NMLS Test Study GuideActs and Regulations

SAFE Act: The Secure and Fair Enforcement for mortgage licensing Act (2008) Encourages states to establish minimum standards for the licensing and registration of state

licensed MLOs and to establish a nationwide licensing system and registry

ECOA (Regulation B): Equal Credit and Opportunity Act (1974) Ensure that all persons, consumers as well as businesses, are given equal chance to obtain credit

HMDA (Regulation C): Home Mortgage Disclosure Act (1974) Provides the public with information that will help show whether financial institutions are serving

the housing credit needs of the neighborhoods/communities in which they are located

MAPs (Regulation N): The Mortgage Acts and Practices Rule ???????

MARS (Regulation O): Mortgage Assistance and Relief Services Protects homeowners from mortgage relief scams by imposing specific requirements and

prohibitions on industry professionals

GLBA (Regulation P): Gramm-Leach-Bliley Act (1999)o Requires a financial institution to give consumers privacy notices that explain its information

sharing practices

FCRA (Regulation V): Fair Credit Reporting Act (1974) Regulates agencies that provide consumer reports and ensures fairness, accuracy, timeliness, and

privacy of info on consumer reports

FACTA (Regulation V): Fair and Accurate Credit Transaction Act (2003)o Helps prevent identity theft and enables individuals to know what their rights and obligations are

when dealing with consumer credit reports

RESPA (Regulation X): Federal Real Estate Settlement Procedures Act (1974) Help consumers become better shoppers for settlement (closing) services and to eliminate

Kickbacks and referral fees

TILA (Regulation Z): Federal Truth in Lending Act (1968) Requires lenders to provide accurate and truthful information to consumers relating to the cost

and terms of credit being offered

AcronymsNMLS: Nationwide Mortgage Licensing System and RegistryCSBS: Conference of State Banking SupervisorsAARMR: American Association of Residential Mortgage RegulatorsCFPB: Consumer Financial Protection BureauLIBOR: London Interbank Offered RateCOFI: 11th District Cost of Funds (Slowest moving Index)

FOMC: Federal Open Market Committee

General Mortgage KnowledgeDTI RatiosAcceptable Debt-to-Income Ratios

Conforming Loans: 28/36 FHA Loans: 31/43 VA Loan: /41 (no front end ratio) USDA Loan: 29/41 Jumbo Loan: 33/40

BankruptcyChapter 7 Bankruptcy: Liquidation of assets to cancel debts; a fresh startChapter 13 Bankruptcy: Implementation of a payment plan over 3-5 years to pay off debts

Tax Returns to Verify Income from a BusinessSchedule E: For Rental Properties, Partnerships or LLCs, Found on form 1040Schedule C: Shows income from a sole proprietorship business

Calculations:Salary:

Semi-monthly salary X 2 = monthly salary (Weekly salary X 52)/12 = monthly salary (Biweekly salary X 26)/12 = monthly salary Annual Income/12 = monthly salary ((Hourly base X average weekly hours)+(overtime X average overtime hours)) X (average weeks

worked per year)/12 = monthly incomeHousing Ratio: Housing debts(including PMI and HOA)/ gross monthly incomeLoan to Value Ratios

o LTV = Loan amount/property value or sales price (whichever is lower)o CLTV = sum of 1st and 2nd loan/property value or sales price (whichever is lower)o TLTV = sum of 1st mortgage, second mortgage, and limit of HELOC/Property value or sales price

Temporary Buy downso 2/1 Buy down: Rate is 2% lower for the 1st year, 1% lower for the 2nd year, back to fixed rate the

3rd yearInterest Rates

o Annual Interest = Interest rate x Loan Balanceo Monthly Interest = (Interest rate x Loan Balance)/12o Daily Interest = (Interest rate x Loan Balance)/365

Principle Reduction (Equity Growth)1. Loan balance x Interest Rate = Annual Interest 2. Annual Interest/12 = monthly interest3. Monthly Payment — Monthly Interest = Principle paid that month4. Loan Balance — Principal Paid = Remaining Loan Balance

Fannie Mae (FNMA) GSE (Government Sponsored Enterprise) Purchases conventional (residential) loans and guarantees conventional MBS (mortgage backed

securities)o Mostly served loans originated by banks

Automated underwriting system is called Desktop Underwritero DTI Ratio 45% (flexible up to 50% with strongly qualifying factors)o Desktop Originator: allows broker to take point of sale application and submit to DU

DTI ratio for manually underwritten loans 28/36o Can be exceeded up to 45% with strong qualifying factors

Loan Level Price Adjustments (LLPA)o Fee charged to lenders to compensate for certain loan features that increase risk o Passed to borrowers as an additional finance charge

Freddie Mac (FHLMC) GSE Automated Underwriting system is called Loan Prospector

Both Fannie and Freddie require lenders to have an executed form 4506-T, know as the Request For A Copy of a Tax Transcript with the IRS

o Validates income information in the file

Ginnie Mae (GNMA) Wholly owned government corporation and not a private GSE Government corporation within HUD Purpose is to increase the supply of credit available for housing by directing funds from the

securities market into the mortgage market Guarantees federally insured loans (FHA and VA) For the most part, any FHA or VA loan created in the primary market is pooled into a GNMA MBS

and sold worldwide GNMA MBS are backed fully by the US government

Liens and Encumbrances Encumbrance: A claim against a property held by one who is not a legal owner of the property, but

does not prevent the owner of the property from using, selling or otherwise transferring the estate Physical Encumbrances:

o Easements: Rights to use another’s property for a specific purpose (E.g. Utilities) These arrangements are recorded between the property owner/ provider of service

o Public/Private Restrictions: Sidewalkso Encroachments: Fences

Lien: A financial encumbrance on a propertyo Voluntary or involuntary

Voluntary Lien: Mortage or other such transactions the owner willingly entered in to Involuntary Lien: Taxes, assessments, judgments, mechanics liens A mortgage lien is considered a Specific Voluntary Lien

Trust: Defined as a right of property being held by one party for the benefit of another Trustor: (Borrower) Person that grants the rights to real estate to a trustee Beneficiary would be the lender Trustee: (Secures Title) Holds the property in trust for a beneficiary (the third party in an

agreement) In real estate financing, when a trust deed is used, it is called a deed of trust When the deed of trust is combined with a note, The note includes the borrowers promise to

repay the loan under the specified contract termso Note also mentions the collateral

The Land Contract, Mortgage and the NoteTHE NOTE is the promise to repay a debt and the MORTGAGE/DEED OF TRUST is the instrument that secures the debt to a property

When a note is used a debt instrument without any collateral, it is called an Unsecured NoteContract for Deed

Many different Names (Land contract, Real Estate Contract, Contract for Sale, etc) A complete financing and sales contract agreed upon and executed by a buyer and a seller

o Does not have an attached note and should not be considered a mortgage or a deed of trust

o Seller is financing the sale of the property and the buyer agrees to take and maintain possession of the property (as long as the terms of the agreement are being met)

Conveyance: The transfer of ownership or interest in real property from one person to another by a document (such as a deed, lease, or mortgage)Reconveyance: When a borrower pays off the mortgage, the lien on the property is released, or re-conveyed back to the borrower

As long as there is a mortgage on a property the borrower does not have free and clear title Equitable Title: means the buyer is entitled to a deed conveying the legal title when the

contract is fully paid and performed

The Promissory Note: promise to repay a debt Contains all of the essential elements of an enforceable contract

o Payor and Payee, Amount owed, Interest Rate (fixed or adjustable), and Loan Terms Lock-In Clause: Prohibits Pre-payment The Acceleration Clause: On the Note

o Creditor’s ability to accelerate the loan (pay the full amount due) if the borrower defaults Notice to the borrower required to provide notice to the borrower of:

