Section 7 Loan Disclosures

Transcription

1 Section 7 Loan Disclosures Many of the Loan Disclosures are forms have been designed by the Federal Reserve Board. Their purpose is to protect and inform consumers and prospective borrowers who are interested in obtaining a residential mortgage loan. In the Evergreen State of Washington for example, there are about 18 Loan Disclosures that are normally used for every mortgage loan. There are a few others that are used only when applicable. And there are many states that have their own set of state specific disclosures in addition to the federal forms. The importance of these Loan Disclosures in terms of what you do as a Loan Officer is that you must introduce and present these Disclosures to your prospective borrowers and loan customers. You usually do this during your first meeting with them, right after completing the In presenting each different Loan Disclosure you are informing your loan customers of their rights as customers and prospective borrowers and some of the important things you do in processing their home loan. These Loan Disclosures also inform them of some lending options that are available to them that they may not have been aware of. After you present each Disclosure, ask them to sign each Disclosure as well. This shows (e.g. The Federal Reserve Board and/or HUD) that you have reviewed each of those signed Disclosures with your customers. One of the objectives here (with these Loan Disclosures) is to reduce as much as possible any false assumptions that our customers may have about their loan and inform them of their rights and options they are entailed to and can expect - before and during the loan process towards their loan closing. It is suggested that you get your hands on a complete set of these Loan Disclosures from the lenders you currently work with. If you cannot obtain a set of these Loan Disclosures then you are welcome to copy the Loan Disclosures offered in this course as Exhibit V. The following discussion follows and will review those Loan Disclosures in the same order as they are shown in the Exhibit. The best and ideal time to present the Loan Disclosures is right after your customers have signed the If your borrowers are refinancing then they have seen these before. What you are trying to achieve when presenting these Loan Disclosures is a nice signing operation whereby you present the important points of each Disclosure and then have them sign it. As you ll find out, most clients do not want you to go over each disclosure in any meaningful detail. When presenting each Disclosure, state the Title or Titles on each Disclosure and explain the main purpose and point of each and Copyright, 2007, The Wealth Preservation Institute ( 1

2 then ask them to sign off that they received it. The important thing here is that you have a complete understanding of each disclosure in its entirety so you can give a very detailed description and your customers have a good idea of what each Loan Disclosure is all about and understand the main message or messages of each. Let's now go over each one of these Loan Disclosures 1. Equal Credit Opportunity Act 2. Borrowers Certification and Authorization 3. Fair Credit Reporting Act / Right to Financial Privacy Act of 1978 / Flood Disaster Protection Act of 1973 => this is sometimes a 3-part form. 4. Floating At Market 5. Lock- In 6. Washington Broker Application Disclosure (2-page form) 7. Mortgage Servicing Transfer Disclosure Statement (also a 2-page form) 8. Occupancy Statement 9. Borrower - Broker Disclosure Form 10. Borrower s Notification and Authorization 11. Affiliated Business Arrangement Disclosure Statement Notice 12. Anti-Coercion Statement 13. Washington Choice of Insurance Notice 14. Appraisal Disclosure 15. Washington Purchase Money Borrower Notification 16. Privacy Protection Policy Notice 17. Patriot Act Information Disclosure 18. Notice To The Home Loan Applicant 19. PMI - Initial Disclosure for Adjustable Rate Mortgages 20. PMI - Initial Disclosure for Fixed Rate Mortgages 21. Adjustable Rate Mortgage Disclosure 22. Balloon Loan Disclosure 23. Request for Copy of Transcript of Tax Form (4506) If you would like to see a copy of your state specific disclosures, please info@thewpi.org. As a Loan Officer, you should read all these Loan Disclosures in detail to be very familiar with each and to be able to field any questions your customers may throw at you. In discussing each one of these Loan Disclosures you should first state what the main purpose(s) of that Disclosure is. Then state what is listed in italics. 1. Equal Credit Opportunity Act: Purpose: This Disclosure is often referred to as the ECOA Disclosure. This informs them that it is against the law for any lender to discriminate against Copyright, 2007, The Wealth Preservation Institute ( 2

