Chapter 3: Initial Application Flashcards
Learning Objectives for Chapter 3 • Describe the difference between pre-approval and pre-qualification • Explain the TILA umbrella and what TILA considered an advertisement • Restate the advertising requirements under TILA and the MAP Rule • Outline all the initial disclosures required at the time of application • Understand what constitutes an application under • Describe how to determine what types of loans to show a borrower • Restate the requirements under ECOA and HMDA
TRUE OR FALSE. Loan pre-qualification does include an analysis of the borrower’s credit report and an in-depth look at the borrower’s income ability to purchase a home.
False
Give three examples of advertisement.
- Newspapers and magazine ads.
- Leaflets and flyers.
- Catalogs.
Federal Mortgage Law Quick Facts: Truth in Lending Act
Regulation:
Acronym:
Year Created:
Disclosures/Notice Required:
Important Terms Related to this Law:
Entity Responsible for Enforcement:
Other Laws that have influenced it:
Federal Mortgage Law Quick Facts: Truth in Lending Act
Regulation: Regulation Z
Acronym: TILA
Year Created: 1968
Main Purpose: Protect consumers from predatory lending practices
Disclosures/Notice Required:
HOEPA notice, homeownership counseling notice, TRID disclosures
Important Terms Related to this Law: High-cost home loan, ability to repay, higher- priced loans, qualified mortgage, advertising, right of rescission, CHARMS booklet, Loan Estimate, Annual Percentage Rate
Entity Responsible for Enforcement: CFPB
Other Laws that have influenced it: Dodd-Frank
Reg. Z applies to any individual or business that offers or extends credit if the following 4 conditions are met:
● The credit is offered to consumers
● Credit is offered on a regular basis
● The credit is subject to a finance charge (interest) or must be paid in more than 4 installments according to a written agreement
* The credit is for personal, family or household purposes
Reg. Z does not apply to loans made for
business, commercial, or agricultural purposes and
only applies to 1-4 unit properties.
A creditor is considered to have regularly offered credit if they
extend credit more than 25 times in the preceding calendar year (or more than 5 times for transactions secured by a dwelling).
A creditor must keep all records of compliance with Reg. Z for at least
2 years after the disclosure date.
For anyone who gives false or inaccurate disclosure information, consistently understates the APR, or otherwise fails to comply with Reg. Z that person can be fined up to
$5,000 and be imprisoned for up to 1 year or both.
Give examples of advertisements.
- Newspapers and magazine ads.
- Leaflets and flyers.
- Catalogs.
- Radio, TV, or public address systems.
- Signs or displays.
- Billboards.
- Point of sale literature.
- Price tags.
- Cash register receipts.
- Online, internet or social media.
- Websites.
If a creditor advertises directly to a borrower, they are required to:
- Advertise only terms that are the specific terms that the lender will offer in credit plans.
- The ad must state the finance charge rate using the term Annual Percentage Rate or APR
- If the APR might increase after consummation of the loan, the ad must be specific on this detail; and
- A simple annual or periodic rate applied to an unpaid balance may be advertised in conjunction with the APR, but not more conspicuous than the APR.
A trigger term is a
phrase that represents the attractive features of the credit plan within the advertisement.
Give three examples of trigger terms used in advertising:
- 10 percent down payment.
- $1000 down.
- 80 percent financing
Give four examples of non-trigger terms.
- Easy monthly payments.
- Low down payments.
- Pay bi-weekly.
- Terms to fit any budget.
If a creditor is advertising an adjustable rate credit plan there are additional requirements for their advertising. The advertisement must say
that the APR may increase or is subject to change.
The MAP Rule was created in 2011 to prohibit
misrepresentation in a commercial communication about any term(s) of a mortgage credit product.
There are three important terms to remember when discussing the MAP Rule:
Term
Mortgage credit product
Commercial communication
Term means
any of the fees, costs, obligations, or characteristics of or
associated with the product. It also includes any of the conditions on or related to the
availability of the product.
Mortgage credit product means
means any form of credit that is secured by
real property or a dwelling and that is offered or extended to a consumer primarily for personal, family, or household purposes.