The default and the action required to cure the default A minimum of 30 days to cure the default Statement that failure to cure in allowable time can result in acceleration or

foreclosure Borrowers right to reinstate after acceleration

Due on Sale (Alienation) Clause: The Demand Feature that states that the entire balance may be called due and payable upon the

sale or transfer of property ownership An individual would use the money from the sale of the current property to repay the lien on said

property Alienation clause: refuse to allow another person to assume the loan if the title is transferred

Exculpatory Clause: Part of a written agreement that relieves one party to the agreement of a liability as a result of

action (or lack thereof) performed in the course of executing the terms of the contractDefeasance Clause:

o Provides for release of lien when the borrower pays off the debto Must provide public notice that debt has been repaid

o A Satisfaction or Release is recordedo Or a Deed of Reconveyance is recorded

o Provides borrower ownership after all the loan terms have been meto Mortgage is considered to have been defeated when the debt is paid off

ForeclosureSheriff’s Deed

If a borrower defaults on his mortgage, the lender can ask the court for a judicial foreclosure and a court ordered sheriff’s sale of the property

After the sale, the sheriff will issue a sheriff’s deed conveying title to the purchaserPower-of-Sale Provision:

Allows a trustee to foreclose and sell the property on behalf of the lender without a court order and issue a trustee’s deed conveying title to the purchaser

Right of Reinstatement: If included on the mortgage, a defaulted borrower has a period after default to stop a foreclosure

by paying all past-due payments and penalties and bringing the loan currentReal Estate Owned (REO):

Property that the lender has acquired through foreclosure

Other options available to lender to prevent or avoid foreclosure:o Deed in Lieu of Foreclosure: Estoppel Deedo Forbearance: Allows borrower experiencing temporary financial struggles to delay his

monthly mortgage payments for a short period of time. Missed payments would be made current after negotiated period of time

o Loan Modification: Permanent change to the terms of the loan NoticesAny liens are generally given priority by their date of registering, earlier registry means higher priorityTax liens have higher priority over other liens regardless of where they are recordedConstructive Notice: Public records are considered public notice and anything learned by inspection of propertyActual Notice: Direct knowledge that one hast the propertyInquiry Notice: Information that should compel a reasonable person to make further inquiries about some aspect of the property

FHA: The Federal Housing Administration (Division of HUD) Insures lenders (by a federal agency) against borrower default or foreclosure Loans charge annual MIP (Mortgage insurance premium)

o Based on Loan term and LTVo Charged up front in all cases (UFMIP)

Paid when the loan closes (pre-paid finance charge) Requires a higher down payment if the borrower has a credit score below 580

o Above 580 are eligible for maximum financing (85% LTV)o Below 500 not eligible

An assumable loan Up to 100% gift funds can be used for cash to close Max LTV for purchase transactions is 96.5% (3.5% required down payment) LTV up to 85% allowed for refinance Ratio of 31/43 DTI for manual underwriting The max AUS DTI ratio is 47/57 Non-occupying co-borrowers allowed The “Notice to Purchasers: The Importance of Home Inspection” must be signed and dated by the

borrower at the time the GFE is given Maximum loan amount cannot exceed the limit set for the geographic area in which the property

is located Offers 1, 3,5, 7, and 10 year ARMs

VA Loans: Department of Veterans Affairs Guarantees loan to lenders up to limit exposure to loss

o Lesser of 25% of the loan balance or 25% of Freddie Mac limit Requires an Up Front Funding Fee (disabled vets exempt from fee)

o Fee varies based on: First time or repeat borrower, Regular service or reserves/national guard, nothing down or 5% down

o 2.15% first time borrower, 3.3% for subsequent use of eligibilityo Not affected by marital status

No down payment required An assumable loan Two methods to qualify borrowers

o 41% DTIo Residual Income: borrower has enough income to cover his fixed debts although debts

might exceed 41% Can reapply for VA loan if:

o Prior property has been soldo A qualified veteran buyer has agreed to assume the outstanding loan balance

VA borrower cannot borrow more than the value shown on the VA appraisal (CRV: Certificate of Reasonable Value)

Require a COE (Certificate of Eligibility)

USDA Loans (U.S. Department of Agriculture) 30 year fixed rate, no required down payment Guarantees loan to lender Up front 2% guarantee fee Guarantee applies to 90% of the loan Applicants Must:

o Be without adequate housingo Have less than 20% liquid assetso Have steady income up to 115% (15% above limit) of median income for areao 29/41 Ratio

Non-Traditional Mortgage Loan ProductsThe SAFE Act defines a nontraditional mortgage as any mortgage product other than a 30-year fixed rate mortgageAdjustable Rate Mortgages (ARM)

Basic non-traditional mortgage product Alternative Mortgage Transaction applies to a loan/credit sale secured by an interest in

residential real property The interest rate changes periodically, usually in relation to an index (can increase or decrease) Written information on each type of ARM must include its terms and conditions, including:

o Index and Margino How the interest rate will be calculatedo How often the rate can changeo Caps on changeso Example of how high a monthly payment could beo Other ARM features, such as negative amortization

Interest Rate= Index +Margin (or cap, whichever is lower) Common Indices Used:

o 1 year Constant Maturity Treasury Rate (CMT)o 6 month London Inter Bank Offered Rate (LIBOR)o 11th District Cost of Funds (COFI)

Changes slower than the rest of the indiceso Moving Treasury Average (MTA)

A 12 month moving average of the monthly average yields of U.S. Treasury securities adjusted to a constant maturity of one year

For a HELOC, the most popular indexes are the Prime Rate Index (based on the federal funds rate) and 3 or 6 month Treasury Bill rates

The fully amortizing payment schedule should be based on the Term of the Loano On a 30 year loan with a 5yr Interest only period, the payment would be calculated based

on a 25yr amortization schedule following the initial 5yr IO period

The Note Rate is the teaser, initial rate that would show on the note (lower than fully indexed rate)

The Adjustment Period is the period between rate changes

Rate Caps Interest Rate Cap limits the amount the loan’s rate can change Lifetime Cap limits the interest rate increase over the life of the loan

o 1/6 cap means ARM has a 1% a year cap and 6% lifetime cap In 5/2/5 ARM

o 5% initial cap, 2% periodic cap, 5% lifetime capNegative Amortization:

Monthly payments are not large enough to pay all of the interest charged Loan balance increases Usual cap on negative amortization is 110% to 115% of the original loan amount

Prepayment Penaltieso If loan is repaid in a short period of time the lender can lose money even if balance is paid in full

(loss of interest on loan)o Abolished in some states and limited by Federal Lawso Majority of loans purchased by Fannie and Freddie are not allowed to have penaltyo May not exceed 2% of the amount prepaid within first 2 years of the loano May not exceed 1% in year 3 and beyond

Hard Prepayment Penalty: borrower would be liable for a penalty during the set timeframe for prohibited prepayment

o Property cannot be sold or refinanced during that period Soft Prepayment Penalty: Property cannot be refinanced during the prohibited payment

period, but can be sold

Types of ARMs Hybrid ARM: mix of a fixed-rate loan and an adjustable rate loan

o Most ARM loans are not referred to as Hybrid (even though they are)o 2/28 ARM means it has a fixed rate for 2 years and the rate adjusts for the 28 years after

the fixed period Adjustment period may be a number of years, annual, 6 months, or less

o 3/1 ARMo 3 years fixed at a low rateo After 3 years, rate changes annually

The FHA offers standard 1 year ARM and four hybrid ARM productso 3/1 (annual cap of 1% and lifetime 5% cap)o 5/1 (2% annual cap and lifetime 6% cap)o 7/1 (same caps as 5/1)o 10/1 (same caps as 5/1)

