SAFE Workbook

SAFE
20 Hour Comprehensive | Fundamentals Of Mortgage Education
Version 4
Date Of Course Content 01.01.2022
Date Of Course Approval: 02.03.2021
20 Hour SAFE Comprehensive: Fundamentals of Mortgage Education (NMLS 10527) - Version 4

Table Of Contents
14 A Message About Vocabulary
14 History
14 How Did We Get Here?
14 Before the 1990’s
15 After the 1990’s
16 The Mortgage Meltdown, A Financial Crisis & New Rules

16 Dodd-Frank Wall Street Reform Act
16 Unfair, Deceptive or Abusive Acts or Practices (UDAAP)
17 Who’s Who?
17 Loan Originators
17 Loan Origination Companies
17 Individual Loan Originators
17 Mortgage Brokers
18 Other Common Roles In The Mortgage Industry

18 Processor
18 Underwriter
18 Appraiser
18 Title Agent
18 Real Estate Agent
18 Lender
18 Investor
18 Regulator
18 Consumer or Customer?
20 MLO Timeline
20 The Four Cs
21 Shopping For A New Home (Pre-Application)
22 Do You Qualify? (Application)
25 Initially Approved And Ready to Go (Processing)
27 Borrower Qualification (Underwriting)
30 Closing
32 Ownership
32 What’s Next?

3
Table Of Contents
33 How Loan Repayment Works
33 What Exactly Is Amortization?
33 How Does It Work?
34 Negative Amortization
38 Agencies
38 Federal Law VS. State Law
38 The States
38 The State Model
39 State Standards and The SAFE Act
40 The State Authority
41 State Licensing and Registration
41 Enforcement Actions
41 Prohibited Conduct
42 Federal Government
43 Impact of the CFPB
43 Department of Housing and Urban Development (HUD)
44 Other Federal Departments and Agencies
44 Agency Activities
45 Reporting
45 Cease and Desist Orders
48 Your License
48 The Secure And Fair Enforcement Act (SAFE Act)
48 The Nationwide Multistate Licensing System and Registry (NMLS)
48 CSBS And AARMR
49 What Does The NMLS Do?
50 Regulation G
50 Regulation H
50 Registration, Licensing, Education, And Testing
58 RESPA
58 RESPA Governs
58 RESPA Does Not Govern
58 Simplifying RESPA
60 Important Sections Of RESPA
60 RESPA, Section 6 - Servicing
61 RESPA, Section 8 - Referrals
61 RESPA, Section 9 - Title Agent
62 RESPA, Section 10 - Escrow
4 © 2022 Rocket Mortgage. All Rights Reserved. Trade Secret, Confidential, and Proprietary. Any duplication or dissemination of these materials is strictly prohibited.
Table Of Contents
62 Disclosures Required Under RESPA
62 What’s A Disclosure?
64 RESPA Penalties
64 RESPA Record Keeping
66 Products
66 Set VS. Variable Rates Of Interest
66 Closed-End VS. Open-End
67 Closed-End Mortgages
67 Fixed Rate Mortgages
68 Adjustable Rate Mortgages
71 Balloon Mortgages
72 Open-End Mortgages
72 Home Equity Lines Of Credit
72 Graduated Payment Mortgages (GPM)
73 Reverse Mortgages
75 Miscellaneous Products
75 Short Term Mortgages
77 Unique Loan Types

77 Subordinate Liens
77 Interest-Only Loans
78 Reduced Documentation Loans
82 Mortgage Math 1
82 Simple Interest Rate
83 Calculations: PITI
83 Property Tax
83 Insurances
83 Hazard Insurance
84 Calculations: DTI
84 Debt To Income
84 Housing DTI
84 Mortgage Insurance
85 Total DTI
86 Calculations: Income
86 Hourly
87 Salary

5
Table Of Contents
89 Calculations: LTV
89 Down Payment
90 Loan To Value
91 Combined Loan To Value (Total Loan To Value)
91 High Combined Loan to Value (High Total Loan To Value)
92 Practice Problems
92 Simple Interest
92 PITI
92 Interest-Only Payment
92 40hr/wk Income From Hourly
92 Income From Salary
93 Housing DTI
93 Total DTI
93 Down Payment
93 LTV
93 CLTV/TLTV
96 Programs
96 The 4C’s
96 Conventional Loans
97 Conventional Conforming Loans
97 Fannie And Freddie Mac
100 Conventional Non-Conforming Loans

100 What Is A Conventional Non-Conforming Loan?
100 Non- Conventional Mortgage Loans (Government Loans)

101 FHA Mortgage Loans
104 VA Mortgage Loans
108 USDA Mortgage Loans
112 Application
112 Complete Application VS. The Application
112 Complete Application
Table Of Contents
114 Borrower Information
114 Who’s Responsible?
114 Consumer
114 Mortgage Loan Originator
115 (co)Borrower VS. (co)Signer
115 Accuracy
116 Mortgage Fraud
116 Credit Report
117 Uniform Residential Loan Application

118 Section 1: Borrower Information
119 Section 2: Financial Information - Assets and Liabilities
119 Section 3: Financial Information - Real Estate
119 Section 4: Loan and Property Information
120 Section 5: Declarations
121 Section 6: Acknowledgment and Agreement
121 Section 7: Military Service
122 Section 8: Demographic Information
122 Section 9: Loan Originator Information
122 Continuation Sheet
123 Lender Loan Information
126 ECOA
126 ECOA Simplified
127 ECOA In Depth
128 3 Common Forms Of Discriminatory Behavior
129 Types Of Action
130 ECOA Valuation Rule
130 ECOA And The Application Process
131 Disclosures Required Under ECOA
132 ECOA Penalties
132 ECOA Record Keeping
134 Consumer Contact Laws

134 Fair Credit Reporting Act - FCRA, Regulation V
134 Simplifying FCRA & FACTA
135 The Disposal Rule
135 Fraud Alerts
135 Red Flags Rule
136 Penalties Under FCRA & FACTA

7
Table Of Contents
136 Disclosures Required Under FCRA/FACTA
136 Notice of Right to Receive Credit Score
136 Gramm-Leach-Bliley Act - GLBA

136 Simplifying GLBA
137 Privacy - Regulation P
138 FTC Safeguards Rule
139 Do Not Call Laws

139 Telephone Consumer Protection Act (TCPA)
139 Do Not Call Improvement Act
140 E-Sign Act

140 Electronic Signatures In Global and National Commerce Act
141 Mortgage Acts And Practices - Advertising

141 MAP, Regulation N
144 Borrower Ethics And Fraud

144 Ethics And Money
144 Human Nature
145 Does A Lie = Fraud?
146 The Formula For Fraud
148 Borrower Fraud

148 Suspicious Activity
148 Impact Of Borrower Fraud
148 Types Of Borrower Fraud
151 Fraud Methods

151 Verbal Fraud
151 Conspiracy Fraud
151 Modified Documentation
153 Examples Of Borrower Fraud

153 Property Flipping
153 Straw Buyer
153 Buy and Bail
154 Seller-Buyer Collusion
157 Industry Fraud

157 Appraisal Fraud
157 Builder Bail-out
158 Predatory Lending
Table Of Contents
158 Chunking
158 Steering
159 Industry Ethics
159 The Impact Of Mortgage Fraud - 10 Years Later
159 By Eric Heisig, Cleveland.com
159 Uri Gofman
160 Tony Viola
160 Anthony Jerdine
160 Lavon Ruderson
161 Susan Alt
161 Stephen Holman
161 Postscript
164 Insurances
164 Mortgage Insurance, Funding Fees And Guaranties
166 Conventional Mortgages - Private Mortgage Insurance, PMI
167 FHA Loans - UFMIP & MIP
169 VA Loans - Funding Fees, Guaranty And Entitlement
171 USDA Loans - Guarantee And Annual Fee
172 Hazard Insurance

172 Basic Homeowner’s Insurance
173 Flood Insurance
175 Title Insurance

175 What is Title?
175 Title Work
176 Title Insurance Policies
178 Third Party Services

178 Credit Reporting
180 Property Inspection
180 Property Survey
180 Appraisal
180 Appraisal Basics
181 Rules And Regulations
183 Appraisal Approaches
183 Appraisal Forms

9
Table Of Contents
184 Title
184 Title Process
188 Mortgage Math 2

188 What’s The Point?
190 Annual Percentage Rate
191 Per Diem Interest
192 Calculating Per Diem Interest
193 Loan Payoff

194 Prorated Taxes
194 Practice
196 TILA
196 TILA Governs
197 TILA Does Not Govern
197 TILA Simplified
198 TILA In Depth
198 Permissible Fees And Finance Charge Requirements
199 Advertising Requirements
200 Important Sections Of TILA

200 TILA, Section 19 - Mortgage Disclosure Improvement Act (MDIA)
201 TILA, Section 23 - The Right of Rescission
202 TILA, Section 32 - Home Ownership Equity Protection Act (HOEPA)
204 TILA, Section 35 - Higher-Priced Mortgage Loans (HPML)
204 TILA, Section 36 - The Loan Originator Rule
205 TILA, Section 42 - Valuation Independence
205 TILA, Section 43 - Qualified Mortgages (QM) and Ability to Repay (ATR)
208 Disclosures Required Under TILA

208 General TILA Disclosures
209 Adjustable Rate Mortgage (ARM Disclosures)
209 Rate Adjustment Disclosures Provided During Servicing
210 TILA Open-End Mortgage Only Disclosures
210 TILA Penalties

210 TILA Record Keeping
Table Of Contents
212 Fairness Laws
212 Fair Housing Act (FHA)
214 Home Mortgage Disclosure Act - HMDA, Regulation C
216 Homeowners Protection Act - HPA
217 Financial Crime Laws
217 USA PATRIOT Act
217 Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism
218 BSA & AML

218 Bank Secrecy Act And Anti-Money Laundering
218 Anti-Money Laundering Program Requirements
219 Reports Used Under BSA/AML
222 Disclosures And Documents

222 What’s A Disclosure?
222 What’s TRID?
223 Simplifying TRID
223 Charges And Fees Disclosed
224 The Loan Estimate

225 The Loan Estimate Page-by-Page
228 The Closing Disclosure

229 The Closing Disclosure Page-by-Page
238 Closing
238 Closing 101
238 Consummation vs. Closing
238 Closing A Purchase
239 Closing A Refinance
240 Who Must Be Present At Closing
240 Settlement Types

240 Wet Settlement
240 Dry Settlement
241 Funding Methods

241 Table Funding
241 Warehouse Funding/Lending
241 Direct Funding/Lending

11
Table Of Contents
242 Recording
243 Remittance And Ownership
243 Servicing
243 RESPA’s Servicing Rules
243 TILA’S Servicing Rules
243 Payment Processing
244 Payoff Statements
244 Periodic Statements
245 Securitization
245 Types Of MBS
245 The MBS Marketplace
246 Repayment
246 Reconveyance
246 Sale
247 Default
247 Forbearance
247 Modification
247 Foreclosure
250 Ethics And The MLO

250 Ethics
250 Your Responsibilities As A Mortgage Loan Originator
250 The Dilemma...
252 Mariama’s Business Practices
252 Carless Patrick
253 Carl’s Loan Shop
01 Course Overview
Throughout this section, consider the following:
1. How did deregulation and regulation of the industry

affect how we do mortgages today?
2. Define and explain UDAAPs.
3. What is an MLO? Please provide full definition.
4. Other than MLOs, what are at least 5 key roles

in the mortgage industry and what are the main
responsibilities for these roles?
5. What are the 3 different types of mortgage loan

originators?
History
A Message About Vocabulary
A Message About Vocabulary

You will notice a number of items in bold blue print.
There’s a reason they are marked - they are all terms that you’ll need to know in your work as a mortgage loan
originator.
In this first section alone there are 29 terms for which you’re responsible. In every block throughout the course you’ll
find these blue-lettered terms. To keep the pages from getting too busy we’ll only mark them the first time they
appear in the course text, so pay attention as you read.
In many cases you may already know the meaning of the term, but keep in mind that some words may have a
different meaning in the mortgage industry. A great example is the word “title”. You’ll see that in our industry we
define “title” very simply: ownership. It’s not a form or a document like you might find with a car title. In our industry
title (or ownership) is demonstrated on the deed (another blue-letter word). The deed is the document that shows
who owns the property.
All the blue-letter terms, and some others can be found in the glossary located in the course Supplemental. In
preparation for your career as a mortgage loan originator as well as your upcoming SAFE Uniform Standard Test
(UST) – yet another blue-letter term – a working knowledge and understanding of all the terms in the glossary is a
necessity.
History
How Did We Get Here?
Providing credit and the lending of money has been around since the dawn of organized mankind. On the other
hand, mortgage loans are fairly new (they’ve only been around for a few hundred years). We offer this brief history
lesson to provide you with some context for why it’s necessary to take this class and to better understand the reason
things are done in the way they are today.
Before the 1990’s

The concept of a traditional mortgage (a 30-year fixed rate loan) is a fairly recent phenomenon with its roots well
into ancient times, and in its current format is something that is fundamentally American.
Prior to the Great Depression, most mortgages were private agreements between property owners (sellers) and the
person or people attempting to become owners (buyers). Prior to the depression most mortgages were short-term
in length (three to five years) and required the borrower to make a substantial down payment as well as a balloon
payment at the end of the financing period. For many Americans it wasn’t until after the Great Depression and
Franklin D. Roosevelt’s presidency that the opportunity of homeownership became a reality.
In an effort to spur the American economy and foster security in the banking industry, Roosevelt created the
Homeowners’ Loan Corporation to refinance the loans made previously in the private sector. The Federal Home Loan
Bank was also created to regulate savings and loan associations. The Federal Deposit Insurance Corporation was
created to protect borrower deposits. These organizations were precursors to the Federal Housing Administration
(FHA) which was created to reassure lenders in cases of borrower mortgage defaults. The FHA also emphasized the
offering of a lengthy mortgage term - popularizing the 20-year mortgage which eventually led to the advent of the
30-year product which today (at least in the United States) is considered the “traditional” mortgage.
History
How Did We Get Here?
Over time the American mortgage industry evolved. Once the FHA was established and maintained a steady level of
financial confidence in mortgage loans, the mortgage and homeownership became synonymous with the American
way of life. Along the way additional mechanisms and supports developed, such as VA loans for military veterans,
and USDA loans to provide housing opportunities in rural areas. As a financial instrument and benchmark, the
mortgage often served as an American’s most important financial commitment. Because of this commitment and
the almost certain appreciation in property value, Americans often refer to their home as their greatest financial
asset or investment. The advent of Fannie Mae, Freddie Mac, and Ginnie Mae provided additional assurances to the
industry that the home mortgage was a safe financial tool.
After the 1990’s

Even though being a homeowner equated to the American dream, buying and owning a home remained out of
reach for many until the mid-1990’s. Prior to the last decade of the 20th century, obtaining a mortgage required a
level of qualification that included high income and asset support, significant down payment, a strong credit profile
as well as a qualifying home to collateralize. To make more mortgage lending possible with fewer restrictions for
borrowers, additional capital with fewer restrictions would be needed. Such capital was limited due to restrictions
such as the Glass-Steagall Act of 1933, which maintained a barrier in the financial marketplace between commercial
investors and the mortgage marketplace. For more capital to be available for mortgage lending, impediments such
as Glass-Steagall would need to be lifted.
Technology and the ever-increasing desire for investment opportunity drove officials to lessen restrictions on capital
markets and make it easier for Americans to buy a home. In 1999 the Gramm-Leach-Bliley Financial Services
Modernization Act1 repealed some of Glass-Steagall’s hurdles for investors to actively participate in the funding of
mortgages thus providing lenders with additional funds and making mortgages more available.
As far back as the early 1970’s Freddie Mac was offering a product of packaged mortgages into investment
instruments called mortgage backed securities (MBS). The MBS allowed Freddie (and Fannie Mae soon after) to
keep cash flowing in the mortgage marketplace through the sale of their MBS. The stability and constant increase
in real estate values made MBSs a safe bet for investors. The deregulation of the 1990’s allowed for more elaborate
forms of the MBS to be available in the market and lenders along with investors took advantage of the opportunity.
In 2003 The American Dream Down Payment Initiative implemented an aggressive agenda for making
homeownership even easier by lessening standards and easing controls on lenders. As a result, lenders focused less
on borrower qualifications and more on collateral in determining loan approval. This led to the development of the
sub-prime mortgage.
Sub-prime mortgages made it possible for previously unqualified borrowers to purchase homes. These sub-prime
loans came with higher fees and interest rates for the borrower, which in turn meant higher profits for lenders and
loan originators. As long as property values continued to increase investors considered the MBS (including those
comprised of sub-prime mortgages) one of the safer investments available in the financial marketplace.
1 Financial Services Modernization Act of 1999, commonly called Gramm-Leach-Bliley.” Federal Reserve History, 11/22/2013. https://www.federalreservehistory.org/essays/gramm_leach_bliley_act.
20 Hour SAFE Comprehensive: Fundamentals of Mortgage Education (NMLS 10527) - Version 4 15