Commercial communication means
any written or oral statement,
illustration, or depiction, whether in English or any other language, that is designed to effect a sale or create interest in purchasing goods or services, whether it appears on or in a label, package, package insert, radio, television, cable television, brochure, newspaper, magazine, pamphlet, leaflet, circular, mailer, book insert, free standing insert, letter,
catalogue, poster, chart, billboard, public transit card, point of purchase display, film, slide, audio program transmitted over a telephone system, telemarketing script, on-hold script, upsell script, training materials provided to telemarketing firms, program-length commercial (“infomercial”), the internet, cellular network, or any other medium. Promotional materials and items and Web pages are included in the term.
List four things that are prohibited under the MAP Rule.
It is a violation of the MAP Rule for any person to make any material misrepresentation, expressly or by implication, in any commercial communication, regarding any term of any mortgage credit product, including but not limited to misrepresentations about:
- The interest charged for the mortgage credit product, including but not limited to misrepresentations concerning the amount of interest that the consumer owes each month that is included in the consumer’s payments, loan amount, or total amount due, or whether the difference between the interest owed and the interest paid is added to the total amount due from the consumer
- The annual percentage rate, simple annual rate, periodic rate, or any other rate
- The existence, nature, or amount of fees or costs to the consumer associated with the mortgage credit product, including but not limited to misrepresentations that no
fees are charged - The existence, cost, payment terms, or other terms associated with any additional product or feature that is or may be sold in conjunction with the mortgage credit product, including but not limited to credit insurance or credit disability insurance
Please note all covered commercial communications must be kept for a minimum of
2 years from the date that the communication was made to the consumer to comply with the MAP Rule.
The six pieces of information that constitute an application are:
- Name of the borrower
- Social Security Number to pull a credit report
- Estimated Property Value
- The borrower’s income
- Loan amount
- Property Address
The acronym URLA stands for
Uniform Residential Loan Application
The URLA is also known as
1003
The 1003 has two forms,
the Borrower Information and the Lender
The Borrower information section
is composed of nine sections.
The nine sections include:
- Borrower Information
- Assets & Liabilities
- Real Estate
- Loan Property Information
- Declarations
- Acknowledgements & Agreements
- Military Service
- Demographic Information
- LO Information
Section 1a is personal information of the borrower including:
- Alternate names
- Type of credit
- Total number of borrowers
- Dependents
- No Primary Housing Expense
TRUE OR FALSE. The definition of dependents does not change whether the borrower is doing a conventional, FHA or VA loan.
False
Section 1b is employment and self-employment. It includes sections on:
- Gross monthly income
- Business owner or self-employed
Section 1c should only be
completed if the borrower has multiple jobs.
Section 1d includes information on previous employment. Complete this section if the borrower has received income from their current
job(s) or self-employment(s) for less than two years
Section 1e is for other sources of
income
We CANNOT ask if they are receiving alimony, child support, or separate maintenance UNLESS
they wish to disclose.
We must always ask if they are paying it for liability and
DTI purposes
Section 2a-d related to financial information. Section 2a is used for:
- Bank accounts
- Retirement accounts
- Other accounts
Assets are what the borrowers own, not necessarily things that
are free and clear, but what they own.
Give three examples of assets.
- Houses,
- Bank Account.
- Savings Accounts.
Section 2b deals with
Other assets and credits you have.
Section 2c deals
with liabilities. . Liabilities are what the borrowers OWE, which means there is a loan against these items.
Give two examples of liabilities.
- Credit card debt
- Mortgage payments
Section 3 deals with
financial information related to real estate.
3b and 3c should be completed if the borrower
has additional properties.
Section 4 is related to______?
This section includes:
loan and property information.
This section includes:
1. Loan Amount
2. Loan Purpose
3. Unit #
4. Property value
5. Occupancy
6. FHA Secondary Residence
7. Mixed-Use Property
8. Manufactured Home
Section 4b is only used for
any concurrent financing.
Section 4c Light gray areas indicate the field is completed by
the lender only. is for any
potential rental income that the property could earn.
Section 4d is for
any gifts or grants.
Section 5 is
declarations.
Section 7 is
military service.
Section 8 is
demographic information.
Section 9 is
loan origination information.
The lender loan information section has 4 sections.
- Property and Loan Information
- Title Information
- Mortgage Loan Information
- Qualifying the Borrower
Section L1 deals with property and loan information. This includes:
- Transaction detail
- Refinance Type
- Refinance Program
- Energy Improvement
L2 is
title information.
L3 is
mortgage loan information.
L4 is
qualifying the borrower
PITI includes:
- Principal
- Interest
- Taxes
- Insurance
Assets are
what the borrowers own, not necessarily things that are free and clear, but what they own.