Interest Only ARMso Borrower only pays interest for a specified number of years (typically 3 to 10 years)o After Interest Only Period, payment will dramatically increase (because paying principle)o High chance of Payment Shock

Option ARMo Borrower has option to pay:

Full principle and interest (highest payment) Interest Only (Middle) Negative Amortization (Lowest Payment)

Secure and Fair Enforcement for Mortgage Licensing Act (SAFE)

Designed to enhance consumer protection, reduce fraud and reduce regulation by:o Encouraging states to establish minimum standards for the licensing and registration of state-

licensed MLOso Establishing a nationwide licensing system and registry

Enacted in 2008, Directed by CSBS and AARMR, enforced by the CFPB Provides a floor to MLO licensing NMLS: Nationwide Mortgage Licensing System and Registry

o Provides Unique Identifiero Does not license people

Individual State Regulators approve or deny the application of an MLO MLOs of non-depository institutions are licensed with the state

o Employees of depository institutions are registered with the state Once a state licensing agency provides confidential information to the NMLS, privacy and

confidentiality requirements continue to apply Exempt from SAFE

o Real estate brokers only performing only real estate brokerage activities and who are properly licensed

o Purely administrative/clerical personnelo Registered Loan Originators or employees of institutions regulated by Federal Bank Agencies

(FDIC, Federal Reserve, etc)o Subsidiaries owned/controlled by a federal banking agency

Licensing/Pre-education 20 hours of pre-licensing

o 3 hours Federal Law, 3 hours of ethics, 2 hours of standards for non-traditional mortgage lending, 12 hours of electives

8 hours of continuing educationo 3 hours Federal Law, 2 hours ethics, 2 hours of standards for non-traditional mortgage

lending, 1 hour of electives A licensed MLO that fails to maintain the license for a period of 5 years must retake the test

TermsPerson: a natural person, corporation, company, LLC, partnership, association

Immediate Family Member: spouse, child, sibling, parent, grandparent, grandchildren, stepfamily, adoptive relationships (cousins, aunts, uncles are not immediate family)

Mortgage Loan Originator: Individual, for compensation, takes a residential mortgage loan application, offers or negotiates terms

Surety Bond: Fund to cover all mortgage loan originator and is reflected in the dollar amount of loans originated

Penaltieso 25k for violation

Federal Truth in Lending Act (TILA) Enacted in 1968 in order to promote the informed use of credito Law does not limit the amount of interest or loan fees a lender may charge

o Those imposed by state usury lawso Requires lenders to provide accurate and truthful information to consumers relating to the cost and

terms of credit being offeredo Rulemaking authority granted to the CFPBo Regulation Z

o Must maintain 2 years of records showing compliance with Regulation Zo Applies to any individual or business that offers or extends credit, whether directly or through a

mortgage broker, when:o Credit is being regularly offered or extended to consumerso Credit is subject to a finance chargeo Credit is for personal, family, or household purpose

o Under TILA Refinancing Occurs when an existing obligation is satisfied and replaced by a new obligation

o Charges are allowed to be understated on the TIL

Disclosures: New disclosures are required for new transactionsEarly disclosures must be given 3 business days after receipt loan application

7 business days prior to consummation of the loan Must wait an additional 3 business days if there has been a violation of the APR rule 3-7-3 rule Cannot give disclosures by telephone (must disclose APR over phone if asked) If mailed, the TIL is considered delivered 3 business days after mailing

The Consumer Handbook on Adjustable Rate Mortgages (CHARM booklet)o Disclosed with ARM programso Provides/Explains:

o Rate, payment, and term are subject to changeo Index or used in making adjustmentso Frequency of adjustmentso Loan has a demand featureo Statement that disclosure forms are available for the lenderso Other variable rate programso Worst case payment scenarioo How the consumer may calculate the loan payments

Subsequent Disclosureso After the consummation of the loan

o Refinancing: The new finance charge includes any portion of old finance charge not credited to the loan being refinanced

o Assumption: Lender must make new disclosures to the consumer based on the remaining obligation

o Adjustments

New disclosure required if the interest rate is adjusted Without a payment change: at least once a year With a payment change: between 25 and 120 calendar days before payment at new

level is dueThe Truth In Lending Disclosure (The TIL)

o The Federal Box shows the disclosures (APR, Finance Charges, Amount Financed, Total Payment) separate from the rest of the document

o Loan term appears on the TILAPR (Annual Percentage Rate)

o Relationship of the total finance charge to the total amount financed as a yearly rateo Cost of credit as a yearly rate, different from the nominal rateo Loans compared on basis of APR must have the same termo Amount disclosed cannot differ from the actual APR by more that .125% for a regular transaction

or .25% for an irregular transactionFinance Chargeo The cost of consumer credit as a dollar amounto Any charge payable by the consumer and required by the lender for the extension of credit

Prepaid finance charges + charges paid over the term of the loano Example Finance Charges

Interest (paid over term) MIP (mortgage insurance premium) Fees charged by third party if use of third party is required by lender Mortgage broker fees

o Example pre-paid finance charge Loan origination, discount, and commitment fees PMI, UFMIP, Prepaid interest, Buy down funds Underwriting, processing, tax service, and courier fees if paid to the creditor

Amount Financedo The actual amount of credit the borrower will receive from the creditoro Loan amount less minus any pre paid finance charges

Total Paymentso The total of the finance charge and the amount financed

Rescission Right to cancel the loan is given to any consumer who has an interest in the property, even if he

did not sign the note Each person must be given 2 copies of the right to rescind Rescission is excised if One consumer requests it, by written notice to the lender Applies to the borrowers primary residence Borrowers have until midnight of the 3rd business day to rescind

o Can rescind on any day but Sunday and legal Federal Holidays The Notice of Right to Cancel/Rescind must be on a separate sheet of paper and disclose

o Retention or acquisition of a security interest in the consumers principle dwellingo The consumers right to rescind and explanation of how to do soo Effects of recessiono Date the rescission period expires (midnight of the 3rd business day)

Within 20 days after receiving the rescission notice, creditor must:o Return any money/property received by anyone in connection with the transaction

o Show that mortgage deed is voided Consumer may waive his right to rescind if the credit is needed to meet a bona fide personal

financial emergency Until the rescission period has passed, the lender may not:

o Disburse any money, other than in escrow, Perform any services, nor deliver any materials or charge interest

Extension (Of 3 years) to the Rescission Period is allowed if:o Lender fails to deliver the required rescission notice and material disclosureso Finance charge is understated by .5% of the credit transaction or 100$, whichever is

greater Consumer has right to rescind after initiation of a foreclosure on his principal dwelling if:

o Broker fee included in finance charge that shouldn’t have beeno Lender did not provide a properly completed notice of rescissiono Disclosed finance charge is understated by more than 35$

Truth in Advertisingo Consumer credit advertising may not be false or misleading, and disclosures must be made clearly

and conspicuouslyBait and Switch Advertising: Advertising a loan at very attractive terms and then informing customers that the advertised terms are not available, but substitute isTrigger Terms: Require disclosure of additional credit terms if contained in an ad

o The amounts of any payments, the terms, amounts of finance chargeso Would require the percentage of down payment, terms of repayment, the APR

o Ads showing an APR do not need to provide additional disclosureso If credit terms are not specific (no numbers or percentages) then no additional disclosures required

