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A mortgage can be defined as a legal instrument that pledges real property as security for the payment of a debt or the performance of an obligation. Occasionally, other documents are held to be mortgages notwithstanding their formal differences from the format of the institutional mortgage.
However, the precise definition of a mortgage depends upon whether the mortgage constitutes a mere lien or is a conveyance. Three theories explain the nature of a mortgage:
A contractual mortgage is the normal and ordinary form of a mortgage encountered in most states today. In form, it is a deed or conveyance of the land by the borrower to the lender followed or preceded by a description of the debt and including a provision to the effect that the mortgage shall be void upon full payment of the debt. The content of the additional paragraphs of fine print varies considerably.
Deed of Trust
A deed of trust is a special form of mortgage in which the title to property is transferred to a third party trustee as security for an obligation owed by the trustor (borrower) to the beneficiary (lender). A deed of trust is similar to a mortgage; the main difference is that it involves three parties. In some states, a foreclosure proceeding is avoided when the trustee can sell the property under a power of sale after allowing the trustor a legally prescribed period of time to reinstate the loan obligation.
As a general rule, any instrument in writing by which the parties show their intention that real estate is to be held as security for the payment of a debt will constitute an equitable mortgage and be subject to foreclosure in a court of equity.
An equitable mortgage arises whenever a court finds that an apparent nonsecurity transaction is in reality a security arrangement. There are many situations in which this may occur. Thus the maxim, "If a transaction resolves itself into a security, whatever may be its form and whatever name the parties may choose to give the instrument, it is, in equity, a mortgage."
The following transactions are generally considered by the courts to be equitable mortgages:
Bases on Their Form of Payment
Fully Amortized Mortgage
A fully amortized mortgage requires that the mortgagor pay a constant amount monthly, quarterly, or semiannually, each payment being first applied to the interest owed and then to the principal. Sometimes it is referred to as a "level payment" loan.
Straight-Line Amortized Mortgage
In a straight-line mortgage, the mortgagor may pay a different amount for each installment: each payment consists of a fixed amount credited to the principal, plus an additional amount for the interest due on the balance of the principal outstanding since the last payment was made.
Variable Rate Mortgage (VRM)
A variable rate mortgage does not have a fixed rate of interest for its entire term. There are a number of types of VRM's:
Rollover Mortgage (ROM)
A rollover mortgage provides for the renegotiation of the interest rate and the payment terms, typically at each five-year period of its term. It is also referred to as a "Canadian Rollover Mortgage."
Balloon Payment Loan
A balloon mortgage requires periodic payments that will not fully amortize the amount of the loan by the time the final payment is due. The final payment being a larger amount than the others. This type of loan is partially amortized.
Growing Equity Mortgage (GEM)
A growing equity mortgage makes use of a fixed interest rate, but payments of principal are increased according to a pre-established index or schedule. The total payment thus increases, but the borrower's income is expected to keep pace, and the loan is paid off more quickly.
Renegotiable Rate Mortgage (RRM)
A renegotiable rate mortgage is a long-term mortgage that is renewable every three, four, or five years, at which time the interest rate is increased or decreased. These adjustments of interest rates are tied to a national index. Interest rates may change at a maximum rate of one-half percent per year, with a five percent maximum cap over the life of the loan; specifics must be included in the provisions of the note.
Shared-Appreciation Mortgage (SAM)
A shared-appreciation mortgage is originated by a lender at a favorable interest rate (several points below the going rate) in return for a guaranteed share of the equity (if any) the borrower may realize when the property is eventually sold.
Reverse Annuity Mortgage (RAM)
In a reverse annuity mortgage, regular monthly payments are made to the borrower, based on the equity the homeowner-mortgagor has invested in the property given as security for the loan. A reverse loan allows owners of property on fixed incomes to realize an equity buildup in their properties without having to sell. The borrower is charged a fixed rate of interest, and the loan is eventually paid from the sale of the property or from the borrower's estate upon the borrower's death.
Straight Payment Mortgage
In a straight payment mortgage, the mortgagor may choose a payment plan that calls for periodic payments of interest with the principal to be paid in full at the end of the loan term. This is known as a straight or term loan. Such mortgages are generally used for home-improvement loans and second mortgages rather than for residential first mortgage loans.
Adjustable Rate Mortgage (ARM)
An adjustable rate mortgage generally originates at one rate of interest, but the rate fluctuates up or down during the loan term depending on a certain public economic indicator. Details of how and when the rate of interest on the loan will change are included in the provisions of the note. Generally, interest rate adjustments are limited to one each year, and there is a set maximum number of increases that may be made over the life of the loan. Certain regulations may enable a lender to adjust the interest rate on a monthly basis.