Federal Mortgage Law Quick Facts: The Home Mortgage Disclosure Act
Acronym:
Regulation:
Year Created:
Main Purpose:
Disclosures/Notice Required:
Important Terms Related to this Law:
Entity Responsible for Enforcement:
Other Laws that are Complimentary:
Federal Mortgage Law Quick Facts: The Home Mortgage Disclosure Act
Acronym: HMDA
Regulation: Regulation C
Year Created: 1975
Main Purpose: Used to track information to prevent discrimination
Disclosures/Notice Required:
Monitoring statement on the 1003
Important Terms Related to this Law: Redlining, blockbusting, disparate impact, disparate treatment
Entity Responsible for Enforcement: The CFPB
Other Laws that are Complimentary: ECOA, Fair Housing Act
What is the primary purpose of HMDA?
HMDA’s primary purpose in requiring financial institutions to make the HMDA reports is to help determine whether financial institutions are serving their communities’ housing needs, to assist public officials in distributing public investment to attract private investment and to assist in identifying potential discriminatory lending patterns and enforcing anti-discrimination statutes. HMDA data is also used to help prevent redlining and blockbusting.
There are four things that are important to understanding how HMDA works:
- the types of institutions are required to report;
- the types of transactions must be reported;
- what specific information is required to be collected, recorded and reported; and
- how the information is reported and disclosed.
The HMDA report is due to the respective regulating body by
March 1st of every calendar year.
The Financial Institution or creditor must retain its full (unmodified) HMDA-LAR for at least
3 years for examination purposes.
It must also be prepared to make each modified HMDA-LAR available for
3 years and each FFIEC disclosure statement available for 5 years.
Federal Mortgage Law Quick Facts:
The Equal Credit Opportunity Act
Regulation:
Acronym:
Year Created:
Main Purpose:
Disclosures/Notice Required:
Important Terms Related to this Law:
Entity Responsible for Enforcement:
Other Laws that are complimentary:
Federal Mortgage Law Quick Facts:
The Equal Credit Opportunity Act
Regulation: Regulation B
Acronym: ECOA
Year Created: 1974
Main Purpose: To prevent discrimination on specified protected classes
Disclosures/Notice Required: Notice of Adverse Action, Appraisal Notice, ECOA Notice
Important Terms Related to this Law: Protected classes, adverse action, appraisal, disparate impact and disparate treatment
Entity Responsible for Enforcement: The CFPB
Other Laws that are complimentary: The Home Mortgage Disclosure Act; Fair Housing Act
What are the protected classes under ECOA?
Race, Color, Religion, National Origin, Sex, Marital Status, and Age
There are two comprehensive prohibitions against discriminatory lending practices in ECOA:
● A creditor shall not discriminate against an applicant on a prohibited basis regarding any aspect of a credit transaction.
● A creditor shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage, on a prohibited basis, a reasonable person from making or pursuing an application.
Give two examples of when an MLO can ask about a borrower’s marital status.
- The non-applicant spouse will be permitted user of or join obligor on the account;
- The non-applicant spouse will be contractually liable on the account;
If the application is for joint credit the creditor can ask the applicant’s marital status but may only use the terms:
“married”, “unmarried”, and “separated.” The term “unmarried”
A creditor can ask if an applicant is receiving alimony, child support or separate maintenance payments but the creditor must
disclose to the applicant that such income need not be revealed unless the applicant wishes to rely on that income in the determination of creditworthiness.
A creditor can consider any information in evaluating applicants, if they do not use the information with the intent or the effect of discriminating against an applicant on a prohibited basis. To that end, a creditor cannot:
● Consider any of the prohibited basis, including age and the receipt of public assistance
● Use child-bearing or child-rearing information, assumptions or statistics to determine
whether an applicant’s income may be interrupted or decreased;
● Consider whether there is a telephone listing in the applicant’s name; or
● Discount or exclude part-time income from an applicant or the spouse of an applicant.
One note on age, if an applicant is under 18 years of age then the applicant is not old enough to
enter a binding contract and that can be used in determining that an applicant is not able to obtain the loan.
Under ECOA, it is the creditor’s responsibility to notify an applicant of any action taking on the applicant’s request for credit, whether favorable or adverse, within
30 days of receiving the completed application. Notice of approval may be expressly stated or implied
If the action is adverse, then an Adverse Action Notice must be sent within 30 days. There are two exceptions, the creditor must notify an applicant of adverse action within
90 days after making a counteroffer unless the applicant accepts or uses the credit during that time, or the creditor may not have to notify the applicant of adverse action if the application was incomplete and the creditor sent the applicant notice that the application was incomplete.