3 anyone on the basis of race, color, religion, national origin, sex, marital status, and age (applicants need to be of legal age to enter into a contract - in that state). This is not news to your customers. Statement: This Disclosure informs you that it is against the law for any lender to discriminate against anyone on the basis of race, color, religion, national origin, sex, marital status, and age. If you feel you have been then there is a list of companies here that would be happy to hear from you regarding this. 2. Borrowers Certification and Authorization: Purpose: This Disclosure informs your customers: 1. That in pursuing this loan request, all the information that they provide to you (e.g. on the 1003) should be true to the best of their abilities. And, that they should not hold back any important and/or pertinent information that you should have regarding them and the subject property (being refinanced or purchased), and 2. Their signing of this form authorizes you to pull a Credit Report and obtain all documentation that you require in processing their loan. Statement: This Disclosure authorizes us to pull a Credit Report and obtain the other things we need in processing your loan. Also, that all the information you have given me (on the 1003 which at this time has been done) is true to the best of your ability. 3. Fair Credit Reporting Act / Right to Financial Privacy Act of 1978 / Flood Disaster Protection Act of 1973 => this is a 3-part form. Purpose. As you can see, this is a three-part form requiring your customers to sign below each part. Fair Credit Reporting Act: Informs your customers that if their loan request is denied, due to what is seen on their Credit Report, then you or your company will inform them of this soon afterwards. Usually, by the time of credit denial (they receive a statement of denial from you or your company) your customers are also told the name, address, and telephone number of your Credit Reporting company and are entitled to receive a free Credit Report, from that Credit Reporting company, if they wish. Statement. Just tell them the purpose as stated above. Right to Financial Privacy Act of 1978: This lets your customers know that if the Department of Housing and Urban Development or the Department of Veterans Affairs wants to - they can access the records of your customer s loan when and if they so choose. And, they can do this without giving prior notice or obtaining further permission from those customers in doing this. Copyright, 2007, The Wealth Preservation Institute ( 3

4 Statement: This states that the Department of Housing and Urban Development or the Department of Veterans Affairs can review your loan file if and when they wish to without your prior consent. Flood Disaster Protection Act of 1973: Purpose: This informs your customers that if their home is (or becomes) in a flood zone then they will need to carry flood insurance. Statement: Tell them exactly that. 4. Floating At Market: Purpose. This Disclosure lets them know that at this time they are floating their interest rate (it is not locked at this time). Also tell them that (in a manner of speaking here) that it is their responsibility to call you when they are ready to lock-in the interest rate on their loan. It also states a reasonable time that we will follow up and lock the interest rate on that loan - after they request their rate lock. Statement: Regarding the interest rate on a mortgage loan, there are only two positions you could be at any time. You are either floating your interest rate or have locked in a specific interest rate on your loan.. At this time we have not locked-in an interest rate on your loan. However, when you are ready to lock-in your rate then just let me know and I will follow-up immediately and lock-in your (requested) rate if I can. 5. Lock- In: This is a Lock-in form. Normally you will not be completing this form with your customers at that first meeting time unless you are certain you can lock them in at that requested interest rate and one that achieves the goals of the loan and makes your customers happy. At the time you do lock-in their interest rate this form needs to be completed (and signed by your customers) and becomes part of your loan file. When it comes to Locking In the rate for your customer you should always make note of your conversation with your customers (giving you permission to lock their rate) and your subsequent lock-in actions on your Comments Sheet in that loan file. When you do lock-in that rate with the respective Lender then note this on the Comments Sheet as well (e.g. 6/23/06 - Faxed Rate Lock-In Sheet to XYZ Lender at 11:00am, for 7.0%, 30-Year Fixed rate loan for $125,000. Called XYZ Lender later at 11:15am. Fax of Rate Lock-in received and lock-in confirmed. They said they would fax us a Lock-in confirmation later today). 6. Washington Broker Application Disclosure (2-page form): Purpose: This is an extremely important Disclosure it epitomizes one of the most important aspects of the Real Estate Settlement Procedures Act (affectionately referred to as RESPA). This Disclosure lets the customers know Copyright, 2007, The Wealth Preservation Institute ( 4

5 that at least 3 business days after you have met with them and completed their 1003 that they can expect from you a completed Good Faith Estimate (e.g. showing the amount of their loan, the interest rate, and all their loan costs) and the Truth-In-Lending Statement (required by TILA). It also goes over again (and confirms) the customer s available options regarding locking or not locking their rate. Additionally, it talks about Funds Held in Trust, for third party providers (for the Credit Report, appraisal, etc.). And finally, whether the Lock-Fee is refundable or not (normally not, if it is required at all). Statement. Tell your customers what is stated above in your own words. 7. Mortgage Servicing Transfer Disclosure Statement (also a 2 page form): Purpose: This Disclosure basically informs them that their loan could be sold to another Lender or what is called a Mortgage Servicer (company who receives the monthly mortgage payments). Statement. As you probably know, banks and lenders commonly sell their loans to other lenders or mortgage servicers - those who you send your monthly mortgage payments to (if they are refinancing this is nothing new to them). We at (your company s name) do not service our loans so you would not make your mortgage payments to us. You would make your monthly mortgage payments to whoever is your lender or current mortgage servicer at that time. If your loan is sold, then this would in no way change the features of your loan. Also, there are two main areas I wish to point out on this Disclosure. Under the: Transfer Practices and Requirements - If your mortgage loan is sold then your current mortgage servicer must notify you of this in writing at least 15 business days prior to that transfer. And, the new mortgage servicer must inform you of this transfer within 15 business days of receiving your loan file. This is so you know where to send your next mortgage payment and (hopefully) prevent your mortgage payment from being late during this process. Under Complaint Resolution. Here it says that if you have any questions or concerns - just put it in writing and send it to your current mortgage servicer and they must respond to that written inquiry or request within 20 business days. At this point, you should offer to help them with any of their questions at any time, and that you are their initial point of contact. Sometimes with servicing issues however they may need to contact the lender directly. 8. Occupancy Statement: Purpose: This Disclosure confirms that it is the Customer s Intent to occupy the subject property as their primary residence. This is pretty straightforward. However, sometimes you may get a what if question from you customers such as, What if my company transfers me to another location and Copyright, 2007, The Wealth Preservation Institute ( 5

