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FEDERAL AND STATE DISCLOSURES AND NOTICE OF RIGHTS
Article 7 - The Borrower
The Real Estate Law has long required the licensing of one who solicits or negotiates mortgage loans for
another or others for compensation (or expectation of compensation) evidenced by promissory notes secured by
deeds of trust or mortgages (either directly or collaterally) by/though liens on real property. The statutory
scheme found in Article 7 of the Business and Professions Code, commencing with Section 10240, was enacted
to curb a variety of abuses carried on by some participants in the mortgage brokerage industry. These abuses
included exorbitant commissions; inflated costs and expenses; short term loans with large balloon payments;
and misrepresentations or concealments of material facts. Article 7 is referred to by the industry, the Courts, the
Regulators, the public and others as the Real Property Loan Law, the Mortgage Loan Brokers’ Law, or the
Necessitous Borrowers’ Act (Business and Professions Code Section 10240 et seq. and 10CCR, Chapter 6,
2840 et seq.).
Non-licensed Assistants
A real estate broker (MLB) who engages in mortgage loan activities or in the purchase, sale, or assignment of
promissory notes may, under specified conditions, employ non-licensed assistants. Business and Professions
Code Section 10133.1(c)(1) and (c)(2) was added in 2000 to provide for an exemption from licensure of
persons who are employees of real estate brokers (MLBs/MLOs) when such persons are performing activities
under the supervision of the MLBs, as defined. The exemption allows a non-licensed employee to assist the
MLBs/MLOs in certain residential mortgage loan transactions (as defined) provided such employees do not
participate in any negotiations among the principals of such transactions (10 CCR, Chapter 8, Section 2841).
Beginning January 1, 2011 loan processors and underwriters must be employees of the real estate broker
(MLB/MLO) or be separately licensed as mortgage loan originators if providing services as independent
contractors.
Real estate brokers (MLBs) must exercise reasonable supervision and control over the non-licensed employees’
activities at an office or branch office licensed to each employing broker. In December of 2000, the activities
and conditions for employment of unlicensed assistants were included in the Commissioner’s Regulations (10
CCR, Chapter 6, Section 2841). This regulation implemented the exemption authorized by Business and
Professions Code Section 10133.1(c)(1) and (c)(2) and mirrors the “Guidelines For Unlicensed Assistants” that
were published by the DRE in the Winter of 1993. The aforementioned Guidelines were issued as a safe harbor
on which real estate licensees may rely when applying the clerical exemption included in applicable law
(Business and Professions Code Section 10133.2).
Accordingly, MLBs employing unlicensed assistants in loan transactions, as defined, that are not subject to
Section 2841 of the Regulations would apply the “Guidelines For Unlicensed Assistants” to establish the
parameters of the activities authorized for such persons under the supervision of these real estate brokers.
Application of Article 7
Certain Sections of Article 7 apply to every real estate broker (MLB) who engages in loan transactions, as
defined. Except for Business and Professions Code Section 10240, this Article applies to dwellings defined to
mean a single dwelling unit in a condominium or cooperative, or a parcel of real property containing 1 to 4
residential units which are owned by a signatory to the deed of trust or mortgage secured thereby that was made
or arranged by an MLB (Business and Professions Code Sections 10240.1 and 10240.2). The provisions of this
Article apply to loans secured directly or collaterally by a first trust deed, the principal of which is less than
thirty thousand dollars, or to a loan secured directly or collaterally by a subordinate lien, the principal of which
is less than twenty thousand dollars.
The remaining provisions of Article 7 apply only to first or senior deeds of trust or mortgages, the original
principal balance of which are $30,000 or more; or to junior deeds of trust of mortgages, the principal balance
of which are $20,000 or more. When the first or senior deeds of trust or mortgages are securing an original
principal balance up to $30,000 or the junior deeds of trust or mortgages are securing an original principal
balance of up to $20,000, these transactions are commonly referred to as “Sheltered Loans”.
Article 7 applies to loans made or negotiated by real estate brokers (MLBs) acting within the meaning of
subdivision (d) of Section 10131 and subdivision (b) of Section 10240 of the Business and Professions Code.
Subdivision (b) of Section 10240 includes loan transactions in which a broker (MLB) solicits a borrower with
express or implied representations that the MLB will obtain and arrange a loan as an agent, but in fact makes
the loan with the broker’s own funds or funds the broker/MLB controls. In such fact situations, the broker may
not discharge the agency and fiduciary relationship established with the borrower, even though the MLB is
acting as well as a principal (and as the agent and fiduciary of private investors/lenders funding the loan) when
making the loan with funds the broker (MLB) owns or controls (Business and Professions Code Sections
10131(d) and (e), 10131.1, 10131.3, 10177(q), 10230 et seq., 10237 et seq., and 10240(b), and 10 CCR,
Chapter 6, Section 2840 et seq. and 2846; Civil Code Sections 2295 et seq., 2349 et seq., and 2923.1; and
Corporations Code Sections 25019, 25100(e) and 25206, and 10 CCR, Chapter 3, Sections 260.115 and
260.204.1; among others).
Mortgage Loan Disclosure Statement
The MLDS is at the heart of Article 7. This statement’s purpose is to provide a prospective borrower with
information concerning the important features or the material facts of an intended loan transaction, including
the fees, costs, and expenses to obtain the financing. A real estate broker (MLB) soliciting or negotiating a loan
transaction, as defined, on behalf of another or others (for compensation or in the expectation of compensation)
or when making the loan with funds owned or controlled by the MLB, which loan is evidenced by a promissory
note and a deed of trust or mortgage (secured either directly or collaterally by/through a lien on real property);
must present and deliver a completed MLDS to the prospective borrower within 3 business days of receipt of a
completed written loan application or before the borrower becomes obligated to take or accept the loan
(whichever is earlier).
MLBs either directly or through a salesperson or broker associate employed by the broker are required to obtain
the signature of the borrower(s) on the MLDS prior to the time that the borrower becomes obligated to
complete the loan transaction. The licensee must certify in the MLDS that the loan transaction complies with
Article 7, as applicable (Business and Professions Code Section 10240 et seq. and 10 CCR, Chapter 6, Sections
2840, 2842.5, 2843 and if lending 2844).
The information that must be included in the MLDS is set forth in the Real Estate Law (Business and
Professions Code Section 10241 et seq. and 10 CCR, Chapter 6, Section 2840 et seq.). Unless the MLDS is in
the form prescribed for use in the Commissioner’s regulations, the form of MLDS must be specifically
approved by the Commissioner prior to its use (10 CCR, Chapter 6, Section 2840 et seq.). The Commissioner
has established approved forms in Regulations 2840 and 2842. Mortgage Loan Disclosure Forms can be
obtained at any DRE office or on the DRE Web site at http://www.dre.ca.gov/frm_mlb.html. Other mortgage
lending and brokerage forms published by the DRE are available through the same web page.
In 2008, the DRE promulgated Commissioner’s Regulation 2842 and adopted the Mortgage Loan Disclosure
Form, RE 885 for the disclosure of terms on non-traditional and subprime mortgage products. This form must
be used when offering any loan that is defined as a “non-traditional mortgage product” in Regulation 2842, or
as defined throughout this chapter as an alternative mortgage(s) or non-traditional loan product(s). Further, the
Real Estate Commissioner promulgated at the same time Regulation 2844 describing the standards to which
MLBs/MLOs are subject when making a loan from funds owned or controlled by the broker that qualifies as a
“non-traditional mortgage product” (Business and Professions Code Sections 10131.1, 10240(b), and 10241(j),
and 10 CCR, Chapter 6, Section 2844).