Prohibited Acts Under TILAo False advertisingo Cannot used the word “fixed”

o If fixed is used, equally and prominently show the time period for which the payment is fixed and the fact that the rate may vary

o ARM, Variable, or similar terms need to be displayed in same capacity as the word Fixedo State product is part of a government loan program unless sponsored by government entityo Make misleading claim product will eliminate debto Use term counselor to refer to a for-profit mortgage broker or lendero Provide info on trigger terms in a foreign languageo Ad for a home equity plan cannot advertise the plan as “free money”

A creditor may not finance any premiums or fees for credit insurance in connection with a credit transaction secured by a dwellingo Credit Insurance:

o Credit Disability, unemployment or property insuranceo Any accident, loss of income, life/health insuranceo Debt cancellation or suspension agreement or contract

o Servicing Practiceso Must provide an accurate statement of total outstanding balance required to pay off the debt in

full as of a specified date

o May not impose a late fee in connection with a full payment made when due because an earlier late fee for payment was late

Loan Originator Compensationo Can be based on amount of credit extendedo Compensation includes

o Salaries, bonuses, trips, fees charged and retained by LOo Cannot be based on terms or conditions of a mortgage transaction

o E.G. Interest rate, prepayment penalty, collateral type, etco Cannot be paid by both the consumer and another persono Illegal to steer a consumer to a loan that provides the LO with greater compensation, unless it is in the

best interest of the consumero Creditor must maintain records of LO compensation for 3 years

o All compensation received from a creditor, consumer, or other persono The compensation agreement that governs those payments

Minimum Standards for Transactions Under TILAo Regulation Z establishes minimum standards for any consumer credit transaction that is secured by a

dwelling, including any real property attached to a dwellingo Under Ability to Repay (ATR) and Qualified Mortgage (QM) ruleso Provisions do not cover home equity lines of credit (HELOC), timeshare plans, bridge loans,

reverse mortgages

Ability to Repay Rule (ATR) : o Creditor may not make a covered loan unless it makes a reasonable determination at/before

consummation that the consumer will have ability to repay the loan based on the termso A covered transaction is a credit transaction secured by a dwelling (1-4 unit residential structure) o Need to consider: Income, assets, employment status, payment, mortgage related obligations, current

debt obligations, DTI, credit historyo Fully Indexed Rate: After recast and the maximum margin that may apply during the life of the loano Recast: When payments/rates change to the levels they will be at to amortize the loan

o End of the initial rate for ARMso After the interest only period is up on IOso End of Negative Amortization period on Neg Ams

Simultaneous Loan: An additional covered transaction or an open-end HELOC that will be secured by the same dwelling that is:

o Made to the same consumer at the same time or before the closing on a separate covered transaction

o If made after closing, made to cover the closing costs of the first transaction

Under the ATR rule, creditor is exempt from performing full repayment analysis when originating a payment shock refinance if following conditions are met:

o Refinancing must be provided by the borrowers current creditor or loan servicer

o Monthly payment on new standard mortgage must be materially lower (reduction of 10%) than the monthly payment on the non-standard mortgage

o Creditor must receive the application no later than 2 months after nonstandard mortgage has been recast

o On existing nonstandard mortgage, borrower must have not made o More than 1 payment that is 30 days late during the 12 months immediately preceding the

creditors receipt of the application and any payments late in the preceding 6 months of the application

The Qualified Mortgage Ruleo A Qualified Mortgage is a covered transaction that provides for substantially equal, regular periodic

payments that do not result in negative amortization, interest only payments, result in balloon paymentso Cannot be over 30 years, have points and fees that exceed 3% of the loan amount, or have a DTI

above 43%In making a QM, required underwriting standards include:

o Using the max interest rate to calculate monthly paymentso Payments will repay principle balance after the rate changes and loan amount over the termo Verification of income and assets

Prepayment Penaltieso Need to be permitted by lawo 2% during the first 2 years of the loan and 1% beginning in year 3

Record Retentiono Must be retained for 3 years for Minimum Standards for Transactions for compliance purposes

Dodd-Frank Wall Street Reform and Consumer Protection Act Title X establishes within the Fed, The CFPB which is tasked with regulating consumer financial

products and services in compliance with Federal Lawo Rule making, take complaints, promote financial education, research consumer behavior,

monitor financial markets for new risks, enforce lawso Restrict unfair, deceptive, or abusive acts/practices

Residential Mortgage Loan Origination Standardso Mortgage Originator: any person who, for compensation/gain, takes a residential mortgage loan

applicationo Assists a consumer in obtaining or applying to obtain a residential mortgage loano Offers or negotiates terms of a residential mortgage loan

o Does not include person who performs purely administrative taskso Does not include person that only performs real estate brokerage activities (that is

licensed/registered in accordance with applicable state law)o Does not include creditor or servicer

Compensationo Cannot be based on terms of the loan (interest, program, etc)

o Avoids Steering (directing consumer to loan they cannot afford for personal gain)o Can be based on amount of credit extended

Penaltyo The maximum amount shall not exceed the greater of actual damages or an amount equal to 3

times the total amount of direct and indirect compensation or gain accruing to the MLO in connection with the loan involved in the violation

Equal Credit Opportunity Act (ECOA) Enacted in 1974 Regulation B Governed by the CFPB Main goal is to ensure that all persons, consumers as well as businesses, are given equal chance to

obtain credit, but does not guarantee an applicant within a protected class will be approved Applies to any Creditor:

o Person who regularly extends, renews, or continues credito Arranges for a credit extension, renewal, or continuation

Unlawful Discriminationo Creditor cannot discriminate against, deny, discourage, or refuse an applicant based on:

o Race, color, religion, ethnicity, marital status, age, expectation of childbirth, o Because income derives solely from public assistanceo The neighborhood in which the applicant wants to buy, refinance, or use funds from loano The income of the spouse being from part-time employment, pension, any other retirement

o Cannot lend an applicant money with terms different from those granted to a comparable applicant of a different race, sex, religion, etc

o Information cannot be an automatic bar against extending credito Cannot Ask:

o If applicant is single, divorced, widowedo About marital status if applicants are applying separately or request info about

spouse/former spouse if said person does not have access to accountso Cannot require signature of spouse or non-applicant on credit transactiono About plans to have childreno About alimony, child support, or separate maintenance not needed to get credit

o Can Ask:o If applicant is married, unmarried, or separatedo About age in order to determine old enough for loan or if 62 and eligible for HECM or other

programs that favor o Ask about public assistance in order to determine proper amount of credit to extend

Need to know if the assistance will continue for at least 3 yearsLoan Application under ECOA

o Regulation B defines a loan application as an oral or written request for an extension of credit that is made in accordance with the procedures established by a creditor for the type of credit requested

o Must follow the guidelines and standards previously set by the creditoro Notes marital status, age, sex, ethnicity, race to comply with government monitoring set forth in

HMDAo If the applicant chooses not to disclose this information, the creditor must note the

information based on visual observationo Whether the inquiry becomes an application depends on how the creditor responds to the

applicant, not on what the applicant says or askso Must let applicants know that the information is being collected for government monitoring

purposesWritten Application

o Regulation B requires that institutions maintain files documenting written applications for mortgages on dwellings occupied as a primary residence (purchase or refinancing)

o Applicant is not required to complete a written application, it is the responsibility of the lenderApplicant Rights/Disclosures

o Right to receive notice of incompletion within 30 days of the creditors receipt of an incomplete application, notice of incompleteness with reasonable time to respond

o Right to receive notice of action taken within 30 days after receipt of completed applicationo Must approve or deny loan within 30 days of receiving applicationo Notice of action within 90 days after notifying the applicant of a counter-offer if the applicant does

not expressly accept or use the credit offeredAdverse Action Notice

o A denial or revocation of credit, a change in terms of an existing credit arrangement, refusal to grant credit in amount or terms requested

o Includes the statement of action takeno The ECOA notice (says ECOA prohibits creditors from discriminating)o The name an address of the federal agency that administers compliance with respect to the LO

o Applicant can get the statement of the specific reasons for the adverse action/disclosure: Within 30 days after the creditors receipt of the applicants request and if the Request is made within 60 days after the notification

o If a credit score is used in the decision:o The actual scoreo The range of scores possible under the model usedo All key factors that adversely affected the credit score (top 4)o The date of the credit score, name of the entity that created the score