6 we decide to rent this property after we move away? The important word in my first sentence here is: Intent. In signing this form it should be the Intent of your customers to occupy this home (subject property) as their primary residence. Things may change, but at the time of loan application and loan funding, it should be their intent for this home (subject property) to be owner-occupied (O/O). However, if this home loan is for an investment type of property that will not be owner-occupied (NOO) and/or it is not the intent of the borrowers to occupy the subject property as their primary residence (as O/O) then you would not present this Disclosure to them. 9. Borrower - Broker Disclosure Form: This Disclosure, as you can see, has two important sections: Section 1. Nature of Relationship Purpose: This relates to your relationship as a Loan Officer to your company (generally as an independent contractor or as an employee) and to your customers for which you are providing your services to assist them in finding a home loan. Also, although your mortgage company may be approved with about 200 Wholesale Lenders (it states here that) you cannot be expected to know what each of their interest rates are at any given time. Section 2. Our Compensation: Purpose: This paragraph, in a nutshell, attempts to tell the customer: 1. How you, as Loan Officer, gets paid (excluding the origination fee) from a loan as it relates to the interest rate that is offered the customer (our Rebate and Yield Spread Premium), 2. The Buy down Option, to pay for a lower rate, and 3. The customer s option to obtain a loan with less or no costs on their loan (a No Cost Loan) by obtaining a higher interest rate and paying for these (those loan costs) through an increased Rebate (Yield Spread Premium). Statement. You typically don t want to go into a whole lot of detail here but try to present the information in a concise and understandable way. Keep in mind that you will be providing them a copy of all these Loan Disclosures that they have signed. They will then have plenty of time to read every word on these Disclosures and call you if they have any questions regarding them. To continue you could say something like I am a Loan Officer for XYZ Company and as such - work as an independent contractor in that capacity for them. As your Loan Officer I will try to obtain for you the very best rate and loan program I can - that will enable you to achieve the goals of your loan. As it states here there are options available to you that enable you to buy down to a lower interest rate than what might not be normally available. If you are interested in doing this then I can certainly explore the feasibility of that (use the payback period method I discussed previously). Also, if you wish to pay for less loan fees Copyright, 2007, The Wealth Preservation Institute ( 6

7 or no fees on your loan then this can be done, but with a higher interest rate. This higher rate is needed to pay for and offset the costs of the loan. If you are interested in exploring any of these options then please let me know and I will be happy to look into that for you. Then wait to see if they have any questions or wish to discuss this further. If not, then hand them this Disclosure to sign. 10. Borrower s Notification and Authorization: If you have read through all of these Disclosures, then you will no doubt realize that there exists duplication in some of these. This Disclosure is an example of one of those. Purpose: First, it pretty much says what was stated in the Borrower s Certification and Authorization Disclosure. However, at the bottom of this Disclosure you see an area for Estimated Fees. This represents a range of fees and costs that the loan customer will most likely incur in the processing of their loan. These are what we call third-party provider fees (e.g. for the appraisal, Credit Report, title insurance, etc.). The range of fees in the Exhibit has what generally experienced (or charged). However, the fees in your state or area could be different than those shown here (more or less). You will most likely see those (range of) third-party provider fees, on this Disclosure, for those third-party providers that your mortgage company or office uses most often. 11. Affiliated Business Arrangement Disclosure Statement Notice: This form deals with: 1. An Affiliation, with any third-party providers, and 2. Referral fees. Note: you should know that it is against RESPA regulations for any Loan Officer to accept or give Referral Fees regarding a loan. Again, this Disclosure is somewhat of a duplication of the above Disclosure - Borrower s Notification and Authorization. However, instead of merely showing a range of fees, this Disclosure is asking you to write in the names of those third-party providers (your company most often uses) with their range of fees charged. This isn t always possible at this point in the loan process on a loan you are working on (you may not even have had enough time or had enough information to do any research yet on this loan). In that case enter your best guess. For example, if you dodn t know the name of a particular appraiser that you will use for a loan then you would just enter Appraisal (or whatever type of third-party provider service this form asks for) and the range of fees the customer could expect to pay for this service. 12. Anti-Coercion Statement: Purpose: The title on this Disclosure is a little scary (Anti-Coercion) This Disclosure informs the prospective borrowers that they have the right, liberty, and freedom to go with whatever Insurance Company they choose for their homeowner s insurance. It is possible that this Disclosure came out as a result of some Lenders not only offered mortgage loans but also offered homeowners Copyright, 2007, The Wealth Preservation Institute ( 7