In addition to the MLDS, real estate brokers (MLBs/MLOs) are required under the Real Estate Settlement
Procedures Act (RESPA) to complete and deliver a Good Faith Estimate (GFE) to the consumer/borrower. The
GFE is more fully discussed in the following section of this Chapter.
Broker Owned or Broker Controlled Funds
Both forms of the MLDS provide for disclosure that the broker (MLB) anticipate that the loan will be made
with broker-controlled funds (including funds that the broker owns). The phrase “broker-controlled funds”
means funds owned by the broker, by the broker’s spouse, child, parent, grandparent, brother, sister, father-in-
law, mother-in-law, brother-in-law or sister-in-law, or by any entity in which the broker alone or together with
any of the above relatives has an ownership interest, among others (Business and Professions Code Sections
10131.1, 10240(b), and 10241(j), and 10 CCR, Chapter 6, Section 2844). The definition of the broker’s own
funds or funds that the broker (MLB) controls should not be determined without consideration of the applicable
sections of the Corporate Securities Law of 1968 and the Corporations Commissioner’s Regulations pertaining
thereto.
Alternate Disclosures - Applicable Federal Law
When the real estate broker (MLB/MLO) is the creditor/lender, the broker may rely on federal disclosures and
the notices of rights required in federally regulated residential mortgage loan transactions, i.e., the disclosures
and the notices of rights required pursuant to the Real Estate Settlement Procedures Act (RESPA) and to the
Truth-In-Lending Act (TILA). A predicate to reliance exclusively on the foregoing federal disclosures and
notices of rights is the original principal amount of the loan must exceed the “Sheltered Loan” limits as set forth
in California law (12 USC 2601 et seq. and 24 CFR Parts 3500 et seq., Regulation X; 15 USC 1601 et seq. and
12 CFR Section 226 et seq., Regulation Z; and Business and Professions Code Sections 10240(c) and 10245).
A further and an important predicate is the qualifying MLBs/MLOs must be the creditor/lender and may not be
performing exclusively as the agent and fiduciary of the consumer/borrower (see the federal cases cited below
in the section entitled, “Disclosures – Case Law”). Qualifying MLBs/MLOs would not be required to complete
and deliver the MLDS in accordance with state law, if the “good faith estimate” that satisfies the requirements
of RESPA includes the broker’s real estate license number and a clear and conspicuous statement that the
“Good Faith Estimate” does not constitute a loan commitment.
Further, if the residential mortgage loan contains a provision for a balloon payment, the notice and disclosure
required under applicable California law must be included. Alternatively, the qualifying MLB/MLO may rely
on the balloon payment notice and disclosure required for the subject residential mortgage loan by Fannie Mae
or Freddie Mac, or the MLB/MLO may use a disclosure determined by the Real Estate Commissioner to satisfy
the requirements of TILA (12 CFR Section 226 et seq. and 24 CFR Parts 3500 et seq.; and Business and
Professions Code Section 10241(h)).
The prospective consumer/borrower must also be provided with the applicable disclosures required by TILA
and must acknowledge receipt of the RESPA “good faith estimate” and TILA required disclosures and notices
of rights prior to becoming obligated to the residential mortgage loan transaction. The broker (MLB/MLO)
must maintain copies of the disclosures and the signed acknowledgement for three years pursuant to applicable
law (Business and Professions Code Sections 10148 and 10240(c)).
Disclosures - Case Law
The federal District Court and the Court of Appeals for the 3rd Circuit have held that the disclosures and
notices of rights required pursuant to TILA (including Regulation Z thereof) must be made by the
creditor/lender and not by a third party agent. However, these holdings do not appear to extend to an agent that
is functioning in the place and stead of the creditor/lender through an express
management/administration/operations agreement (including the loan servicing relationship), i.e., in an
investment contract relationship with private investors/lenders funding and making the residential mortgage
loan as the creditors for TILA purposes. Further, these holdings should not apply to the exclusive authorized
agent and loan correspondent for the depository institution or licensed creditor/lender funding and making the
loan as the creditor for TILA purposes. The agent in this circumstance is also acting in the place and stead of
the creditor/lender.
The Court in the three separate reported case citations issued in the 3rd Circuit regarding this issue did not alter
the holding applicable to this discussion, i.e., the TILA required disclosures and notices of rights must be
completed and given to the consumer/borrower by the creditor/lender and not by a third-party agent, as defined.
The MLB/MLO making the residential mortgage loan relying on funds the broker controls or on the broker’s
own funds (as defined) would be the creditor/lender for TILA purposes.
Further, when the MLB/MLO is performing in an investment contract relationship, or is the exclusive
authorized agent and loan correspondent for a depository institution or a licensed creditor/lender may also
qualify as the creditor/lender pursuant to TILA. The status of creditor/lender (or performing in the role of
creditor/lender as described above) is an essential predicate to reliance on the alternative federal disclosures and
the notices of rights discussed in the previous section, “Alternate Disclosures - Applicable Federal Law”. This
means an MLB/MLO who is acting as the exclusive agent of the consumer/borrower is not entitled to complete
and deliver TILA disclosures and notices of rights. (Vallies v. Sky Bank, 432 F. 3d 493 – 2006; Vallies v. Sky
Bank, 583 F. Supp. 2d 687 – 2008; and Vallies v. Sky Bank, 591 F. 3d 152 – 2009).
In Realty Projects, Inc. v. Smith (1973 32 C.A. 3d 204), the court held that the statutory obligation of a licensee
to act fairly and honestly demanded that the licensee inform prospective borrowers of the differences between
commissions and other charges for loans in amounts subject to the Real Property Loan Law as against loans not
covered by that law. While the Court referred to the respondent/licensee as the agent of the prospective
borrower, the Court did not rely upon an agency theory in reaching its decision regarding this disclosure duty.
Rather, this duty was declared to stem simply from the respondent’s status as a licensee.
However in the case of Wyatt v. Union Mortgage Co. (1979 24 C.A. 3d 773), the Court held that a mortgage
loan broker’s (MLB’s) duty to disclose information about late charges and the effective interest rate of a loan
was based upon a fiduciary relationship between the broker (MLB) and the prospective borrower, i.e., part of
the fiduciary duties owed to the consumer/borrower (Civil Code Sections 2295 et seq., 2349 et seq., and 2923.1
and Financial Code Sections 4979.5, 4995(c) and (d), and 4995.3). It should be noted that Civil Code Section
2923.1 and Financial Code Sections 4979.5, 4995(c) and (d), and 4995.3 were each codified subsequent to the
reported decision in Wyatt v. Union Mortgage Co.
Commissions and Other Charges
Article 7 limits the amount that may be charged as commission or fees and as “costs and expenses” for
arranging or making a loan. Again, these limitations do not apply to a first or senior loan of $30,000 or more or
a junior loan of $20,000 or more (residential mortgage loans other than “Sheltered Loans”). The maximum
commissions for loans subject to Article 7 are:
1. First or senior loans:
a. 5 percent of the principal of a loan of less than 3 years;
b. 10 percent of the principal of a loan of 3 years or more;
2. Second or other junior loans:
a. 5 percent of the principal of a loan of less than 2 years;
b. 10 percent of the principal of a loan of at least 2 years but less than 3 years; and,
c. 15 percent of the principal of a loan of 3 years or more.
Costs and expenses of making or arranging a loan subject to Article 7, including appraisal fees, escrow fees,
notary and credit investigation fees (but excluding actual title charges and recording fees) charged to or
imposed upon a consumer/borrower cannot exceed 5 percent of the original principal balance/amount of the
loan or $390, whichever is greater, to a maximum of $700. The amount charged cannot exceed the actual costs
and expenses paid, incurred or reasonably earned. Fees, costs, and expenses imposed by the MLB/MLO must
be reasonably earned and actually incurred. No charge can exceed the amount customarily charged for the same
or comparable service in the community where the service is rendered (Business and Professions Code Section
10242 and 10 CCR, Chapter 6, Section 2843).
