Compliance FAQs

The Truth-in-Lending disclosure requirements for certain mortgage and variable rate transactions are found in Regulation Z (12 CFR § 226.19(a)). If a loan is subject to RESPA and is secured by a consumer’s dwelling (and is not a HELOC or timeshare), the creditor is required to deliver the Truth-in-Lending Disclosure Statement or place it in the mail not later than the third business day after the creditor receives the consumer’s application. This paragraph also requires that the disclosures be delivered not later than the seventh business day before consummation of the transaction. Should the APR disclosed on this initial disclosure become inaccurate, this paragraph also requires that revised disclosures be received by the consumer not later than three business days before consummation.

12 CFR §226.19(a)(4) requires that disclosures made pursuant to the provisions described above contain the following statement, “You are not required to complete this agreement merely because you have received these disclosures or signed a loan application.” However, the Truth in Lending Act doesn’t include a corresponding provision that the statement be included on disclosures provided at closing. Accordingly, the DocMagic Truth-in-Lending Disclosures are programmed to include the statement based on package type, so that the statement will appear only on disclosures provided prior to closing. However, this default programming can be customized at the account level. DocMagic customers who prefer to have the statement appear on all TILs, regardless of package type, may contact DocMagic’s Customer Service Department for assistance.

If you should have questions about the information presented in this article, please contact DocMagic’s Compliance Department.

Many state anti-predatory lending laws provide a definition of “points and fees” that refers to Section 32 (12 C.F.R §226.32). The definition of “points and fees” in Section 32 includes (among other charges) “All items listed in §226.4(c)(7) (other than amounts held for future payment of taxes) unless the charge is reasonable, the creditor receives no direct or indirect compensation in connection with the charge, and the charge is not paid to an affiliate of the creditor.” To understand which fees are to be included in the state high cost test, then, one must turn to a different section of Regulation Z – 12 C.F.R. §226.4(c)(7).

Regulation Z (12 C.F.R. §226.4) implements the Truth-in-Lending Act by providing a definition of “finance charge”. Regulation Z Section 226.4(c)(7) specifically addresses which charges can be excluded from the finance charge in a transaction secured by real property or in a residential mortgage transaction. (The section number gives the charges their nickname.) Although these charges are excluded from the finance charge generally, they are included as points and fees in the Section 32 test if they are paid to the creditor or an affiliate of the creditor, and may be included in state high cost tests, as well, under certain circumstances.

DocMagic has the ability to calculate the APR by either excluding the per diem interest period or extending the loan term by the per diem interest period. Both methods are authorized under Reg. Z Section 226.17(c)(4).

DocMagic's default is to exclude the per diem interest period so that the amount financed is spread over equal intervals. Generally speaking, excluding the per diem interest period generally yields a higher APR that extending the loan term by the per diem interest period, assuming the same loan parameters.

If you wish to modify DocMagic's default for calculating APR (i.e., extending the loan term by the per diem interest period), you may ask any Customer Service Representative, at (800) 649-1362, to make this change for you.

Generally speaking, a charge is a finance charge unless it is specifically excluded. You might be able to squeeze this into the exemption afforded by Reg. Z Section 226.4(c)(7) for title examination and related charges, but that is a stretch. The better, more conservative approach would be to treat this type of charge as a finance charge.

Here's why it would be a stretch to characterize a fee for a closing protection letter (CLO) as a 4(c)(7) charge (i.e., a non-finance charge). At first glance, one may think that as a title insurance company issues closing protection letters, a fee for such letter may be considered a "[F]ee[s] for title examination, abstract of title, title insurance, property survey, and similar purposes" under Reg. Z Section 226.4(c)(7)(i). But, it is not. A closing protection letter has nothing to do with title examination, title insurance, etc.

A closing protection letter identifies "the circumstances under which a title underwriter will accept liability for its agents' acts or omissions. Closing protection letters are issued to proposed insured lenders and owners who request them. The closing protection letter: 1) assures the proposed insured that the escrow officer who handles the closing will properly apply the funds placed in escrow to clear the encumbrances on title; and 2) indemnifies the proposed insureds against loss due to the issuing agent's handling of the lender's or owner's funds or documents in connection with the closing. The protection offered by the closing protection letter includes protection against the fraud or dishonesty of the agent issuing the title underwriter's policy.2" This info was pulled from this web page.