Graduated Payment Mortgage (GPM)
In a graduated payment mortgage, a mortgagor may elect to take advantage of a flexible payment plan. Under this plan, a mortgagor makes lower monthly payments for the first few years of the loan (typically the first five years), and larger payments for the remainder of the term, when the mortgagor's income is expected to have increased.
Pledged Savings Account Mortgage (PSAM)
In a pledged savings account mortgage the borrower makes a special deposit with the lender. The special deposit operates as additional security for the loan. Part of the initial payments are made by withdrawals from this account so the borrower has lower monthly payments for earlier years.
A mortgage is only plain security; it cannot exist without an underlying obligation. A mortgage without a debt has no effect. Any contractual obligation reducible to a money value may be secured by a mortgage. The obligation by a mortgage secured is ordinarily one for the payment of money. The underlying obligation may be embodied in the mortgage itself, but is usually evidenced by the separate promissory note or bond.
However, there is no requirement that the mortgagor or anyone else be personally liable on the obligation. A mortgage transaction in which no one person has liability is known as a "nonrecourse" or "in rem" mortgage loan.
A mortgage may be given to secure a debt or an obligation of a third party.
As between the mortgagor and mortgagee, it is prudent but not necessary to describe the underlying obligation in the mortgage. A description of the obligation, however, is necessary to protect the mortgagee against subsequent purchasers and lienors. Although authorities disagree regarding what information is required to impart adequate notice of the obligation, it is customary for the description to specify its form, amount, date of execution and maturity. Failure of the mortgage to state the maturity of the debt does not invalidate the mortgage.
It is a well-established doctrine that an instrument must be deemed and held a mortgage, whatever may be its form, if taken alone or in connection with the surrounding facts and attendant circumstances it appears to have been given for the purpose or with the intention of securing the payment of money. The mere absence of terms of defeasance cannot be used to determine whether or not the instrument is a mortgage.
Although no particular format is necessary to create a valid mortgage, state law generally requires a mortgage to include the formalities required of a deed. The minimum requirements to create a valid mortgage can be summarized as follows:
A deed of trust, in certain jurisdictions, also referred to as trust deed, is a species of mortgage and, as such, subject to the same rules and requirements that are applicable to mortgages.
The most notable distinction between a mortgage and a deed of trust is that the former is a bilateral grant from a mortgagor to a mortgagee, while the latter involves the intermediation of a third party, the trustee, who takes the mortgage grant and holds it in trust for the mortgagee. The trust created by a deed of trust is wholly inactive unless and until the mortgage goes into default. In the event of a default, the trustee is the party who is responsible for selling the property.
The most important use and purpose of a deed of trust is the achievement of speed and economy in the process of foreclosure. The deed of trust provides for foreclosure by power of sale, the mortgage usually does not. The deed of trust is popular in those states in which out-of-court sale is the prevalent method of mortgage foreclosure.
Supposedly, the trustee owes fiduciary duties to both mortgagor and mortgagee, and consequently, when default occurs, the trustee initiates foreclosure proceedings. Usually, publication according to statute is required and a public auction of the mortgaged property is then held by the trustee.
Some jurisdictions have established restrictions against the use of a nonindividual trustee in a deed of trust.
It should be noted that not all the jurisdictions permit deeds of trust and foreclosures by power of sale, and those which recognize their existence present some variations depending on the status of lien theory or title theory.
Ordinarily, any interest in real property capable of being transferred may be mortgaged, and any person having a right to sell or devise real property also has the right to mortgage it. An owner of an interest in property may mortgage any portion of it or any fractional interest therein.
In some states the mortgage of a homestead is prohibited altogether. In other states, homesteads may be mortgaged only for specific purposes and under special conditions.
In those jurisdictions recognizing the doctrine of after-acquired title, the title of a mortgagor acquired after the execution of a mortgage will usually inure to the benefit of the mortgagee. However, as established by the recording laws, a mortgage executed and recorded before a mortgagor acquires title to the property will not be in its chain of title. Therefore, it may not impart constructive notice to bona fide purchasers and encumbrancers and may not be superior to their subsequently recorded interests.
As a general rule, and unless specifically excepted in the mortgage instrument, a mortgage passes all the interest of the mortgagor, whatever it may be, in the property described in the mortgage.