Balloon Payments
For the purposes of Article 7, a balloon payment is defined as an installment payment that is greater than twice
the amount of the smallest installment payment required by the terms of the promissory note (Business and
Professions Code Sections 10244 and 10244.1).
Generally, no mortgage loan subject to Article 7 that qualifies as a “Sheltered Loan” may have a balloon
payment, if the term of the loan is less than 3 years. However, if the real property securing the loan is an
owner-occupied dwelling, a balloon payment is not permissible if the term of the loan is 6 years or less
(Business and Professions Code Section 10244 and 10244.1). As in the case of the 3-year balloon payment
provision, this restriction does not apply to a promissory note given back to the seller (“carry back”) by the
purchaser of the dwelling on account of the purchase price (Civil Code Section 2956 et seq.). Notwithstanding
the foregoing, should the residential mortgage loan qualify as a “High-Cost Loan”, applicable California law
otherwise limits the use of balloon payments when the term of the loan is less than 5 years (Financial Code
Section 4973(b)(1)).
The MLDS includes a required notice regarding balloon payments. This notice must be in 10 point bold
typeface/font (using capital or upper case letters) and it must contain the precise language required by statute
(Business and Professions Code Sections 10241 and 10241.4). Business and Professions Code Section 10241.4
requires an expanded disclosure should provisions have been made, or will be sought, for either extension,
refinancing or renegotiation of a residential mortgage loan (as defined) subject to Article 7 when the loan
includes a balloon payment.
Other Restrictions
Other restrictions on mortgage loans subject to Article 7 include:
1. An MLB is prohibited from charging or negotiating any loan servicing or loan collection fees to be
paid by the borrower;
2. A consumer/borrower may not be required to purchase credit life or credit disability insurance as a
condition of obtaining a loan;
3. An MLB/MLO may collect only one premium for credit life or credit disability insurance provided
through duly licensed insurance agents, and only one consumer/borrower whose earnings are
reasonably relied upon by the creditor/lender for repayment of the loan may be insured;
4. Regardless of the amount of the loan, charges for late payments of an installment are limited to 10
percent (or $5, whichever is greater) of the principal and interest part of the installment or periodic
payment, and if a payment is paid or tendered within ten days of a payment due date, no late charge
may be imposed for the payment tendered;
5. No charge may be assessed for a prepayment penalty fee in connection with a prepayment of the
principal amount owning made more than seven years from the date of the loan, and if the prepayment
occurs within the first seven years of the origination of the loan, the prepayment penalty may not
exceed for any prepayment of principal (during any 12-month period) a fee in excess of six months’
advance interest on the amounts prepaid that are greater than 20 percent of the then remaining unpaid
principal balance; and,
6. The term of an exclusive right granted to the MLB/MLO by the consumer/borrower to secure
financing cannot exceed 45 days.
The late payment charges may not be imposed more than once for each late payment of an installment due and
no late charge may be imposed upon any installment which is paid or tendered in full within 10 days after its
scheduled due date (even though an earlier maturing installment or a late charge on an early installment may
not have been paid in full). A late charge in the authorized amount of 10% (of the monthly or periodic
installment of principal and interest) may not be imposed for the failure to timely pay a balloon payment, as
defined. Rather, the authorized late-payment charge for a balloon payment is limited to the late charge
imposable for a single monthly installment of principal and interest multiplied by the number of months
occurring from the date that the balloon payment was due to the date such payment was paid or tendered plus
one such monthly late charge.
The prepayment penalty provisions of Article 7 are trumped by the prepayment penalty fees controlled by the
provisions of the “High-Cost Loan” or “Covered Loan” and the “Higher-Cost/Priced Mortgage Loan” laws
subsequently enacted (if the loan transaction is subject to these laws). The prepayment penalty fees under the
“High-Cost Loan” or “Covered Loan” law are controlled by Financial Code Section 4973(2)(C) and such fees
under the “Higher-Cost/Priced Mortgage Loan” law are controlled by Financial Code Section 4995.1. While the
foregoing late charges and prepayment penalty fees established in Article 7 were intended for single family,
owner-occupied dwellings, these provisions apply to any loans negotiated by MLBs (Business and Professions
Code Sections 10241.1, 10242.5, 10242.6, 10248, and 10248.1).
Commissioner’s Regulations
As previously cited in this section, regarding Article 7, real estate licensees should be familiar with
Commissioner’s Regulations 2840, 2841, 2841.5, 2842, 2842.5, 2843, and 2844.
REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA) REGULATION X
Background
The U. S. Congress enacted the Real Estate Settlement Procedures Act (RESPA) in 1974 to provide certain
consumers/borrowers with early information about the fees, costs, and expenses involved in real estate
transactions that include federally related mortgage loans. RESPA also protects consumers/borrowers from
hidden kickbacks and other abusive practices. In residential transactions involving federally related mortgage
loans, RESPA requires consumers/borrowers who are refinancing, further encumbering, or purchasing (as the
buyers) the intended security property to receive information regarding settlement or closing costs and prepaid
expenses (estimates of fees, costs, expenses and “points” to be incurred).
The term “points” as applied in the financial services industry includes loan origination fees; discounts to adjust
investor yields or to assist in accomplishing a “rebate” sufficient to pay the required fees, costs, and expenses to
settle or close the loan transaction; and to pay the commissions imposed by mortgage brokers (MLBs/MLOs)
for services rendered to arrange mortgage loans. In this Chapter, the consumer/borrower is the person applying
for a loan and to whom the disclosures and notices of rights are to be delivered.
Federally Related Mortgage Loans
Generally, federally related mortgage loans include loans the proceeds of which are for the purpose of
purchasing, refinancing, or further encumbering real property improved with 1 to 4 residential units. The
residential real property may be owner occupied or non-owner occupied, and the deed or trust or mortgage
securing the repayment of the loan may be recorded senior or junior in priority (12 USC Section 2601 et seq.
and 24 CFR Section 3500 et seq.).
The specific definition of the term, “federally related mortgage loan”, as set forth in RESPA is any loan (other
than temporary financing such as a construction or bridge loan) which:
“(A) is secured by a first or subordinate lien on residential real property (including individual units of
condominiums and cooperatives) designed principally for the occupancy of from one to four families, including
any such secured loan, the proceeds of which are used to prepay or pay off an existing loan secured by the same
property; and
(B) (i) is made in whole or in part by any lender the deposits or accounts of which are insured by any agency of
the Federal Government, or is made in whole or in part by any lender which is regulated by any agency of the
Federal Government; or
(ii) is made in whole or in part, or insured, guaranteed, supplemented, or assisted in any way, by the Secretary
or any other officer or agency of the Federal Government or under or in connection with a housing or urban
development program administered by the Secretary or a housing or related program administered by any other
such officer or agency; or
(iii) is intended to be sold by the originating lender to the Federal National Mortgage Association, the
Government National Mortgage Association, the Federal Home Loan Mortgage Corporation, or a financial
institution from which it is to be purchased by the Federal Home Loan Mortgage Corporation; or
(iv) is made in whole or in part by any “creditor”, as defined in section 103(f) of the Consumer Credit
Protection Act (15 USC Section 1602 (f)), who makes or invests in residential real estate loans aggregating
more than $1,000,000 per year, except that
for the purpose of this Act, the term “creditor” does not include any agency or instrumentality of any State” (12
USC Section 2602 (1)(B)).