Does this coverage have anything to do with title? No. Accordingly, you cannot justify treating a CLO fee as a non-finance charge. In our opinion, it should be treated as a finance charge.

The Homeowners Protection Act of 1998 (HPA) governs the circumstances under which borrowers may request that Private Mortgage Insurance (PMI) be terminated and when lenders must terminate PMI. The provisions of HPA apply only in certain circumstances. Specifically, HPA applies to "residential mortgage transactions." The key definitions in HPA are "residential mortgage" and "single-family dwelling":

(15) Residential mortgage transaction - The term "residential mortgage transaction" means a transaction consummated on or after the date that is 1 year after July 29, 1998, in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained against a single-family dwelling that is the principal residence of the mortgagor to finance the acquisition, initial construction, or refinancing of that dwelling.
(14) Residential mortgage - The term "residential mortgage" means a mortgage, loan, or other evidence of a security interest created with respect to a single-family dwelling that is the principal residence of the mortgagor.
(17) Single-family dwelling - The term "single-family dwelling" means a residence consisting of 1 family dwelling unit.

As you can see, the transaction must involve a single unit, principal dwelling - by definition, these exclude second homes and non-owner occupied residences. Only single unit principal residences are subject to the cancellation/termination provisions of HPA.

As provided in the RESPA FAQs for GFE Block 3, the VA Funding Fee (and other fees specific to government loan programs) and any up-front mortgage insurance premiums should be displayed in Block 3 of the GFE.

Although we previously placed the VA Funding Fee and Rural Housing Guaranty Fee in the first available line in the 800 series, we modified the HUD-1 programming to include these fees in Line 902 instead as they are a type of upfront mortgage insurance premium for VA and USDA loans. Upon further reflection and consultation with a RESPA expert, we have decided that the more appropriate place to reflect the VA Funding Fee and Rural Housing Guaranty Fee is Line 902. (Note that Line 902 of the HUD-1 references Block 3.) Furthermore, we believe that this change complies with the HUD-1 instructions for Line 902, which provide:

"Lines 901-904. This series is used to record the items which the Lender requires to be paid at the time of settlement, but which are not necessarily paid to the lender (e.g., FHA mortgage insurance premium), other than reserves collected by the Lender and recorded in the 1000 series."

When the fee is required to obtain a loan guarantee or loan insurance, it makes little sense to treat it as something other than a mortgage insurance premium. The VA Funding Fee, Rural Housing Guaranty Fee, PMI premiums, state housing authority fees, and FHA MIP all buy the same service - protecting the lender when the borrower defaults.

The "his/her agent" should be the default verbiage when the property is in PA and if not in PA the "attorney-in-fact" verbiage would default. The reason for using "agent" is because the power of attorney statutes in PA use "agent" instead of attorney-in-fact. 20 Pa. Stat. § 5601(f) states: As used in this chapter (Chapter 56. Powers of Attorney), the term "agent" means a person designated by a principal in a power of attorney to act on behalf of that principal.

Here's what Appendix A of Reg. X provides regarding "no cost" loans:

In the case of "no cost" loans where "no cost" encompasses third party fees as well as the upfront payment to the loan originator, the third party services covered by the "no cost" provisions must be itemized and listed in the borrower's column on the HUD-1/1A with the charge for the third party service. These itemized charges must be offset with a negative adjusted origination charge on Line 803 and recorded in the columns.

Appendix A further provides:

In the case of "no cost" loans, where "no cost" refers only to the loan originator's fees, the amounts shown in Lines 801 and 802 should offset, so that the charge shown on Line 803 is zero. Where "no cost" includes third party settlement services, the credit shown in Line 802 will more than offset the amount shown in Line 801. The amount shown in Line 803 will be a negative number to offset the settlement charges paid indirectly through the loan originator.