A mortgage therefore does not cover the property acquired by the mortgagor after the execution of the mortgage under the general rule. Nevertheless, there are four potential exceptions to this rule:
A mortgagor's interest in real estate is normally freely transferable, just as is any other real property. However, the presence of a due-on-sale clause in the mortgage instrument may permit a mortgagee to accelerate a secured obligation upon the sale of the security.
Any transfer of the mortgaged property can be made (1) subject to the mortgage or (2) with mortgage assumption. The difference is substantial for seller and buyer. When a purchaser takes property subject to a mortgage, the purchaser has no personal liability on the mortgage debt to either the mortgagee or the grantor. When a purchaser takes property with mortgage assumption the purchaser acquires personal liability for the payment of the mortgage debt.
A mortgagee's interest in a mortgage is freely transferable subject to only one condition: that both the obligation and the security interest pass to the same person.
The method of transfer is by assignment. A mortgage cannot be assigned except in connection with a sale of the mortgage debt.
It is possible for a mortgage lender to assign partial interests in a loan or a group of loans to one or more investors.
In order to be notice to third parties in some sates any assignment of mortgage must be filed for record.
Assignment of Mortgage
An assignment of mortgage is an instrument whereby a mortgagee's interest in a mortgage is transferred to another party. The mortgagee, as assignor, endorses the note to the assignee and executes an assignment of mortgage.
A mortgage cannot be assigned except in connection with a sale of the mortgage debt.
Assignment of Rents
An assignment of rents is an instrument whereby the mortgagor assigns to the mortgagee, as additional security for the payment of the mortgage debt, all of the mortgagor's interest in the existing and future leases and rents thereof pertaining to the mortgaged property.
In title theory states, the assignment is activated upon a default by the mortgagee's serving notice on the tenants to pay rents to the mortgagee. In some lien theory states, the assignment can be activated only upon the commencement of a foreclosure suit. In other lien theory states, the collection of rents can be achieved only after a mortgagor has turned over possession to the mortgagee.
The instrument of assignment ordinarily will contain language to the effect that a payment of the debt or satisfaction of the mortgage will terminate the assignment.
Assumption of Mortgage
An assumption of mortgage is an agreement whereby the grantee of a mortgagor, when acquiring title to mortgaged property, assumes payment of the mortgage debt and becomes personally and primarily liable to the mortgagee for any deficiency judgment which by law may arise after a foreclosure sale of the mortgaged property.
A cross-default agreement, usually related to a junior mortgage instrument, stipulates that a default in a senior encumbrance also triggers a default in the junior mortgage.
In an extension agreement, mortgagee and mortgagor or mortgagor's successor in title agree to the lengthening of the term of the mortgage beyond its stated maturity.
In a modification agreement, mortgagee and mortgagor or mortgagor's successor in title agree to the change or modification of certain term or terms of the mortgage.
The modification of a mortgage may subordinate the lien of that mortgage to intervening liens, depending upon state law.
A participation agreement is an arrangement whereby one lender, usually called the lead company, divides into shares a large loan which it has or will make, and then, offers the shares to another participating lending institution. The agreement may affect two or more lenders.
In a spreading agreement, mortgagee and mortgagor or mortgagor's successors in title agree to spread or extend a mortgage lien to encompass other properties in order to give the mortgagee additional security on the loan.
In a subordination agreement between lienholders, they agree to subordinate the priority position of an existing lien in regard to another existing lien or anticipated future lien.
An open-end mortgage is one that secures a note executed by the borrower to the lender, as well as any future advances of funds made by the lender to the borrower or the borrower's successors in title. The mortgage usually contains a statement of the maximum amount to be secured by the instrument. The terms of an open-end mortgage usually restrict the increase in debt to a limit of either the original amount of the debt or a stipulated amount set forth in the mortgage instrument.
In essence, a mortgage that covers future advances constitutes an executory agreement by the mortgagor that the mortgaged property is security for all funds to be advanced by the mortgagee. The mortgagor's obligation is a single promise, not a series of independent promises. Thus, the lien of the mortgage for future advances arises at the date of the execution of the mortgage and not when advances are made.
Mortgages generally provide for coverage of future advances in either of two ways:
Both methods have been upheld by the courts, but the second alternative is by far the most popular.
The future advances may be either obligatory or optional.
The priority of the lien for each advance is predicated upon the following factors:
A revolving credit line mortgage is one characterized by advances, payments, readvances, and repayments, but the outstanding balance of the principal indebtedness cannot exceed the amount secured by the mortgage.
This type of mortgage is generally structured so that:
State law must be researched in order to ascertain the existence of statutes setting requirements for mortgages securing revolving credit lines.