History
The Mortgage Meltdown, A Financial Crisis & New Rules

Unfortunately, in the mid-2000s many of these sub-prime borrowers were unable to pay their mortgage bills.
This began a domino effect in which more and more loans went into default, triggering foreclosures that led to a
depressed real estate market and decreasing property values. Lenders and investors who needed to collect on the
mortgages now found themselves holding properties that were worth more on paper than their actual value in the
market. This mortgage meltdown not only impacted everyday borrowers, it also had devastating consequences for
the entire financial marketplace because of the market’s reliance on the MBS as an investment tool. The result was a
near collapse of not only the American financial system, but also the world’s financial markets.
In response to this collapse and to prevent future occurrences, a significant restructuring of regulations and rules
was enacted. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 20101 changed the oversight
and capitalization of financial institutions, added licensing and education standards for mortgage professionals,
and limited the availability of riskier products in the marketplace.
Today the mortgage industry is one still adjusting to the changes made after the financial crisis and working to
maintain access to the American dream of owning a home.
Dodd-Frank Wall Street Reform Act

On July 21, 2010, Congress signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. This
Act was created to address economic concerns in many financial markets, including the mortgage industry, by
improving regulations within certain consumer protection laws. These regulations apply to financial institutions,
appraisers, and financial and investment advisors.
Besides strengthening the consumer protection responsibilities of federal banking agencies, the Act also
established the Consumer Financial Protection Bureau (CFPB) in order to consolidate the federal regulatory
authority for those protections.
The CFPB, otherwise known as the Bureau, oversees and enforces the regulations of the Dodd-Frank Act, with its
sole purpose being to protect consumers from deceptive and unethical financial practices. Dodd-Frank removed
a wide variety of agencies overseeing consumer protections and consolidated the oversight of those protections
under CFPB control.
In addition, the Dodd-Frank Wall Street Reform Act defined and specifically outlawed UDAAPs.
Unfair, Deceptive or Abusive Acts or Practices (UDAAP)2

What Is a UDAAP?
A UDAAP is an unfair, deceptive, or abusive act or practice.
The Dodd-Frank Act provides the CFPB with wide regulatory and enforcement powers as they relate to enforcing
the prohibition of UDAAPs in the mortgage industry. Because of the all encompassing nature of UDAAPs and
their broad definition, the enforcement of UDAAP prohibitions often serves as a main component in ethics
investigations.
Unfair: Defined
Unfair acts or practices are activities that can cause injury (usually financial harm) to the consumer, especially if
that harm cannot be avoided.
There is an exception to the concept of the behavior being unfair if the benefit of the act outweighs the injury
caused.
1 “Public Law 111-203-July 21, 2010.” 11th Congress, 7/21/2010. http://uscode.house.gov/statutes/pl/111/203.pdf

2 “12 U.S. Code § 5531 - Prohibiting unfair, deceptive, or abusive acts or practices.” Legal Information Institute, 7/21/2010. https://www.law.cornell.edu/uscode/text/12/5531.
Who’s Who?
Deceptive: Defined
Deceptive acts or practices are behaviors in which the mortgage loan originator deceives the consumer - or at
least plans to deceive the consumer. This deception could lead the consumer to make poor decisions, because
the consumer relies on the expertise of the originator as it relates to mortgage loans.
Abusive: Defined
Abusive activities involve conduct in which the mortgage loan originator takes advantage of their position in the
transaction to confuse the consumer. An abusive act could be as simple as the originator only providing a single
loan product or program option to the borrower when the borrower qualifies for multiple options.
Who’s Who?
Over the course of this training, you will encounter numerous players in the mortgage industry. Here is a short list of
some common roles: loan originator, lender, investor, consumer, customer, regulator
This chapter will provide a brief description of the roles listed above.
Loan Originators
A mortgage loan originator takes a residential mortgage loan application and offers or negotiates rates and terms
of a residential mortgage loan for compensation or gain. Mortgage loan originators (MLOs) may be simply referred
to as loan originators (LOs) and the term MLO can be used to describe a company, branch office, an individual or a
mortgage broker. Let’s explore each one more in depth.
Loan Origination Companies

Loan origination companies employ individuals who serve as individual loan originators. Both the company and the
people who work directly with consumers negotiating loans must be licensed if the company is a non-depository
institution.
Individual Loan Originators

This is you after you take this course, prepare for the exam, and pass the test. You will work with borrowers to find
them the best mortgage solution possible depending on their needs and qualifications. Remember the definition
of a mortgage loan originator: a person who takes a residential mortgage loan application and offers or negotiates
rates and terms of a residential mortgage loan for compensation or gain.
Mortgage Brokers
Mortgage brokers are loan originators who work independently of lenders. They originate mortgages for the
customer and then find a lender to provide the loan. Since mortgage brokers are mortgage loan originators, they
too can be companies or individuals.
Things To Know
• Person = Company, corporation, LLC, partnership, natural person, etc.
• Natural Person = An individual human being
Things To Know
• Mortgage brokers are mortgage loan originators that sell their
originated applications to companies
• Serve as a “middle man” between borrowers and companies

Who’s Who?
Other Common Roles In The Mortgage Industry
Other Common Roles In The Mortgage made. The title agent also offers forms of title insurance,
which protects the lender or borrower in case of future
Industry
claims against title.
Processor
A processor works for a mortgage loan originator and
Real Estate Agent
provides clerical functions such as collecting documents The real estate agent is an independent party
or verifying information with borrowers. Some working on behalf of the buyer or seller in a purchase
organizations may call this person an assistant, clerk, transaction. Sometimes referred to as a Realtor® or real
or administrator. What sets them apart from the MLO is estate broker, this individual’s focus is the sale of the
that they are not permitted to negotiate rates and terms property. Real estate agents typically are licensed in the
with borrowers. No special licensing is required for this states where they operate.
role unless the individual works for the company as an
independent contractor.
Lender
A lender is a person or company that makes loans for
Underwriter real estate. Sometimes in legal speak the lender will be
The underwriter works for the mortgage loan originator referred to as the mortgagee. Some lenders (but not
and reviews loan applications to determine the risk all) also originate mortgages. It is not a requirement for
associated with granting the borrower a mortgage loan. lenders to write their own loans.
As was the case with the processor, the underwriter
is not allowed to negotiate rates and terms with the
Investor
borrower. They are not required to carry a special license An investor is a person or organization that puts money
unless they work for the company as an independent into financial arrangements, property, etc. with the
contractor. expectation of achieving a profit.
Appraiser Regulator
The appraiser works independently of the mortgage A regulator is a person or institution that supervises and
loan originator and provides the service of determining controls a financial system in order to guarantee fair and
a property’s value. This determination of value can efficient markets and financial stability.
be provided in a variety of ways including a physical In our industry there are both state and federal
visit to the property and by comparing the home to regulators. The state regulators oversee mortgage
similar properties. The appraisal is most often paid origination in their particular state while the federal
for by the borrower as part of the borrower’s closing regulator oversees mortgage origination at the federal
costs. Appraisers follow the guidelines of the Uniform level.
Standards of Professional Appraisal Practice (USPAP),
are licensed at the state level, and may need to register Consumer or Customer?
or be licensed by local jurisdictions. In the mortgage industry it’s important from a legal
perspective to know the difference between a consumer
Title Agent
and a customer. How the person is designated helps to
The term title agent may refer to a title company or determine what information must be provided to them
the individuals working for the company. Additionally, and when it must be given.
title agents may be referred to as abstractors or title
attorneys. The title agent works independently of the Customer
mortgage loan originator, is chosen by the borrower, A customer is someone who is in an ongoing process
and typically paid a fee as part of the mortgage or relationship with a financial services provider.
transaction’s closing costs. Title agents research Consumer
the ownership (title is another word for ownership) A consumer is an individual who may obtain financial
associated with the property upon which the loan is services (they’re shopping).
02 MLO Timeline
1. What is amortization and how does it work?
2. What do each of the 4C’s represent?
3. How are the 4C’s used in a mortgage transaction?

MLO Timeline
The Four Cs
MLO Timeline
Mortgage Loan Origination
In this chapter we will provide a summary of the mortgage loan origination process through the eyes of a borrower
and their conversations with an MLO. We’ll also provide a visual timeline to supplement the review. While this
summary will help you associate where in the mortgage loan origination process certain activities take place, we
want to caution you that this should serve only as a guide. In reality, every mortgage loan origination company uses
methods unique to their specific organization to originate mortgage loans and while they are similar across the
industry they may be described or coupled differently.
The Four Cs
Before we get into the timeline, it’s important that we clearly establish the main determinant in how a mortgage
borrower qualifies for a loan – the Four Cs. The Four Cs are the main foundational criteria that mortgage loan
originators use to determine if a borrower qualifies for a mortgage loan.
Each C stands for a specific item on the qualification spectrum and each is equally important in determining if a
borrower qualifies for the mortgage. Let’s break it down with a quick rundown on what each one of the Four Cs
represents:
Credit Capacity
The borrower’s credit score and history. Most The borrower’s income or their incoming cash flow
mortgage programs require a minimum credit score versus the monthly bills they’re obligated to pay. The
and a history of proper credit account management amount of income a borrower has will need to be
to qualify for a mortgage loan. compared to their debt obligations so the MLO can
determine if the borrower can afford the loan, or has
the capacity required to pay back the loan.
Cash Collateral
The liquid assets the borrower has available to The property pledged as security for the loan. The
cover any shortfalls. The MLO will typically require value of the home and ownership responsibility
a borrower to have money in reserves to cover any must meet the standards required by the lender.
interruptions in the borrower’s monthly income.
Think of each C as if it were the leg on a table. For the table to sit squarely on the ground and not wobble requires
each leg to be of equal length and strength. If one leg is shorter than the others or not as strong, the table may lean
or collapse.
Such is the case with a borrower’s qualifications. If one of the qualifying factors – say the borrower’s credit score -
does not meet the standard, the likelihood is that the borrower does not have a strong enough base to support the
repayment of the loan, and thus the lender is not likely to provide a loan. We’ll talk more about specific qualification
requirements in a later chapter dealing with programs, but for our purposes right now we’ll focus on where and
when in the mortgage loan origination process each of the four Cs is provided by the borrower and when they are
confirmed.
Now, let’s follow the borrower Renata through the Mortgage Loan Origination Timeline.
MLO Timeline
Shopping For A New Home (Pre-Application)

In the pre-application portion of our story, we want to give you an idea of how a borrower can get connected with
a real estate agent and an MLO. The mortgage process can begin in many different ways, but the section below will
illustrate a common scenario of how a borrower begins the process of obtaining a home loan.
Every week Renata Vento’s paycheck is directly deposited into her checking account. After she pays all her bills
Renata takes most of what’s left and transfers the money into a special account she set up four years ago after her
divorce. She set the account up to help her save enough money for the down payment on a new home. She never
dips into the balance for frivolous expenses and over time she’s accumulated a pretty healthy savings balance.
Today she was driving home from the office and she saw a For Sale sign in the front lawn of a house on the corner
of Main and Elm - 100 Elm Street. She’s always appreciated the house’s nice front porch with room for a couple of
rocking chairs and strong beams from which to hang the type of flowering baskets that she loves. She once had
the chance to attend a book club meeting in the home and had seen the first floor – a nice living room opening
into a smartly laid-out kitchen. There was also a small powder room on the first floor. The woman who owned
the house at the time mentioned that the second floor had a good-sized master suite with an attached bath and
a guest room that was being used for sewing space. Wrapped around the home was a well-cared for lawn that
Renata felt she could easily manage on her own.
I wonder what they’re asking she thought. She called the number on the sign from her cell phone.
“Mrs. Morganstern’s moving in with her daughter,” the real estate agent said. “She can’t get up and down the stairs
anymore.”
“Can you tell me what she’s asking for the home?” Renata asked.
Renata could hear some papers rattling in the background. “We listed at one eighty-five nine,” came the voice on
the other end. “And I’m pretty sure that we’ll move it quickly at that price. You’re the third person to call today and
I’m doing a showing for one of the others tomorrow morning.”
“Hmmm…,” Renata murmured as she thought. “Any chance I could take a look at the house tonight?”
“Absolutely! Mrs. Morganstern’s already moved out, so we can get in any time,” said the agent. “But I do need to
make sure of one thing before we do anything else. Do you have financing in place? In today’s market I only show
homes to serious buyers. It’s such a tight market that if you don’t have the finances in place all we’re doing is
wasting time.”
“Oh.” Renata hadn’t even considered the money piece. She thought that her finances were in good shape. She had
been saving money, paying her bills on time, even using a credit tracking app to keep an eye on her credit score -
which was in the mid-700s the last time she checked. But she didn’t have $185,900 available and didn’t know who
to turn to for a loan. Maybe the bank, she thought. “I really hadn’t thought that far ahead, but I think I should be
able to get a loan.”
“Not to worry,” said the real estate agent. “I work with a lot of mortgage people. Do you have something to write
with? Let me give you some names and numbers.”
Renata scribbled down the information provided by the agent for a local mortgage broker as well as a mortgage
loan originator with an online lender.
“They’re both good. I’ve worked on many deals with each of them,” said the agent. “You may also want to reach
out to your bank.”
“Thanks for the information, but it sounds like this may take a while before I’ll have anything in place,” Renata
said. “I guess I’ll call you in a few weeks, and maybe I’ll get lucky and the house will still be available?”