8 insurance as well. Some of those lenders may have required their customers, who obtained mortgage loans through them, to also obtain their homeowners insurance through them as well. However, upon review of those homeowners insurance policies (by the powers that be) offered by those Lenders it may have been found that the policy premiums on those were not as competitive as those they (the customers) could have obtained elsewhere. This Disclosre does not prevent you from recommending an insurance company or advisor if asked. 13. Washington Choice of Insurance Notice: This Disclosure is a duplication of the Disclosure above (Anti-Coercion Statement). Again, just tell your customers that they have the right, liberty, and freedom to go with whatever Insurance Company they choose. 14. Appraisal Disclosure: Purpose: this Disclosure informs the customers that they have a right to receive a copy of the appraisal on their property (or property that they intent to purchase or refinance) if an appraisal is required and completed on the subject property. Although it doesn t say so here, the assumption is that the customers have paid for the appraisal. Payment of the appraisal usually occurs during the loan process either at: 1. Payment at the Door. This refers to: That the customers paid the appraiser when the appraiser first visited their home to inspect the subject property for the appraisal, or 2. Paid out of the loan funds at loan funding time. Either way the appraisal was paid for. 15. Washington Purchase Money Borrower Notification: Purpose: Again this Disclosure is a duplication of the above Disclosure (Appraisal Disclosure) but has an added feature. It gives the borrowers an option to waive their rights to receive a copy of their appraisal. When preparing these Disclosures, for the meeting with my customers, always put a check in the second option that indicates that they Do not wish to waive our right to receive copies of the appraisal. 16. Privacy Protection Policy Notice: This Disclosure also falls under the Federal Trade Commission s (FTC) Privacy Rule. This Disclosure informs your customers of the Non-Public Information (NPI) you collect in providing the financial products and services they (your customers) have requested. Today customers seem increasingly concerned about the disclosing and sharing of their Non-Public Information, which you obtain when completing a loan application. And, that is exactly the purpose of this Disclosure. To not only inform, but to address any concerns they may have about their Non-Public (customer) Information being given to individuals or companies that are not necessary in pursuing their loan request. Copyright, 2007, The Wealth Preservation Institute ( 8

9 That is what this Disclosure states: That the customer s Non-Public Information is kept (and safeguarded) within your company and that their Non- Public Information is given to (your company s) third party providers and your targeted Lender(s) in pursuing your customer s requested loan goals. It should also be noted that whatever Non-Public Information you and/or your company are giving to a third party provider (or Lender) is only the information that provider needs in providing that service to you and for your customer s loan request (e.g. social security number for the Credit Reporting service). This Disclosure also offers the customer the option to opt out of giving their Non-Public Information to companies (e.g. third party providers) outside of your company. Doing this, the customer is directing you to not share their Non- Public Information to anyone or any company outside of your firm. If they wish to do that then this Disclosure should have a telephone number for them to call and/or an address (of your company s headquarters) for them to request - to not share their Non-Public Information outside of your company. According to the Privacy Rule, when a customer relationship is established, then you are required to provide a Privacy Protection Notice at that time. For example, if you meet with you customers to obtain information (complete an application) to do a loan then you are required to give those customers your company s Privacy Protection Notice at that time (before that meeting ends). An important question to ask here is: When is a customer relationship established? According to the Privacy Rule, a customer relationship is established at the time a customer submits (loan) application information to you. However, if you take an application over the telephone then, according to the Privacy Rule, you have a reasonable amount of time to get that Privacy Notice to that customer. 17. Patriot Act Information Disclosure: This Loan Disclosure became a required Disclosure as of October 1, In presenting this Disclosure just state what is on this Disclosure and then have them sign it. Also, like the Privacy Protection Notice above, leave with your customers a copy of this Disclosure - before ending your meeting with them. However, unlike the other Disclosures discussed above, after your customers have signed this Disclosure - you are not done here. You will still need to complete the Patriot Act Information Form. Some of the information required on this form can be taken directly from your completed But some of it is asking for detailed customer information on the borrower and co-borrower regarding their identity that is not normally asked when completing a loan application (e.g. Driver s License number, its issue and expiration date, etc.). Therefore, it is recommended that once your customers have signed this Disclosure ask them to complete the Patriot Act Information Form as well.. Copyright, 2007, The Wealth Preservation Institute ( 9