The principle, first in time, first in right, applies to mortgages in the absence of the applicability of a statutory provision or agreement to the contrary. Normally, this principle becomes effective if the mortgage is recorded prior to other liens.
The determination of the priority of one mortgage over another mortgage or lien is important in the event of foreclosure. The general rule establishes that interests acquired before the mortgage survive the foreclosure but those acquired after the mortgage are extinguished.
Recording statutes vary with regard to the requirements and conditions that a subsequent purchaser or lienholder must meet in order to claim priority.
The most common situations that may affect a priority situation are the following:
Where a purchase money mortgage has priority over a judgment lien under state law, it would also have priority over a federal tax lien against the purchaser. Slodov v. U.S., 436 U.S. 238, 98 S. Ct. 1778, 56 L. Ed. 2d 251 (1978).
Company Policy: If you are insuring a purchase money mortgage which secures funds advanced solely for the purchase of the land and if the mortgage is executed simultaneously with the deed to the purchaser and is promptly recorded, you may show judgment liens and federal tax liens against the purchaser as subordinate to the lien of the insured purchase money mortgage (or omit exception if you have a general exception to subordinate matters) in the following states:
Alabama, Arkansas, California, Colorado, Connecticut, District of Columbia, Florida, Georgia, Idaho, Illinois, Indiana, Kansas, Maryland (if mortgage contains purchase money recitation), Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Utah, Virginia, West Virginia, Wisconsin, and Wyoming.
If the purchase money mortgage is executed in favor of the vendor simultaneously with the deed to the purchaser and is promptly recorded, you may show judgment liens and federal tax liens against the purchaser as subordinate to the lien of the insured purchase money mortgage (or omit exception if you have a general exception to subordinate matters) in the above mentioned states and in the following states:
Delaware (if recorded in 5 days), Iowa and Texas (if mortgage to vendor or if loan also secured by express vendor's lien to third party).
In the following states, a judgment lien or federal tax lien against the purchaser must be released or excepted to as a superior lien on the loan policy insuring a purchase money mortgage:
Alaska, Arizona, Hawaii, Kentucky, Louisiana, Maine, Massachusetts, Nevada, New Hampshire, New Mexico, Rhode Island, Vermont, and Washington.
A mortgage can be terminated or extinguished by any of the following methods:
Although the payment of the mortgage debt automatically terminates all title, lien, or interest of the mortgagee in the mortgaged property, the holder of the mortgage must execute an instrument releasing all the land (full release) or a part thereof (partial release) from the lien of the mortgage, and it must be filed for record in the proper recording office. This instrument is variously called a:
A release of a part of the land or a release of the personal liability of the original mortgagor may, in certain cases, result in a loss of the priority of the mortgage lien over subsequently created rights in or liens on the land.
Any request made by an insured under a loan policy, securing an assurance from the Company relative to the fact that a partial release of lands from the lien of the insured mortgage will neither operate to decrease the Company's liability under the policy nor affect the lien or the priority of the lien on the remaining land, can only be consented to in the following cases:
From the title insurance point of view, any mortgage or deed of trust affecting the subject property in question must be shown as a exception in Schedule B of the title commitment or policy, unless:
The mortgage exception cannot be eliminated on the basis that:
The Consumer Financial Protection Bureau (CFPB) is responsible for enforcement of federal consumer protections laws and regulations and has authority over banks, credit unions, non-banks, mortgage servicing operations and other financial companies. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) transferred authority over the Truth In Lending Act (“TILA”) and the Real Estate Settlement Procedures Act (“RESPA”) mortgage disclosure to the CFPB. The Dodd- Frank Act also directed the CFPB to create “rules and model disclosures that combine the disclosures required under TILA and sections 4 and 5 of RESPA, into a single, integrated disclosure for mortgage loan transactions covered by those laws.”
The Bureau finalized the Integrated Mortgage Disclosures under the Real Estate Settlement Procedures Act (Regulation X) and the Truth In Lending Act (Regulation Z) on November 20, 2013 with an effective date on or after October 3, 2015. This rule establishes new disclosure requirements and forms in Regulation Z for most closed-end consumer credit transactions secured by real property.
The Integrated Disclosure Rule (new forms and timing requirements) apply to most closed end consumer mortgage loan secured by real property. The final rule does not apply to:
· Home-equity lines of credit secured by a consumer’s dwelling
· Reverse mortgages (subject to 12 C.F.R. §1026.33 and RESPA). 12 C.F.R. §1026.19(a).