MLO Timeline
“Nonsense!” The agent chuckled. “Provided you meet some requirements, either of these folks should be able to
get you qualified in an hour or two – at least with a pre-approval or pre-qualification letter that says you meet
their standards for a particular loan amount.”
“Really?”
“With today’s technology, you’d be amazed. Tell you what,” the agent said. “It’s 3:45 right now. Why don’t we meet
at the house at 7:30 tonight? That should give you enough time to make some calls.”
“Okay,” Renata said. “I’ll call you if I can’t make it.”
Do You Qualify? (Application)

In our application portion of our story, you will see an example of an initial conversation between a borrower and an
MLO for a purchase transaction. As you are reading through this part of the story, consider the following points:
• One of the first actions our MLO, Jervis, takes is confirming the first of our four Cs by pulling up a copy of the
Renata’s credit report. Why do you think that is? What kind of information does Jervis see listed?
• Jervis asks about Renata’s income in comparison to her debts. Which of the 4 Cs deals with the borrowers
income and debts? Why would Jervis want to know about this?
• Take a close look at the kinds of questions Jervis asks Renata. What sticks out to you? What other information is
he trying to gather and why?
• Based on Jervis’ explanation, what different elements make up Renata’s monthly mortgage payment?
• How does Jervis explain the “Intent to Proceed”?
After Renata hung up with the real estate agent she dialed the number of the local mortgage broker. After a few
rings a friendly voice answered. “Hello, Jervis Roberts Mortgage, Jervis speaking. How can I help you?”
Renata introduced herself and told Jervis about her conversation with the real estate agent and her interest in
getting a mortgage to buy a home.
“So you’ve found a house and want to see if you qualify for the mortgage?”
“Well…” Renata stammered, “there’s a house I may be interested in. I haven’t even looked at it yet. You know,
toured it or whatever, but it’s a house I like.”
“Okay,” Jervis said “Do you own a home now?”
“No,” Renata said “I’m a renter.”
“Okay, that’s great! That means you may be considered a first-time homebuyer, which means you would be
eligible for some additional options with the mortgage,” the broker said.
“I don’t know if I’m even interested in a mortgage yet,” Renata said. “But for me to look at this house, they’re asking
for some kind of approval or letter.”
“Not a problem,” Jervis said. “Many sellers now require potential buyers to have some kind of financing in the
works before they’ll even let you look at the home. You and I can go through the pre-qualification process right
here on the phone if you’ve got about 30 minutes, and we’ll see what types of loans you qualify for. Provided
everything works out, I can email you a pre-qualification letter within the hour.”
“Really?” Renata couldn’t mask her surprise. “How much does it cost?”
“For right now, just your time. If, after you look at the numbers, you want to move forward, there will be costs for
originating the loan and the services needed. But I’ll show you all of those costs before you’re required to pay
anything.” he said.
MLO Timeline
“Sounds good.”
The broker continued, “We’ll need to look at your credit, so I’ll need your permission to pull a credit report. I’ll also
need your address, date of birth and social security number so I can access your credit report. I’ll also need to
get some additional info from you, like how much the asking price is on the house, how much money you have
available for a down payment if one is needed, your income and of course your full name. ”
Renata hesitated. That’s a lot of personal information, she thought. Then again, I was referred to him by the real
estate agent… “Okay, let me know what you need. I’m ready.”
“Okay,” Jervis said. “The first thing I need is your permission to pull your credit in conjunction with your interest in
obtaining a mortgage loan.”
“You have my permission,” Renata said.
After receiving Renata’s information, Jervis pulled her credit report and briefly reviewed the information with her.
“Well it looks like you’ve got a credit score of 767, which is pretty good. I see you’ve got a couple of credit cards
listed here with small balances and I think a car loan with Honda. Is that correct?”
“Yes.”
“There doesn’t seem to be any issues on the credit side,” he said. “Do you have any other debts that aren’t showing
up here? Anything else that you have to pay monthly or will be required to pay in the future?”
“Nope. I’ve been pretty thrifty since my divorce four years ago. I even pay my credit cards off each month. I don’t
like debt.”
“Okay then, what we need to do now is compare your income to your debts,” Jervis said. “I can use the information
from your credit report for the bills, but what about your income? Are you paid hourly or do you receive a salary?”
“Salary,” she said. “I bring home $1,723 every two weeks.”
“Is that after taxes?”
“Yes.”
“Okay,” the broker said. “Do you know what your gross income is? Before taxes and anything else gets taken out?”
“Oh. My annual salary is $67,000 per year.”
“Great,” he said. Renata could hear him tapping on a keyboard in the background. “That comes out to $5,583 per
month in gross income. Does that sound about right to you?”
“Yes.”
“Okay,” he said. “If after we go through this process you decide you want to move forward with me in getting the
loan, we’ll ask you for some paystubs and other paperwork. For right now we can just go with these numbers.
Now, just a couple more pieces of information we need so I can run some numbers for you. What’s the asking
price on the house?”
“$185,900.”
“Do you have an idea of how much you’d like to put down as a down payment?”
“As much as I need to,” she said. “I have almost $36,000 saved up. Is that enough? Will I need to use all of it?”
“It should be enough, and you may not need to use all of it,” he said. “Each loan program has different down
payment requirements, and you’ll also need to consider closing costs and other expenses like moving costs and
things like furniture and appliances that you may need. Of course, the more money you put down the less you’ll
owe. What I’ll do is use the program’s minimum down payment requirements to figure out your monthly payment
and then we can go from there.”
“Great!” she said as she heard more typing in the background.

MLO Timeline
“Tell you what, Renata,” he said. “Based on the information you’ve provided I think we have a number of options
available for you. If you can give me about 30 minutes here to look at what I think best fits your needs, I can call
you back and go over the numbers with you.”
“That would be fine.”
“One last thing,” he said. “Based on your current finances, how much would you be comfortable spending each
month on housing? Your current rent payment is $1,100. Is that a good number for you?”
“Yes. I’m comfortable with that. I could probably afford about $100 more each month.”
“Okay,” the broker said. “I’ll call you back in a little bit.”
Jervis called her back 25 minutes later with three different loan options. He said that she qualified for many others,
but based on their conversation these were his recommendations. After further discussion, they agreed that a 30-
year fixed rate mortgage would be the best option for Renata.
“This is probably the only house I’ll ever buy,” she said. “And I don’t see myself changing jobs or income brackets
any time in the future.”
“Let’s talk for a moment about how the payment schedule works for this loan,” Jervis said. “With the fixed rate
product you’ll be making something called a fully amortizing payment each month. What that means is that by
making your payment each month on schedule you’ll be reducing the principal balance as well as paying the full
amount of interest owed each month.
“So let’s say that when you first take out the loan after you’ve made your down payment and everything else, your
initial loan balance is $165,000 and your qualifying interest rate is 5%. With a 30-year fixed rate mortgage at 5%,
the monthly payment would be $885.76. So each month for 30 years you’ll have 360 equal principal and interest
payments of $885.76.
“The other thing that we do not have included in the principal and interest payment is the cost for insurance and
taxes. Those are considered when we look at your total payment. Before I called you back I got an estimate on
annual property taxes and homeowners insurance for the house you’re interested in. It looks like you’d expect
to pay about $2,400 per year in property taxes, and $1,200 per year for homeowners insurance. We’ll divide both
of those numbers by twelve to include a monthly portion of each when figuring out your housing costs, which
means another $300 per month for housing. So your total beginning payment in this case would be $1,185.76. I
can’t guarantee that the total payment will be the same for the life of the loan because taxes and insurance will
probably change at some point, but the principal and interest portion will not change with this type of loan.”
“Great, I think I understand. What’s next?”
“I need to send you some forms called disclosures that you need to review. I just sent a link to your email, so you
can view them on our secure server. They basically cover the information we just discussed. Provided they meet
with your approval, I’ll need to get a disclosure called the Intent to Proceed with the loan from you and that will
allow us to continue the process. Once I have your Intent to Proceed I can send over the Pre-Approval Letter for the
real estate agent.”
“Wow! You’ve got my intent or approval or whatever,” Renata said.
“I appreciate that, but not so fast,” he said. “You’ll need to review the disclosures before you provide your Intent.
In the meantime, I can tell you that even if you agree to move forward now, it puts you under no obligation to
complete the process. You can still decide later during the process not to do the loan. You are not legally obligated
to the mortgage until after you sign the closing documents. The disclosure that lays out all of the costs and
arrangements for the loan is called the Loan Estimate or LE. I’m sending it to you now.” Renata saw another email
pop up on her screen. “I’m clicking on the link to your site now and looking at the documents. The numbers are
what we discussed. Are these written in stone?”
MLO Timeline
“Not necessarily,” the broker said. “Some things may change during the process, but if they do I’ll let you know and
we’ll have new disclosures for you to review.”
“Okay,” she said. “I guess I’m ready to proceed.”
“Great! Just go ahead and scroll to the bottom of the screen and you’ll see a button that says, ‘I intend to proceed
with this loan’. Click the button and you’ll see our pre-approval letter in a few minutes in your email inbox.”
Initially Approved and Ready to Go (Processing)

Our timeline story is now in the processing phase. As you read through this next section, think about the questions
below.
• What are the differences between Olivia’s responsibilities as a processor and Jervis’ responsibilities as an MLO?
• What kind of documentation is being collected and why?
• What is a 4506-C?
Renata received the pre-approval letter along with some other documents in her email from Jervis. She printed the
letter and took it with her to look at the house with the real estate agent that evening. She loved the house, and
armed with the letter, Renata made an offer for the full asking price.
Once the offer was accepted, Renata called Jervis with the news and asked what was needed next.
“Wow,” he said. “You really do move fast.”
“I had been in the house before and really liked it,” Renata said. “I checked some local home values online before I
met with the agent and the price seemed to be at market level. So I made an offer and wrote the real estate agent
a check as a good faith deposit. She called the seller and they accepted. We also filled out a purchase contract –
the agent said you’d probably need that.”
“She’s right,” he said. “We’ll need that and, as we discussed in our earlier conversation, we’ll also need some other
paperwork like paystubs, bank account information and tax returns. I’ll send you a complete list.”
“Do you need me to email those?”
“Whatever is convenient for you,” he said. “You can scan them and send them over, or my office is only a few
blocks from where you work. You can bring everything to my office and we can make copies here. If you come in, I
can also introduce you to my processor, Olivia. She’ll be the one you’ll be in contact with during this process, and
she will manage your file during origination.”
Renata smiled to herself. This was all going so well, but she didn’t have the documents with her and she would be
tied up in meetings for most of the day. “Okay, send me the list. But I’m already at the office and I won’t be able to
look for all of that stuff until tonight.”
“Not a problem. Do you have second right now to look at what we’ll need?”
“Sure.”
“Okay,” the broker said. “I just sent you the email. Take a look and let me know if you have any questions.”
Renata opened the email and started to read aloud the list of items, “last two paystubs, last two years’ W2 forms,
last two months’ bank statements, last two years’ tax returns… what’s this 4506-C form?”
“Great question,” he said. “You’ll need to sign that so we can have the IRS send a transcript of your returns to us
for review. Most loans have program requirements for underwriting. In this case our underwriters will review the
information you provided to me on the phone and compare it to the documents we’re asking for to ensure that
you meet the program’s qualifications.

MLO Timeline
Initially Approved and Ready to Go (Processing)
“At this point in the process, Olivia will be gathering all of your documentation and information for our
underwriters to review. In the business we call this phase processing, and while everybody does things a little
differently, at our office Olivia processes the loan and then packages everything up for the underwriter to review.
She’ll also be the one who will arrange for the appraisal and title work to be done – but we typically don’t order
those until after the underwriters have matched everything up.”
“So underwriting and processing kind of occur at the same time?”
“For us they do,” he said. “We’re a fairly small operation because we like to interact directly with our customers. And
because we are that small, we all have multiple hats to wear.”
“I know what that’s like,” Renata said. “It’s the same way at my office.”
“Provided you find everything we need when you go home tonight,” he said. “Would it be convenient for you to
come by our office some time tomorrow? It should only take about 30 minutes, and I can get your signature on
some documents as well.”
“Would 1:00PM work?” She asked. “It’s my lunch break.”
“Only if you join us for a sandwich,” he said. “Tomorrow’s deli day at the office and we’ll have a sandwich tray
brought in.”
“Sounds great,” she said. “I’ll see you tomorrow.”
As requested, Renata was able to find all the documents on Jervis’ list. She showed up for lunch the next day and
enjoyed a sandwich with Jervis and Olivia while the copies were being made.
“Usually at about this point in the process the customer is wondering how long this whole thing takes,” Olivia said.
“I’m sure you’re curious.”
“Everything’s gone so fast,” Renata said. “I’d guess this will take a week or so?”
“I wish it were that easy,” Jervis said. “Our purchase loans usually take about 45-60 days to close. We do try to
move certain loans through faster, especially if the purchase agreement lists a specific date by which the loan
needs to close. Yours is coming up in less than 45 days, but we’ll be able to make it work. Up until now you and
I have been able to control the process, but now the heavy lifting comes on our end. We need to go through
the underwriting process and that usually takes a few weeks. There’s a lot of moving parts – document reviews,
appraisal work, inspections, title work.”
“Yeah,” Renata said. “I guess I really hadn’t thought about all that.”
“Not to worry,” Olivia said. “You’ve got some arrangements to make on your end as well. Moving, setting up
utilities, and, of course, shopping for new furniture!”
“I guess I’ll be busy too,” Renata smiled.
“Okay,” Jervis said as he retrieved the documents from the copier. “Here’s all of your stuff back.”
“We’ll need you to sign some of these,” Olivia said as she pointed to some disclosures on the table. “Jervis can
review them with you before you sign. One of the laws that we must follow says that only a licensed mortgage loan
originator can discuss the rates and terms of a mortgage with the borrower. So during the process, if you have
questions about rates or terms he’s the one you’ll talk to. Otherwise I’ll be your main point of contact.”
Jervis walked her through the disclosures and documents needing her signature which she reviewed and signed.
Olivia made copies of the newly signed forms and added them to the stack of Renata’s copies. She kept the
original set in the folder on her desk. “I’ll get these over to our underwriting team. It will probably take about a
week to get through them. Once they do the review they may ask for some additional information, and I’ll call you
if they do. Otherwise, expect to hear from me toward the end of next week and we can plan for the appraisal with
the agent. In the meantime, here’s my card. Please do not hesitate to call me if you have any questions.”
MLO Timeline
Borrower Qualification (Underwriting)

Now we begin the underwriting portion of the loan process. In underwriting, all of the Four Cs will be verified. Pay
particular attention to the following pieces as you read through this next section:
• How does our underwriter, Kahlil, verify Renata’s capacity and capital? Why do you think Kahlil wants to confirm
how much money Renata has in the bank?
• What is Kahlil’s main function as the underwriter? How does Olivia assist him throughout the underwriting
process? How do their roles differ?
• How is the collateral verified? Who is responsible for completing the appraisal?
• How does Olivia explain title work to Renata?
Olivia took the folder with all of Renata’s paperwork down the hallway to the underwriting office. “Hi, Khalil,” she
said as she approached the desk situated midway into the room. “Jervis just wrote a new customer, and I see that
you’re the next one up for a folder.”
The man behind the desk didn’t take his gaze off the computer screen in front of him. “Please tell me this is an easy
one, I’m still working through these others,” he said as he waved to a pile of folders on the corner of his desk.
“Should be,” she said. “Nice woman, no co-borrower, good credit. All of her paperwork is in order.”
He made a note in the open file on his desk, closed and held it in the air. “Good, because this one isn’t easy.
In fact, Mr. Cavil doesn’t have the income needed to meet requirements. It would seem that he may have over-
estimated a little during application.”
She traded folders with him and said, “Sorry to hear that. I’ll take this back to Jervis so he can call Mr. Cavil. Maybe
he can re-work the loan.”
“Thank you,” Khalil said as he opened Renata’s folder. “767 credit score? Great!” He flipped through the pages.
“Hmm… 30-year fixed, plenty down, money in the bank… As long as everything checks out we should be able to
get through it in a few days.”
Khalil closed Renata’s file and stuck it at the bottom of the stack next to him and then picked up the top folder and
began to scan as Olivia turned and walk away.
For the next few days, Renata’s folder moved steadily along with the others in the stack on Khalil’s desk. When
it reached the top Khalil opened it and typed the loan number into the database screen on his computer.
Renata’s information was already in there, along with some recent updates provided by Olivia showing that her
employment and bank account balances were verified. There was also a contract sales date by which the loan
needed to close listed in the proposed closing date field.
He then pulled up a copy of Renata’s application on the screen and reviewed the paystubs to see if they matched
what was listed – to the penny, he thought. Then he checked the W2 forms to confirm the last two years’ income.
Next, he pulled up the numbers from the IRS transcript on his computer and compared them to what was listed on
the tax returns – everything matched. He returned to the application and confirmed that the debts listed on the
application were the same as those listed on the credit report.
Once the preliminaries were completed he took out his calculator and computed whether she could afford the
loan and whether her down payment would meet the program requirement. Everything was in order. He pulled up
another screen on his computer and began to complete fields on multiple pages on the screen. By the time the
afternoon reached its end he was satisfied that Renata qualified for the mortgage she had applied for.
He picked up the phone and dialed.

MLO Timeline
“This is Olivia,” came the voice on the other end.