10 Additionally, you will most likely need to obtain a copy of a picture ID of your customers for both the borrower and co-borrower. A copy of their driver s license will usually will suffice. 18. Notice To The Home Loan Applicant: This is one of the newest Disclosures and is a result of The FACT Act, which was signed into law on December 4, 2003 and became effective on December 1, FACT stands for Fair and Accurate Credit Transactions. This Disclosure presents important points and purposes of a customer s Credit Report and discloses to them the main features reported on their Credit Report (i.e. the Credit Reporting bureaus shown on their Credit Report, their credit scores, and the factors influencing those credit scores). For a more in-depth discussion on how to complete this form please go to the Notice To The Home Loan Applicant within the chapter on Reading the Credit Report. If at the time you are meeting with your loan-inquiring customers you have pulled a Credit Report (prior to that meeting) then you would present this Disclosure to those customers. However, if you pulled a Credit Report after your meeting with them then mail a completed Notice To The Home Loan Applicant disclosure within 3 business days following the date you pulled their Credit Report. 19. PMI - Initial Disclosure for Adjustable Rate Mortgages: This Disclosure, while fairly wordy, informs and disclosures to your customers that their loan is an Adjustable Rate Mortgage which will also include Private Mortgage Insurance (PMI). 20. PMI - Initial Disclosure for Fixed Rate Mortgages: This Disclosure, also fairly wordy, informs and discloses to your customers that Private Mortgage Insurance (PMI) will be included in their Fixed Rate loan. 21. Adjustable Rate Mortgage Disclosure: This Disclosure informs the customers that their loan has an Adjustable Rate Feature (it is an ARM) and that the interest can (and most likely will) increase over the life of that loan (once the adjustable rate period has begun). 22. Balloon Loan Disclosure: This Disclosure informs the customers that their loan has a Balloon feature and, as such, at the time that Balloon date arrives, the outstanding balance of the loan will become due. Copyright, 2007, The Wealth Preservation Institute ( 10

11 23. Request for Copy of Transcript of Tax Form (4506)T: This form is referred to, in lending, as the While this is not actually a Disclosure it is a form that we oftentimes are requested, by the Lender, to be signed by the borrowers. This form, when signed, gives the Lender of that loan the right to obtain (tax) records of those borrowers directly from the IRS and compare the information on those documents to what was entered on their loan application. It seems that just a few years ago it was only occasionally that a Lender would request this as a Prior-To-Doc condition. Today, however, it seems that it is becoming quite common for Lenders to require a signed 4506 before docs go out. A good explanation of why this form is being signed is The federal government and or state regulators perform random audits of loan files in an effort to reduce fraud. If your file were to be selected, they would obtain tax information that was filed and compare it with the information we are providing to the lender. Before leaving this area of Loan Disclosures we wanted to make a couple of important points regarding these: First, these Loan Disclosures are part of what we refer to as RESPA Requirements and they are required to be presented to all your customers at the time that you either meet with them to complete an application or you include these in your mailing of the application (1003) to them. Additionally, three business days after you have met with your customers and completed the 1003 (or the date you received the 1003 in the mail) you are required to send a Good Faith Estimate (GFE) and Truth-In-Lending (TIL) statement to your customers and any state specific disclosures that may be time sensitive. Also, regarding these Disclosures, if you have not done so before that time - then include with these two forms (GFE & TIL) a copy of all the Disclosures required by your state and signed by your customers. Doing so will satisfy one of RESPA s requirements here and will also provide your customers with the opportunity to review and read those Loan Disclosures (in detail) if they so choose. Looking at these Disclosures you will notice that some of them have places for the Borrower s names and their property s address (the subject property). In preparing for your meeting with them, fill these in (beforehand) so that all of your customers have to do at the loan application meeting, is sign and date each one. This helps the meeting, with your customers, to move along smoothly and saves time. And finally, while we are talking about Loan Disclosures, there are also home financing booklets, which need to be given to your customers, which explain the features of that particular type of loan they will be obtaining. The following is a list of when certain home financing booklets are required to be given to your customers at loan application time: Copyright, 2007, The Wealth Preservation Institute ( 11

12 -At the time of loan application All borrowers should be given HUD s Special Information Booklet. -If the borrowers are obtaining a loan to purchase a home then give them HUD s guide (a booklet) titled Buying Your Home, Settlement Costs & Helpful Information. -If the borrowers are obtaining an ARM loan (whether to purchase or refinance their home) then give them the booklet titled Consumer Handbook on Adjustable Rate Mortgages. -If the borrowers are obtaining an Equity Line type of home loan (sometimes referred to as an open-ended loan) or a Reverse Mortgage then give them the booklet When Your Home is on The Line: What You Should Know About Home Equity Lines of Credit. Chapter 8 Good Faith Estimate The Good Faith Estimate (GFE) is a Loan Disclosure and document that summarizes all the costs of a loan that the borrowers will incur and states the total loan amount, the interest rate on that loan, the term of the loan, and what kind of loan program it is (e.g. 30-Year fixed, 2-Year ARM). Some GFEs will also show the Loan-to-Value (LTV) of the loan. It should also show the monthly mortgage payment on that loan, broken down into its various parts: Monthly P&I, monthly hazard insurance, monthly property taxes, and monthly private mortgage insurance (PMI) if required. Also, at the bottom of some GFEs is a summary of the total costs included in the loan as well as the sum of all the accounts being paid off (including the existing mortgage or mortgages on the subject property) with that loan. And finally, what the borrower can expect to receive at loan funding or how much money they need to bring to the closing table. The Good Faith Estimate is a required Loan Disclosure as stipulated by the Real Estate Settlement Procedures Act (RESPA), which was enacted by Congress in The GFE is to be prepared and sent to your borrowing customers within 3 business days after you have met with them to complete an application (1003) or received a completed 1003 in the mail from your customers. And, this rule also applies if you completed a loan application over the telephone. When you do complete the GFE, the costs on this Disclosure should be as accurate as possible and should reflect those loan costs that your customer can expect to see at their loan closing and on their HUD-1 Settlement Statement as well. Copyright, 2007, The Wealth Preservation Institute ( 12