Exemptions from RESPA
RESPA applies to federally related mortgage loans (as defined) except for loans secured by real property
consisting of 25 acres or more, vacant land, or for a loan that is primarily for business, commercial, or
agricultural purposes. Loan transactions for temporary or short-term purposes (defined as construction or bridge
loans) are exempt from the application of RESPA. The temporary financing exemption from RESPA relies
upon the definition for such financing included within the regulations promulgated under TILA (12 CFR
Section 226.3(a)(1)).
The definition for temporary financing applied under California law is similar to the federal definition with a
noted exception that state law imposes, i.e., such loans must have a maturity of one year or less. Further, bridge
loans when applied under California law are for the express purpose of financing the acquisition or construction
of a dwelling intended to be the consumer’s/borrower’s principal residence (Financial Code Section 4970(d)).
Further, RESPA does not apply to loan “assumptions” (transfers of the title to the security property) without at
the same time transferring the liability of the initial maker of the mortgage loan through an assumption
agreement executed by the transferee and the creditor/lender. Such transfers occur “subject to” the existing
mortgage loan and may well be in violation of due–on-sale clauses included within the loan documents. RESPA
also does not apply to contemplated conversions of existing loans from one amortization to another or from
adjustable to a fixed interest rate residential mortgage loan. Secondary market transactions where the
originating creditor/lender sells, endorses or assigns the mortgage loan as an “asset in being” (an asset existing
as part of a loan portfolio) to the ultimate investor(s) are also exempt from RESPA (24 CFR Section 3500.5(a)
and (b)).
Definitions of “Creditor” and of “Lender”
The Consumer Credit Protection Act, commonly referred to as the Truth-In-Lending Act (TILA), applies to
qualifying “creditors” (15 USC Section 1601 et seq. and 12 CFR Section 226 et seq.). Accordingly, federal law
applies two distinguishable definitions to the persons or entities that fund and make loans, i.e., “creditors” and
“lenders”. RESPA defines the persons or entities that fund or make loans as “lenders”.
Pursuant to TILA, the term ''creditor'' refers to a person (or entity) that “(1) regularly extends, whether in
connection with loans, in sales of property or services, or otherwise extends consumer credit which is payable
by an agreement in more than four installments or for which the payment of a finance charge is or may be
required, and (2) is the person to whom the debt arising from the consumer credit transaction is initially payable
on the face of the evidence of indebtedness or, if there is no such evidence of indebtedness, by agreement…”
(15 USC Section 1601(f) and 12CFR Section 226.2(a)(17)). The conjunctive “and” requires both the extension
of credit (funding and making the loan) and being identified as the initial payee on the face of the evidence of
indebtedness or the agreement.
Further, a person or entity regularly extends consumer credit, “… only if it extended credit (other than credit
subject to the requirements of 226.32) more than 25 times (or more than 5 times for transactions secured by a
dwelling) in the preceding calendar year. If a person did not meet these numerical standards in the preceding
calendar year, the numerical standards are to be applied to the current calendar year. A person regularly extends
consumer credit if, in any 12-month period, the person originates more than one credit extension that is subject
to the requirements of 226.32 or one or more such credit extensions through a mortgage broker” (15 USC
Section 1601(f) and 12 CFR 226.2(a)(17)). The TILA definition of “creditor” has been adopted for RESPA
purposes (12 USC Section 2602).
The term “lender” is defined in applicable federal law as persons and entities that regularly make loans and that
appear on the promissory note and other evidence of indebtedness as the initial payee. Under federal law, the
term “creditor” applies to persons and entities that complete and deliver certain disclosures and notices of rights
to consumers/borrowers when making residential mortgage loans. The term “creditor” also applies under
federal law to persons or entities that make residential mortgage loans that are subject to various federal
mandates, including the completion of demographic and geographic reports, and that otherwise require
compliance with consumer/borrower protection objectives. The result of the foregoing is a “two-pronged”
definition for those persons and entities engaged in the funding and making of residential mortgage loans, i.e.,
“lenders” and “creditors”.
RESPA Amendments
Significant changes to RESPA were published November 17, 2008. The new regulations became effective over
a period of several months, commencing January 16, 2009, and concluding as of January 1, 2010. These
changes include (among other technical changes) amending the contents of the booklet, “Shopping for Your
Home Loan, HUD’s Settlement Cost Booklet”; revisions to the Good Faith Estimate; modifying the HUD-1 and
HUD-1A Settlement/Closing Statements; restructuring the Servicing Disclosure Statement; and altering the
requirements for the Initial Escrow (Impound) Account Statement. Each of the foregoing amendments,
revisions, modifications, alterations, or restructuring is discussed in this Section.
Special Information Booklet
There are six disclosure requirements under RESPA. The first is to provide mortgage loan applicants
(consumers/borrowers) with a special information booklet. This booklet entitled, “Shopping for Your Home
Loan, HUD’s Settlement Cost Booklet”, revised in December 2009, is available on the HUD website at
www.hud.gov. The booklet is to be delivered to a person from whom the creditor/lender receives or for whom a
written application is prepared in connection with a federally related mortgage loan. The special information
booklet may be translated into languages other than English when appropriate or as required by applicable law.
When Required
The special information booklet is to be received by the applicant (consumer/borrower) at the earliest possible
time; however, the booklet is not required when the applicant is applying for a reverse mortgage. In open-end
credit transactions, such as home equity lines of credit (HELOCs), the special information booklet may be
replaced with the booklet published by HUD entitled, “When Your Home is on the Line, What You Should
Know about Equity Lines of Credit”.
Multiple Applicants
When two or more persons (consumers/borrowers) apply together for a loan, the creditor/lender is in
compliance if one consumer/borrower receives a copy of the booklet. The creditor/lender may deliver the
booklet to the applicant or mail it to the applicant (consumer/borrower) no later than three business days after
the application is received or prepared. If the applicant uses a mortgage broker (MLB/MLO), the mortgage
broker is to provide the special information booklet relieving the creditor/lender from the responsibility to do
so. Further, if the creditor/lender denies the application for credit of the consumer/borrower before the end of
the three-business-day period, then the creditor/lender need not provide the booklet (12 USC Section 2604 and
24 CFR Section 3500.6(c) and (d)).
Time of Delivery
Disclosures required under RESPA are generally to be completed and delivered within a defined number of
business days. For RESPA purposes, a business day is defined as a day on which the offices of the person or
business entity (creditor/lender or mortgage broker (MLB/MLO)) are open to the public for carrying on
substantially all of the entity’s business functions (24 CFR Section 3500.2(b)). Notwithstanding the foregoing,
Sundays and federal holidays are excluded from the definition of a business day.
Good Faith Estimate
Content, Form, and Delivery
The second required disclosure under RESPA is the Good Faith Estimate (GFE). The GFE is to be completed
and delivered to the applicant (consumer/borrower) and it includes an estimate of settlement charges or closing
costs and prepaid expenses as well as the prospective material loan terms. RESPA requires that a GFE
disclosing the fees, costs, and expenses and the material loan terms be completed and delivered to the
consumer/borrower no later than three business days after preparing the loan application or receiving
information sufficient to complete an application, whether received by the creditor/lender or the mortgage
broker (MLB/MLO) (24 CFR Section 3500.7).
The creditor/lender or the mortgage broker (MLB/MLO) is to provide the GFE to the loan applicant
(consumer/borrower) by hand delivery; by placing it in the mail; or, if the applicant agrees, by fax, e-mail, or
other electronic means. When the residential mortgage loan is being delivered to the creditor/lender by a
mortgage broker (MLB/MLO), it is the obligation of the creditor/lender funding the mortgage loan to verify the
GFE was delivered to the consumer/borrower within the three business days as described in this paragraph. If
the GFE was timely delivered by the mortgage broker (MLB/MLO), then the creditor/lender need not complete
and deliver the GFE. A GFE is not required on home equity lines of credit (HELOCs), or regarding loan
applications denied by the creditor/lender or withdrawn by the applicant (consumer/borrower) within the
statutory three days. (24 CFR Section 3500.7(a)(3)(i)(ii)).
