How To Understand Mortgage Disclosures

As of July 31, the process of mortgage loan disclosure got a lot more complicated with revised provisions of the Truth In Lending Act (TILA) being implemented as of this date. Since today’s date is when the first of these loans are getting to the closing phase, lenders and borrowers are beginning to realize just how complicated it is. Normally you shop for a mortgage, get some competing Good Faith Estimates, choose your lender and go forward. Estimates should have always been accurate but since the lender’s Good Faith Estimate is disclosing line item fees that come from third parties like title and insurance companies, there was always fine tuning in the end of a transaction as those third-party fees were finalized during a transaction. And speaking of fine-tuning, maybe you’re in a sales transaction and the seller offers a credit mid-escrow or changes the closing date. These items change the final terms.

And the new TILA rules say final fees cannot change by more than $100 as compared to the disclosures you signed when you began: you will sign a Good Faith Estimate which is the line-item breakdown of cash to close (also includes monthly obligations and rate) and the Truth In Lending form which shows what your rate would be if you financed closing costs (called Annual Percentage Rate (APR) and Amount Financed) and what the total cost of the loan would be over the life of the loan (called Finance Charge). If they change by more than $100 up or down, you have to sign new disclosures, put the transaction on hold for three days while you wait out the ‘rescission period’, then resume. Even the three days will most likely change the cash-to-close by more than $100 because of the change to prorated interest. The best thing to avoid problems is to choose a lender you trust and stick with them—if you expect to close on time or at all, you should be done shopping for a lender before you enter into escrow. More on this topic to come. For now, the link above is to the full TILA rules, and below are the excerpts highlighting APR, Amount Financed, and Finance Charge. More to come on this topic.

§ 106. Determination of finance charge
(a) Except as otherwise provided in this section, the amount of the finance charge in connection with any consumer credit transaction shall be determined as the sum of all charges, payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit. The finance charge does not include charges of a type payable in a comparable cash transaction. The finance charge shall not include fees and amounts imposed by third party closing agents (including settlement agents, attorneys, and escrow and title companies) if the creditor does not require the imposition of the charges or the services provided and does not retain the charges. Examples of charges which are included in the finance charge include any of the following types of charges which are applicable:

(1) Interest, time price differential, and any amount payable under a point, discount, or other system of additional charges.

(2) Service or carrying charge.

(3) Loan fee, finder’s fee, or similar charge.

(4) Fee for an investigation or credit report.

(5) Premium or other charge for any guarantee or insurance protecting the creditor against the obligor’s default or other credit loss.

(6) Borrower-paid mortgage broker fees, including fees paid directly to the broker or the lender (for delivery to the broker) whether such fees are paid in cash or financed.

(b) Charges or premiums for credit life, accident, or health insurance written in connection with any consumer credit transaction shall be included in the finance charge unless

(1) the coverage of the debtor by the insurance is not a factor in the approval by the creditor of the extension of credit, and this fact is clearly disclosed in writing to the person applying for or obtaining the extension of credit; and

(2) in order to obtain the insurance in connection with the extension of credit, the person to whom the credit is extended must give specific affirmative written indication of his desire to do so after written disclosure to him of the cost thereof.

(c) Charges or premiums for insurance, written in connection with any consumer credit transaction, against loss of or damage to property or against liability arising out of the ownership or use of property, shall be included in the finance charge unless a clear and specific statement in writing is furnished by the creditor to the person to whom the credit is extended, setting forth the cost of the insurance if obtained from or through the creditor, and stating that the person to whom the credit is extended may choose the person through which the insurance is to be obtained.

(d) If any of the following items is itemized and disclosed in accordance with the regulations of the Board in connection with any transaction, then the creditor need not include that item in the computation of the finance charge with respect to that transaction:

(1) Fees and charges prescribed by law which actually are or will be paid to public officials for determining the existence of or for perfecting or releasing or satisfying any security related to the credit transaction.

(2) The premium payable for any insurance in lieu of perfecting any security interest otherwise required by the creditor in connection with the transaction, if the premium does not exceed the fees and charges described in paragraph (1) which would otherwise be payable.

(3) Any tax levied on security instruments or on documents evidencing indebtedness if the payment of such taxes is a precondition for recording the instrument securing the evidence of indebtedness.

(e) The following items, when charged in connection with any extension of credit secured by an interest in real property, shall not be included in the computation of the finance charge with respect to that transaction:

(1) Fees or premiums for title examination, title insurance, or similar purposes.

(2) Fees for preparation of loan-related documents.