13 While it is true that the GFE is automatically calculated by most loan processing software, it is still important for a MMB to understand everything on the page and to be able to explain each item on the GFE to their clients. To enable you to begin to get a handle on completing the GFE this material will go over the different parts of this form and based on the assumptions (of a borrower) below, you will complete a GFE. For this discussion please refer to the GFE in Exhibit VI. Some GFE forms are difficult to understand and seem to be missing important information (e.g. monthly payment - PITI). Exhibit VI is a form that has all the needed information and is laid out in such a way that your clients will easily understand it. Take a look at this Good Faith Estimate. Starting at the upper left-hand corner of this form you can see here is where you enter the customers name and address of the subject property (this could be different from the address where those customers live). Looking at the upper right-hand corner you can see a rectangular box where, within it, we enter the subject property s Sales Price or Appraised Value. Below that line - the Loan Amount, Loan s LTV, Interest Rate, Loan Term, and Type of Loan (e.g. 30-year fixed) and to the right of that you write an X there - indicating whether you have locked the interest rate on that loan or are floating the rate at that time. Below that is another rectangular box that breaks the PITI payment into its various parts with the total of all shown => Total Monthly Payment. Look to the left of those two boxes, just below where it asks for the Borrower s name and address. You see a small paragraph there. Basically that paragraph informs the customer that those costs, listed on this GFE, are estimates of the loan costs and fees that they will incur in doing this loan. It states here that the actual loan fees could be more or less as shown on this GFE. However, it is suggested that you always try to have the loan costs and fees shown on your initial GFEs as accurate as possible and as close to what you expect your customers will realize at their loan closing. This paragraph also ends by stating that after this loan is approved, if the customers are unable to do the loan, are declined, and/or withdraw their application then the applicant agrees to pay your mortgage company for any costs and/or fees they have incurred up to that point. An example of this could be that after loan approval the customers then decide to either not do the loan or to go with another mortgage company. At that point perhaps an appraisal have been ordered and completed on that customer s behalf. Your mortgage company would have the right to bill that customer for those services provided Copyright, 2007, The Wealth Preservation Institute ( 13

14 Look below that paragraph to where you see the title HUD-1 and to its right ITEM. Under the title HUD-1 you see a list of numbers. To the right of each number is a Description of that Line Item. Each Line Item s number and description generally corresponds to the numbered Line Items you will see on the HUD-1 Settlement Statement that is prepared for your borrowers at loan closing. And, to the right of each Line Item s Description is another line to enter that Line Item s loan cost. Within this entire area of Line Items (numbers ) you can see that there appears to be about 5 sections. It should be noted here that most GFEs that you will be working on may not separate the above loan cost items into the five sections that are shown on our GFE here. However, as you look over the Good Faith Estimate that is printed from your mortgages office s loan processing software program (i.e. Point, Genesis, etc.), you will most likely find that there are 4 sections within it as follows: 800 Series: Items Payable In Connection with the Loan 1100 Series: Title Charges and Settlement/Closing Costs 1200 Series: Government Recording and Transfer Fees 1300 Series: Additional/Miscellaneous Charges As you can see, there are usually several blank lines without numbers in each section. These blank lines are for additional fees that may be charged in connection with the associated groupings. For example, if your title company charges a Courier Fee, you would write in the next number in sequence then the description then the fee. With that said, let s go over each section on our GFE: Section 1. Items Payable in Connection With Loan (# ): Within this Section are those loan costs - which primarily includes your origination fee, discount fee, all third party providers (except title and escrow), Processing Fee (your company s fee), and the Lender s Underwriting Fees (which normally includes Wire Transfer Fee, Flood Certification Fee, etc). One of the important things about this Section is that most of the costs within this section can change for the borrower if they choose to go with another mortgage company or Loan Officer. In other words, the costs within this section are those costs that your customer will incur if they decide to do the loan with you. If they choose to go with another company then the costs, within this section, for that loan customer could change (more or less). Copyright, 2007, The Wealth Preservation Institute ( 14