Tolerances for Amounts Included on the GFE
Neither the creditor/lender nor the mortgage broker (MLB/MLO) may charge, as a condition for providing a
GFE, any fee for an appraisal, inspection, or other similar settlement services. The creditor/lender or the
mortgage broker (MLB/MLO) may, at its/their option, charge a fee limited to the cost of a credit report. No
additional fees may be charged by the creditor/lender or the mortgage broker (MLB/MLO) until after the
applicant (consumer/borrower) has received the GFE (24 CFR Sections 3500.7 (a)(4) and (b)(4)). The GFE is
deemed received by the consumer/borrower within three calendar days subsequent to the mailing, excluding
Sundays and legal holidays specified in applicable federal law (5 USC Section 6103(a) and 24 CFR Section
3500.7 (a)(4) and (b)(4)).
The loan application includes an estimate of the then market value of the intended security property as
represented by the applicant (consumer/borrower) or as may be reflected in a purchase and sale agreement (if
the loan is to finance the purchase of the intended security property). The creditor/lender or the mortgage
broker (MLB/MLO) are advised to research comparable sales and/or listings in the neighborhood where the
intended security property is located through on line vendor services, MLS’, or through information available
from title companies. The purpose of the foregoing is to apply reasonableness tests as the appropriate standard
when considering the applicant’s estimate of market value or that the proposed sales price of the intended
security property bears a relationship to recent comparable sales in that neighborhood.
Limitations on Collection of Fees
The creditor/lender or the mortgage broker (MLB/MLO) may at any time collect from the loan applicant
(consumer/borrower) information in addition to the contents of the application (as described and defined), when
the creditor/lender is prohibited from requiring such information as a condition for providing a GFE. An
example is the applicant (consumer/borrower) may not be required to submit supplemental documentation to
verify the information provided on the loan application (24 CFR Section 3500.7 (a)(5) and (b)(5)). However,
the creditor/lender may obtain verification from third parties in support of the information included in the
application provided no fees, costs, and expenses are imposed on the applicant (consumer/borrower) other than
a credit report fee in advance of providing a GFE. As previously mentioned, the foregoing includes (among
others) the fee for an appraisal report (24 CFR Section 3500.7 (a)(4) and (b)(4)).
Binding on Loan Originator
It is paramount the GFE contains accurate information. While the GFE is not a commitment to lend by the
creditor/lender, the creditor/lender and the mortgage broker (MLB/MLO), as loan originators, are each bound
within the tolerances established when completing and delivering the GFE to the consumer/borrower. Some of
the fees, costs, and expenses disclosed are subject to zero tolerances and others are subject to the 10 percent
tolerance cap on the amounts disclosed in the GFE. Should the loan originator provide a new or revised GFE to
the consumer/borrower prior to settlement or the close of the loan escrow, documentation must be included
supporting the reasons for the revisions.
The estimate of the charges (fees, costs, and expenses) for settlement services and the loan terms must remain
available for at least 10 business days from when the GFE is initially delivered to the consumer/borrower. The
loan originator may elect to maintain the GFE and the estimated charges and loan terms for longer than 10 days.
Should the loan originator extend the period of availability of the GFE, certain estimated charges or loan terms
are not subject to the tolerance requirements. These are the interest rate; the charges and loan terms dependent
upon the interest rate (which include the charges for credit to reimburse the fees, costs, and expenses through
adjustments in the interest rate chosen); the adjusted origination charges, if any; and the daily or per diem
interest (24 CFR Section 3500.7(c)).
If a consumer/borrower does not express an intent to continue with a loan application within 10 business days
after the GFE is delivered or during the extended period of availability offered by the loan originator, the
creditor/lender or mortgage broker (MLB/MLO) is no longer bound to the initial GFE (24 CFR Section 3700.5
(f)(4)).
Retention of Documents and Disclosures
Loan originators must retain copies of GFEs and documentation of the reasons in support of a new or revised
GFE for a minimum of three years after settlement or loan closing (24 CFR Section 3500.7(f)). Mortgage loan
brokers (MLBs/MLOs) are required under state law to retain the entire loan file for at least three years
subsequent to loan closing or the last action taken, whichever is later (Business and Professions Code Section
10148).
Changed Circumstances
Change in circumstances includes those requested by the consumer/borrower; those affecting the
consumer’s/borrower’s eligibility and/or the ability to qualify for the specific loan terms disclosed; those
affecting the anticipated or represented market value of the intended security real property; or those affecting
increased costs of settlement services that exceed the tolerances for those charges arising from the foregoing
changed circumstances. Should changed circumstances apply, the loan originator should provide a revised GFE
to the consumer/borrower. If a revised GFE is delivered to the consumer/borrower, the loan originator must do
so within three business days after receiving information to establish the changed circumstances (24 CFR
Section 3500.7(f)(1), (2) and (3)).
Distinctions between Federal and State Law
Application of this federal law is not as strict as state law when considering the fiduciary duties owed by the
mortgage broker (MLB/MLO), a category of loan originator distinguishable from those who are
creditors/lenders or employees/agents of creditors/lenders. As the agent and fiduciary of the consumer/borrower
where the contemplated loan is being delivered to a depository institution or a licensed lender (the
creditor/lender), the change in circumstances (regardless of cause or reason) must be disclosed by the mortgage
broker (MLB/MLO) to the consumer/borrower (Business and Professions Code Section 10240 et seq.; and 10
CCR, Chapter 6, Section 2840 et seq.; Civil Code Sections 2295 et seq. and 2923.1; and Financial Code
Sections 4979.5, 4995(c) and (d) and 4995.3(c)).
The MLB/MLO is required under California law to complete and deliver to the consumer/borrower a Mortgage
Loan Disclosure Statement (MLDS) together with the GFE in a federally related loan transaction, as defined.
California law requires the material loan terms, including the estimated fees, costs, and expenses to be
disclosed, in writing, as well as any change in the foregoing through the use of the MLDS (and through a
revised GFE to avoid any conflicts between the two required disclosure statements). This means the material
loan terms and the estimated fees, costs and expenses and any changes are to be in writing and evidence of such
disclosures is to be maintained in the loan file. The purpose is to ensure no misrepresentation occurs and that no
false promises have been made to the consumer/borrower by the mortgage loan broker (MLB/MLO) (Business
and Professions Code Sections 10176(a), (b) and (c), 10177(d), (g) and (j), 10240 et seq., and 10 CCR, Chapter
6, Section 2840 et seq.; Civil Code Sections 2295 et seq. and 2923.1; and Financial Code Sections 4979.5,
4995(c) and (d) and 4995.3(c)).
Generally, state laws that are inconsistent with RESPA are preempted to the extent of the inconsistency.
However, the regulations promulgated pursuant to RESPA are not intended to “…annul, alter, affect, or exempt
persons subject to their provisions from complying with the law of any state with respect to settlement
practices, except to the extent of the inconsistency” (24 CFR Section 3500.13). The requirement under
California law to obtain the signature of the loan applicant (consumer/borrower) on the MLDS and to include
the GFE for this purpose (prior to becoming obligated to the loan transaction) represents an added
responsibility of the MLB/MLO that is not an “inconsistency” subject to the preemption (Business and
Professions Code Section 10240 and 10 CCR, Chapter 6, Section 2842.5).