The New RESPA Rule FAQs, dated January 28, 2010 further provide the following regarding "no cost" loans:

GFE - Block 2 (p. 27):
1) Q: How does a loan originator show a "no cost" loan on the GFE?
A: Where a "no cost" loan encompasses the loan origination charge and some or all third party fees, a credit should be listed in Block 2 of the GFE to offset all fees encompassed in the "no cost" loan resulting in a negative number in Block A to cover the intended third party fees, listed in Blocks 3 thru 11 as appropriate.
GFE - Block 2 (p. 27):
4) Q: The regulation states that while the borrower‘s interest rate is locked, the credit or charge for the interest rate chosen and the adjusted origination charge may not increase from the amount shown on the GFE. On a "no-cost" loan that covers third-party costs where the rate has been locked, the GFE should show a credit for the interest rate chosen, in an amount sufficient to cover the estimated loan originator and third party fees. If the actual third party fees at closing are lower than stated on the GFE, may the loan originator reduce the amount of the credit to match what is needed to pay the actual third party and loan originator fees?
A: No, the amount of the credit may not be reduced. The loan originator may choose to: 1) have the amount of the credit remain the same as stated on the GFE to cover additional closing costs previously not anticipated to be included in the "no-cost" loan; 2) apply a principal reduction to the principal balance; 3) reduce the interest rate and the credit accordingly; or 4) have the credit remain the same, resulting in cash to the borrower.
HUD-1 - 800 series (p. 44):
3) Q: How does a settlement agent show a "no cost" loan on the HUD-1?
A: In the case of "no cost" loans where "no cost" refers only to the loan originator‘s fees, a credit equal to the amount shown in Line 801 on the HUD-1 must be given in Line 802 of the HUD-1 so that the adjusted origination charge in Line 803 of the HUD-1 equals zero. In the case of "no cost" loans where "no cost" encompasses some or all third party fees and the origination charge, a credit should be listed in Line 802 of the HUD-1 to offset all fees encompassed in the "no cost" loan, resulting in a negative number for the adjusted origination charge on Line 803 of the HUD-1. The third party services covered by this offset must be itemized and listed in the borrower‘s column.

"No Cost" Loans Referring to Both Loan Originator's Fees and All Third Party Settlement Services

Accordingly, for "no cost" loans, where "no cost" refers to both loan originator's fees and all third party settlement services, you should enter charges as you normally would, but as paid by the lender. Then, enter a Miscellaneous charge (you can write any description you want, such as "Lender Credit to Borrower"); enter the sum of all origination charges and settlement costs, plus prepaid interest and the starting balance for impounds, and less any premiums plus discount points, as a negative value (remember to select "Days Prepaid Interest" under DocMagic's "Terms" tab as being paid by the lender if the lender will be covering per diem interest); select the "Rate, Credit or Charge" category and designate this Miscellaneous charge as paid by the lender. See below screen shot and last fee on the list as an example:

If you enter the data in the manner described, the borrower column should equal zero in Line 1400. Note that if the borrower will be responsible for paying only per diem interest, then make sure to select "Days Prepaid Interest" under DocMagic's "Terms" tab as being paid by the borrower. In this case, the Rate, Credit or Charge amount entered would be reduced by the amount of per diem interest so that Line 1400 will equal the amount of per diem interest only. For example, in the above screen shot, per diem interest equals $616.67. Thus, the Miscellaneous charge of Lender Credit to Borrower should equal ($3630.94) so that the Borrower's Column in Line 1400 equals $616.67.

"No Cost" Loans Referring to Loan Originator's Fees Only

In the case of "no cost" loans, where "no cost" refers only to the loan originator's fees, the amounts shown in Lines 801 and 802 should offset, so that the charge shown on Line 803 is zero. There are two ways to reflect a credit in Line 802. (Check with your investor to determine whether one way is preferred over the other.) The first way would be to enter as a Miscellaneous charge (you can write any description you want, such as "Lender Credit to Borrower") an amount equal to the total of all origination fees and charges, expressed as a negative value, paid by the lender to the borrower, with the "Rate, Credit or Charge" category selected. See screen shot below:

The other way to enter the "Lender Credit to the Borrower" would be to enter a yield spread premium in the "Premiums" section of DocMagic's "Charges/Fees/Premiums" tab in an amount equal to the total of all origination fees and charges, designated as paid to the Borrower, like the below:

Lines 801, 802 and 803 will result in the same values under either method used above. Below is a screen shot of Lines 801, 802 and 803, using the values in each one of the above, two examples:

In the case of an overstated APR, it is difficult to answer your question and give you a concrete answer, because whether you need to re-disclose depends on the circumstances. Section 226.22 and Section 226.18(d)(1) of Reg. Z are the governing regulations that would help guide you in making the determination on whether or not to re-disclose.