“It’s Khalil,” he said. “I know you’ll get this in tomorrow’s batch report, but I figured I might catch you before you
leave for the day. I just finished Renata Vento’s folder. She’s good to go. I was hoping you could order the appraisal
and title work today so we can get a jump on this. The contract date is coming up pretty quick, so I want to make
sure we keep everything moving.”
“Awesome!” she said. “I’ll take care of it right now. Thanks for the heads-up.”
Olivia hung up with Khalil and clicked to call an often-used contact.
After three rings a voice said, “Thanks for calling Northeastern Appraisal. No one is available to take your call,
but if you’ll please leave a message with your name and the nature of your call we’ll get back to you as soon as
possible. For faster service or to request a service order please visit our website at NEAppraisal.net. Thanks again
for calling.”
When the message ended Olivia spoke into the receiver, “Hi, it’s Olivia at Jervis Roberts. I was hoping I’d catch
you. We’ve got a clean app ready for an appraisal for a house here in town on Elm, and we’re on a tight timeline.
I’m hoping we can schedule with you guys by the middle of next week. The name on the file is Vento, Renata. I’ll
put the order in online right now, but can you please call me when you get in tomorrow and let me know if it’s
possible. You’ve got my number. Thanks!”
After hanging up she called another often-used contact, but this time a loud voice answered. “National Title. How
can we help you?”
“Hey, Maria, glad I caught you.”
“Hey, Olivia!” Maria said, “What’s up?”
“I need a quick turn-around on a purchase.”
“How quick?” Maria asked.
“Middle of next week?” Olivia said with some reserve. “It’s a house over on Elm.”
“Doesn’t matter to us as long as it’s in the county,” Maria said.
“Yeah, I guess that makes sense with the title work being done at the county records building,” Olivia laughed.
“What do you think? Can you do it?”
“How complicated is the deal?”
“One owner, no mortgage on the house currently...” Olivia continued to give her the run down on Renata’s file.
“Seems pretty straightforward,” Maria said. “Lucky for you I just had a cancellation for tomorrow. Can you get the
info over to me by 10 tomorrow morning?”
“Oh yeah,” Olivia said. “I’ll shoot the documents over to you when we hang up.”
“Great! As long as it‘s as simple as you say we should be able to turn it around for you quickly,” Maria said. “Hey,
I’ve got to run. You need anything else?”
“No. Thanks for your help, I’ll have everything over to you within the next thirty minutes!”
The next morning Olivia called Renata to update her on the loan origination’s progress. “Your side of the
approval’s pretty much done,” Olivia said. “Now we just need to get things sorted on the property. I ordered the
title work last night, and this morning the appraiser called the real estate agent to see about scheduling the
appraisal visit.”
“Do I need to be there?” Renata asked.
MLO Timeline
“No. Typically the appraiser will work with the real estate agent or current owner and do their work with one of
them on the property. They’ll take some measurements and pictures, then they’ll check recent sales of similar
homes in the area to set a value.”
“Is the appraisal really necessary?” Renata asked. “I mean, we already agreed on the price.”
“You may have agreed on the price, but our underwriters will not approve a loan unless the home’s value meets or
exceeds the purchase price.”
“What happens if it doesn’t?”
“You’d probably want to renegotiate with the seller,” Olivia said. “Or restructure the loan so that you put more
money down to cover the difference. I don’t think you have anything to worry about here, but if that’s the case
Jervis will call you and walk you through it.”
Renata crossed her fingers. “Okay. What about the title work – what’s that for?”
“The title company will research the history of the property, confirm its current owner and ensure there are no liens
or claims against the property,” Olivia said. “Once they do that they let us know that the property has a clean title
and that they are willing to insure the property against the possibility of a previously unknown claim being made
against the property after you take ownership. That’s what the cost for title insurance is for on your disclosures.”
“Does that happen?”
“Occasionally,” Olivia said. “With the technology and record keeping we have now, it’s fairly infrequent.”
“So why do I need the insurance?” Renata asked.
“Lenders won’t make a loan without title insurance protection in place,” Olivia said.
“I guess that makes sense.”
“So, now it’s a little bit of a waiting game while they do their thing. We’ll get their reports back probably about the
middle of next week and then our underwriters will take a look to make sure everything works.” Olivia paused for a
moment. “I don’t want to over promise here, but we could have this whole thing wrapped up by the beginning of
the following week. You should plan on hearing from Jervis by Monday or Tuesday of that week.”
“And then the house is mine?”
“Well, we have to schedule closing – that’s when you will sign all of your final documents. There’s also some
disclosures and documents you’ll want to look at before we close.
“Okay,” Renata said. “I’ve had my fingers crossed for two weeks. I guess I can go for another two.”
“Hang in there,” Olivia said. “Everything’s moving along well.”
The next week passed slowly for Renata, but she kept herself busy looking for a new washer and dryer. She
arranged with Mrs. Morganstern to have the kitchen appliances stay with the house, but the washer and dryer had
moved with the woman to her daughter’s house.
As for the review of the property’s value and ownership, the process moved quickly.
On Wednesday, Khalil returned to his desk from lunch and found a new email from Northeastern Appraisal with
the report for 100 Elm Street attached. He opened the report and smiled. The appraisal valued the home at
$190,000. He spent another half hour reviewing the report, and everything checked out. The appraisal report
based 100 Elm Street’s valuation on comparisons to recent sales of similar homes in the immediate area. The
report also included photos, a map and an attachment with further explanation from the appraiser about how and
why he arrived at the value given.

MLO Timeline
He switched screens on his computer and opened the log Renata’s loan. He added some notes and filled out
fields associated with the underwriter’s review of the appraisal. Then he attached a copy of the appraisal and
closed out of the screen.
As he finished he noticed that Olivia was talking to another underwriter a few desks away. Khalil motioned toward
her. “Hey, Olivia, do you have a sec?”
“Sure, what’s up?”
“We’re good for the appraisal on Vento,” he smiled. “Came in about $5,000 high.”
“Oh that’s great!” She said.
“Any news on title?” He asked.
“No, but National said they would have it to us mid-week, so probably tomorrow.”
“Okay,” he said. “Just let me know.”
True to Olivia’s prediction the title report and a commitment to insure arrived the next day from the title company.
The report confirmed everything that they expected and the commitment to insure said National Title was
prepared to handle the title insurance for the previously agreed fee at the time of closing.
Closing
It’s closing time! Our borrower’s journey in the mortgage loan origination process is coming to an end. Take a close
look at the questions below:
• How does Jervis explain why Olivia cannot answer any questions about the loan itself?
• What is the purpose of closing?
• Who is involved in the closing?
• How does Olivia explain why Maria is present?
On Thursday the 7th Renata was at the desk in her office when the phone rang. “Hello?” She said.
“Renata?” The voice sounded familiar. “Jervis Roberts calling. I’ve got you on speakerphone. Is that okay?”
“Yes.” Renata could feel her heart beating faster.
“I’ve got Olivia here with me,” Roberts said.
And then in unison Roberts and Olivia said, “Congratulations!”
Olivia stepped in with, “We’re all set on our end. Everything’s approved.”
Renata struggled as if something was caught in her throat. “Really? Oh my gosh. Oh, thank you!”
Jervis picked up the phone. “Olivia has to step out, but we both wanted to let you know. There are some more
documents and disclosures that you’ll need to review. I’ve already put them on our secure website for your
approval. When you get in there you’ll see a bunch of things to review. I’m happy to sit down with you and walk
you through them at your convenience.”
“One of the disclosures I want you to pay particular attention to is the Closing Disclosure. The information on it
pretty much mirrors what was listed on the Loan Estimate that you received at the beginning of the process. The
Closing Disclosure just goes into more detail and includes the information for your escrow account – you know,
the account that holds your tax and insurance payments.”
“Okay,” Renata said. “I’ll take a look and let you know if I have any questions.”
MLO Timeline
Closing
“One more thing,” he said. “Olivia will be calling you to arrange the closing. It can’t be scheduled for at least three
more days because by law we have to wait at least three days for you to review the documents. And we’ll need to
make arrangements with the real estate agent and Mrs. Morganstern. So I think we should stick with our original
closing date.”
“Oh yes,” Renata said quickly. “I’ve got some things I need to do now: hire movers, clean out my apartment, buy
more stuff!”
“Okay,” he chuckled. “Olivia will call you in a day or two to make the arrangements. Another thing: if you have
questions about the loan itself, you’ll need to talk to me. The law says that only a licensed loan originator can
discuss rates and terms with the borrower and Olivia’s not licensed. She’d tell you that if you asked her about the
loan.”
“She already told me.” Renata said. “Thanks again!”
Olivia scheduled closing for two weeks later. The closing took place at Renata’s office and was attended by
Renata and Maria from National Title. Olivia explained when she called that part of Maria’s responsibility in
this transaction would be to serve as the closing agent. She told Renata that title companies often handled
loan closings, but not always. In Maria’s case she was also an attorney and a notary, so she could answer any
questions Renata might have during the meeting as well as witness the signatures and then take care of filing the
documents after they were signed.
Renata looked at the stack of papers spread out on the desk between her and Maria.
“So, before we start I usually like to explain the process with the borrower,” Maria said. “Is that okay?”
“Yes, please.” Renata said.
Maria waved her hand over the papers. “This is your closing package. You should have received a closing package
from the mortgage company at least three days ago to review.”
Renata nodded. “I brought it with me.”
“Good,” Maria said. “These should be an exact copy of those papers. As we’re going through this process please
review each document and ensure that it matches what you already received. I’ll explain what each document is
before you sign it. If you have any questions, please do not hesitate to ask.”
Renata nodded.
“Once you sign these, I’ll take your certified check for the down payment to the lender. Tomorrow I’ll meet with
Mrs. Morganstern so she can sign her documents and I’ll give her the check for the full amount of the sale,” Maria
said. “From there I’ll file the papers with the county, and then I’ll see you on Friday with the keys and your finalized
documents. Any questions?”
Renata shook her head, grinning. “I don’t think so.”
“Great,” Maria smiled handing a pen to Renata. “Let’s make you a homeowner!”
The signing took about an hour and ended with a handshake and smiles from both women.

MLO Timeline
Ownership
Ownership
Our timeline is complete, and our borrower is now in their new home. Renata will now start making her mortgage
payments to her servicer.
For Renata the first few weeks after closing were a whirlwind. She cleaned out her apartment, moved into 100 Elm
Street, and went through the steps of establishing herself in her new home.
Things were busy on the business side of the mortgage as well. Once Maria had received and filed the loan
documents and distributed all the necessary funds, the loan was sold by the lender to an investor. The sale of the
loan did not impact Renata in any way, but the choices the investor made for the collection and processing of her
loan payments did.
A letter was sent to Renata indicating that the servicing of her loan (i.e., the collection and processing of her
payments) would be handled by a company called ServiceStar. ServiceStar told Renata that a monthly statement
would be sent to her.
When time came for Renata’s first payment, she sent it well ahead of the due date to ServiceStar. When
ServiceStar received the payment, they credited the principal portion of her payment against her loan balance,
thus reducing the balance slightly based upon the amortization schedule. ServiceStar also took the portion of the
payment involving property taxes and insurance and placed it in her escrow account to have ready when it came
time to pay the tax and insurance bills. A portion of the interest part of the payment amount went to ServiceStar
for servicing the loan and the remainder was sent to the investor who owned the loan.
Renata remained in her home for many years, making regular payment on time and in full, and lived happily ever
after.
What’s Next?
The story you just read was written to help you understand the mortgage loan origination process. It was in no way a
complete description of the process, nor did it touch on many of the complications that can occur during origination
like the challenges that occur when an appraisal does not support the value of the loan or title research uncovers
unexpected ownership issues.
The bulk of the course workbook and virtual trainings cover the specific topics of mortgage loan origination in more
depth. As you’re reading the text and participating in the training, pay particular attention to the importance the
borrower plays in the process. The laws and practices we will discuss were created with consumer protection at the
forefront of each component of the mortgage loan origination process.
MLO Timeline
How Loan Repayment Works

It’s basically understood that if you borrow something, you have to give it back. In the mortgage industry, when
a loan is made, the borrower isn’t only expected to pay back what they borrowed, but also interest, that goes
directly to the lender (or investor if the loan is sold). There are a variety of ways that this repayment with interest is
accomplished, but the most common is in the form of an amortization schedule.
What Exactly Is Amortization?

Our glossary defines amortization as “periodic payments on a loan requiring payment of enough principal and
interest to ensure complete repayment of the loan by the end of the loan term.”
For example, if a loan is amortized over 20 years, and the correct monthly payments are made at the appropriate
time, the loan will be fully paid off in 20 years including interest. The way the payment is allocated to interest or to
the principal owed on the loan balance can change with different types of amortization schedules. The one we’ll
talk about now is fully amortizing. With a fully amortizing payment, each month more money is allocated to the
principal, and less to the interest.
How Does It Work?

We’ll use the most basic of mortgages - a 30-year fixed rate - to show you. Let’s assume the borrower has a 30-year
fixed rate mortgage with a $100,000 loan amount at 5% interest. The amortization schedule allows us to determine
their fully amortizing monthly payment. Don’t worry, you don’t need to know the math on this one because it’s
complicated, but you should have a basic understanding of how it works.
Below and on the next page is a snippet of the loan and the payment schedule. To save some trees, we’re only
showing you the first and last three months of the payment schedule.
Loan Amount $100,000.00 Scheduled Payments $536.82
Annual Interest Rate 5.00% Scheduled Number of Payments 360
Loan Period in Years 30 Actual Number of Payments 360
Number of Payments per Year 12 Total Early Payments
Start Date of Loan 7/1/2017 Total Interest $93,255.78
Optional Extra Payments

MLO Timeline
PMT. Payment Beginning Scheduled Total Ending Cumulative

Principal Interest
No. Date Balance Payment Payment Balance Interest
1 8/1/17 $100,000.00 $536.82 $536.82 $120.15 $416.67 $99,879.85 $416.67
2 9/1/17 $99,879.85 $536.82 $536.82 $120.66 $416.17 $99,759.19 $832.83
3 10/1/17 $99,759.19 $536.82 $536.82 $121.16 $415.66 $99,638.03 $1,248.50
Notice how each month’s payment remains the same ($536.82); however, the amount of principal paid increases
slightly and the amount of interest paid decreases slightly. At the beginning of the loan term the majority of the
borrower’s payment will be applied to the payment of interest, and at the end of the payment schedule it will be
focused mostly on the reduction of principal.
PMT. Payment Beginning Scheduled Total Ending Cumulative

Principal Interest
No. Date Balance Payment Payment Balance Interest
358 5/1/47 $1,597.14 $536.82 $536.82 $530.17 $6.65 $1,066.97 $93,249.11
359 6/1/47 $1,066.97 $536.82 $536.82 $532.38 $4.45 $534.59 $93,253.56
360 7/1/47 $534.59 $536.82 $536.82 $532.37 $2.23 $0.00 $93,255.78
The idea behind the schedule is to ensure the same monthly payment for the entire life of the loan. This allows the
remaining balance due on the loan to go down with each payment, ultimately with the loan completely paid off at
the end of the term.
You may have noticed the far-right column, which shows the amount of cumulative interest paid on the loan. This
shows the borrower is paying $93,255.78 just in interest. So even though the client only borrowed $100,000, they
ended up paying almost twice as much by the end of the 30 year loan, for a total of over $190,000.
If you want to look at more examples, there are plenty of websites out there that will create an amortization schedule
based on the loan amount, interest rate, and loan term.
Negative Amortization
Although what we just described above (a fully amortizing loan) is the most common way loan repayment works, we
do want to include another type of amortization. Negative amortization occurs when the mortgage payment made
does not cover the full amount of interest owed. As a result, the amount of unpaid interest is added to the loan’s
principal balance. To put it simply -- negative amortization is when the loan balance goes up, rather than going
down like with a fully amortizing loan.
Examples of negative amortization loans include reverse mortgages and graduated payment mortgages (GPM). In
the case of GPMs, the loan only negatively amortizes during the rising payment period. Read more about these loan
products within the Products chapter.
Things To Know
Amortization means regular payments on a debt that cover both the principal and the interest
portion of the mortgage payment. At the end of the payment cycle, the debt will be completely
paid. An amortization schedule allows for the entire loan to be paid off by the end of the term.
For a fully amortizing loan, both principal and interest are paid with each payment.
MLO Timeline
Key
Please do not write below this line. This content will be used for class discussion.
Key
Qualification
• Borrower considers ____________________________________________
Processing
• MLO advertises
Post Closing
• ______________________ verified
• Credit report pulled
• ______________________ collected
• MLO matches borrower with product and program
• _____________________________________
• Supporting _______________________________ collected
• ______________________
• DTI and employment verified
• ______________________
• Bank accounts verified
• ______________________
• Value verified (appraisals)
• Ownership verified (title work)
• Documents signed by ____________________, ____________________, and ____________________ (purchase only)

