Purpose:
1.
2.
3.
4.
Provide borrower with likely costs of the loan
Help consumers become better shoppers
Eliminate kickbacks and referral fees that
increase the cost of services
Limit impound accounts
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Real Estate Settlement
Procedures Act (RESPA)
1. Requires lender or mortgage broker to disclose
any affiliated business arrangement with an
individual or entity offering settlement services.
2. Special information booklet (Buying your Home:
Settlement Costs and Helpful Information) within
three days of loan application.
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Real Estate Settlement Procedures Act (RESPA)-continued
3. Good Faith Estimate of settlement service charges must:
a. be provided at loan application or within 3 business days.
b. requires disclosure of the following fees:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
xii.
xiii.
xiv.
Loan origination fee (Points)
Appraisal fee
Credit Report fee
Tax service fee
Underwriting fee
Escrow closing fee
Title insurance
Loan processing fee
Appraisal review fee
Recording fee
Document fee
Application fee
Beneficiary demand fee
Miscellaneous fee, including courier, notary, messenger and express mail fees.
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Real Estate Settlement Procedures Act (RESPA)-continued
4. Servicing Disclosure Statement
a.
Required if someone other than lender or
mortgage broker will be servicing the loan.
b.
Must be provided at, or within three business days
of, loan application.
c.
NEW HUD-1 form as of Jan 1, 2010
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HUD-1 (3 page) form
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Page 1: Section J are borrower’s costs; Section
K are seller’s transaction costs
Page 2: Section L: Borrower funds paid at close
of escrow; Seller funds paid at close of escrow
Page 3: Comparison of GFE to HUD-1;
Charges that in total cannot increase more than
10%; Charges that can change; Loan terms
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HUD–1
Settlement Statement
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May inspect one business day before closing
Includes disclosure of lender-paid broker
fees
Escrow Account Statement
a. No more than two months of excess payments
b. Accounting provided within 45 days
c. Annual review of escrow account
• www.hud.gov/fha/resrespa_hm.html.
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5.5 Home Mortgage Disclosure Act
(HMDA) Reg C
(only for originating lenders Not mortgage
brokers)
1. Identify lending patterns
2. Comply with regs issued by:
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The Board of Governors
Federal Reserve System
3. Lender must collect data on loan applications
each calendar year and report findings.
4. Data must be available by March
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HMDA report
1. A number for each application
2. The type and purpose of loan
3. Owner-occupied status
4. Amount of the loan
5. Property location with census tract and county code (no street
address)
6. Race or national origin of borrower and co-borrower
7. Sex of borrower and co-borrower
8. Income relied on in processing the application
9. Investor code for the entity purchasing the loan
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Credit Card Accountability, Responsibility &
Disclosure Act (CARD)
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Implemented Feb 2010.
Set limits on interest rates and fees.
Credit card statement must include more
information on the extent of the debt.
Ban on hiking interest rate on existing
balances.
Under age 21, person must show they are sole
support of themselves.
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5.6 Government loan disclosures: FHA
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Addendum to URAR, 1003 loan
application
Notice to home buyer that FHA does not
set the property value or interest rate.
Assumption notice
Informed consumer choice disclosure
Real estate certification
FHA identity of interest certification
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5.6 Government loan disclosures: DVA
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Addendum to URAR, 1003 loan
application
VA debt questionnaire
Interest rate & discount statement
Federal collection policy notice
Assumption of VA-guaranteed loan
Borrower acknowledgment of disclosures
Counseling checklist for military
homeowner
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5.7 State Law
A. Usury Law - California Constitution Article 15
1. Proposition 2 exempts loans made or arranged by real estate broker and
secured by real property.
2. Federal Law exempts federally-related residential first mortgage loans.
3. Seller financing of real property is considered an extension of credit,
and not a loan, for the purposes of the usury law.
4. Usury Law Maximums:
a. Consumer loans – 10% (non-purchase, construction, real estate)
b. Goods, purchases, business -10% or Fed. Reserve discount rate + 5%
c. Maximum rate of Federal Reserve Bank discount rate plus 5% on business
loans.
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State Law
B. Mortgage Loan Disclosure Statement
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Applies to every real estate broker who negotiates a loan to be secured
directly or collaterally by a lien on real property.
Statement must include estimated maximum loan costs and expenses
to be paid by the borrower.
Total brokerage fees or commissions.
Any liens against the real property.
Estimated amounts to be paid on the order of the borrower, such as fire
insurance.
Estimated balance of loan funds to be paid to borrower.
Principal amount of loan and Rate of interest.
Name of real estate broker.
Terms of prepayment privileges and penalties.
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State Law
C. Good Faith Estimate (MLDS/GFE)
1. DRE-provided form
2. Meets both state and federal requirements
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State Law
D. Lender/Purchaser Disclosure Statement (LPDS)
1. Provided to private and small pension trust lenders/investors as soon as
practicable before investor becomes obligated to purchase or make the loan.
2. Three separate forms available from DRE for:
a. loan origination
b. sale of an existing note
c. or collateralized loan.
E. Creative Financing Disclosure Law
1. Requires that on all seller carry-back loans seller and buyer must be given written
disclosures on residential 1-4 unit properties, including: (Mortgage Broker not usually
involved in this-Real Estate brokers are.
Balloon payment
Notice of Default
Negative amortization
Senior loans
Credit report
Warning on pitfalls of all-inclusive deed
of trust (wrap-around deed of trust).
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5.8 California non-loan disclosures
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Appraisal
Credit & fair lending
Death or AIDS
Earthquake
Energy conservation
retrofit & thermal
insulation
Environmental hazards
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Fire hazard (State
responsibility)
Flood disaster
Foreign Investment in Real
Property Tax Act (FIRPTA)
(Cal-FIRPTA)
Government
Hazard insurance
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5.8 California non-loan disclosures
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Language of the contract
Lead-based paint
Local option
Supplemental property
tax
Mello-roos
Methamphetaminecontaminated property
Pest control
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Real estate owned
(REO)
Smoke detector
Title insurance advisory
Transfer disclosure
statement (TDS)
Utility line extensions
Water heater bracing
Lender/purchase
statement
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5.9 Other loan disclosures
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Article 7-used for small loans
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Broker discloses written statement within 3 days of
loan application
Broker to retain copy for 4 years
www.DRE.CA.GOV/forms RE 851A
Prepayment penalty-amount charged for
paying off a loan in advance of the due
date.
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Deduct 20% from current unpaid loan balance
Multiply by interest rate, then divide by 2
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5.9 Other loan disclosures
Liability-borrower may be liable if they do not
disclose current outstanding liens
Loan terms: 3 categories
1.
2.
3.
Due date under 3 years
Due date under 6 years
Loan amount < $30,000 for lst; < $20,000 for 2nd
Maximum charges:
Actual charges or 5% of principal loan amount,
not to exceed $700, excluding loan fees
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5.10 Predatory Lending Law
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Disclosure
Prohibited loan
terms
Prohibited
practices
Penalties &
Corrective Action
Balloon Payments
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Name and address to whom the payment
must be made
The due date
The estimated amount that will be due
The terms of a refinance, if any
The amount of all interest, principal, and
charges due between the date of the
notice and the due date, assuming all
payments are made until payoff
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5.11 Good Faith Estimate (GFE)
Non-traditional loans
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Allows borrower to defer repayment of principal or
interest
Secured by 1-4 unit residential property
May be an interest-only loan
Result in negative amortization
Does not include RAM or home equity loans
DRE Form 885:
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Page 1: compensation to the broker
Page 2: used if initial adjustable rate box is checked
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