What information must be included in the Adverse Action Notice?
- The creditors name,
- The creditors address,
- The nature of the action taken,
- An ECOA notice that includes the identity of the federal agency responsible for enforcing compliance with ECOA,
- Specific principal reasons for the action taken or disclose that the applicant has the right to request the reason(s) for denial within 60 days of receiving the creditor’s notification and the information of who to contact to receive that information.
ECOA requires that creditors provide an applicant a copy of all appraisals and other written valuations that were developed in connection with the application promptly upon completion or at least ______?
3 business days prior to the consummation of the transaction whichever is earlier.
What is the big difference between ECOA and the Fair Housing Act?
The Fair Housing Act is similar to ECOA with one small difference that is important to remember, the Fair Housing Act adds disability to the list of protected classes.
List four things that are new or different about the new 1003.
- The redesigned format is more consumer-friendly and supports accurate data collection and better efficiency. It looks a lot like the recently created Loan Estimate and Closing Disclosure, which we will talk about later in this section.
- It is meant to support the collection of details that are relevant and useful in making an underwriter decision (it also eliminates unnecessary information)
- A new Spanish informational version will be provided (it cannot be used as an application, only as assistance for a Spanish speaker to fill out the 1003)
- An expanded demographic area to help the lender collect the information required for the new 2019 HMDA Rule
Federal Mortgage Law Quick Facts: The TILA-RESPA Integrated Disclosure Rule
Regulation:
Acronym:
Year Created:
Main Purpose:
Disclosures/Notice Required:
Important Terms Related to this Law:
Entity Responsible for Enforcement:
Other Laws that are complimentary:
Federal Mortgage Law Quick Facts: The TILA-RESPA Integrated Disclosure Rule
Regulation: N/A
Acronym: TRID
Year Created: 2015
Main Purpose: Simplify the Disclosure Process
Disclosures/Notice Required: Loan Estimate, Closing Disclosure
Important Terms Related to this Law: Changed Circumstance, Tolerances, Business Day, Consummation, Application
Entity Responsible for Enforcement: CFPB
Other Laws that are complimentary: RESPA, TILA
The TILA-RESPA Integrated Disclosure Rule or TRID was created in 2015 to simplify and clarify the disclosure process. TRID requires two disclosures
The Loan Estimate and The Closing Disclosure.
The Loan Estimate replaces
two disclosures that were required by RESPA and TILA, respectively, the Good Faith Estimate and the Initial Truth-in-Lending Disclosure.
The Closing Disclosure also replaces
disclosures required by RESPA and TILA, the HUD-1 Settlement Statement and the Final Truth-in-Lending Disclosure. The new disclosures were simplified in their format and created to help clarify complicated mortgage terms for consumers.
TRID does not apply to
Reverse Mortgages & HELOCs
Those transactions must continue to use Good Faith Estimates, Truth in Lending Disclosures and the HUD-1 Settlement Statement.
The Loan Estimate is another initial disclosure required during the beginning of the loan application, specifically the Loan Estimate must be provided at the time of the application or within
3 business days of application.
When we are talking about the Loan Estimate, a business day is considered _____?
all days that the lender is in full operation and their office is open to the public for carrying out substantially all its business functions.
What are the things that appear on the first page of the Loan Estimate?
- Loan terms
- Date issued
- Rate lock information
- Loan type
What questions are asked on the first page of the LE?
- Can this amount increase after closing? This question is answered with a YES or a NO to let the borrower know if the terms of their loan could change after the loan has closed.
- Can the loan amount change after closing? – only in a situation where negative amortization is allowed. Can the interest rate change after closing? – only if we are talking about an adjustable-rate mortgage.
- Can the monthly principal and interest payments go up? - generally only when we are talking about adjustable-rate mortgages or other nontraditional mortgage products.
Page Two of the LE is the
closing cost details
Discount points
or cost to lower the borrower’s interest rate in exchange
for an upfront fee.
Lender credits
lower the borrower’s closing costs in exchange for a higher interest rate.
Give two examples of origination charges.
- Application fee
- Processing fee
Origination charges are considered
zero tolerance fees
Services that a borrower cannot shop can include:
- Appraisal fees,
- Credit report fees,
- Flood determination fees,
- Flood monitoring fees, tax monitoring fees and
- Tax status research fees.