(3) Escrows for future payments of taxes and insurance.

(4) Fees for notorizing deeds and other documents.

(5) Appraisal fees, including fees related to any pest infestation or flood hazard inspections conducted prior to closing.

(6) Credit reports.

(f) TOLERANCES FOR ACCURACY.–In connection with credit transactions not under an open end credit plan that are secured by real property or a dwelling, the disclosure of the finance charge and other disclosures affected by any finance charge–

(1) shall be treated as being accurate for purposes of this title if the amount disclosed as the finance charge–

(A) does not vary from the actual finance charge by more than $100; or

(B) is greater than the amount required to be disclosed under this title; and

(2) shall be treated as being accurate for purposes of section 125 if–

(A) except as provided in subparagraph (B), the amount disclosed as the finance charge does not vary from the actual finance charge by more than an amount equal to one-half of one percent of the total amount of credit extended; or

(B) in the case of a transaction, other than a mortgage referred to in section 103(aa), which–

(i) is a refinancing of the principal balance then due and any accrued and unpaid finance charges of a residential mortgage transaction as defined in section 103(w), or is any subsequent refinancing of such a transaction; and

(ii) does not provide any new consolidation or new advance;

if the amount disclosed as the finance charge does not vary from the actual finance charge by more than an amount equal to one percent of the total amount of credit extended.

[Codified to 15 U.S.C. 1605]

[Source: Section 106 of title I of the Act of May 29, 1968 (Pub. L. No. 90–321; 82 Stat. 148), effective May 29, 1968; as amended by section 606 of title VI of the Act of March 31, 1980 (Pub. L. No. 96–221; 94 Stat. 170), effective October 1, 1982; sections 2 and 3 of the Act of September 30, 1995 (Pub. L. No. 104–29; 109 Stat. 271 and 272), effective September 30, 1995, except the amendment adding paragraph (a)(6), which is effective the earlier of: (A) 60 days after the date on which the Board of Governors of the Federal Reserve System issues final regulations under paragraph (3) of the Act of September 30, 1995; or (B) September 30, 1996]

§ 107. Determination of annual percentage rate

(a) The annual percentage rate applicable to any extension of consumer credit shall be determined, in accordance with the regulations of the Board,

(1) in the case of any extension of credit other than under an open end credit plan, as

(A) that nominal annual percentage rate which will yield a sum equal to the amount of the finance charge when it is applied to the unpaid balances of the amount financed, calculated according to the actuarial method of allocating payments made on a debt between the amount financed and the amount of the finance charge, pursuant to which a payment is applied first to the accumulated finance charge and the balance is applied to the unpaid amount financed; or

(B) the rate determined by any method prescribed by the Board as a method which materially simplifies computation while retaining reasonable accuracy as compared with the rate determined under subparagraph (A).

(2) in the case of any extension of credit under an open end credit plan, as the quotient (expressed as a percentage) of the total finance charge for the period to which it relates divided by the amount upon which the finance charge for that period is based, multiplied by the number of such periods in a year.

(b) Where a creditor imposes the same finance charge for balances within a specified range, the annual percentage rate shall be computed on the median balance within the range, except that if the Board determines that a rate so computed would not be meaningful, or would be materially misleading, the annual percentage rate shall be computed on such other basis as the Board may by regulation require.

(c) The disclosure of an annual percentage rate is accurate for the purpose of this title if the rate disclosed is within a tolerance not greater than one-eighth of 1 per centum more or less than the actual rate or rounded to the nearest one-fourth of 1 per centum. The Board may allow a greater tolerance to simplify compliance where irregular payments are involved.

(d) The Board may authorize the use of rate tables or charts which may provide for the disclosure of annual percentage rates which vary from the rate determined in accordance with subsection (a)(1)(A) by not more than such tolerances as the Board may allow. The Board may not allow a tolerance greater than 8 per centum of that rate except to simplify compliance where irregular payments are involved.

(e) In the case of creditors determining the annual percentage rate in a manner other than as described in subsection (d), the Board may authorize other reasonable tolerances.

(f) Prior to January 1, 1971, any rate under this title to be disclosed as a percentage rate may, at the option of the creditor, be expressed in the form of the corresponding ratio of dollars per hundred dollars.

[Codified to 15 U.S.C. 1606]

[Source: Section 107 of title I of the Act of May 29, 1968 (Pub. L. No. 90–321; 82 Stat. 149), effective May 29, 1968; as amended by section 607 of title VI of the Act of March 31, 1980 (Pub. L. No. 96–221; 94 Stat. 170), effective October 1, 1982]