ECOA Rules on Appraisals Must provide an applicant a copy of all appraisals and other written valuations

o Promptly upon completiono 3 business days prior to consummation of the loan or account opening (open-end credit)o Applicant may waive the timing requirement and agree to receive any copy at or before

consummation Waiver must be obtained at least 3 business days prior to consummation If applicant provides waiver and the transaction is not consummated the creditor must

provide copies no later than 30 days after determination has been made that loan will not close

o A creditor must mail/provide a notice of the applicants right to receive all written appraisals no later than the third business day after receipt of an application

o Requirements to provide an appraisal must be met whether credit is extended, denied, or if the application is incomplete or withdrawn

Record Keeping Requirements under ECOA 25 months Loan transaction records, original application or copy, notification of action taken, any written

statement from the applicant alleging a violation of ECOAPenalties for Violating ECOA

Civil action may be brought within 2 years (5 according to pro schools?) of the alleged violation Liability for punitive damages:

o Individual actions can be up to 10ko Class action lawsuits can be up to 500k or 1% of the creditors net worth, whichever is less

Home Mortgage Disclosure Act (HMDA) Enacted in 1974 Regulation C Enforced by the CFPB Provides the public with information that will help show whether financial institutions are

serving the housing credit needs of the neighborhoods/communities in which they are located

Requires most mortgage lenders located in metropolitan areas to collect data about their housing related lending activity

o Exemption for Financial institutions with 43 million or less in assets Allows for the public to determine possible discriminatory lending practices HMDA does not prohibit specific activities of lenders and does not establish a quota system of

loans to be made in any MSA (Metropolitan Statistical Area)Redlining

The act of banks/lending institutions lending and providing banking only in certain geographic areas

Reverse Redlining would be not providing lending/banking in certain geographic areasGeneral Notice Poster

Regulation C requires a lending institution to post a general notice about the availability of HMDA data in the lobby of its home office and in each branch

HMDA disclosure on the posterLoans Subject to HMDA

Home purchase loans for residential dwellings, Home improvement loans, Refinancing a home previously covered by HMDA

Under HMDA a dwelling is any residential structure, whether or not attached to real propertyo 1-4 family, condos, 2nd/vaction homes, manufactured homes

HMDA excludes recreational vehicles (boats, campers, travel trailers, hotels, hospitals, dorms)Data Reported

On HMDA LAR (Loan Application Record)o The loan/application (type, amount, price)o Disposition of application (denied or approved)o Type and location of propertyo Applicants race, ethnicity, sex, annual income

Pricing Related Data Institutions required to report higher priced loan activity Must report the spread (difference) between the APR on a loan and the APOR for comparable

transactionso To determine if loans meet HOEPA thresholds (1.5% over APOR for 1st Lien and 3.5% for

subordinate)Disclosures

Institution must make its disclosure statement available to public at home office within 3 business days of receipt of compiled MSA data report

Make disclosure statement available in at least one branch in each MSA it has an office within 10 business days of receipt of report

Post address for requests in each additional MSA and send the disclosure statement within 15 business days

A financial institution must retain its full (unmodified) HMDA-LAR for at least 3 years Each Federal Financial Institutions Examination council (FFIEC) disclosure needs to be

available for 5 years

Fair Credit Reporting Act (FCRA) Enacted in 1971 Regulation V Regulates agencies that provide consumer reports and ensures fairness, accuracy, timeliness, and

privacy of info on consumer reports Requires any user of a consumer report to have a legally permissible purpose to obtain a report

Consumer Reporting Agencies (CRAs) Credit bureaus A consumer report is any written, oral, or other communication of any information by a CRA

o That bears on a customers credit worthiness or capacity or is used in establishing eligibility for the extension of credit

CRAs can report negative information for up to 7 yearso Bankruptcy information may be reported for 10 years

A user of credit information who takes an adverse action based on the info in a consumer report must provide the consumer oral, written, or electronic:

o Notice of the adverse action

o Name, address, phone number of CRA furnishing the reporto Notice of his right to:

Obtain a free copy of a consumer report from the CRA within a specified 60 day period

Dispute with CRA the accuracy/completeness of the information on the report CRA’s must investigate disputed items, usually within 30 days

o Written or electronic notice must contain: Credit score, range of likely scores based on the model, all key factors that adversely

affected the score, date of credit score, name of the entity that created the score

Fair and Accurate Credit Transactions Act (FACTA)o Enacted in 2003o Updates and amends FCRAo Helps prevent identity theft and enables individuals to know what their rights and obligations are

when dealing with consumer credit reportso Requires the three major CRA’s to allow consumers to obtain a free copy of their own credit report

every 12 monthso Creates uniform standards that set clear rules on what credit agencies can include in their reportso Customers have been given the right to “opt-out” and block solicitations from affiliates of

companies with whom they do businessDisclosure of Credit Scores

o The MLO must disclose the following info as soon as is Reasonably Practicalo Credit score, range of likely scores based on the model, all key factors that adversely

affected the score, date of credit score, name of the entity that created the scoreo MLO not required:

o Explain the information in relation to the credit score or disclose any information other than the score/key factors

o Disclose any credit score or related information obtained after the loan closeso Provide more than 1 disclosure per transactiono Provide disclosure after it has been provided by someone else

Negative Information About the Borrowero Financial institutions must disclose an negative information on the consumer report to the

consumer no later than 30 business days after the information is supplied to the CRAo Notice must be clear and can be included with any default notice

o Consumer can send a dispute notice if he wishes to dispute the negative information being addedo Identification of specific information being disputed, explanation of dispute, all supporting

documentationo Investigation into disputed information must be completed and the consumer must be notified of

the results with 30 days after the dispute notice is receivedo If the dispute is found to be frivolous, the consumer should be notified within 5 days

Reasons for determination and identification of information that would be required to investigate the claim

Risk Based Pricing Notices (RBP)o Required when credit terms being extended to borrower are materially less favorable than the

best terms available to most consumers

o Notice must containo Terms of credit based on consumer report and Identity of CRA providing the reporto Statement informing the borrower that he may obtain a free copy of the report from the

CRA along with the contact info for the CRAo RBP requirement designed to improve the accuracy of consumer reports by alerting consumers to

the existence of negative information of their consumer reportso Notice must be provided to each consumer in a transaction involving more than one consumer

o No earlier than when the approval is communicated to the consumer and: Before consummation for a closed-end line of credit or before the first transaction

for an open-end line of credit

The Red Flags Ruleo Enforced by the FTCo Requires financial institutions and creditors that hold any consumer account with the risk of

identity theft to develop and implement a written Identity Theft Prevention Program that will:

o Identify patterns. Practices, and specific forms of activity that are “red flags” signaling identity theft

o Detect and respond appropriately to red flags in order to prevent identity thefto Be updated periodically to reflect changes in risks from identity theft

o Defines a financial institution as a organization that directly or indirectly holds a transaction account belonging to a consumer

o A written program only needs to be implemented when the institution has covered accounts o Accounts primarily for personal, family, or household purposes (Mortgage, car loan, credit

card, cell phone, etc.)o The program must be appropriate to the size and complexity of the business/organization

o Company with higher risk of identity theft would need more comprehensive programo 4 steps to Red Flag Program

o Identifyo Detecto Prevent (You are not the cop/would not chase down thief)o Update the program

o Red Flags rule seeks to prevent Identity Thefto Implementing data security practiceso Paying Attention to the red flags