15 It is important to make this point because when you are trying to be competitive (in terms of loan costs) and/or massaging (changing) the costs of the loan (to perhaps make the loan doable and/or acceptable to the borrower), it is within this section that you will usually be looking at. Mainly at your origination fee, discount fee, and loan processing fee. The costs in the other sections will be dictated by what the Title Companies charge, Recording fee, and Prepays and Reserves required by the Lender. Before leaving this Section it should also be mentioned that within this Section is where you also disclose your Rebate or Yield Spread Premium. This is normally shown at the bottom of this Section - after you have written in all the other loan costs. As you can see the Yield Spread Premium does not have a Line Item number and is often written as: Paid to Broker from Lender: YSP (POC) with the actual YSP shown, in dollar amount, just to the right of that description. That acronym POC stands for Paid Outside of Closing and therefore is not an actual loan cost that your loan customer will incur. Therefore, the dollar amount of your Yield Spread Premium, for the interest rate on that loan, is not shown within the column where the other loan costs are but is shown just to the right of its description. This item has become a bit controversial over the years. Why? Because if a client closes a loan directly with a bank or through a mortgage broker who has a correspondent lender affiliation or warehouse line, this fee (which sometimes is not insignificant) does NOT have to be disclosed. An example of a correspondent lending situation is when a lender gives the broker the authority to close the transaction in their (the lender s) name before the full package is submitted to the lender. In other words, the lender gives the broker the ability/authority to close the loan by themselves without approval or even knowledge of the lender. This is good because the broker can close loans much quicker and without disclosing any rebates, but the downside is that if the broker screws something up, he/she is on the hook for the entire loan amount. A warehouse line is when the broker sets up a line of credit with an independent lender with which the broker can use to fund loans. The broker than goes out and finds loans using what he/she know about the lenders use as their guidelines, closes loans using the line of credit and then shops the closed loans with the lenders. The up side is that the loans can be closed quickly, the amount of money the broker can make is more, but the downside is that if a closed loan is not attractive to his/her lender, the broker could end up funding the loan out his/her own pocket. Copyright, 2007, The Wealth Preservation Institute ( 15

16 Section 2. Title Charges (# 1100s) Listed here are the various Line Items relating to the loan s Title Insurance and Escrow (Closing) costs. In many states the title company that issues the policy for the transaction will also be able to provide closing services. Some states use attorneys instead of title companies. In any case, there will probably be fees associated with the actual closing of the loan. This would include closing fees, document preparation fees, notary fees, attorney fees, and title insurance. Section 3. Government Recording and Transfer Charges (# 1200s ) Short section for the Recording Fee for recording of the Deed of Trust after the loan funds. Also, tax stamps (transfer taxes) are taxes that either state or local municipalities charge in connection with the loan. These fees are typically reserved for purchase loans but not always. Some of these fees can be rather high (over 1% of the total loan amount), so it is very important to ask you local title agent or attorney if your area has these costs. Section 4. Items Required By the Lender in Advance (# 900s) This is often referred to as Prepays - for Interest Adjustment and those payments that are paid in advance. As we discussed in earlier Sections, the first payment of the new loan will not be until the first day of the month after the first full month after closing. In other words, if a loan closes on June 25 th, the first payment would be August 1 st. That payment would pay the interest accrued in July therefore the few extra days in June would be collected at closing. This figure is calculated by daily interest charges X days until end of month. For estimating purposes the use of 15 days would be good practice unless you know exactly what day of the month the closing will be. Another item that may be collected in advance are insurance premiums (hazard or PMI). Based on the lender s requirements up to one year of insurance may need to be collected at closing. here. Any property taxes now due would also need to be collected and itemized Section 5. Reserves Deposited with the Lender (# 1000s Sometimes also referred to as pre-paids, These are Reserves that are setup so that when the premium for the homeowner s insurance policy and county property taxes becomes due - there will be enough in that borrower s reserve account for the Lender (or Mortgage Servicer) to pay for those. If the lender is going to pay the taxes and insurance (escrows), they will collect 1/12 of the total bill each month as part of the total mortgage payment. In most cases, Copyright, 2007, The Wealth Preservation Institute ( 16

17 these bills are due on the same day every year. When that date comes, the lender must have the full premium in the account in order to make the payment. Therefore, if only 4 payments will be made on the loan between closing date and the premium due date, 8 months of the bill (8/12) must be deposited in the account at closing. If there is PMI required on the loan usually about 2 months of reserves is required here as this bill is usually paid monthly by the lender and not annually.. Section 6. Additional Settlement Charges (1300 s) This section can be utilized for costs that may not be associated with the others. For example, a pest inspection fee may be charged on a purchase transaction. This fee, payable to the company that performed the inspection would be listed in this section. Below that and to the right you see Estimated Total Closing Costs & Prepaid Items. This is a separate section (without any Line Item Numbers), which itemizes and totals the loan s costs and financing features. After entering the amount for each line item here you then add or subtract the various amounts and that gives you what the customer will either be receiving at loan closing or the amount they need to bring to the closing table. Now that we have reviewed how this GFE is made up let s now use the following example to see how to fully complete this Good Faith Estimate. In completing this Good Faith Estimate make the following assumptions: Your Borrowers are John and Jane Smith who live at 4321 Sunshine Avenue, Tacoma, Washington Also: 1. This is a Cash-Out Refinance loan for Home Improvements. 2. The Appraised Value (or Estimated Value) of the Property is $197, The Interest Rate is 7.0%. 4. For that 7.0% Interest Rate you will realize a 1.0% Rebate (YSP) (which pays you on the back-end). 5. This is a 30-Year Fixed Rate Loan. 6. Your Customers Want the Maximum Loan Amount they can get without PMI. 7. You charge a 1.0% Loan Origination Fee (this is quite common) 8. For Reserves Deposited with the Lender (Prepays) you estimated that: For Hazard Insurance - 6 Months will be required at $35.00 per Month, For Property Taxes - 3 Months will be required at $ per Month. 9. The Outstanding Balance on the existing (and only) 1st mortgage is $115, The Loan Closing, also by the Title Company, will cost about $325. Here it should be noted that the cost of Loan Closings could be more then this because the closing agent may determine that their total closing costs are based on the total loan amount. This is especially true with purchase home loans. Copyright, 2007, The Wealth Preservation Institute ( 17