· Mortgages secured by a mobile home or dwelling not attached to land (if the mobile home is real property, the rule does apply). 12 C.F.R. §1026.2(a)(19) and §1026.3(b).
· No-interest second mortgage made for down payment assistance, energy efficiency or foreclosure avoidance. 12 C.F.R. §1026.3(h).
· Loans made by a creditor who makes five or fewer mortgages in one year. 12 C.F.R. §1026.2(a)(17).
· Certain defined subordinate liens. 12 C.F.R. §1026.3(h).
· Loans that are not “consumer loans”- commercial or business purpose loans. 12 C.F.R. §1026.3(a).
Many of these exempt mortgages are still subject to TILA and RESPA, and the 2010 HUD-1 Settlement form will be used in these instances.
The rule includes two primary new forms and instructions on how these forms are to be prepared and delivered to the consumer.
· Loan Estimate (LE) Model Form H-24 combines and replaces the early TIL and GFE. It provides a summary of the key loan terms and estimates of loan and closing costs. The form is meant to promote comparison shopping by the consumer. 12 C.F.R. §1026.19(e) and §1026.37).
· The Closing Disclosure (CD) Model Form H-25 combines and replaces the final TIL and HUD-1 settlement statement. It provides a detailed account of the transaction including loan terms, final costs and a comparison of Loan Estimate with final terms and costs. 12 C.F.R. §1026.19(f) and §1026.38).
The new forms are mandatory for covered transactions and the rule permits only limited modification to these forms. The form includes other disclosures required by Dodd-Frank Act.
The Loan Estimate must provide a “good faith estimate of closing costs” and the creditor must give the consumer the “best information reasonably available” with regard to these costs. 12 C.F.R. §1026.19(e)(l)(i). An estimate is in good faith if the charge paid by or imposed on the consumer does not exceed the amount originally disclosed on the Loan Estimate subject to certain limited exceptions. 12 C.F.R. §1026.19 (e)(3)(i) and Comment 19(e)(3)(i).
The Loan Estimate must be prepared and provided to the consumer either by the creditor or mortgage broker. However, the creditor will remain liable and responsible. 12 C.F.R. §1026.19(e)(1)(i-ii) and Comment 19(e)(1)(ii)-1 and -2. The creditor is responsible for ensuring it delivers or places in the mail the Loan Estimate form no more than three business day after receiving the consumer’s application and no less than seven business days before consummation. 12 C.F.R. §1026.19(e)(1)(ii-iii). Business day is defined as “a day on which the creditor’s offices are open to the public for carrying on substantially all of its business function. 12 C.F.R. §1026.2(a)(6). Business day means all calendar days except Sundays and legal public holidays for the seven business day waiting period. The waiting period can only be waived for a “bona fide financial emergency” and only upon a specific written statement from the consumer. 12 C.F.R. §1026.19(e)(1)(v).
The Bureau retained the “tolerance” buckets adopted by HUD in 2010 but with some modifications. 12 C.F.R. §1026.19(e)(1)(i) and §1026.19(e)(3)(i). An estimate is in good faith if the charge imposed does not exceed the original amount disclosed, except as follows:
Charges Subject to Zero Variation (12 C.F.R §1026.19(e)(3)(i))
Zero tolerance charges include:
For each item falling within this bucket, there cannot be any increase in the amount paid at closing from the estimated amount on the Loan Estimate.
Charges Subject to 10% Cumulative Variations (12 C.F.R. §1026.19(e)(3)(ii)
Certain charges are permitted limited increases provided estimated charge is made in good faith and the total sum of the charges paid by the consumer does not exceed the aggregate amount of all such charges disclosed on the Loan Estimate by more than 10 percent for the following:
· Fees paid to third party provider (unaffiliated) if the creditor permitted the consumer to shop for the third-party service and the consumer selected a third party service provider off the creditor’s written list of service providers. If a consumer selects a provider not on the creditor’s list of providers, then the creditor is not limited in the amount that may be charged for the service.
· Recording fees paid by borrower
The aggregate amount paid for items falling within this bucket can increase up to a maximum of 10% for the aggregate amount for the same items on the Loan Estimate. 12 C.F.R. §1026.19(e)(3)(i-ii).
Variations Permitted for Certain Charges (12 C.F.R. §1026.19(e)(3)(iii))
Variations are permitted if the charge is made in good faith with the best information reasonably available to the creditor at the time the amount is disclosure for the following charges:
· Prepaid interest;
· Property insurance premiums;
· Amounts placed in escrow, impound, reserve or similar account;
· Charges paid to third party service provider (not on creditor’s list of service providers) selected by the consumer;
· Charges paid for third party service providers which were not required by the creditor.