Comparison of GFE with HUD-1 or HUD-1A
As aforementioned, charges disclosed on the GFE are compared for accuracy prior to drawing of the loan
documents (including instruments, disclosures, notices of rights and escrow instructions) and when funding the
loan. The settlement or loan closing statement (HUD-1 or HUD-1A) must be reviewed in advance of settlement
or loan closing to ensure no unauthorized changes have occurred to the fees, costs, and expenses. As
previously mentioned, once the GFE is completed and delivered to the consumer/borrower, certain charges are
subject to a zero tolerance. Charges that cannot change include the origination fee (whether imposed by the
creditor/lender or the mortgage broker (MLB/MLO)), the credit or charge (“points”) for the specific interest
rate chosen after the interest rate is “locked”, and transfer taxes (24 CFR Section 3500.7(e)).
A 10 percent tolerance is applied to the sum of the prices for services where either the creditor/lender or the
mortgage broker (MLB/MLO) requires the use of a particular provider, or the consumer/borrower uses a
provider selected or identified by the loan originator (24 CFR Sections 3500.2 and 3500.7(e)). The charges
required by the service providers selected by the loan originator (creditor/lender or the MLB/MLO); the fees
imposed for title services including title insurance coverage (lender’s and owner’s title insurance coverage);
and the charges for other required services subject to shopping (when the consumer/borrower selects providers
identified by the loan originator) cannot increase by more than 10 percent at settlement or loan closing.
Government recording charges are also subject to a 10 percent cap, i.e., they cannot exceed the amount
disclosed in the GFE by more than 10 percent.
However, the services for which the consumer/borrower selects a provider (other than a provider identified by
the loan originator) are not subject to any tolerance cap and, at settlement or loan closing, would not be
included in the sum of the charges on which the 10 percent tolerance is based. Charges of third party service
providers can change in addition to those where a service provider chosen by the consumer/borrower is used.
Other charges that can change include the initial deposit for an escrow (impound) account, daily or per diem
interest charges, and premiums for property insurance coverage (24 CFR Section 3500.7(e)).
While the regulations do not refer to property taxes, the amount of such taxes may change through pro-rations,
and the amount of reserves required when establishing an escrow (impound) account may also be subject to
change (depending upon the date of settlement or loan closing). California creditors/lenders and mortgage
brokers (MLBs/MLOs) should be aware that if the proceeds of the loan are to facilitate the purchase of
residential real property, future property taxes may be increased by supplemental tax assessments resulting from
the purchase price paid for the security property.
Interest Rate Locks and Loan Commitments
The term “interest rate lock commitment” was defined in the Mortgage Bankers Association Presentation to
Bank Regulatory Agency Representatives made on February 20, 2004. This presentation included a definition
which in part states, “An interest rate lock commitment represents a lender’s agreement to make money
available to a borrower within a specified time period at a specified rate for a specified tenor…”. When
“locking” the interest rate in residential loan transactions, the consumer/borrower may elect to “lock” typically
for periods of 15, 30, 45 or 60 days. Generally, the lock period selected is from 45 to 60 days. Shorter periods
are often selected when pre-approval of the loan has been extended by a creditor/lender and in those
circumstances when a purchase transaction must close within a short defined period.
“Pre-approve” vs. “Pre-qualify”
Interest rate locks with a commitment to make a loan to a consumer/borrower at a specified rate and terms for
an identified period (based upon “pre-approval” subject to specified conditions) is an offer from the intended
creditor/lender that may not be made by a mortgage loan broker (MLB/MLO). It is a misrepresentation and a
false promise for a MLB/MLO to communicate a “lock” in the rate and terms of a mortgage loan without
identifying the source of the “lock of rate and loan terms”. The MLB/MLO is obligated to disclose the material
facts relevant to the consumer’s/borrower’s decision to rely upon the “lock”, including the identity of the
intended creditor/lender (Business and Professions Code Sections 10176 (a),(b), (c), (k) and (l)).
Creditors/lenders may “pre-approve” the loan application of a consumer/borrower whereas mortgage brokers
(MLBs/MLOs) may “pre-qualify” but may not “pre-approve.” It is a misrepresentation for a mortgage broker
(MLB/MLO) to pre-approve or to issue a “lock” and/or “commitment”, unless the MLB/MLO is the
creditor/lender or the authorized agent for the creditor/lender for such purposes (Business and Professions Code
Sections 10176(a),(b),(c) and (k) and 10177 (g) and (j)). It is also unlawful for an MLB/MLO to delay the
closing of a mortgage loan to increase fees, costs, or expenses (charges) payable by the consumer/borrower
(Business and Professions Code Sections 10176(l) and 10177 (g) and (j)).
Revised GFEs
If the interest rate has not been “locked” or a “locked interest rate” has expired; the charge for the interest rate
chosen, the adjusted origination charges, the daily or per diem interest, and the loan terms related to the interest
rate lock may change. If the consumer/borrower later requests a “locked interest rate”, a revised GFE must be
completed and delivered showing the altered interest rate and dependent charges and loan terms. All other
charges and loan terms must remain the same as on the original/initial GFE, except as otherwise provided in the
event of changes in circumstances (24 CFR Section 3500.7 (f)(5)).
In the event the contemplated loan transaction is to finance a new home purchase and the anticipated settlement
or loan closing is to occur more than 60 calendar days from the time the initial GFE is completed and delivered,
the loan originator must separately disclose in a clear and conspicuous manner that a revised GFE may be
issued to the consumer/borrower. Should a separate disclosure occur in anticipation of a revised GFE, the
subsequent disclosure must comply with the required tolerances established by the original/initial GFE, except
as to the changed circumstances previously discussed (24 CFR Section 3700.5(f)(6)).
Violations of Section 5 of RESPA Regarding GFEs
Should any charges at settlement or loan closing exceed the fees, costs, and expenses listed on the GFE by more
than the permitted tolerances, the loan originator is to cure the tolerance violation by reimbursing the
consumer/borrower the excess amounts. The required reimbursement are the amounts by which the tolerances
were exceeded at settlement or loan closing, and the reimbursement is to be made either at loan closing or
within 30 calendar days thereafter. If the loan originator delivers or places the reimbursement in the U. S. Mail
within 30 calendar days after settlement or loan closing, the consumer/borrower is presumed to have timely
received the reimbursement.
It may prove to be difficult for a loan originator who is a mortgage broker (MLB/MLO) to cure tolerance
violations beyond the scope of the mortgage broker’s authority and capacity. Many MLBs/MLOs are pursuing
a practice of establishing the amount of the estimated fees, costs, and expenses, and the specific material loan
terms through creditors/lenders; with settlement agents, title insurers, title companies or public escrows in
advance of issuing the original/initial GFEs (24 CFR Section 3500.7(i)).
Apparently, a HUD omission has occurred regarding enforcement of Section 5 of RESPA. As of this writing,
no sanctions or penalties exist for violations of Section 5 other than timely curing any breach of the tolerance
limits or conforming the transactional terms to the material loan terms disclosed in the GFE. HUD indicates it
plans to seek authority from the U. S. Congress to impose civil monetary penalties and injunctive and equitable
relief for such RESPA violations. In the meantime, it is likely banking and other regulators will enforce the new
GFE requirements under their regulations. Federal regulators are likely to examine the fees, costs, and expenses
and material loan terms disclosed in the GFE and compare these disclosures to the HUD-1 or HUD-1A and to
the loan documents to learn whether compliance with Section 5 has occurred.
Available Instructions
HUD has prepared instructions to assist loan originators in completing and delivering the GFE that are
available on the HUD website at http://edocket.access.gpo.gov/cfr_2009/aprqtr/24cfr3500AppC.htm.
HUD-1 or HUD-1A
Required Use
The third disclosure required by RESPA in a federally related loan transaction is either the HUD-1 or HUD-1A.