Gramm-Leach-Bliley Act (GLBA)Regulation P enacted in 1999

o Enforced by the FTCo Requires a financial institution to give consumers privacy notices that explain its information

sharing practiceso Restricts the disclosure of nonpublic customer information (NPI)o Must provide customers the opportunity to “opt-out” of the sharing of NPI

Defines customer as a consumer who has a customer (continuing) relationship with a financial institution

Consumer: Individual who obtains/has obtained a financial product/service from a financial institution that will be used for personal, family, or household purpose

o Establishes minimum federal privacy standards (states can adopt stricter standards)Safeguards Rule

o Implements the security requirements of GLBA, requires all financial institutions to design, implement, and maintain safe guards, 3 major goals:

o Policies and procedures to ensure security and confidentiality of customer info o Protect against any anticipated threats to the integrity or security of customer recordso Protect customer info against unauthorized accesso Standards/Safeguards of this ruling encompass nearly every aspect (administrative,

technical, and physical) relating to consumer information possessed by financial institutions

o Financial institutions must have a written information security program that is appropriate to its size and complexity

The Financial Privacy Ruleo Governs the collection and disclosure of customers personal financial information by financial

institutionso Must provide to customers:

o Initial privacy notice with an opt-out notice prior to sharing any NPI Must clearly and accurately show company’s privacy practices, including what

information it collects about its customers and with whom it shares the informationo Annual privacy noticeo A “reasonable opportunity” to opt-out before sharing NPI (such as 30 business days)

o If a customer elects to opt-out, the financial institution must honor that opt-out direction as soon as reasonably practical

Non-Public Personal Information (NPI)o Non-public, personally identifiable financial informationo Any list, description, or other grouping of consumers derived using any personally identifiable

financial information that is not publicly availableo Fact that an idividual is the customer of a particular financial institutiono Name, Address, Social Security Number, Account numberso Cookie obtained from websiteso Info on a consumer report obtained by a financial institutiono Finance company’s mortgage customers with their outstanding loan balances and account

numberso Publicly available information not consider NPI

o Any info financial institution reasonably believes the general public has access too Federal, State, local government recordso Widely distributed media

Types of Noticeso Initial: Sent to customers not later than when relationship is established and prior to sharing of NPI

(must include opt-out clause)o Opt-out: Sent prior to sharing information, provided with every type of notice

o Short-Form: Send to consumers who are not customers, in lieu of full initial notice, prior to sharing NPI

o Simplified: Sent if institution does not disclose NPI to affiliates/nonaffiliated third parties, simple statement of that fact

o Annual: Can be posted on continuously on website in clear and conspicuous mannero Revised: Sent if privacy policy is updated, states new policy, provides new opt-out clauseo Notices must be delivered so each customer can reasonably be expected to receive actual notice in

writing, or electronically if agreed upon with customero Hand delivery, mail, posted on website (requires acknowledgement or receipt)

Prohibitions under GLBAo Financial institutions are prohibited from disclosing their customers account numbers to non-

affiliated companies (other than CRA’s) even if the customer has not opted outo Pretexting: Use of false pretenses, including fraudulent statements and impersonation, to obtain

consumers personal financial informationo Cannot use forged, counterfeit, lost, or stolen documents to get customer information from a financial

institution

FTC Disposal Ruleo Financial institutions need to have at least 1 in office shedder or be serviced by an outside shredding

companyo Need to burn, shred, or otherwise pulverize paper documents to the point where they cannot be

reconstructedo Need to erase or destroy electronic files in way that media cannot be reconstructedo All files need to be purged when changing systemso Routinely destroy consumer reports once there is no longer a legit business need for themSafe Storage Practices

o Literal lock and key with access given on need to know basis

Telemarketing Ruleso Do-not-call list registrations became permanent in 2008o Calls can be placed between 8am and 9pmo Tax-exempt Non-Profit organizations are allowed to call people on do not call listo Violation of the rules can result in a 16k fineo Can call people with whom seller has an established business relationship for 18 monthso Can call an individual whom made an inquiry for 3 months from the inquiry (90 days)o Safe Harbor provision protecting companies who accidentally call numbers on the do not call list

Mortgage Assistance Relief Services (MARS)o Issued by the FTC in 2010o A law that prevents companies from offering help they cannot provide and collecting advance feeso Protects homeowners from mortgage relief scams by imposing specific requirements and

prohibitions on industry professionalso Specifically targets unfair and deceptive practices

o Any service offered to the consumer in exchange for consideration that assists the consumer with any of the following:

o Stopping, preventing, postponing, or saving the consumers dwelling from foreclosureo Negotiating/Obtaining a loan modificationo Obtaining a forebearanceo Negotiating an extension on when a consumer may:

Cure his default on a dwelling, reinstate his dwelling loan, redeem his dwellingo Obtaining any waiver of an acceleration clause or balloon paymento Negotiating, obtaining, or arranging:

A short-sale of a dwelling, a deed-in-lieu of foreclosure, or any other disposition of a dwelling other than a sale to a third party who is not the dwelling loan holder

The Final Ruleo Under the Final Rule, MARS providers must comply with the following:

o Cannot make false/misleading claimso Mandate that providers disclose certain information about their serviceso Bar the collection of advance fees for the provision of MARS

Except in certain circumstances with attorneys collecting them to file documents

Required Disclosures Under MARSo Provider must disclose it is not affiliated with the government and does not have special approvalo Fees and that lenders may not agree to loan modificationso That consumer may stop doing business with provider at any time, can accept or reject offer and is

not obligated to pay fee if he rejects the offero Offer of Relief: Needs to have separate page showing difference between offer of relief mortgage

and current mortgage

Record Keeping under MARSo Providers are required to retain records for a period of 24 months (2 years) from the date the

records are producedo Contracts/agreementso Copies of all written communicationo All documents and phone recordingso All consumer fileso Scripts and marketing materialso Copy of upfront disclosure provided to client

Ethics Ethics: Refers to the actions we take and the decisions we make that reflect a system of beliefs Morality: An overall system of beliefs or values which help us decide right from wrong Morality is an idea or goal, and ethics are what are done to work towards that goal Ethics important because they are a reflection of the brokers morality, the lenders morality, and

the morality of the industry as a whole Tailor the company code of ethics to the particular company and industry Fiduciary Responsibilities are those of loyalty and trust owed by a person who hold funds in a

trust for another person or by another person acting as an agent of another

USA Patriot Act

o Enforced by FinCen (Financial Crimes Enforcement Network)o Part of US dept of Treasury

o 2001, broadened the scope of the Bank Secrecy Act (BSA) to focus on Money Launderingo Ensures that mortgage brokers verify the identity of borrowers and facilitate the flow of

information between financial institutions and the governmento Verify Identityo Maintain Recordso Determine if person is on terrorist watch list

o Institutions have 2 weeks to respond to a request for information by FinCen regarding individuals suspected of money laundering

Suspicious Activity Report (SAR)o Under the BSA, institution must file a SAR upon detection of:

o Criminal Violations that involve insider abuse, total 5k or more when suspect can be identified, total 25k or more regardless of potential suspect

o Transactions conducted or attempted that total 5k or more when bank knows or suspects: May involve money laundering, are designed to evade provisions of the BSA, have no

business purpose, are not typical of the customerMoney Laundering

o Every financial institution is to have an anti money laundering program (AML)o Internal policies, procedures, and controls for detection and preventiono Internal compliance officero Training programo Independent audit function to test programso Must exist as a written policy

o Money Laundering Techniqueso Placement: Introducing unlawful proceeds into the financial systemo Layering: Separating criminal proceeds from origins by using funds in transactions in other

accounts o Integration: Combining illegal proceeds with legal funds to provide legit ownership