Violation of Variation Thresholds
If the amounts paid by the consumer at closing exceed the amounts disclosed on the Loan Estimate beyond the tolerance threshold, the creditor must refund the excess to the consumer no later than 60 calendar days after consummation. 12 C.F.R. §1026.19(f)(2)(v). For charges subject to zero tolerance, any amount that is charged beyond the amount disclosed on the Loan Estimate must be refunded to the consumer. 12 C.F.R. §1026.19(e)(3)(i). For charges subject to a 10 percent cumulative tolerance, to the extent the total sum of the charges added together exceeds the sum of all charges disclosed on the Loan Estimate by more than 10 percent, the difference must be refunded. 12 C.F.R. §1026.19(e)(3)(ii).
Changed Circumstances Affecting Settlement Charges
Creditors are not permitted to charge consumers more than the amount disclosed on the Loan Estimate under any circumstances other than changed circumstances that permit a revised Loan Estimate. 12 C.F.R. §1026.19(e)(3)(i). Certain changed circumstances permit the creditor to increase a charge the consumer and revise Loan Estimate within three business days of receiving sufficient information as follows:
· An extraordinary event beyond the control of any interested party or other unexpected event specific to the consumer or transaction; or
· Information specific to the consumer or transaction that the creditor relied upon when providing the Loan Estimate and that was inaccurate or changed after the disclosures were provided; or
· New information specific to the consumer or transaction that the creditor did not rely on when providing the original Loan Estimate. 12 C.F.R. §1026.19(e)(3)(iv)(A)-(B)
· The consumer requests a revision to the credit or settlement terms and this increases the estimate. 12 C.F.R. § 1026.19(e)(3)(iv)(C).
· The discount points, loan originator charges, and loan originator credits change because the interest rate was not locked when the Loan Estimate was provided. 12 C.F.R. §1026.19(e)(3)(iv)(D), as amended.
· The consumer does not indicate an intent to proceed with the transaction within 10 business days after the Loan Estimate was provided. 12 C.F.R. §1026.19(e)(3)(iv)(E).
· For new construction loans where the creditor reasonably expects that settlement will occur more than 60 days after the initial Loan Estimate is provided, the creditor may provide a revised Loan Estimate, but only if the original Loan Estimate states clearly and conspicuously that at any time prior to 60 days before consummation, the creditor may issue revised disclosures. 12 C.F.R. §1026.19(e)(3)(iv)(F), as amended.
However, the creditor cannot deliver a revised Loan Estimate on same day as or after delivery of Closing Disclosure. The Loan Estimate must go out one day before the consumer receives the Closing Disclosure. Once Closing Disclosure has gone out, there can be no new Loan Estimate. 12 C.F.R. §1026.19(e)(4)(i) and (ii).
The Closing Disclosure must state “the actual terms of the credit transaction, and the actual costs associated with the settlement of the transaction.” Comment 19(f)(1)(i)-1.
The rule requires the creditors to provide the Closing Disclosure to the Consumer no later than three business days before consummation. 12 C.F.R. §1026.19(f)(1)(ii)(A). For timeshare transactions, the creditor must ensure that the consumer receives the Closing Disclosure no later than consummation. 12 C.F.R. §1026.19(f)(1)(ii)(B). Business days are defined as all calendar days except Sundays and the legal public holidays specified in 5 U.S.C. 6103(a), such as New Year's Day, the Birthday of Martin Luther King, Jr., Washington's Birthday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day and Christmas Day. 12 C.F.R. §1026.2(a)(6).
Under the rule, delivery of the Closing Disclosure is not the same thing as receipt of the Closing Disclosure by the consumer. If the Closing Disclosure is delivered to the consumer in person, then it is considered received by the consumer on the day it is provided. Comment 19(f)(1)(iii). If is delivered by mailed or electronically or by some other method, then the consumer is presumed to receive it three days after it is delivered or placed in the mail (such as by overnight mail, Fed, Ex, courier) to the address specified by the consumer. 12 C.F.R. §1026.19(f)(1)(iii). So, the rule presumes three day for the consumer to receive the Closing Disclosure and then three days from receipt of the Closing Disclosure for the consumer to review the form before consummation and closing. In order to use email as a valid method, the creditor must comply with requirements of the federal Electronic Signature Act “E-Sign Act” at 15 U.S.C. Sec. 7001, et seq. 12 C.F.R. §1026.19(f)(1).