• Documents recorded by closing agent
• __________________________ = collection of payment
In Class:
1. _________________________________________: payments that reduce the principal balance and pay all the
current monthly interest due on the loan

03 Agencies
1. What are some of the main responsibilities of the State?
2. What is the CFPB and what are some of its main

responsibilities?
3. What does NMLS stand for and what are the

responsibilities of the NMLS?
4. Why would someone be examined by the state?
5. What is a cease and desist and what are the next steps
after an MLO receives a cease and desist order?
Agencies
Federal Law VS. State Law
Agencies
Long before the SAFE Act and the heightened federal interest in participating in the active oversight of mortgage
lending, the states had their own rules and regulations for mortgage lenders. Each state has different laws unique
to that particular state and the way business and consumer protections are organized according to the state’s
governance. Through the coordination of the Nationwide Multistate Licensing System & Registry (NMLS), the
states work together with the federal government to regulate the industry.
The following sections provide an overview of the state and federal agencies involved with the regulation of the
mortgage industry. We’ll conclude this section with the agencies’ activities.
Federal Law VS. State Law

Back when the United States was being formed and the Constitution was being written, the states agreed to govern
themselves in accordance with the laws of the country. These laws are called federal laws, and they control how the
United States operates as a whole.
At the same time the Constitution was adopted, the first ten amendments to the Constitution (the Bill of Rights)
were immediately added to ensure that specific rights for citizens would be protected. The Tenth Amendment to the
Constitution says in part: “The powers not delegated to the United States by the Constitution nor prohibited by it to
the states, are reserved to the states respectively, or to the people.” To simplify that - states are allowed to make their
own laws as long as they do not contradict federal law.
This is known as state sovereignty, and it was because of this that each state established their own rules and
regulations for overseeing activities in their states - including the mortgage industry.
The States
There are currently 59 different state and territorial mortgage regulating entities across the United States (some
states have more than one authority depending on the way state law and how the state’s governance is organized).
Each state’s mortgage laws are unique to that particular state. For instance, the laws governing mortgage
origination in Ohio are different from those in Michigan.
The State Model

After the mortgage meltdown of 2008, federal regulations were reorganized with a special emphasis placed on
common standards for the mortgage industry.
These standards, known as the State Model
were written by the Conference of State Bank STATE
STATE
Supervisors (CSBS) to ensure that state law LAWS LAWS
governing mortgage loan originators followed STATE

certain guidelines. These guidelines allow for LAWS
consistent legislation at the state level that is STATE STATE

consistent with the rules of the SAFE Act. LAWS LAWS
The State Model is simply a template (not a law)

for how states should regulate the mortgage
industry in their state. Standards established by
the State Model are expected to be incorporated
by the states into their respective codes and regulations. As an incentive to adopt the State Model, the states receive
perks such as having access to a centralized database location for licensing records.
Agencies
The States
State Standards And The SAFE Act

The following are standards expressed in the State Model that states are expected to incorporate into their own
laws:
• The requirement for licensing and/or registration of mortgage loan originators (MLOs)
• The application for and issuance of licenses or registries
• Education requirements
• Testing requirements
• License renewal
• Enforcement, Authority, Violations, and Penalties
• Surety Bond, State Fund, and Net Worth Requirements
• Investigation and Examination Requirements
• Prohibited Acts and Practices
• Mortgage Call Reports
• Use of the NMLS
• Requires unique Identifiers on all advertising
• Maximum penalty for violations of the SAFE Act is $30,0581
1 SAFE Mortgage Licensing Act 12 USC §5113(d)(2).

1. The State Model is a ____________________________________ (not a law), that directs states on what codes
and regulations should be put in place to_________________________________________________________________
_______________________________________ in their state.

Agencies
The States
The State Authority

The SAFE Act requires that each state have an authority in place to oversee (regulate) mortgage loan originators.
This authority goes by a variety of names depending on the particular state. Common titles include:
• Superintendent
• Department
• Commissioner
• Director
• Authority
• Secretary
• Bureau
• The State
State Authority Responsibilities

The state has the authority to apply, interpret, and enforce the SAFE Act within that particular state. The state also
has the authority to put into action rules and regulations that aid in implementing this Act.
Among the numerous regulatory responsibilities of the state authority, the following are the most significant:
• Registration and licensing for mortgage loan originators
• Enforcing the SAFE Act at the state level
• Reporting MLO actions to the NMLS
• Fines
• Mortgage education requirements for the state
• State examinations
• Orders and directives2 Examples Of States And Their Authority’s Title:

• Tennessee Department of Financial Institutions
(Tennessee)
• Office of the State Bank Commissioner
(Delaware)
• Secretary of State, Securities Division (Indiana)
• Maine Bureau of Consumer Credit Protection
(Maine)
2 CSBS/AARMR. State Model Language for Implementation of Public Law 110-289, Title V –S.A.F.E. Mortgage Licensing Act. Retrieved from http:// mortgage.nationwidelicensingsystem.org/SAFE/NMLS%20
Document%20Library/MSLFinal.pdf
1. All states must have a head regulatory authority that oversees mortgage practices in their state, also known as:
_______________________________________________________________
Agencies
The States
State Licensing And Registration

To originate loans on real property located in any state, the mortgage loan originator must be registered or
licensed in the state in which the property is located. So yes - it’s entirely possible for an MLO to carry over 50 loan
originator licenses!
Enforcement Actions
How the state authority handles violations of mortgage law is also very important. The SAFE Act and the
corresponding state model require the authority to have enforcement responsibilities in the oversight and
regulation of their respective licensees.
Prohibited Conduct
The following are deemed prohibited conduct under the State Model and could result in penalty:
• Directly or indirectly employ any scheme, device, or cunning trick to defraud or mislead borrowers, lenders, or
any person
• Engage in any unfair or deceptive practice toward any person
• Obtain property by fraud or misrepresentation
• Earn a fee or commission to obtain a loan when no loan is obtained for the borrower
• Solicit, advertise, or enter into a contract for specific interest rates or financing terms that are unavailable at
that time
• Aid and abet any person conducting business without a valid license
• Fail to make disclosures
• Negligently make any false statement or omission of information requested in connection to an investigation
conducted by a governmental authority
• Make monetary bribes or threats to any person to influence their judgment related to a residential mortgage
loan
• Make monetary bribes or threats to any appraiser of a property to influence the appraiser’s judgment regarding
the property’s value
• Collect, charge, attempt to collect or charge, or use any agreement with the intention to collect or charge any
prohibited fee
• Cause or require a borrower to obtain property insurance coverage in an amount that exceeds the replacement
cost of improvements
• Fail to truthfully justify monies of a party in a residential mortgage loan transaction1
1 CSBS/AARMR. State Model Language for Implementation of Public Law 110-289, Title V –S.A.F.E. Mortgage Licensing Act. Retrieved from http:// mortgage.nationwidelicensingsystem.org/SAFE/NMLS%20
Document%20Library/MSL-Final.pdf
1. The state and only the state has the ability to:

Agencies
Federal Government
Federal Government
The federal government has numerous agencies that oversee the mortgage industry. In this section we’ll review the
most important to your role as a mortgage loan originator.
The Consumer Financial Protection Bureau (CFPB)

The Consumer Financial Protection Bureau (CFPB) was created as part of the Dodd-Frank Act with the express
responsibility of providing a single federal regulator for consumer financial protections.
Mortgage-Related Law Regulated By The CFPB
Upon its creation the following mortgage-related federal regulations were reorganized or created and placed
under the CFPB’s authority2:
2 “Code of Federal Regulations.” Consumer Financial Protection Bureau, 11/21/2018. https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/code-federal-regulations/.
B Equal Credit Opportunity Act (ECOA) 12 CFR §10021
C Home Mortgage Disclosure Act (HMDA) 12 CFR §10032

R
E Secure and Fair Enforcement for Mortgage Licensing Act:
G
G Federal Registration of Residential Mortgage Loan Originators (SAFE Act) 12 CFR §10073
U Secure and Fair Enforcement for Mortgage Licensing Act:
H
L State Compliance and Bureau Registration System (SAFE Act) 2 CFR §10084
A N Mortgage Acts and Practices - Advertising (MAP) 12 CFR §10225
T
P Privacy of Consumer Financial Information (Gramm-Leach Bliley Act, GLBA) 12 CFR §10246
I
O V Fair Credit Reporting Act (FCRA) 12 CFR §10227
N
X Real Estate Settlement Procedures Act (RESPA) 12 CFR §10248
Z Truth in Lending Act (TILA) 12 CFR §10269
1 “Equal Credit Opportunity Act (ECOA).” CFPB Consumer Laws and Regulations, June 2013. https://files.consumerfinance.gov/f/201306_cfpb_laws-and-regulations_ecoa-combined-june-2013.
pdf.
2 Home Mortgage Disclosure Act (Regulation C). 12 CFR §1003.3.
3 “12 CFR Part 1007 - S.A.F.E. Mortgage Licensing Act - Federal Registration of Residential Mortgage Loan Originators (Regulation G).” Electronic Code of Federal Regulations, 12/20/2018. https://
www.ecfr.gov/cgi-bin/text-idx?SID=6da658bf7c0a239368f856d4c7336356&mc=true&node=pt12.8.1007&rgn=div5.
4 “12 CFR Part 1008 - S.A.F.E. Mortgage Licensing Act - State Compliance and Bureau Registration System (Regulation H).” Electronic Code of Federal Regulations, 12/20/2018. https://www.ecfr.
gov/cgi-bin/text-idx?SID=e3d74cc17876654e00eb5e7aa3c8a13c&mc=true&node=pt12.8.1008&rgn=div5.
5 “Fair Credit Reporting Act, 15 USC §1681.” Federal Trade Commission, September 2012. https://www.consumer.ftc.gov/articles/pdf-0111-fair-credit-reporting-act.pdf.
6 “Regulation X - Real Estate Settlement Procedures Act.” CFPB Consumer Laws and Regulations, April 2015. https://files.consumerfinance.gov/f/201503_cfpb_regulation-x-real-estate-settlement-
procedures-act.pdf.
8 “Regulation X - Real Estate Settlement Procedures Act.” CFPB Consumer Laws and Regulations, April 2015. https://files.consumerfinance.gov/f/201503_cfpb_regulation-x-real-estate-settlement-
procedures-act.pdf.
9 “Truth in Lending Act.” CFPB Laws and Regulations, April 2015. https://files.consumerfinance.gov/f/201503_cfpb_truth-in-lending-act.pdf.
Agencies
Federal Government
Impact Of The CFPB

The CFPB is charged with making protections easier to understand and more accessible to consumers. The SAFE Act
establishes federal regulatory and enforcement responsibilities of mortgage loan originators that are similar to those
of the state authority. These include:
• Examining MLO records and data
• Penalizing licensees
• Providing information about licensees and potential licensees to the NMLS
The main differences between the responsibilities of the CFPB and the state authority are that the CFPB has
jurisdiction in all 50 states, and can replace the NMLS system if needed.
The CFPB’s impact on the mortgage industry is significant. During its short tenure, the CFPB has added multiple
rules, regulations, and initiatives to better protect consumers. These new rules include the TILA-RESPA Integrated
Disclosure Rule (TRID), The Loan Originator Rule (Section 36 of TILA), and the Qualified Mortgage (QM) Rule
(Section 43 of TILA).
Given the broad scope of the Bureau’s responsibility, one of the most important aspects of their operation involves
a consumer’s ability to file a complaint. The CFPB developed a system that allows for consumers to file complaints
with the Bureau that are then quickly posted online for public access. Regardless of validity or resolution the
complaint remains available as a matter of public record.
Department of Housing and Urban Development (HUD)

The United States Department of Housing and Urban Development (HUD) is a federal agency with a mission “to
create strong, sustainable, inclusive communities and quality affordable homes for all.”1 As the lead federal housing
agency, HUD oversees the Federal Housing Administration (FHA) and Fair Housing laws, and sponsors the Federal
National Mortgage Association (FNMA, Fannie Mae), the Federal Home Loan Mortgage Corporation (FHLMC,
Freddie Mac) and the Government National Mortgage Association (GNMA, Ginnie Mae).
The Fair Housing Act and other fair housing laws are overseen by HUD to ensure that all Americans have equal
access to housing in strong and stable communities. The fair housing laws protect against discrimination in the
provision of housing and the financing of housing.
An example of housing discrimination would be the denial of a person trying to purchase a home due to their race
or ethnicity.
As government sponsored enterprises (GSE) Fannie Mae, Freddie Mac, and Ginnie Mae operate as private entities
that were created to serve a public purpose. Fannie and Freddie establish standards for conventional conforming
mortgages that are then bundled as financial products and sold to investors in the secondary market. Ginnie Mae
provides insurance to investors on bundles of non-conventional loans.
1 https://portal.hud.gov/hudportal/HUD?src=/about/mission

Agencies
Agency Activities
Other Federal Departments And Agencies

Because the business of mortgage loans touches so many areas of American life, there are numerous other agencies
we will discuss in this course. The following is a list of these agencies and a brief explanation of how they impact the
mortgage industry.
The Department of Justice (DOJ) enforces Fair Housing and other federal laws. The DOJ serves as the prosecutor in
cases where the federal government sues a mortgage loan originator.
The Financial Crimes Enforcement Network (FinCEN) and the Secretary of the Treasury regulate and enforce
financial crime laws; such as the USA Patriot Act and Anti-Money Laundering laws. An example of FinCEN and the
Treasury fighting financial crime can be found in their work battling terrorists’ use of money laundering as a tool to
support their activities.
Mortgage transactions often include activities that cross state lines such as when a mortgage loan originator
writes the mortgage for a property in Pennsylvania while working out of an office in Michigan. The Federal Trade
Commission (FTC) oversees how this business is done. Similarly, because that MLO is likely to use communications
tools such as the telephone and the internet to conduct their business, the Federal Communications Commission
(FCC) deals with the control of those communications.
Finally, the mortgage industry’s development of the secondary mortgage market where lenders and investors buy
and sell packaged mortgages called mortgage-backed securities (MBS) requires the involvement of the Securities
and Exchange Commission (SEC).
Agency Activities
As previously discussed, the state authority and the CFPB both operate in similar fashion - it’s just their
jurisdiction that differs. Whereas the CFPB focuses on federal law and mortgage loan originators, the states
focus on the industry in their particular state. The one area where they specifically differ is that the states and
only the states can issue, deny, revoke or suspend an MLO’s license or registration. The main activities that
they share are examinations (audits) and reporting.
Things To Know
The state (and ONLY the state) can issue, deny, revoke or
suspend an MLO’s license or registration.
Examinations
• Pre-Examination: Determine the scope of the investigation
• Institution Licensing: Review the company’s ownership, structure, and affiliations
• Human Resources: Review individual licenses and renewals
• Compliance Management: Is the company compliant with NMLS rules and regulations?
• Operational Management: Personnel, training, systems, reporting, and internal audits
• Financial Condition Review: Does the company meet necessary financial standards?
• Mortgage Call Review: Did the company meet quarterly and annual reporting requirements?
• Interviews: With personnel and affiliates
It is the responsibility of the financial institution to comply with the request of the regulator as well as to pay for all
costs associated with the examination.
Agencies
Agency Activities
Reporting
In addition to the examination responsibilities, regulators are also responsible for reporting their findings to the
NMLS and ensuring that mortgage loan originators file necessary documents with the appropriate regulator when
due. The most common of these reports is the mortgage call report (MCR) which is filed both annually and quarterly.
The NMLS receives and collects this information from the mortgage loan originator on behalf of the regulators.
Responsibilities That Both Federal And State Agencies Share
• Enforcing the SAFE Act
• Reporting MLO actions to NMLS
• Assessing fines
• Mortgage education and testing requirements
• Holding examinations
• Giving orders and directives
Cease And Desist Orders
A cease and desist is a legal order that requires the recipient to immediately stop a specific action. For MLOs, all
cease and desists are considered temporary until a hearing takes place.
If a person has, is, or is about to violate the law, the state authority or the head of the CFPB (Director) can request
each person involved to cease and desist from committing the violation.
If the person’s violation will likely result in harm to the public interest prior to the proceeding’s end, the Director can
enter an immediate temporary cease and desist.
The Director can publish the findings:
• The Director will send a notice regarding the proceedings and will set a hearing date. The notice will include a
hearing date that is between 30 and 60 days of the MLO receiving it. Only the Director can set an earlier or later
date, with the consent of the person served.
• After the notice and opportunity for a hearing, the cease and desist order may require future plans for
compliance, if the Director specifies.
The Mortgage Loan Originator can do the following:
Request Director Review: Apply for the order to be set aside or suspended (if the temporary order was entered after
an opportunity for a hearing), or requesting a hearing within 10 days of a temporary order that was originally served
without a hearing.
Request Judicial Review: Apply to a district court system within 10 days after a hearing and decision on a temporary
order that was originally entered without a hearing
1. It is the responsibility of the financial institution to __________________________________________________________

______________________________ of the regulator as well as to ______________________________associated with the
examination.