Disclosures Under the Patriot Acto 3 main disclosures under the Patriot Act

o Patriot Act Information Disclosureo Customer Identification Formo Patriot Act Identification Form for entities and organizations

Penalties for Violation of Patriot Acto Criminal penalties of up to 1 million per incidento Civil fines of 250k per incidento Executives may be fined or imprisoned depending on severityo Forfeiture of accounts and other assets in question is possible

Record Keeping Requirements for the Patriot Acto Information collected must be kept for at least 5 years after the account closeso Record must show:

o Verification Documentso Description of non-documentary process used for verifying identityo Discrepancies discovered and how they were resolved

The Real Estate Settle Procedures Act RESPA Regulation X enacted in 1974 Enforced by the CFPB (consumer financial protection bureau)The purpose of RESPA/Regulation X is to:

o Help consumers become better shoppers for settlement (closing) serviceso Eliminate Kickbacks and referral fees o Education o Advanced disclosures to home buyers of settlement costso Reduce the amounts homebuyers are required to place in escrows

Covers residential mortgage loans (1-4 family property, condo, single family, etc) Conventional Loans VA and FHA Purchase Loans Construction Loans that will converted into permanent financing Home Equity Loans and Home Equity Lines of Credit A loan secured by vacant or unimproved property is covered under RESPA if a structure or a

manufactured home will be constructed or placed on property within two years RESPA DOES NOT cover:

o Temporary Construction Loanso Bona fide transfer of a loan in the secondary marketo Business/ commercial loan

o 25 acres or moreo All cash sale

RESPA does not care about how much you charge, only how/ where you charge and how you disclose it

Delivery of Disclosures At time of loan application or within 3 business days an originator must give/mail the applicant:

o A mortgage servicing disclosure statement (In any form—may add to model wording)o A GFEo A special information booklet (For ARMS/ non-traditional mortgage products)

In any form—can be translated, stamped with LO company name Must be stand alone document and provided directly to borrower (mail/fax/ in

person) The lender is responsible for ascertaining that the GFE is provided if disclosure were sent by a

broker Docs do not have to be provided if applicant withdraws or is denied within 3 business days The Affiliated Business Arrangement (AfBA) Disclosure statement must be given on a

separate piece of paper at or before the time of a face to face referralo Within 3 business days after a telephone referralo At the time the GFE is provided

Borrower must receive Transfer Notices at least 15 days before the effective date of the transfero Sent by both Transferor and Transfereeo There is a 60 day transfer period in which no late fees can be charged to a borrower who

sends payment to the original servicer

The Good Faith Estimate (GFE)o An estimate of settlement charges a borrower is likely to incur, as a dollar amounto Related loan information must be provided with the estimateo Allows the borrower the opportunity to see the costs that will be associated with the loano Must be sent to the borrower within 3 business days after receipt of application

o Can be delivered by hand, mail, fax, emailo An application that requires a GFE has:

o Borrower Nameo S.S.N.o Gross Monthly Incomeo Property Addresso Estimate of Property Valueo Amount of the Mortgage sought

o If a GFE is mailed to an applicant it is considered received after 3 calendar dayso No one associated with the loan can collect any fee for 3 business days after the mailing of

the GFEo Lender has to refund any fees in violation of this rule at settlement or within 30 calendar days

after settlementTolerances for the amounts included in the GFE

o Zero Tolerance (charges at settlement may not exceed amounts on GFE)o Transfer Taxes

o Lender/Broker origination chargeso Credit or charge while the interest rate is locked or and adjusted origination charge

o 10% Tolerance (Net total charges cannot be greater than 10% above the estimate)o Lender required settlement services where lender selects the 3rd party settlement service

providero Lender required services

Title services and title insurance and owners title insurance when provider is identified by the loan originator

Government Recording Chargeso No Tolerance Restriction

o Settlement services chosen by the borrowero Homeowners insuranceo Daily Interest Charges

Revised GFE Loan originator may provide a revised GFE only if LO documents reasons for providing new form

and Retains documentation for 3 years Revision permissible if:

o Changed circumstance affecting settlement costs (an increase that would exceed tolerances)

o Changed circumstance that result in a change in borrowers eligibility for loan terms specified in GFE

o Expiration of original GFE LO bound to GFE for 10 business days

o Change in rate without a rate locko May provide new GFE up to 60 calendar days prior to closing a new home purchase

Changed circumstances defined as:o Change in the informationo Inaccurate infoo Acts of God, war, disaster, other emergencyo Boundary disputes, need for flood insurance, environmental problems

Charges Line A: Shows the adjusted origination charges (Sum of origination charge and credit charge Line B: Shows all other services Add lines A and B to get total estimated settlement charges

The HUD-1 Settlement Statemento Also called the Closing Statemento Itemizes all payments and fees for the actual settlement costs provided for purchase loano Copies are provided to the buyer, the seller, and the lendero HUD-1A for refinancing o Must provide copy to borrower (at borrowers request) 1 business day before settlement

o Section 2603o Whole dollar amounts presented o Same charges as GFE, but finalized

o Prepared by the settlement agent

Mortgage Application, Underwriting, Appraisals

Prequalification: An estimate made by an MLO of the amount of a loan for which the borrower can qualify based on

his statements regarding his financial conditionPreapproval

Estimate of the amount of a loan for which the buyer can qualify, based on Verification of his income and assets

Final Approval Subject to property borrower wants to buy

o Value to support the loan (Appraisal)o Marketable Title (Title Report)o Suitable Condition (Inspection)

OriginationLoan origination: Process of making or initiating a new loanUniform Residential Loan Application

Fannie Mae form 1003 or Freddie Mac form 65 o FNMA 1003 or FHLMC 65

Used when loan is to be sold to Fannie/Freddie, insured by FHA, guaranteed by VAbo Can be completed by Phone, Mail, Online, In-Person

Applicants sign at time of completion or as soon as possible after phone call Loan originator must provide his unique NMLS identifier, phone number, company identifier,

company’s addressFour categories of information on Application

Type of Mortgage and Terms of loan Property information and purpose of loan Borrower Information Details of Transaction

1. Type of Mortgage and Term of Loan Mortgage applied for (Conventional, VA, FHA, USDA, other) Terms

o Amount (rounded to nearest 0$)o Interest Rateo Termo Amortization Type (Fixed, graduated payment GPM, ARM, other)

2. Property Information and Purpose of Loan Address and legal description (Legal description noted by reference to deed, title report, insurance

policy, etc) Purpose of loan (Purchase, refinance, construction, construction to permanent financing, other) Occupancy (Primary, secondary, investment)

Owner-occupied is considered better security and therefore has higher LTV qualifications available

Investment Property if owner intends to rent out property and not occupy it more than the greater of 14 days or 10% of the number of days it is rented at fair value

o If loan is for a rental property, Fannie and Freddie will require an Operating Income Statement, current lease, last two years federal tax returns

o Schedule E from IRS form 1040 Construction Loan

o Year lot acquired, original cost, amount of any existing lienso Present value of lot, estimated cost of improvements, and total of the two figures

Refinance Loano Year property was acquired, original cost, amount of existing liens, purpose of refinance

How the Title will be heldo How names of borrowers should appear on legal docso How borrowers wish to hold title (tenants in common, joint w/rights of survivorship, etc)

Whether borrowers will have: A Fee Estate (ownership of land) or A leasehold estate (if on leased land) and remaining lease term if applicable