Consummation is the date that a consumer becomes contractually obligated to the creditor on the loan. For example, this may be the day the consumer signs the note under state law. This is not the same as when the consumer becomes contractually obligated to a seller on a real estate transaction. The point in time when a consumer becomes contractually obligated to the creditor on the loan depends on applicable State law. 12 C.F.R. §1026.2(a)(13) and Comment 2(a)(13)-1). Therefore, the “Closing Date” is only consummation if the closing date is the time that a consumer becomes contractually obligated on a credit transaction.” 12 C.F.R. §1026.2(a)(13).
Revisions and Corrections
There are only three circumstances which require a re-disclosure of the Closing Disclosure with a new three business day waiting period. They are:
1. An increase in the annual percentage rate (“APR”) of more than 1/8 of a percentage point (0.125%) or, for “irregular transactions,” 1/4 of one percentage point (0.25%). 12 C.F.R. §1026.19(f)(2)(ii)(A). The Bureau clarified that “A decrease in APR will not require a new 3-day review if it is based on changes to interest rate or other fees.”
2. The loan product is changed, such as changing from a fixed rate to a variable rate or adding an interest-only payment feature. 12 C.F.R. §1026.19(f)(2)(ii)(B).
3. A prepayment penalty is added. 12 C.F.R. §1026.19(f)(2)(ii)(C).
All other changes would require only updated and revised Closing Disclosure at the closing table but would not require a new three business day review period. 12 C.F.R. §1026.19(f)(1)(v). This includes most changes in payments made at the closing table or typographical errors found at the closing table.
Changes After Consummation
The creditor must provide a corrected Closing Disclosure within 30 calendar days of receiving information sufficient to establish the event in connection with the settlement that causes the Closing Disclosure to be inaccurate and the inaccuracy results in a change to an amount actually paid by the consumer. For example, the fee charged by the recorder’s office after closing for recording the security instrument differs from the amount disclosed and paid at closing. 12 C.F.R. §1026.19(f)(2)(iii). If the Closing Disclosure contains non-numeric clerical errors, the creditor must provide a corrected Closing Disclosure no later than 60 days after consummation. 12 C.F.R. §1026.19(f)(2)(iv).
The settlement agent is required to prepare and provide the seller with the Closing Disclosure reflecting the actual terms of the seller’s transaction. 12 C.F.R. §1026.19(f)(4)(i). There is a separate disclosure form for the Seller. 12 C.F.R. §1026.38(t)(5) and §1026.19(f)(4). The Closing Disclosure to the Seller must reflect the actual terms of the seller’s transaction. The Closing Disclosure must be provided to seller no later than the day of consummation. Seller’s Disclosure may be on a separate form from the Borrower’s Disclosure. 12 C.F.R. §1026(f)(4)(ii)). Creditors are obligated to obtain and retain a copy of completed Closing and records from the third party settlement agent. 12 C.F.R. §1026.38(t)(5). Creditors are not required to collect underlying seller-specific documents and records from that third party settlement agent to support the Closing Disclosure.
Use of Estimates
The amount imposed upon the consumer (or seller) for any settlement service must not exceed the amount actually received by the settlement service provider for that service. 12 C.F.R. §1026.17(c) and §1026.19(e). Creditors may estimate using the best information reasonably available when the actual term or cost is not reasonably available to the creditor at the time the disclosure is made. The creditors must act in good faith and use due diligence in obtaining the information. The creditor is required to provide corrected disclosures containing the actual terms of the transaction at or before consummation. 12 C.F.R. §1026.19(f)(1)(v).
Naming an Calculation of Title Fees
All fees and charges must be separately itemized. Fees and charges must be listed alphabetically. 12 C.F.R. §1026.37(g)(4) and §1026.38(g)(4). All title insurance charges and title fees including title search fees, settlement agent fees, commitment binder fees, etc. must be set out on both the Loan Estimate and Closing Disclosure and must proceeded by:
“Title – [description of fee]”.
Any reference to a cost associated with title insurance must be proceeded by:
“Title – Lender’s Title Insurance to ABC Title”
On the Loan Estimate, the lender’s title insurance policy should be estimated based on the type of loan required by lender’s underwriting standards. The amount of premium disclosed must be calculated as the full premium without any adjustments for simultaneous purchase of an owner’s policy. This is regardless of whether it is known that the buyer will purchase an owner’s policy and regardless of whether seller or buyer is paying for the policy. On the Loan Estimate and Closing Disclosure form, the undiscounted rate should be disclosed for the Loan Policy. (Comment 37(f)(2)-4.) (Comment 38(g)(4)-2). The Loan Policy should be disclosed under the “Services You Can Shop For” category on both the Loan Estimate and Closing Disclosure. 12 C.F.R. §1026.37 and §1026.38.