Agencies
Agency Activities
Determine which entity (CFPB, State, or both) regulates/determines certain aspects of the MLO process.
Can impose civil penalties to

Examines MLOs Can investigate MLOs
MLOs of up to $30,0581
Performs or accesses Writes and promulgates rules

Publishes findings in the NMLS
background checks on MLOs for MLOs
Can share information about Can issue cease and desist

Can subpoena MLOs
MLOs with other authorities orders to MLOs
Can take over running the Issues, approves, renews, Creates state fund, net worth,
NMLS or start a new licensing denies, revokes, and suspends and surety bond requirements
system if needed MLO licenses for lending institutions
1
https://www.federalregister.gov/documents/2021/01/15/2021-00925/civil-penalty-inflation-adjustments
04 Your License
1. What is the purpose of the SAFE Act?
2. Explain the difference(s) between the two regulations

under the SAFE Act.
3. List 3 examples of key players within the industry that

would require a license to do business.
4. Please name at least 5 different individuals that are

exempt from licensure.
5. What are the registration, licensing, education and

testing requirements for a MLO?
Your License
The Secure And Fair Enforcement Act (SAFE Act)
Your License
This next chapter will help breakdown the specific requirements implemented by the SAFE Act to ensure minimum
standards for the licensing of MLOs regardless of the state jurisdiction.

The Secure and Fair Enforcement Act of 2008 (SAFE) was created to improve consumer treatment by the mortgage
industry through the minimum qualification of its mortgage loan originators. This improvement was achieved
through licensing and registration requirements for originators. The SAFE Act may also be referred to as Title V of
the Housing and Economic Recovery Act (HERA)1.
The Nationwide Multistate Licensing System and Registry (NMLS)

The Nationwide Multistate Licensing System and Registry (NMLS) serves as the communication hub and database
for the mortgage industry. The NMLS was created by the Conference of State Bank Supervisors (CSBS) and
the American Association of Residential Mortgage Regulators (AARMR). The NMLS is operated by the State
Regulatory Registry (SRR) which works on behalf of the CSBS and AARMR to manage the NMLS, oversee education
and testing content, as well as operate the system as a database of information about mortgage loan originators. It
also allows for consumers to seek out information regarding MLOs.
The CFPB serves as the regulator for the NMLS and through this provides information to the system about licensees.
Because of its regulatory authority, the CFPB also has the right to create a new licensing system should the NMLS fail
in its responsibilities.
CSBS And AARMR

The Conference of State Bank Supervisors (CSBS) is a national organization founded in 1902 to further advance the
ideas and professionalism for state banking departments; it acts as the single voice to Congress for state banks and
serves as a liaison between state and federal regulators. Involving over 5,000 state-chartered financial institutions,
the CSBS and its member state banking departments supervise many financial service providers operating in
their states. These providers include mortgage lenders and originators, money servicers, check cashers, finance
companies, and payday lenders.
The American Association of Residential Mortgage Regulators (AARMR) was established to promote the exchange of
information and knowledge between the states regarding residential mortgage lending, servicing, and brokering.
Both the CSBS and AARMR play an integral role in consolidating opinion at the state level and provide guidance and
communication for their members at the national level.
1 “Mandates of P.L. 110-289.” State Regulatory Registry LLC, Public Law 110-289, TITLE V—S.A.F.E. MORTGAGE LICENSING ACT, ‘‘Secure and Fair Enforcement for Mortgage Licensing Act of 2008,’’ September 2009.
https://mortgage.nationwidelicensingsystem.org/SAFE/NMLS%20Document%20Library/Mandates-SAFE.pdf.
1. The SAFE Act was created in 2008 to ___________________________ consumer protections through establishing
_____________________________________________________ standards for MLOs.
Your License
What Does The NMLS Do?

The NMLS has a wide range of responsibilities. The following is a list of major tasks that fall into that range:
• Give uniform license applications and reporting requirements for mortgage loan originators
• Provide a comprehensive licensing and supervisory database
• Collect and improve the flow of information to and between regulators
• Provide increased accountability and tracking of mortgage loan originators
• Streamline the licensing process
• Increase consumer protection and support anti-fraud measures
• Provide consumers with information about mortgage loan originators free of charge
• Establish requirements for mortgage loan originators to act in consumers’ best interest
• Ensure responsible behavior in the sub-prime mortgage marketplace
• Provide training and examination requirements related to sub-prime mortgage lending
• Facilitate the collection and disbursement of consumer complaints on behalf of state and federal mortgage
regulators
1. How does the NMLS help Consumers?

Your License
Regulations G and H
The SAFE Act includes two regulations that define and direct the registration and licensing of mortgage loan
originators - Regulation G and Regulation H.
Regulation G
Regulation G1 applies to federally-regulated depository institutions that operate in the mortgage industry. Examples
of these companies are banks that are members of the Federal Reserve System as well as insured state non-
member banks. Some savings associations and credit unions also fall into this category. For the most part, if the
institution has checking and savings accounts and originate mortgages - they probably fall under Regulation G.
Loan originators that work for these companies are only required to register with the NMLS and will receive a unique
identifier (NMLS ID) for their registry. This registration process includes a background check and 10 years’ previous
work history.
Regulation H
Regulation H2 affects non-federally regulated entities that provide mortgage-related services. To make it simple,
while Regulation G deals with depository institutions, Regulation H covers companies that do not have checking or
savings accounts (i.e., non-depository institutions). A company that only originates mortgage loans is an example of
a non-depository institution. Mortgage loan originators governed by Regulation H must also register with the NMLS
and receive a unique identifier, and will also need to take the extra step of obtaining a license.
Registration, Licensing, Education, and Testing

To be licensed in a particular state, a mortgage loan originator must apply to that state for the license. We cannot
emphasize enough how important it is for you to understand that your mortgage loan originator’s license is issued
by the state. Having met the 20 hour PE requirement and passing the test only means that the candidate has met
the minimum NMLS requirement under the SAFE Act. Each state operates independently in determining whether
or not to award a mortgage originator a license for their state, and they will only do this if the education and testing
requirements are met.
1 “12 CFR Part 1007 - S.A.F.E. Mortgage Licensing Act - Federal Registration of Residential Mortgage Loan Originators (Regulation G).” Electronic Code of Federal Regulations, 12/20/2018. https://www.ecfr.gov/cgi-bin/
text-idx?SID=6da658bf7c0a239368f856d4c7336356&mc=true&node=pt12.8.1007&rgn=div5.
2 “12 CFR Part 1008 - S.A.F.E. Mortgage Licensing Act - State Compliance and Bureau Registration System (Regulation H).” Electronic Code of Federal Regulations, 12/20/2018. https://www.ecfr.gov/cgi-bin/text-idx?SID
=e3d74cc17876654e00eb5e7aa3c8a13c&mc=true&node=pt12.8.1008&rgn=div5.
Who do these regulations govern?
REGULATION
G
REGULATION
Your License
Registration Requirements
As part of the registration process, mortgage loan originators are required to fill out and submit a
Mortgage Uniform (MU) form.
There are four different types of MU forms: MU1, MU2, MU3, and MU4.
In order to register, MLOs will also need to provide authorization for a credit check, submit fingerprints for
a federal background check, and submit a 10 year work history to the NMLS.
The MU1 is also known as the Institution Form. Companies are required to submit an MU1 for
MU1
company licenses.
The MU2 form is known as the responsible party form and is filled out and submitted by the
MU2
individual person responsible for a company.
The MU3 form is known as the Branch form and must be submitted for each branch location
MU3
the company originates mortgages from.
The Individual form is the MU4. The MU4 must be filled out and submitted by YOU as part of
MU4
your licensing application process.
Licensing Requirements
Persons Required To Be Licensed
Mortgage loan originators as well as independent contractors acting as processors or underwriters must
register with the NMLS, obtain a unique identifier, and acquire a license for each state in which they do
business.
Persons Not Required To Be Licensed
The following individuals are exempt from the licensing requirements of Regulation H:
• An individual who performs only real estate brokerage activities
• An individual who only extends credit related to timeshare plans
• An individual who performs only administrative, clerical, or support duties (as an employee) under the
direction of a mortgage loan originator
• An individual who is NMLS registered and is an employee of a covered financial institution
• An individual who simply forwards a loan application, such as a loan processor, or who decides if a
borrower is qualified, such as an underwriter
• An individual who explains loan terminology or steps and arranges the loan closing, such as a closing
agent
• An individual who acts completely as a volunteer
• An individual who offers or negotiates terms on behalf of an immediate family member
1. Who needs a license?

•
•
•

Your License
• An individual who offers or negotiates terms of a residential mortgage loan secured by a dwelling that served
as the individual’s residence
• A licensed attorney who engages in the business of a mortgage loan originator, if those loan origination
activities are all three of the following:
• Considered by the state’s court of last resort to be part of the authorized practice of law within the state
• Carried out within an attorney-client relationship
• Accomplished by the attorney in compliance with all applicable laws, rules, ethics, and standards
• An employee of a government or housing finance agency
• An employee of a bona fide nonprofit organization
• An employee of a non-federally insured credit union
Education Requirements
The 20 Hour pre-licensing education (PE) requirement, as prescribed by the SAFE Act, is broken into multiple topic
areas and minimum time requirements for each topic. The Act requires at least 3 hours devoted to federal law
and regulations, a minimum of 3 hours of ethics (including fraud, consumer protection and fair lending issues),
2 or more hours of standards related to non-traditional mortgages, and 12 hours of undefined education. The
undefined component is usually spread over the three main topic areas.
Once MLOs are licensed, they will also be required under the SAFE Act to complete at least 8 hours of
continuing education (CE) to keep their licenses up to date. The breakdown on CE minimum time within
the 8 hours is as follows: 3 hours of federal law and regulation, 2 hours of ethics (including fraud, consumer
protection and fair lending issues), 2 hours of standards related to non-traditional mortgages, and the 1
remaining hour to be used for undefined education.
Credit is given only for the year in which the course is taken. Loan originators cannot get credit for taking
a class multiple times in the same year or taking the same course in successive years. Credit for approved
course instructors is given at the rate of 2 hours credit for each 1 hour taught.1
As indicated previously, states may require additional state specific education as part of their PE and CE
requirements.
Testing Requirements
In most cases, the MLO candidate will only need to take and pass the Uniform State Test (UST) (aka the SAFE
test) to meet the testing requirement for application to each state for their license.
There are five categories of questions on the exam each with a specific percentage of total questions.
The five categories are: Mortgage Loan Origination (MLO): 27%, General Mortgage Knowledge (GMK):
20%, Federal Law: 24%, Ethics: 18%, and Uniform State Content (USC): 11%. All questions on the exam are
multiple choice with the opportunity for one correct answer from a group of four options.
The UST test itself requires a passing score of 75% (this standard was set
as part of the SAFE Act). The current UST exam has a total 120 questions.
5 of these questions are not graded, but are included on the exam for
experimental purposes - which means your score is based on 115 questions.
If you want to do the math, this means you’ll need to get at least 87 questions
correct to pass. Test-takers are allowed a maximum of 190 minutes to
complete the exam.
• If the candidate does not pass the test, they must wait 30 days to take the
test again.
• The candidate will have 3 opportunities in a test cycle to pass the test.
Should they fail on the third attempt, they will be required to wait 180
days before attempting the test again in a new cycle.
• Each cycle is composed of 3 attempt opportunities with a 30 day wait
period in between. Test takers are permitted unlimited cycles in their
attempt to pass the test.
1 SAFE Mortgage Licensing Act (Regulation H). 12 CFR 1008.107. Retrieved from http://www.ecfr.gov/cgi-bin/text-idx?SID=abb104ce476ab3c2680b1b5cb0987e4b&node=se12.8.1008_1107&rgn=div8
Your License
How To Lose (Or Never Get) Your License

Licenses can be denied, suspended, or revoked by the state (AND ONLY BY THE STATE). To keep it simple, if one
state denies or revokes your license, the other states will likely deny or revoke your license as well.
Additionally, institutions may be denied a license for failing to meet specific net worth or surety bond
requirements. They can also lose their license if they fail to meet a regulator’s request or demand for information.
Individuals
The following is a list of common reasons why a state may deny or revoke an individual loan originator’s license:
• Revocation of a loan originator’s license in any governmental jurisdiction
• Conviction of, or plead guilty or nolo contendere (no contest) to any felony in any court within the last 7 years
• Conviction of, or plead guilty or nolo contendere (no contest) to any felony at any time involving fraud,
dishonesty, breach of trust, or money laundering
• Lack of financial responsibility and good character
• Failure to complete the necessary pre-licensing education requirement
• Failure to pass the federal or state components of a written exam
Companies/Institutions
The following are reasons for license denial specifically related to companies or institutions:
• Failure to meet the net worth and surety bond requirement or pay accordingly into the state fund as required
by the state.
• Failure to complete and submit the required NMLS Mortgage Call Report, detailing a loan originator’s activities
for the previous year.
Fill in the licensing education requirements below.
PE Total = 20 Hours
CE Total = 8 Hours

Your License
Surety Bond
Bonds act as insurance for entities. A company secures their bond and it covers all MLOs sponsored by the
company. Some states have a set required amount, others determine the amount based on volume of loans in
the previous year or number of licensees.
Net Worth
Net worth is a requirement that is only applicable to companies applying for licensure and only in certain
states. While individuals applying for originator licenses are subject to background checks and credit reports in
addition to disclosing their criminal and pertinent financial history, there is no net worth requirement imposed on
individual originators. The company must meet those net worth requirements and demonstrate it by submitting a
financial statement to the NMLS.
Loan Originator With Temporary Authority
Certain loan originators have temporary authority to act as a loan originator in a state for a limited period of time
while applying for a state loan originator license in that state. Not all loan originators are eligible for temporary
authority. Temporary authority applies to loan originators who were previously registered or state-licensed for
a certain period of time before applying for a new state license. Additionally, loan originators are eligible for
temporary authority only if they have applied for a license in the new state, are employed by a state-licensed
mortgage company in the new state, and satisfy certain criminal and adverse professional history requirements
described in the SAFE Act. More information about these requirements can be found in the SAFE Act, 12 USC §
5117 .
Note: Registered Loan Originators and State-Licensed Loan Originators are types of loan originators initially
established by the SAFE Act when it was enacted in 2008. Loan Originators with Temporary Authority were
added to the SAFE Act by § 106 of the Economic Growth, Regulatory Relief, and Consumer Protection Act
(EGRRCPA), effective as of November 24, 2019.
You Might Be Curious