If a borrower can shop from a list of providers TRID imposes a _____?
10% cumulative fee tolerance
TRID also gives a no tolerance to services that a borrower can shop for that are not on a provider’s list such as
a hazard insurance provider, meaning that these fees can increase by any amount from their disclosure on the LE to the CD without penalty.
Give a few examples of prepaids.
Homeowners Insurance Taxes
Prepaid interest
Initial Escrow Payment
In most situations at the time of closing the borrower must make an initial payment into their escrow account to make sure that they have enough to pay property taxes and insurance when they come due.
Generally, a creditor can revise a Loan Estimate at any time before it provides the Closing Disclosure. However, the creditor must ensure that the consumer receives the final revised LE no later than
4 business days prior to closing (or consummation).
Give three examples of changed circumstances.
- An extraordinary event out of anyone’s control (also known as an Act of God).
o Example: a weather disaster like a hurricane or tornado - Information specific to the consumer or the transaction that the lender relied upon when providing the disclosures and that was inaccurate or changed after the disclosures were provided
o Example: The appraisal comes back lower than initially expected, and the borrower no longer qualifies for the original product. They do qualify for a different product with different charges; for example, now they have to have mortgage insurance. - New information specific to the consumer or transaction that the lender did not rely on when providing the disclosures
o Example: At the time of disclosure there was an unknown tax lien on the property, and that disqualifies the borrower for a specific product but still qualifies for a different product with different charges
The new revised LE must be provided no later than
3 business days after the date of the changed circumstance.
APR is
the costs of the loan expressed as a rate. It is not the interest rate! It is the cost of credit expressed as a rate. In this scenario, the costs of the loan make up 4.274 percent of what the borrower will pay over the loan term.
TIP is
is the total amount of interest that the borrower will pay over the loan term as a percentage of your loan amount. In this scenario, 69.45 percent of what will be paid on the loan is interest.
What is the difference between a mortgage interest rate and an APR?
The difference between a mortgage interest rate and an APR is that the interest rate is the cost that the borrower pays each year to borrow money for a mortgage. An APR rate reflects the mortgage interest and other charges over the life of the loan including mortgage insurance. The APR is a broader measure of the cost to the borrower of borrowing that money. The APR reflects not only the interest rate but also the points, fees, and other charges that the borrower must pay to get the loan. For that reason, the APR is usually higher than the interest rate.
This form is used to obtain tax transcripts to determine
whether they can qualify for a mortgage
We talked about the Homeownership and Equity Protection Act (HOEPA) in Chapter 2. It generally governs
High-Cost and Higher-Priced home loans, but there is a disclosure that is required by HOEPA that applies to all loans.
Per HOEPA, on all federally-related loan applications, the lender must provide a list of at least
ten (10) housing counselors. The list of housing counselors must be sent at application or within three (3) business days after receiving the application.
The Home Loan Toolkit is another disclosure required by TRID. This document must be provided to the borrower within
3 business days of application.
The __ Homeownership and Equity Protection Act (HOEPA)___ is
a part of the Truth in Lending Act and generally governs High-Cost home loans but there is a disclosure that is required under this law that applies to all loans. It also requires that on federally-related loan applications receive a list of housing counselors. The list of housing counselors must be sent at application or within 3 business days after receiving the application.
The Consumer Handbook on Adjustable-Rate Mortgages is
a required disclosure on all adjustable-rate mortgages (regardless of whether they are a purchase or a refinance). This document is also required to be disclosed by the lender within three (3) business days of application. The CHARM handbook is prepared and maintained by the CFPB. It is required under RESPA.
Federal Mortgage Law Quick Facts: The Electronic Signatures in Global and National Commerce Act
Regulation:
Acronym:
Year Created:
Main Purpose:
Disclosures/Notice Required:
Important Terms Related to this Law:
Federal Mortgage Law Quick Facts: The Electronic Signatures in Global and National Commerce Act
Regulation: N/A
Acronym: E-Sign Act
Year Created: 2000
Main Purpose: Allows for electronic signatures on mortgage loan documents
Disclosures/Notice Required: Prior Consent, Notice of Availability of Paper Records
Important Terms Related to this Law: e-signatures
What is the purpose of the E-sign Act?
The E-Sign Act allows for electronic signatures to be used as a valid signature for financial transactions with the permission of the borrower. The E-Sign Act also allows for electronic records to satisfy any federal statute.