Generally, the HUD-1 is to be used when the security property is being purchased and sold and the HUD-1A
when the purpose of the loan is to refinance or further encumber the intended security property (24 CFR
Section 3500.8 (a), (b), and (c)).
Form HUD-1 is required in every settlement or closing statement involving a federally related mortgage loan in
which there is a borrower (buyer) and a seller. In preparing regulations to implement RESPA, HUD has
focused on the borrower even in sales transactions. The borrower and the buyer are generally the same person
in such transactions. As previously mentioned, the HUD-1 is the appropriate form when the proceeds of the
loan are used to purchase the security property, i.e., a residential property improved by 1 to 4 dwelling units.
Creditors/lenders may use the HUD-1 in other transactions such as refinancing loans or loans secured by
subordinate liens by simply using the borrower’s side of the form. A single HUD-1 may be distributed to
multiple borrowers in the same transaction.
Form HUD-1A may be used as the settlement or loan closing statement for loans refinancing or further
encumbering the equity of the intended security property, or in other one-party transactions that do not involve
transfers of title. Creditors/lenders are not required to use either the HUD-1 or HUD-1A for open-end home
equity lines of credit (HELOCs), as long as the applicable provisions of Regulation Z are followed.
Comparison with GFEs
The settlement agent (or the escrow holder) is required to use the HUD-1 or HUD-1A settlement statement in
every settlement/escrow involving a federally related mortgage loan. In most cases, in transactions that involve
an escrow holder or settlement agent (for example, title insurance companies, underwritten title companies,
public escrows, or an attorney acting as a settlement agent), the creditor/lender historically did not have direct
statutory responsibility for the accuracy of the HUD-1 or HUD-1A (24 CFR Section 3500.8 (a), (b), and (c)).
However, the imposition of tolerance caps and related issues such as changes in circumstances place a burden
on creditors/lenders and mortgage brokers (MLBs/MLOs) to ensure the HUD-1 or HUD-1A is consistent with
the settlement charges or closing costs and prepaid expenses as disclosed in the GFE. This burden to ensure
consistency and to protect the consumer/borrower also extends to the material loan terms disclosed in the GFE
as well as in the disclosures required under Regulation Z of TILA.
Definition of Settlement Agent or Escrow Holder
The federal definition of “settlement agent” includes the creditor/lender if no one is designated by the parties in
the transaction to be a neutral settlement agent or escrow holder. In California, to function as a settlement agent
or escrow holder the person or entity requires licensing under the Public Escrow Law or an exemption from
licensing pursuant to this law (Financial Code Sections 17003, 17004 and 17006). The persons or entities that
may function as settlement agents or escrow holders without being licensed under the Public Escrow Law
include title insurance companies, underwritten title companies, banks, savings and loan associations, savings
banks, trust companies, or other licensed insurance carriers that are doing business under applicable laws of the
state of California or of the United States. Title insurance companies or underwritten title companies are
required to make an offer to issue a title policy as a predicate to conducting an escrow under this exemption.
In addition, persons licensed to practice law in California who are in a bona fide relationship with a principal to
a real property or a real property secured transaction may act as the settlement agent or escrow holder through
an exemption from the Public Escrow Law, provided the attorney is not actively engaged in business as an
escrow agent. Real estate brokers are also exempt from licensure under the Public Escrow Law when acting as
an escrow holder, provided the broker is either an agent or party to the real property or real property secured
transaction performing an act requiring a real estate license Financial Code Section 17006(a)(1) through (4),
and (b)).
Unlike most other settlement agents or escrow holders, brokers acting as an escrow holder in a real property or
a real property secured transaction are not functioning as a neutral escrow agent (Business and Professions
Code Section 10145 and Financial Code 17006). Further, mortgage bankers acting under the Residential
Mortgage Lending Act (RMLA) or finance lenders acting under the Finance Lender Law (CFLs) may not act in
California as settlement agents or escrow holders.
Obligation for Loan Originator to Review HUD-1 or HUD-1A
When the settlement agent or escrow holder is someone other than the creditor/lender, the creditor/lender
should obtain a copy of the HUD-1 or HUD-1A issued to the consumer/borrower from the settlement agent or
escrow holder. The purpose is to ensure the settlement agent or escrow holder has complied with the
instructions of the creditor/lender, including confirming that the amounts imposed as fees, costs, and expenses
are within the applicable tolerances of the estimates disclosed in the GFE. The creditor/lender is also to review
the HUD-1 or HUD-1a to ensure the material loan terms disclosed remain unchanged and to accomplish record
keeping obligations.
Similar obligations are imposed upon mortgage brokers (MLBs/MLOs) with the added burden of ensuring that
conformed copies of the deeds of trust or mortgages have been delivered to the creditor/lender or investor and
to the consumer/borrower as required under applicable law (Business and Professions Code Section 10234.5).
MLBs/MLOs must also confirm that the consumer/borrower received a copy of the final HUD-1 or HUD-1A
Settlement Statement.
Contents of HUD-1/HUD-1A
The HUD-1 settlement statement is a three-page document which has been redesigned to provide the
consumer/borrower with the ability to compare the estimates of settlement or closing costs and pre-paid
expenses given in the GFE to the actual charges shown on the HUD-1. Further, the HUD-1 includes a third
page that was added at the time of this writing to allow the consumer/borrower to determine if the actual
charges or closing costs and pre-paid expenses have exceeded the required tolerances and whether a
restatement of the same material terms of the loan as set forth in the GFE has occurred.
The GFE for comparison purposes is the last GFE (and when the loan originator is a MLB/MLO, the last
MLDS) that was completed and delivered to the consumer/borrower in accordance with applicable federal and
state law. The consumer/borrower should receive a final GFE including settlement or closing costs and prepaid
expenses that are actually being imposed as well as disclosing the material loan terms actually occurring in the
transaction (24 CFR Section 3500.8 (b) and (c) and Business and Professions Code Section 10240 et seq.).
As previously mentioned, the HUD-1A form applies in residential mortgage loan transactions where the
purpose of the loan is to accomplish the refinance or the further encumbrance of the intended security property.
The HUD1-A is a two-page statement that includes much the same information as the HUD-1, except no
information is included for a seller of real property (since no sales transaction is occurring). Again, the
information to be included must be sufficient to allow a consumer/borrower to compare the settlement charges
or closing costs and prepaid expenses to the fees, costs, and expenses and to the material loan terms as
disclosed in the GFE (24 CFR Section 3500.8 (a), (b) and (c)).
Advance Review by Consumer/Borrower
One-day in advance of the anticipated settlement or close of the loan escrow, the settlement agent or escrow
holder must permit the consumer/borrower to inspect the proposed HUD-1 or HUD-1A settlement statement as
completed, including all items known to the settlement agent or escrow holder at the time of inspection. The
one-day prior inspection of the proposed HUD-1 or HUD-1A is to occur during the business day immediately
preceding the date on which the contemplated transaction is to be settled or closed. The only items that may be
eliminated from the proposed HUD-1 or HUD-1A settlement statement for this advance inspection are those in
a sales transaction exclusively concerning the seller (24 CFR Section 3500.10 (a)).
Waiver of Right to Advance Review
The consumer/borrower may waive the right to inspect in advance the proposed HUD-1 or HUD-1A settlement
statement. Such waiver must be in a writing executed by the consumer/borrower. In such event, the settlement
agent or escrow holder is to deliver a completed HUD-1 or HUD-1A to the consumer/borrower as soon as
practical after the settlement or the close of the escrow (24 CFR Section 3500.10 (b) and (c)). When mailing the
HUD-1 or HUD-1A settlement statement, it is to be placed in the U.S. Mail addressed to the
consumers/borrowers at the address included within the loan application. A distinguishable address may be
used if authorized in writing and executed by the consumer/borrower (24 CFR Section 3500.11).