Surety Bond - A financial guaranty product (insurance) that provides
payment to injured parties in case of a violation of the law by an MLO
Net Worth - The value of an organization determined by subtracting one’s
debts and liabilities from one’s assets
Steps To Register: Steps To Obtain And Maintain A License:
Your License
To be eligible for Temporary Authority MLOs must meet the following two criteria:
2
1) Employed by a state-licensed mortgage company in the application-state, and
2) Either:
a. Registered in NMLS as an MLO continuously during the one-year period preceding the application
submission; or
b. Licensed as an MLO continuously during the 30-day period preceding the date of application.
MLOs who have had the following issues do not qualify for Temporary Authority:
• A license application denied or an MLO license revoked or suspended in any jurisdiction;
• Been subject to, or served with, a cease and desist order; or
• Been convicted of a misdemeanor or felony that would preclude licensure under the law of the application
state.
Temporary Authority begins on the date an eligible MLO submits a license application with the required
background check information, which is fingerprints, personal history and experience, and authorization for a
credit report.
1. Temporary Authority ends when the earliest of the following occurs:
2. The MLO withdraws the application,
3. The state denies or issues a notice of intent to deny the application,
4. The state grants the license, or
5. 120 days after the application submission if the application is listed on NMLS as incomplete.
2 https://nationwidelicensingsystem.org/NMLS%20Document%20Library/FAQs%20S.2155%20Temporary%20Authority%20to%20Operate.pdf

Real Estate Settlement
05 Procedures Act (RESPA)
1. Summarize the purpose of RESPA.
2. What does RESPA govern? What does RESPA not

govern?
3. What is a settlement service? What are at least 5

examples of settlement services?
4. What are the 4 sections of RESPA and how do they

support the law’s purpose?
5. What are the disclosures required under RESPA? When

are they due to the client? What does each disclosure
tell the client?
RESPA
RESPA Governs
RESPA
Real Estate Settlement Procedures Act, Regulation X
The Real Estate Settlement Procedures Act (RESPA, Regulation X) is the federal law that governs the oversight of
costs associated with the mortgage and the entire real estate transaction.1
Throughout this chapter, we’ll cover what the law is and what it isn’t. Then we’ll simplify the law to give you the
basics you will need to conduct your job within its guidelines. After that, we’ll break down the specific sections of
the law that impact our industry. We’ll finish up the chapter with the disclosures the law requires as well as the law’s
penalties and record keeping requirements.
RESPA Governs
RESPA governs all federally-regulated mortgage loans that are secured by residential property. To be secured by
residential property simply means that the loan (mortgage) provided by the lender is given (secured) in exchange
for the borrower’s collateral, which is the home (residential property).
RESPA Does Not Govern

RESPA does not govern loans on residential property of more than 25 acres. RESPA does not govern loans for
agricultural properties, like an income-producing farm, or business/commercial properties, like office buildings or
storefronts. If the property has a business purpose, the loan is not governed by RESPA.
RESPA also does not govern temporary loans, such as construction loans and bridge loans. RESPA is not involved
when a loan is modified, which means the terms of the loan are changed through an agreement with the lender
in cases where the borrower is struggling to make their mortgage payment and would not qualify for a refinance.
Finally, transactions involving the sale of the loan in the secondary market have nothing to do with RESPA.
Simplifying RESPA
RESPA’s purpose is to ensure that consumers can make informed decisions about real estate transactions by
understanding the costs for settlement. The law prohibits illegal practices such as referral fees or kickbacks paid
or provided by real estate settlement service providers. As we already discussed, RESPA governs mortgages on
residential property.
So what do we mean by real estate settlement? Real estate settlement is the process in which all of the parties
involved agree to the terms of the transaction and sign the documents needed to demonstrate their agreement.
This process is also known as closing.
Okay, then what is a settlement service? A settlement service is any service needed or provided in order to carry the
transaction to the closing table. These services include:
• Servicing: Collecting the payment from the borrower
• Appraisal: Determine the property’s value
• Title Work (including title insurance): Clarifies and protects the property’s ownership rights.
• Legal Services
• Document Preparation: There hasn’t been a mortgage transaction yet that didn’t kill a few trees. There’s a lot of
paperwork and somebody has to put it all together.
• Credit Reporting: Credit reports come from companies like TransUnion, Experian, and Equifax.
1 “Regulation X - Real Estate Settlement Procedures Act.” CFPB Consumer Laws and Regulations, April 2015. https://files.consumerfinance.gov/f/201503_cfpb_regulation-x-real-estate-settlement-procedures-act.pdf.
RESPA
Simplifying RESPA
• Property Surveys and Inspections: Depending on the transaction, property lines may need to be determined and
inspections might be needed.
• Real Estate Services and Brokerage: If it’s a purchase transaction, there could be a real estate agent involved,
and they don’t get paid until the paperwork is signed and filed.
• Loan Origination (includes processing, underwriting and funding): This is where you fit in. What? You thought
we’d forget you?
• Closing or Settling the Transaction: Nothing is free, including signing the paperwork. This covers the cost of the
closing agent and associated fees.
Again, to be clear, RESPA deals with the costs associated with these settlement services - not necessarily with the
actual service involved (e.g., the cost of the appraisal is governed by RESPA, but other laws such as Section 42 of
TILA govern the actual work done by the appraiser).
One more thing you should know about settlement services - the borrower may only be charged the actual cost of
the service. No additional charge, administrative, or handling fees may be added to the cost of the service by the
originator or lender.
And just in case you were wondering, the Consumer Financial Protection Bureau is the regulatory authority for
RESPA.
1. The purpose of RESPA is to:
2. The borrower can only be charged for:

RESPA
Important Sections Of RESPA

Most laws are broken down into sections that focus on a specific aspect of the regulation and its requirements. In
the case of RESPA, the key sections we’re concerned with are Section 6, Section 8, Section 9, and Section 10.
RESPA, Section 6 - Servicing

Section 6 of RESPA requires servicers to set specific policies and procedures within their organization in order to
meet certain RESPA-required objectives. Servicing is the process of collecting payments from the borrower and
disbursing them to the loan owner(s) and proper escrower authorities. The example below shows how payments
flow from the borrower to the owner of the loan, the bondholder.
The following four objectives are foremost as it relates to Section 6.
Objective 1:
Provide timely and accurate information in relation to an information request, complaint, foreclosure process, or
death of a borrower. Ensure that borrowers are well informed about procedures for submitting error notices and
requests for information.
Objective 2:
Properly oversee and ensure compliance of all employees/employers with relation to procedures and laws. Certain
procedures must be followed with relation to a borrower’s escrow account and/or hazard insurance policy.
Objective 3:
Properly process and evaluate loss mitigation applications. Follow proper regulations with regard to the pre-
foreclosure process.
Objective 4:
Ensure that necessary information about probable or actual transfer of servicing are disclosed, and ensure that all
documentation is transferred during actual servicing transfer situations.
Mortgage Payments Principal And interest
Borrower Bondholder
Borrower Bondholder
Servicer
Borrower Bondholder
Borrower Bondholder
Borrower
1. Servicing is the ________________________________________________________ after the loan has closed.
section 1. Provides __________________________ and __________________________ information

6 2. __________________________ must follow procedures and laws
SERVICING
3. Properly process and evaluate __________________________ apps
4. Inform the client regarding the __________________________ of a loan
RESPA
RESPA, Section 8 - Referrals

Section 8 of RESPA deals with prohibitions on referrals and kickbacks. In most circumstances, the payment or
provision of a thing of value in exchange for a referral is outlawed under RESPA. Even if a thing of value is provided,
and no kickback is gained, that still may be a violation.
What’s a “thing of value”, you ask?
Great question! The answer is anything that’s worth something. So in the eyes of RESPA it would be considered
illegal for you to buy dinner for your friend, the real estate agent, in exchange for them sending you a client (dinner
is a thing of value). It’s also illegal for you and your real estate friend to exchange clients (i.e., for every client they
send to you, you send one to them - this is known as “quid pro quo” and it is a no-no).
It is permitted for referral fees to be paid within an organization. Let’s say that you’re licensed to write mortgages in
Connecticut. After you close a loan with a Connecticut client, they’re so pleased with your service (after all, you’re
reading this book and taking this course - YOU MUST BE AWESOME!) that they ask you to refinance the mortgage
for their vacation home on Martha’s Vineyard. Unfortunately, Martha’s Vineyard is in Massachusetts, and you aren’t
licensed in the state of Massachusetts, but one of your fellow team members are. Under the rules of RESPA, it’s
perfectly legitimate for the other MLO to scratch a check for the referral. Why? Because you work for the same
company.
If you work for different companies, referral fees are not allowed.
Section 8 also requires that an MLO disclose to their client if they are referring them to a company with whom the
MLO is affiliated. Affiliated means they own 1% or more of the other business. If a company is an affiliated business,
we must tell the borrower about the relationship if we refer them. The only thing of value that can be received from
the use of an affiliate is the equivalent in ownership percentage provided from the payment of the fee.
RESPA, Section 9 - Title Agent

Section 9 is pretty simple - the borrower and/or seller has the right to choose their own title agent. A lender cannot
require the use of a specific title company as a condition for the loan.
1. Payment of __________________________ or _________________________ is prohibited

section
8 2. __________________________ or __________________________ charges are illegal

REFERRALS 3. Fee splitting is prohibited
4. Exchanges of things of __________________________ or referrals is illegal
5. Limit of __________________________

RESPA
Disclosures Required Under RESPA
RESPA, Section 10 - Escrow

Section 10 (think ONE - OH, ES-CROW!) of RESPA is focused on protection for consumers with escrow accounts.
As with most consumer protection laws, RESPA’s Section 10 requires that borrowers be informed about their escrow
account.
Section 10 allows the servicer to collect a maximum of one-sixth (or 2 months) of the borrower’s annual tax and
insurance payment. An overage is allowed as a cushion in case the tax or insurance bill fluctuates higher than
expected. At the time of the annual escrow analysis, if a surplus of $50 or higher is discovered, the complete
overage must be returned to the borrower within 30 days of the analysis.

What’s A Disclosure?
To disclose means to tell or inform. In our business, there are three types of disclosure requirements: basic, written,
and form.
The basic disclosure means that the law compels (requires) the MLO to disclose to the borrower certain things like,
“you should keep all of the documents you receive for this transaction”. Basic disclosures are not limited by how they
must be provided to the borrower, but most MLOs provide them in written form to ensure the borrower can keep a
copy. Written disclosures are just like it sounds, they must be provided in writing.
Form disclosures are disclosures that must be provided to the borrower on a specific type of form. For example, The
Loan Estimate and Closing Disclosure are two forms that must be used when a borrower is in process for a closed-
end mortgage.
RESPA requires a number of disclosures be given to the borrower throughout the loan process to provide guidance,
notification, and education for the consumer.
Required RESPA Disclosures For Most Loan Transactions:

• Mortgage Servicing Disclosure Statement (MSDS)
• Notice of Transfer Statement (NTS)
• Affiliated Business Arrangement Disclosure (ABA or AfBA)
• Initial & Annual Escrow Statement
• Homeownership Counseling Organizations List
section 1. Requirements for information that must be provided regarding _________________________________
10 2. Allows the servicer to guard against __________________________ in escrow

ESCROW
• Limit is 1/6 (2 months) of total annual disbursement
ACCOUNTS
• Surplus of $50 or more is returned to the borrower
RESPA
MORTGAGE SERVICING DISCLOSURE STATEMENT (MSDS)

Required under Section 6: Servicing
Must be delivered to the consumer AT APPLICATION or within 3 days (excluding legal public holidays,
Saturdays and Sundays) on first lien mortgages
Informs the borrower that their loan may be assigned to another company for servicing
Includes:
• Likelihood of the loan’s servicing rights being sold
• Explains the borrower’s rights for complaint resolution
• Applicant acknowledgment signature line
NOTICE OF TRANSFER STATEMENT (NTS)
Required under Section 6: Servicing
Must be delivered to the borrower 15 days prior to the transfer of servicing AND 15 days after the servicing
is transferred
Informs the borrower that their loan is being placed with a new servicer
Includes:
• Contact information for current servicer
• Contact information and payment address information for new servicer
• Provision that during the 60-day period following the transfer, a late fee cannot be charged to the
borrower for payments sent to the previous servicer
AFFILIATED BUSINESS ARRANGEMENT DISCLOSURE (ABA, AfBA)
Required under Section 8: Referrals
• Must be delivered to the consumer at the TIME OF REFERRAL if the originator is affilliated with the
service provider
• Informs the consumer of the business arrangement between the two parties
Includes:
• Description of the business arrangement as well as ownership interest
• An estimate of costs
• Statement that the consumer is not required to use the affiliate for the service and may instead choose
their own provider
INITIAL AND ANNUAL ESCROW STATEMENTS
Required under Section 10: Escrow
Initial Escrow Statement:
• Due AT CLOSING or within 45 calendar days of establishment of escrow account
• Explains the amount needed for escrow and breaks down each payment
Annual Escrow Statement:
• Due within 30 days of analysis
• Determines any overages or shortages

4 63
RESPA
HOMEOWNERSHIP COUNSELING ORGANIZATIONS LIST

Required under the general rules of RESPA
• Must be delivered to the consumer AT APPLICATION (or within 3 business days if mailed)
• Informs the borrower of local counseling organizations
• The lender is ultimately responsible for ensuring that the consumer receives the list
• Reverse mortgages and timeshares are exempt from receiving the list
• Must have at least 10 organizations listed within the vicinity of the subject property
GOOD FAITH ESTIMATE (GFE)
This disclosure is for HELOC & Reverse Mortgages Only
• Must be delivered to the consumer AT APPLICATION (or within 3 business days if mailed)
• Informs the consumer of expected costs of the complete transaction and is good for 10 business days
HUD-1 SETTLEMENT STATEMENT (HUD-1).
This disclosure is for HELOC & Reverse Mortgages Only
• Must be delivered to the borrower AT CLOSING (or 1 day prior if requested)
• Informs the borrower of the final costs for the entire transaction
RESPA Penalties
Like most laws, RESPA provides penalties within its language for violations of its rules. The following are penalties as
prescribed under each section of the law:
Section 6: Servicing
• Damages not to exceed $1,000
• Class Actions: Penalties up to $1,000 for each member, total damages not to exceed
$500,000, or 1% of net worth, whichever is less
Section 8: Referrals
• Fines up to $10,000 and up to 1 year in prison
Section 9: Title Agent

• Borrower can sue for up to 3x amount charged for title insurance
Section 10: Escrows

• Failure to provide an Annual Escrow Statement = $75 per violation ($130,000 annual limit)
• Intentional violations = $110 per violation (no limit)
RESPA Record Keeping

According to RESPA, The Good Faith Estimate (GFE) must be kept for 3 years from the date of settlement.
The following disclosures must be retained for 5 years from settlement:
• The HUD-1 Settlement Disclosure
• The Affiliated Business Arrangement Disclosure (ABA or AfBA)
• Mortgage Servicing Disclosure Statement (MSDS)
06 Products
1. List out and describe how the four common types of

closed end mortgages work.
2. How are a HELOC and a reverse mortgage similar and

how are they different?
3. Define a jumbo mortgage.
4. What is the difference between a construction loan and

a bridge loan?
5. How is a closed end loan different from an open-end

loan?
Products
Set VS. Variable Rates Of Interest
Products
Set VS. Variable Rates Of Interest
One of the key factors involved with lending money is interest. In the simplest of terms interest is what the lender
charges the borrower for the use of the lender’s money. The interest rate charged on a loan is determined when
the loan terms are negotiated during the application process. At this time it is also decided if the interest rate will
remain constant throughout the repayment cycle or if the rate can change. If the loan’s interest rate will be constant
for the life of the loan, the function of the loan’s interest is considered set. If the interest rate can change during the
repayment cycle, the loan’s interest is considered variable.
Closed-End VS. Open-End

Before we get into specific product types, it’s important for us to draw a specific designation between two categories
of loans - closed-end and open-end. What makes these two categories different is whether the final payoff date is
certain.
With a closed-end mortgage the final pay-off date is determined when the loan is originally made. For example,
a traditional mortgage will be paid off in 360 payments after the loan repayment process begins. So, if the first
payment is due on June 1, 2018 the final payment would be May 1, 2048. The loan is considered closed-end,
because there is certainty about when the loan will be repaid (think of a closed door).
On the other hand, with an open-end mortgage the final payoff date is unknown when the loan is originally made.
For example, a reverse mortgage is not due until the borrower leaves the home permanently. At the time the loan is
made there is no specific date for the borrower to leave and therefore no final due date for payment. The payment
date is determined by the borrower’s departure date. The loan is considered open-end, because there is no
certainty about when the loan will be repaid (think of an open door).
We need to know whether a mortgage loan is open or closed because this will dictate some of our responsibilities
and actions as mortgage loan originators along with disclosures we are required to provide to the borrower.
1. _______________________________________: The final payoff date is set/known.