In essence, you would first have to look to see whether APR exceeds applicable tolerances, up or down, under Section 226.22(a), and, if they do, you then would need to apply Sections 226.22(a)(4), which includes an analysis under Section 228.18(d)(1) to see if the finance charge exceeds the tolerance, and then apply Section 226.22(a)(5). Bottom line, if the APR decreases (is overstated) beyond Reg. Z tolerances, it can be, but is not always, "exempt" from re-disclosure under Reg. Z and, therefore, MDIA. Re-disclosure may be required if the overstated APR impacts the payment stream, loan amount, etc.

Click here for a link to Reg. Z so that you can refer to the above-referenced sections.

Excerpt from Section 226.22 states:

(4) Mortgage loans. If the annual percentage rate disclosed in a transaction secured by real property or a dwelling varies from the actual rate determined in accordance with paragraph (a)(1) of this section, in addition to the tolerances applicable under paragraphs (a)(2) and (3) of this section, the disclosed annual percentage rate shall also be considered accurate if:
(i) The rate results from the disclosed finance charge; and
(ii)(A) The disclosed finance charge would be considered accurate under §226.18(d)(1); or (B) For purposes of rescission, if the disclosed finance charge would be considered accurate under §226.23(g) or (h), whichever applies.

(5) Additional tolerance for mortgage loans. In a transaction secured by real property or a dwelling, in addition to the tolerances applicable under paragraphs (a)(2) and (3) of this section, if the disclosed finance charge is calculated incorrectly but is considered accurate under §226.18(d)(1) or §226.23(g) or (h), the disclosed annual percentage rate shall be considered accurate:

(i) If the disclosed finance charge is understated, and the disclosed annual percentage rate is also understated but it is closer to the actual annual percentage rate than the rate that would be considered accurate under paragraph (a)(4) of this section;

(ii) If the disclosed finance charge is overstated, and the disclosed annual percentage rate is also overstated but it is closer to the actual annual percentage rate than the rate that would be considered accurate under paragraph (a)(4) of this section.

Following are examples from the Official Commentary illustrating the above:

22(a)(4) Mortgage loans.

1. Example. If a creditor improperly omits a $75 fee from the finance charge on a regular transaction, the understated finance charge is considered accurate under §226.18(d)(1), and the annual percentage rate corresponding to that understated finance charge also is considered accurate even if it falls outside the tolerance of1/8of 1 percentage point provided under §226.22(a)(2). Because a $75 error was made, an annual percentage rate corresponding to a $100 understatement of the finance charge would not be considered accurate.

22(a)(5) Additional tolerance for mortgage loans.
1. Example. This paragraph contains an additional tolerance for a disclosed annual percentage rate that is incorrect but is closer to the actual annual percentage rate than the rate that would be considered accurate under the tolerance in §226.22(a)(4). To illustrate: in an irregular transaction subject to a1/4of 1 percentage point tolerance, if the actual annual percentage rate is 9.00 percent and a $75 omission from the finance charge corresponds to a rate of 8.50 percent that is considered accurate under §226.22(a)(4), a disclosed APR of 8.65 percent is within the tolerance in §226.22(a)(5). In this example of an understated finance charge, a disclosed annual percentage rate below 8.50 or above 9.25 percent will not be considered accurate.

The conservative approach would be to simply re-disclose. Keep in mind that even if there is no obligation to disclose under the above provisions in the case of an overstated APR, there are some investors who mandate re-disclosure even if the APR has decreased. So, you should check on the policy of each one of your investors.

We've also written an article here regarding the MDIA requirements and the implementation of the APR Threshold Variance Audit.

Here's a link to the most recent RESPA rules: http://www.hud.gov/offices/hsg/ramh/res/resparulefaqs422010.pdf.