Getting Off to the Right Start
Starting off on the right foot is always important, but it is essential when taking an application for a closed-end consumer mortgage loan that is subject to the integrated Truth in Lending Act disclosures, ”Know Before you Owe” or “TRID.” The technicalities of TRID can cause even one error at the time of application to have a snowball effect that impacts the contents of the Loan Estimate and the Closing Disclosure.
A crucial starting point in generating an accurate Loan Estimate and Closing Disclosure (the disclosures) is to know the correct purpose of the transaction. Without knowing the correct purpose, numerous errors could occur. For example, if a purchase transaction was not treated as a purchase, the seller’s name and address would not be included on the disclosures. This sometimes occurs when a dwelling-secured loan is refinanced with cash out taken for the purpose of purchasing another dwelling to be secured by both dwellings, resulting in the financial institution erroneously labeling the purpose as a refinance rather than as a purchase. Some loan origination software systems use the purpose field to determine the fields that populate on the disclosures. So when the purpose field is incorrect, other fields may be missing or inaccurate. The description and amount for the Sales Price/Estimated Value listed on the disclosures may be incorrect since a purchase requires the Sales Price to be disclosed and other transactions require an estimated property value. The Calculating Cash to Close table is impacted by the loan’s purpose because the alternate table may be used if a transaction was erroneously labeled as something other than a purchase.
Another key factor impacted by the loan purpose and/or product are the fees that will be charged to the borrower. Origination fees, title fees and recording fees are often based on the loan purpose and/or product, and getting the fees, correct from the start will prevent potential tolerance cures. The financial institution should reach out to applicable third parties to obtain the estimated third-party fees. For example, without having the title company’s detail of all fees for the transaction, the fees listed on the Loan Estimate and written provider list could be incorrect in the name and the amount on the disclosures, or absent altogether.
If an incorrect product description is listed on the disclosures, the Loan Terms and Projected Payments could be incorrect due to not taking into consideration the actual repayment terms of the loan. There can be a wide variety of product errors, from the obvious error in treating an adjustable rate mortgage product as a fixed rate product to the not as obvious error of treating a 62-month balloon loan as a 61-month balloon loan. Other errors may include not properly identifying an interest only payment in the product description, which would also affect the Loan Terms and Projected Payments tables. These errors can cause the In 5 Years and Total of Payments as well as the Annual Percentage Rate on the disclosures to be incorrect.
At the time of application, the property securing the loan needs to be determined, especially if more than one property will be used. This information not only will impact the property address(es) listed on the disclosures but also will impact the fees listed for the appraisals, flood determinations, tax monitoring, title work, recording fees, and transfer taxes. Errors in these fees impact the Calculating Cash to Close table along with the Comparisons table on the disclosures. In addition to fees, the amounts listed for the Estimated Taxes, Insurance and Assessments on the disclosures should take into consideration all properties securing the loan since these impact the Escrow Account information on the Closing Disclosure.
Some other items that can cause errors on the disclosures stem from not acknowledging all details stated on the offer to purchase contract. A simple, but important, item is to know the correct purchase price, including any price adjustments noted on amendments to the contract. Not using the correct purchase price can cause errors throughout the disclosures including title fees, the Calculating Cash to Close table, and even the private mortgage insurance payment streams, if applicable. Anytime the payment information is incorrect, the Comparisons table along with the In 5 years, Total of Payments, and Annual Percentage Rate are also impacted. Any fees the borrower is to pay and the earnest money deposited by the buyer, that are stated in the Offer to Purchase, need to be disclosed on the Loan Estimate because errors on these items also impact the Calculating Cash to Close table.
It is plain to see that taking the time to get the correct information on mortgage applications at the beginning can prevent consumer confusion on the disclosures they are provided, as well as prevent technical errors on the disclosures that can potentially lead to costly tolerance cures. Here are some action steps that can be taken to avoid an error at application from snowballing into a tolerance cure:
- Remind lenders of the importance of reviewing as much information and details provided by the applicants at time of application, which could possibly include the loan purpose, loan product, property details, and the offer to purchase (if available).
- Remind loan personnel to take the time to read the offer to purchase in detail for any related costs associated with the transaction, in particular the earnest money that has been deposited by the applicant and any non-customary fees the purchaser or seller will be paying.
- Pay attention to the type and location of the property securing the loan to properly estimate appraisal and title fees and to properly disclose property information.
- Obtain a detailed estimate of all applicable title charges from the title company prior to issuing the Loan Estimate to ensure that all applicable services are included on the written provider list (if shoppable) and the fees and services are included on the Loan Estimate to prevent potential tolerance issues from arising.
- Always document change in circumstances as they arise, including what fees are impacted and why, and provide the applicant with a revised Loan Estimate, if applicable.