Neither the settlement agent nor the escrow holder or any other person (whether the creditor/lender, mortgage
broker, or a third party service provider) may impose a fee or charge to prepare and deliver the HUD-1 or the
HUD-1A settlement statement. This fee or charge prohibition applies to any disclosures or notices of rights
required under RESPA or pursuant to TILA (12 USC Section 2601 et seq. and 15 USC Section 1601 et seq.).
Servicing Disclosure Statement
When the Servicing Disclosure Statement is Required
The fourth disclosure required by RESPA in a federally related loan transaction is the Servicing Disclosure
Statement. When an application for a federally related mortgage loan is submitted or within 3 business days
after submission of the application, the creditor/lender or mortgage broker (MLB/MLO) who anticipates using
“table funding” or the dealer who anticipates a first lien dealer loan is to provide a Servicing Disclosure
Statement to each loan applicant (consumer/borrower) (24 CFR Section 3500.21 (a), (b), (c), and (d)).
Definition of Mortgage Servicing Loan/Federally Related Mortgage Loan
In the regulations promulgated to implement RESPA, the phrase “mortgage servicing loan” is interchangeable
with and is meant to mean a “federally related mortgage loan” (24 CFR Section 3500.2). The objective of
providing a Servicing Disclosure Statement is to inform the applicant (consumer/borrower) whether loan
servicing of the mortgage servicing loan/federally related mortgage loan may, will, or will not be transferred by
the identified loan originator.
As previously discussed, the term loan originator has been redefined in recent amendments to RESPA to
include for certain purposes creditors/lenders and mortgage brokers (MLBs/MLOs). A creditor/lender or a
mortgage broker in those jurisdictions where “table funding” is acceptable and who anticipates such a
transaction are each subject to the obligation of issuing a Servicing Disclosure Statement at the time of an
application for a federally related mortgage loan, or within 3 days after submission of the application. A
mortgage broker (MLB/MLO) in California may not engage in “table funding” (with a limited exception
described below) is not required to issue a Servicing Disclosure Statement (Business and Professions Code
Section 10234; 10CCR, Chapter 3, Section 1460; Financial Code Section 50003(o) and (t); and 24 CFR Section
3500.21 (a), (b), (c), and (d)).
“Table Funding” Defined
The issue of “table funding” has been previously discussed in this Chapter. However, for the purposes of
completing and delivering the Servicing Disclosure Statement, a further discussion is necessary. Except in
narrow circumstances involving California mortgage bankers (licensed under the RMLA) that are relying on
funds advanced from an affiliated creditor/lender (as defined), “table funding” is unauthorized under and
inconsistent with applicable state law (Business and Professions Code Section 10234; 10CCR, Chapter 3,
Section 1460; and Financial Code Section 50003(o) and (t)).
While various references are made to “table funding” in federal regulations promulgated under RESPA or
otherwise, the definitions applied to this practice must first be understood to interpret the application of such
references to the relationships between creditors/lenders (as one category of loan originator) and mortgage
brokers (as another category of loan originator). In the federal regulations implementing RESPA, “table
funding” is defined to mean a settlement at which a loan is funded by a contemporaneous advance of loan funds
and an assignment of the loan to the person(s) advancing the funds. In California, such transactions are
“concurrent assignments”. For RESPA purposes, a “table funded” loan is not a secondary market transaction
(24 CFR Section 3500.2).
Secondary Market Transactions Defined
Secondary market transactions are defined under RESPA as a bona fide transfer of a loan obligation in the
secondary market, except as set forth in Section 6 of RESPA and in accordance with 24 CFR Section 3500.21.
The aforementioned regulation is relevant to this discussion and distinguishes a secondary market transaction
for the purposes of establishing the actual creditor/lender and thus the obligation to complete and deliver the
Servicing Disclosure Statement. While obligated to complete and deliver the Servicing Disclosure Statement, a
mortgage broker (MLB/MLO) in a “table funded” transaction (where authorized under federal law in
jurisdictions other than California) does not become the creditor/lender (12 USC Section 2602(1); 24 CFR
Section 3500.2; 15 USC Section 1602(f); and 12 CFR 226.2(a)(17)).
HUD has stated that in determining what constitutes a bona fide transfer for a secondary market transaction
will depend on the real source of funding and the real interest of the funding creditor/lender. Further, HUD
points out “table funded” mortgage broker transactions are not secondary market transactions; and neither is the
creation of a dealer loan nor a dealer consumer credit contract, nor is the assignment of such a contract to a
creditor/lender (24 CFR Section 3500.5 (b)(7)).
Table Funding Pursuant to California Law
The differences in definitions and use of the term “table funding” between federal and California law are
consistent. While applicable federal law does not seek to prohibit “table funding”, the previously identified
federal statutes and regulations clearly define such transactions as brokering and not lending, i.e., other than a
secondary market transaction. The mortgage broker (MLB/MLO) when authorized to engage in “table funding”
is to complete and deliver the Servicing Disclosure Statement (even though the relationship with the
creditor/lender advancing the funds is under applicable federal law other than a secondary market transaction).
A secondary market transaction occurs when a residential mortgage loan/a mortgage servicing loan is being
sold and assigned from one actual creditor/lender to another.
Rather, in such transactions the mortgage broker (MLB/MLO) is arranging and delivering the loan to the
creditor/lender that is the real party at interest while at the same time completing and delivering the Servicing
Disclosure Statement to the consumer/borrower. The purpose is for the MLB/MLO to disclose the material
facts regarding the transfer of loan servicing. Under California law, a mortgage broker (MLB/MLO) would be
misleading the consumer/borrower by claiming to be the creditor/lender when brokering or arranging the loan
rather than funding and making the loan. This is a misrepresentation of a material fact and an avoidance of and
a breach of fiduciary duty (Business and Professions Code Section 10176(a), (b), and (c); Civil Code Sections
2295 et seq. and 2923.1; and Financial Code Sections 4979.5, 4995(c) and (d) and 4995.3(c)).
The purpose of delivering the Servicing Disclosure Statement in “table funded” transactions is to ensure the
consumer/borrower is aware of the transfer of loan servicing by the person or entity identified on the
promissory note as the payee (24 CFR Section 3500.21 (a), (b), (c) and (d)). The Servicing Disclosure
Statement providing for the transfer of loan servicing, as defined, does not in and of itself establish the “table
funding” mortgage broker (MLB/MLO) held any loan servicing rights to transfer. California mortgage brokers
(MLBs/MLOs) who are unable to engage in “table funding” would not complete and deliver the Servicing
Disclosure Statement. Thus, no inconsistency exists with applicable federal law (24 CFR Sections 3500.5(b)(7)
and 3500.21 (a), (b), (c) and (d); Business and Professions Code 10234; 10 CCR, Chapter 3, Section 1460; and
Financial Code Section 50003 (o) and (t)).
Format for Servicing Disclosure Statement
A format for the Servicing Disclosure Statement appears in the Federal Register, Vol. 73 No 222 68259. The
specific language of the Servicing Disclosure Statement is not required to be used. The information set forth in
the “Instructions to Preparer” on the Servicing Disclosure Statement need not be included with the information
given to applicants (consumers/borrowers), and the material in the square brackets is optional or alternative
language.
The model format may be annotated with additional information that clarifies or enhances the model language.
The creditor/lender, “table funding” mortgage broker in authorized jurisdictions, or the dealer should use the
language that best describes the particular circumstances of each person or entity completing the statement. The
format appearing in the Federal Register is as follows:
“Sample language; use business stationery or similar heading”
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