18 11. Title Insurance will cost about $375. Like the closing costs, the actual cost of the Title Insurance Policy is usually based on the total loan amount. So you normally need to lookup those fees. 12. Your Borrower tells you he needs at least $25,000 in order to do the home improvements and to make the loan worthwhile (Customer s Loan Goal). 13. And finally, your customers told you that they want to keep the (new) mortgage payment (PITI) under $1,200 per month - if possible (Customer s Loan Goal). At this point, in the processing of the loan, you have met with your customers and completed a You pulled a Credit Report and found that they have outstanding credit - so no problems there. They have good job stability (worked for their current employers for over 2 years) and it looks like their housing and total debt ratios are within Conforming guidelines. Your customers have lived at the subject property for the past 3½ years - which is how old their existing mortgage is so you know the 1st mortgage is seasoned. You then calculated what the maximum loan amount for this refinance loan should be to avoid having Private Mortgage Insurance (LTV of the loan will need to be 80% or less of the Appraised or Estimated value of the subject property). OK. Now, these are assumptions and/or facts that the average Loan Officer could have regarding their prospective loan customer when they are ready to complete a GFE for a loan - with some fairly firm numbers. Next, calculate the monthly P&I, enter the monthly taxes and homeowners insurance (escrow) payments (you can go to any one of thousands of web-sites out there to find a mortgage calculator or you an info@thewpi.org for an excel spreadsheet you can use to calculate the P&I). Total that up and enter the PITI for that loan. What do you have? Does it look like you are going to be able to achieve the goals of the customers as noted in items # 12? Just to make sure to make sure you are doing this correctly, the first box should contain: Appraised Value = $197,000, Loan amount = $147,750, LTV = 75%, Interest Rate = 7.0%, Term = 360, and Loan Program = 30-Year Fixed. And place an X in the float box. You may ask, Why not increase the total loan to $157,600? That s a good question, because at that loan amount the LTV would be at 80% and still not require PMI - which satisfies one of our customer s goals here (#5 above for maximum loan amount without PMI). However, look at customer goal #12. There you see that another goal of that customer is to keep the total monthly PITI at or under $1,200. This additional loan goal forces us to lower the maximum loan amount in order for their monthly PITI to be at or under $1,200. Therefore you should use a LTV of 75%. Thus, when you consider the monthly taxes and homeowners insurance, which is added on to that P&I (at LTV of 75%) then their monthly PITI is about $1,167.98: Just under this customer s loan goal. Copyright, 2007, The Wealth Preservation Institute ( 18

19 Many times the loans you will be working on are just like this with more than one customer loan goal. Your job is to structure the loan in such a way so that all the loan goals of your customers are achieved. That isn t always possible especially with you are dealing with clients with less than perfect credit or constraints on the maximum LTV you can offer them (e.g. Non-Conforming and B/C Sub Prime loans). But these are the types of considerations you will be dealing with when structuring your loans and you should always try to satisfy as many of the loan goals of your customers that you can. Moving on. Entered within the second box (below) should be: P&I = $982.98, Monthly Property Taxes = $150.00, Monthly Hazard Insurance = $35.00, There is no Mortgage Insurance or Other. So the Total Monthly Payment (PITI) = $1, your: Let's now go over each of the itemized costs on this GFE - starting with Origination Fee: Enter 1.0% here and multiply that by the total loan amount. To the right of that where you see the blank column spaces starting with a $ - enter $1, Lender s Loan Discount Fee: This is usually reserved for when the customer is buying down the interest rate. Put a zero there. Appraisal Fee: Most Appraisers in the same general area charge about the same fee as the others. Here in my neck of the woods an appraisal on a home is usually about $375. So enter that figure here. Credit Report: Enter here whatever it cost your company to order a 3- bureau Credit Report. For me it cost $ Enter that amount here. As with any third party fee, if you are charging the customer, the fee must be what the third party is charging you. You are not allowed to mark-up the price. Pest Inspection Fee: Since this is a re-finance, you usually will not have a such a fee, so put a zero there. Mortgage Broker Fee: It is rare you will ever use this. You will not normally charge this fee (because you are being paid on the origination fee and through the YSP, so put a zero there too. Tax Service Fee: Here is where we start to get into what the Lender (who you are submitting the loan to) will charge for doing the loan. Keep in mind that each Lender will charge a different fee or fees to do the loan. Lender costs generally follow under the cost headings of: Underwriting, Tax Service Fee, Document Preparation Fee, and Flood Certification Fee. Sometimes they have additional fees such as Wire Transfer and Messenger Fees. You know that for Copyright, 2007, The Wealth Preservation Institute ( 19