Owner’s Title Insurance
Any reference to costs associated with the owner’s title insurance must be listed as “optional” on the Loan Estimate and Closing Disclosure.
“Title – Owner’s Title Insurance (Optional) to ABC Title”
The premium estimate for an owner’s policy should be based on the standard or basic owner’s policy rate, not on an enhanced policy. The owner’s policy should be disclosed in the “Other” category. It must be listed as “optional” on the Loan Estimate and Closing Disclosure. The creditor may use the enhanced policy if the creditor knows the enhanced policy will be purchased or if it is contained in the purchase contract. Comment 37(g)(4) and Comment 38(g)(4).
Special Rate for Simultaneous Issuance of Owner’s and Lender’s Policy
The final rule specifically sets forth how title insurance premium must be disclosure when an owner’s and lender’s policy of title insurance are issued in a simultaneous transaction at a special rate (also known as simultaneous title insurance premium rate in a purchase transaction). 12 C.F.R. §1026.37(g)(4). The Loan Policy must be shown at full premium rate for a loan policy of title insurance without adjustment for simultaneous issue on Closing Disclosure and Loan Estimate. 12 C.F.R. §1026.37(f)(2) or (f)(3). If an owner's policy is also purchased, the owner’s policy must be disclosed on both on the Loan Estimate and Closing Disclosure, as the sum of the following formula:
Owner’s Policy on Closing Disclosure = full owner’s title insurance premium (Full Rate) adding (+) the simultaneous issuance premium for lender’s coverage (simultaneous rate) and then deducing (–) the full premium for lender’s coverage.
Regardless of how the simultaneous issuance rate is filed or promulgated by state law or regulations, this is the required method for disclosure of the title insurance premium for a simultaneous purchase transaction on the Loan Estimate and Closing Disclosure. The Bureau’s believes this formula give the consumer a more accurate picture of what they would pay for the loan policy if they did not purchase an owner’s policy. The intent is to ensure the consumer is not surprised by the higher cost of an LTP at the closing table.
CFPB may bring Administrative enforcement proceedings or civil actions in federal district court and has jurisdiction over banks or related persons such as service providers to mortgage lenders. Sec. 1055(c) “of the Dodd-Frank Wall Street Reform and Consumer Protection Act sets forth the relief available to the CFPB for violations of federal consumer financial law. This relief includes the following:
• Rescission or reformation of contracts
• Refund of money, return of real property, or restitution
• Disgorgement of compensation for unjust enrichment
• Payment of damages or other monetary relief
• Public notification regarding the violation
• Limits on the activities or functions of the person against whom the action is brought
• Cost in enforcing action.
Sec. 1055(c) sets three tiers of penalty amounts for violation of any provision of “Federal consumer financial law” as (a) not to exceed $5,000 for each day during which such violation or failure to pay continues; (b) if any person recklessly engages in a violation, not to exceed $25,000 for each day during which such violation or failure to pay continues, and (c) not to exceed $1,000,000 for each day, if any person knowingly violates a Federal consumer financial law. The definition of “Federal consumer financial law” includes a number of enumerated consumer laws, including RESPA, Truth-in-Lending and HOEPA, and any rule or order prescribed by the CFPB under an enumerated consumer law. Violations of the rule would be included. It is unclear how the CFPB or a court will construe a violation of the integrated disclosure requirements this section.
Civil penalties under Regulation Z- Truth in Lending
The Consumer Financial Protection Bureau established the integrated disclosures under Regulation Z- Truth in Lending. This means that the civil liability for TILA disclosure violations would apply to violations of the integrated disclosures for residential real estate loans as set forth in Section 130. Under Section 130, violations may result in liability for actual damages (i.e finance charge, amount financed, etc) and attorney’s fees plus up to $4,000 in statutory damages per violation.
For high cost loans under Section 131, assignees are generally liable for disclosures that are apparent on the face of the disclosures. In addition, the “material disclosures” that are required to be given timely to avoid extended rescission rights were not modified by the Rule. It remains to be seen whether the CFPB and courts will deem the integrated disclosures to be “material disclosures” for purposes of rescission. It also is unclear how the CFPB or a court will construe a violation of the integrated disclosure requirements this section.