Source of Down Payment (Savings, gifts, sale of property, seller contribution, stocks, etc) If applicant is borrowing money (subordinate financing) he must explain how and from whom

o Considered fraud if borrowed money is not disclosed on application E.G. under the table money from a Silent Second

o A Gift letter (stating gift does not need to be repaid) from the gift giver will need to be provided if the gift is to be used an was made less than 60 days prior to the application

Gift considered seasoned and treated as an asset it older than 60 dayso If the borrowers loans exceed a certain percentage of the property value, underwriter will

put some sort of mortgage insurance on transaction to protect lender3. Borrower Information

Name, SSN, phone number, birth date, years of schooling, marital status (married, unmarried, separated)

Number/ages of dependents Past 2 years of residence history (addresses, whether owner or renter)

o Used to obtain a Verification of Mortgage (VOM) Co-Borrower info needed if using income or assets for qualification

4. Employment Information Past 2 years (names, addresses, numbers, titles held, length of employment, etc) Verify income from each job to show applicant has regular income and can sufficiently make

payments The Verification of Employment (VOE) generally shows all of the employment info

o Not handled by MLO or applicant to avoid forgery Self Employed Borrowers

o Owns 25% or more of a businesso Needs to verify employment with current business license, a year-to-date profit and loss

statement prepared by an accountant, balance sheets and personal/business tax returnso IRS Form 4506 (Request for copy of tax return)o IRS Form 4506-T (Request for Transcript of Tax Return)

Authorizes tax account info, W-2’s and 1099 info to be mailed to mortgage companyo IRS Form 8821 (Tax information Authorization) authorizes release of confidential tax info

to lender5. Monthly Income and Combined Housing Expense Information

Determination of Sufficient and Durable income to repay debts Gross monthly income

Self Employed or commissioned income is averaged over a two year period Net rental income (if positive number)

o If negative, it is included in monthly obligations

6. Assets and Liabilities Assets: Cash, Verification of Deposits (VOD) for checking/savings, liquid assets (easily

converted to cash), REO (Real Estate Owned) Liabilities: Debts and other payments

o Any payment obligation extending longer than 10 months will be included in DTI Pledged Asset

o May be both an asset and a liabilityo Item a borrower hold equity in, but still owes money on (EG. Car loan)

Schedule of Real Estate Owned lists each property the borrower owns and the payments/income from each

7. Details of Transaction: o Rate, term, amount, etc.

8. Declarationso Must disclose any outstanding judgments o Disclose if, in the past 7 years, have declared bankruptcy, been foreclosed, given lender deed in

lieu of foreclosureo A borrower in a refinance or second mortgage transaction cannot be a first time homebuyer

o Person who has had no ownership interest in residential property during 3 year prior to date of purchase

o Displaced homemaker or single parent is considered first time buyer if he had no ownership interest in a principle residence

9. Acknowledgement and Agreement: o Signatures and verifying all information is trueo Electronic Record: Record created by electronic means

o Oral communication not consider electronic record10. Information for Government Monitoring Purposes

o Sex, Race, Ethnicityo Voluntary o MLO must make a note based on visual observation if applicant unwilling to disclose

ProcessingLoan processing: The preparation of the loan package for underwriting.

o Collection and verification of information about the borrowero Helps determine the borrowers ability to repay the loan

Limited Documentation o Alt-A loanso Stated Income, Stated Assetso Stated Income, Verified Assetso Verified Income, Stated Assets

Underwriting

Underwriting: The process of deciding whether to make a loan based on credit, employment, assets, and other factors

Freddie Mac automated underwriting system (AUS): Loan ProspectorFannie Mae automated underwriting system (AUS): Desktop Underwriter

The 4 Traditional C’s of Underwriting1. Collateral2. Capital3. Capacity4. Character (Credit History)

Collateral: o Refers to the property used as security for the loano Need appraised value to support loano Property type has to eligible for type of loano Intended use of property has to be suitable for loan program

Capital: o Borrowers cash and liquid assets availableo Borrower has to have necessary down paymento Consider if cash needs to be repaid to another lender

Capacity: o Applicants ability to make paymentso Current Incomeo Past/Present Employment (Verified by VOE)o Debt ratios, type of employment (salary or self-employed), cash reserves, type of loan, purpose of

loanCharacter (Credit History):

o Considers borrowers credit report, credit score, and factors included in eacho Foreclosures, bankruptcy, judgments, liens, credit delinquencies, new credit applications in past

yearo Chapter 7 Bankruptcy: Liquidation of assets to cancel debts; a fresh starto Chapter 13 Bankruptcy: Implementation of a payment plan over 3-5 years to pay off

debts Only bankruptcies declared within the past 7 years need to be disclosed on the

1003o A credit score is based on payment history, amounts owed, length of credit history, types of credit

in use, and recent attempts to obtain new credito The primary borrower will always be the person with the higher income

o An underwriter can deny, suspend, or approve a loan applicationo Will ask for more docs if the risk associated with the loan is too high

o An applicant who is rejected or offered terms other than those for which he applied (Change of Terms, COT) has the right to request a statement of the reasons for the adverse action and to obtain a copy of his credit report (if adverse action is based on the info in that report)

The Appraisalo An appraisal is an Opinion of Valueo Must meet the Uniform Standards of Professional Appraisal Practices (USPAP)

o A Comparative Market Analysis (Broker Price Opinion) not acceptable as an appraisal for underwriting purposes—Normally used by real estate agent to determine market listing for house

o Market Value: Probable price a property would bring in a competitive and open market

o FHA, VA, and Conforming Loans require the appraiser to use the Uniform Residential Appraiser Report (URAR) (Fannie Mae form 1004/Freddie Mac 70)

o Appraiser must also attach a Market Conditions Addendum (Fannie Mae 1004MC/Freddie Mac 71)

o 3 Basic Appraisal Approaches Uses to Estimate Value:o The Sales Comparison (or market data) Approacho The Income (Or capitalization) Approacho The Cost Approach

The Sales Comparison (market data) Approacho Allows the appraiser to compare similar, recently sold propertieso Minimum 3 comparableso FNMA and FHLMC prefer that comps:

Should not have net dollar amount adjustments that exceed 15% of the sales price of the comparable

Should not have gross dollar amount adjustments that exceed 25% of sales price of comparable

The Income Approacho An estimate of the rent that a property could earno The Capitalization Rate is the rate of return the new owner can expect to receive

The Cost Approacho Determination of the amount necessary to construct a replica of that property in its existing

condition on the existing locationo Considers:

Site valuation Replacement cost Depreciation

Home inspections: Report on the structural defects in a home

Providing Appraisal:o The lender must provide a copy of each written appraisal

o 3 business days prior to consummation of the loano 30 days after the creditor determines that the loan will not be consummated

Prohibited Acts or Practiceso Lender may not influence or encourage and appraiser to misstate or misrepresent the dwellings

valueo Cannot imply that retention of appraiser depends on value for certain dwellingo Exclude appraiser b/c he does not set value that meets minimum standard for loano Tell appraiser minimum value neededo Have compensation dependent on appraisal value

Title

Title Search: Examination of public records to trace the conveyances and encumbrances relating to the property and to ensure that no one except the current owner has a valid claim to the propertyTitle Commitment (Title Report): The title insurer’s commitment to issue a title insurance policy

Title Insurance Policy: o Standard coverage will insure against any item affecting title that has been made a matter of public

recordo Insure against hidden risks not disclosed in a recorded document

o Extended Coverage covers items requiring an inspection of the property to discover and losses caused by unrecorded deeds and liens

o Title insurance paid by borrow for lenders coverage