2. _______________________________________: The final payoff date is not set/unknown.
Products
Closed-End Mortgages
As we said before, closed-end mortgages are loans whose term and maturity date cannot change. Closed-end
mortgages have an established time at which the entire debt will be repaid. This means when the loan closes and
the repayment period begins, the borrower and the lender know exactly when the loan will be repaid if the payment
schedule is followed.
The majority of mortgages we’ll discuss in this course are closed-end mortgages.
Fixed Rate Mortgages

Fixed rate mortgages are mortgages in which the interest rate of the mortgage remains constant throughout the
loan. This steady rate provides a level of certainty to borrowers and allows them to easily manage their long-term
budgets. With fixed rate mortgages the principal and interest portion of the payment remains the same. This is
accomplished through an amortization schedule as discussed earlier in this section. Amortization allows for the
combined payment of principal and interest to remain the same until the loan is completely paid off at the end of
the term.
The most common forms of fixed rate mortgages come in the following term lengths - 10, 15, 20, 25 and 30 years.
The 30-year fixed rate mortgage is known as a traditional mortgage.
1. The principal and interest ______________________________________________ stays the same for the duration of the
loan.

Products
Adjustable Rate Mortgages

An adjustable rate mortgage (ARM) is a loan in which the interest rate can change over the term of the loan. Since
the rate can change, ARMs are sometimes referred to as variable rate mortgages because their most obvious feature
is the variance of rate. Most ARMs function on a 30-year full amortization schedule which means that even though
the interest rate and payment amounts may change during the loan’s term, the loan will be completely paid off after
360 payments.
How and why an ARM’s interest rate changes is tied to the current state of the financial marketplace. When the
money markets place a low value on money (meaning it is readily available), interest rates are low and thus the rate
on an ARM will adjust lower. If money is tight and inflation goes up, an ARM will follow that trend and move higher
with interest rates.
Types Of ARMs
Adjustable rate mortgages come in a variety of types:
Traditional ARMs:
Traditional ARMs are loans in which the rate adjusts on a periodic basis. Most traditional ARMs have an interest rate
that adjusts each year, but at one time in history it was not unusual for the rate to change monthly.
Hybrid ARMs:
Hybrid ARMs are the most common adjustable rate mortgages available in the market today. The hybrid ARM
combines features of a fixed rate mortgage and an adjustable rate mortgage. An example of a hybrid ARM is the
5/1. With a 5/1 ARM, in the first five years the loan’s interest rate remains fixed at the note (initial) rate. After the
fifth year, the rate adjusts once annually. Common forms of hybrid ARMS include 3/1, 5/1, 7/1, and 10/1 (three,
five, seven and ten-year set periods respectively). The chart below provides a graphic of how a hybrid ARM works.
Initial interest Rate

Adjustment
Hybrid Arm :
Interest rate stays

the same for 5 years
0 5 6 7 30
(Years)
Periodic Interest Rate AdjustmentS
Option ARMs:
Option adjustable rate mortgages are ARMs in which the borrower has the option of three different payment
amounts. One option allows for the borrower to make a fully amortized payment like any other ARM loan. The
second option is an interest-only payment where just the interest part of the payment is made. The third option
can be called a minimum or reduced or flat payment. No matter the name for the third option, this payment does
not cover enough principal and interest, so it leads to negative amortization.
With option ARMs, the interest-only and flat payment choices are only available for a limited period (usually the
first 5 years of the loan term). After this period, the borrower is required to make a fully amortizing payment.
1. Because the interest rate can adjust in an ARM, the _______________________________ and____________________________
portion of the mortgage payment can also adjust.
2. All ARMs are amortized over __________ years.
Products
How An ARM Adjusts

The factors that impact an ARM’s interest rate are the margin and the index:
Margin:
The lender’s profit on the loan and an amount of interest that remains constant. Since the margin serves as the
lender’s cut of the mortgage payment, the interest rate of an ARM can never go below the margin - regardless of
market factors.
Index:
Makes the ARM’s rate change. It is an instrument that tracks the financial marketplace. If the market moves, so will
the rate of the ARM. In today’s market the most commonly used indices are the London Interbank Offered Rate
(LIBOR), United States Treasury Bill (T-Bill) and the Cost of Funds Index (COFI a.k.a The 11th District). The index
that will be used to determine an ARM loan’s adjustment is included in the language of the mortgage contract
and cannot be changed once the loan closes.
Looking Ahead:
Effective January 3, 2022 the LIBOR will no longer be used as an index for mortgages in the U.S.
It will be replaced with the Secured Overnight Financing Rate (SOFR). One of the reasons for the change was
LIBOR was manipulated in the past and federal agencies sought to find a more secure index.
Another reason was SOFR is being used is because it is secured by U.S. Treasuries.
Even though LIBOR will no longer be used as of January 3, 2022, lenders will begin transitioning to SOFR
beginning as early as August 2020.
Borrowers who have ARM loans that used LIBOR will be affected by this because their rates will now be based off
of SOFR.
Fully Indexed Rate VS. Note Rate
Note Rate:
The note rate (AKA initial rate) is the interest rate at the time of loan closing. The reason it is known as the
note rate is because the initial rate is the one listed on the promissory note.
Fully Indexed Rate:
The fully indexed rate is a combination of the margin plus the index. It is the interest rate of a mortgage provided
there are no limits on how high or low the rate may go.
Margin + Index = Fully Indexed Rate

So if a lender’s profit margin was 2.5% and the current index was 3%,
the fully indexed rate would be 5.5% (2.5% + 3% = 5.5%).
1. ____________________________ = the interest rate at closing
2. ____________________________ = the margin + the index
3. The ____________________________ is the lowest the rate can ever adjust to over the full term of the loan, and it stays
the same for the entire term of the loan.
4. The ____________________________ is what will cause the rate to adjust up or down. It reflects the financial
marketplace.

Products
Initial Interest Periodic Interest Lifetime Interest CAPS

Rate Cap Rate Cap Rate Cap Due to the variable nature of an ARM, it sometimes can be
2% 3% 5%
more challenging for a borrower to manage. That’s why most
of the ARMs available today come with caps.
Think of the cap as a ceiling or a floor that the ARM’s rate
cannot exceed. If the fully indexed rate remains within the
cap, then that’s the new rate. But if the fully indexed rate
exceeds the cap, the ARM’s new rate stops at the cap. Caps are voluntary limits set by the lender when making the
mortgage agreement, and if included, they are written as part of the mortgage contract.
The most common caps are annual caps (also referred to as the periodic cap) and lifetime caps. Some ARM loans
also include an initial cap which is used to control the amount a rate may change the first time the rate adjusts.
Here is an example of mortgage industry shorthand used to describe an ARM’s caps: 2/3/5.
In this example working from left to right, the 2 is the initial rate change - meaning at the time of the initial
adjustment the rate may only go up or down by a maximum of 2%. The 3 is the annual rate change cap and it also
shows that the rate may only move up or down by a maximum of 3% at each change after the first. The 5 is an
indicator of the lifetime cap, which means that over the life of the loan the rate may never change by more than 5%
from the initial rate of the mortgage.
Okay let’s put these caps into practice. Let’s say that the borrower has an ARM with an initial (note) rate of 5.25%,
a margin of 2.25% and caps of 2/3/5. The following diagram shows you how the caps control the amount our
borrower’s interest rate can change.
In this example, the borrower’s rate will never exceed 10.25% (lifetime cap of 5% + 5.25%) or go below the margin
of 2.25%. Additionally in this example, you can see that the initial rate adjustment will only change between 7.25%
(5.25% + 2%) and 3.25% (5.25% - 2%).
Caps on adjustable rate mortgages limit payment shock: a sudden or severe increase in payment.
Maximum Rate
10.25%
23 5 Caps
7.25%
Note Rate
Initial Adjustment Range
5.25% (1st Adjustment)
3.25%
Initial Cap: 2%
Periodic Cap: 3% Margin
Lifetime Cap: 5% 2.25%
Things To Know
Payment shock is a sudden or severe increase in the
monthly amount due on a borrower’s mortgage loan.
1. ____________________________: A limit on how much the ARM’s rate may change, up or down, at any given
interval.
Products
Balloon Mortgages
Balloon mortgages are loans that require a planned
full repayment of the balance prior to the end
of a 30-year amortization schedule. Depending on
how the mortgage is structured, the borrower
typically makes regular payments at the beginning of the
payment cycle. These payments may reflect a fully
or partially amortizing payment, or may
even be interest-only. At the end of this
period of payments, the remaining principal balance must be
paid. 1
This chart shows how a balloon mortgage functions:
• The payments the borrower makes may reduce the principal balance (if the payment is fully amortized). If the
payment is interest-only, the principal is not reduced.
• If the borrower falls on hard times and is unable to pay or refinance the remaining balance when the period of
regular payments ends, they may lose their home.
Types Of Balloon Mortgages Monthly payments to be made
Balloon mortgages come in a variety of forms. With a as if for 30 years
30/15 balloon mortgage, the borrower makes payments
30 15
for the first 15 years in the amount of a fully amortizing
payment for a 30-year fixed rate mortgage. At the end of
the payment period (15 years), the remaining balance is
due.
Full balance due after 15 years
Reset And Conditional Refinance
If the borrower is unable or unwilling to refinance or sell their home to avoid the large lump sum payment,
they may have the option, through a conditional refinance provision, to convert the balloon mortgage to a
fully amortizing mortgage at the maturity date. These reset options are not automatically built into every
loan; they need to be agreed upon by the borrower and the lender and/or investor at loan application. Some
loans do not contain a conditional refinance provision. For example, the earlier mentioned 30/15 balloon loan
does not contain a reset option.
A balloon loan with a reset option is a 5/25 loan. Balance Due
The lump sum is due after 5 years while the reset
5 25
amortizing term is 25 years. For the refinance of a
loan with a reset option, no income or credit needs
to be qualified.
The following provisions still must be met: New reset term
• The property must be the borrower’s primary residence.
• The resetting mortgage must be the only lien on the property.
• The borrower must have no late payments in the last 12 months.
• The borrower is still required to sign documents and pay closing costs.
1 Ask CFPB: What is a balloon loan? Retrieved from http://www.consumerfinance.gov/askcfpb/104/what-is-a-balloon-loan.htm
4
Products
Graduated Payment Mortgages (GPM)

Graduated Payment Mortgages are products that allow the borrower to ease into a fully amortizing payment on the
loan. Typically used by first-time home buyers, the GPM features monthly payment amounts that increase annually
until they reach the full payment.
The gradually increasing payment period usually lasts Payments Per Month
for 5 - 10 years. During this time the payment does not
fully amortize, and thus the remaining unpaid interest Year 1 $500
for each payment is added to the principal balance of In the first 4 years the
the loan - this result is called negative amortization, and Year 2 $550 payment amount is
it is an expected feature of the GPM. partially amortizing
At the end of the gradual increase period, the remaining Year 3 $600 and grows until
loan payments are made based on a fully amortizing the 5th year when
amount that will result in the loan being fully repaid at Year 4 $650 fully amortizing
the end of the payment cycle. See the example: payments of $700
Year 5-30 $700 per month are made.
Open-End Mortgages
Open-end mortgages are loans in which the terms and maturity date can change. At the time open-end
mortgages begin, there is no date when the loan commitment will end.
Common forms of open-end mortgages are
Example Of A HELOC:
the home equity line of credit (HELOC) and
the reverse mortgage. A borrower has a HELOC on their home.
The maximum amount the lender will
Home Equity Lines Of Credit
allow for the borrower to borrow with the
A HELOC is a form of an open-end mortgage HELOC is $50,000. In this case, the $50,000
that allows the borrower to make repeated is the HELOC’s limit. Each withdrawal the
withdrawals and payments against the equity borrower makes against that limit reduces the
they have on their home.
remaining amount the borrower has available
Very similar to how a credit card functions, to use on the account. So if the borrower uses
the HELOC assumes a lien position on the $20,000, they only have $30,000 available
borrower’s home that allows for a maximum ($50,000 - $20,000 = $30,000).
dollar amount that can be used by the
borrower. In a simplistic sense, it’s using the Each month the borrower is required to a
equity as if it were a credit card. minimum payment on the amount used (just
like on a credit card). The minimum payment
The reason the HELOC is an open-end
term is limited, and once expired, the
mortgage is because, based on the recurring
payments and withdrawals, it is impossible at borrower will be required to repay the balance
the time the account opens to determine all through a fully amortizing payment.
the repayment terms.
1. ____________________________ allows borrowers to access the equity in their home and use it like a credit card.
2. Equity = _____________________________________________ - _____________________________________________
Products
Open-End Mortgages
Reverse Mortgages
Reverse Mortgages are products designed for elderly borrowers - homeowners 62 years of age or older. Reverse
mortgages were created with the idea that retirees who spent a lifetime building equity in their home shouldn’t be
forced to sell the house when they can no longer afford to pay the monthly payment. Instead, a reverse mortgage
allows the homeowner to tap their equity and use it to support a rate and term refinance of their current mortgage,
take cash out or use the equity as a line of credit. Each month, rather than pay the lender (think forward), the lender
simply accrues the monthly payment and holds it (think reverse) until the borrower either moves out or passes
away. When the borrower leaves, the lender can then collect on the amount due either through collection from the
borrower (or their heirs) or through the sale of the property. Because there is no way to predict when the borrower
will leave the home, the reverse mortgage is a form of open-end mortgage.
Methods Of Equity Conversion

The following are methods the borrower can use to exercise their equity conversion with a reverse mortgage.
Lump Sum Cash Out
The borrower receives a one-time payment or transfer of existing principal loan balance at the time of closing.
Tenure And/Or Term Cash Out
The borrower receives a regular payment for the life of the loan (tenure) or over a set period of time (term).
Line Of Credit
The borrower receives a maximum credit limit at the time of closing which they may utilize in a similar fashion to a
credit card.
Types Of Reverse Mortgages
Single Purpose Reverse Mortgage: provided to the borrower for a specific need. Examples include paying property
taxes or making needed repairs. It is often provided by a local government or non-profit agency, and is typically a
fairly small amount.
Proprietary Reverse Mortgage: provided by a private lender.
Home Equity Conversion Mortgage (FHA HECM): assumes the same standards as the proprietary reverse except
that it is insured by the federal government and requires counseling on the part of the borrower prior to loan
closing. The counseling helps explain how the reverse mortgage works to our borrower.1
You Might Be Curious

“Elderly”: the term elderly is defined under ECOA
as a natural person that is 62 years of age or older.1
1 Federal Reserve. Federal Fair Lending Regulations and Statutes Overview. Retrieved from
http://www.federalreserve.gov/boarddocs/supmanual/cch/fair_lend_over.pdf
1. What is the difference between a HELOC and a Reverse Mortgage?

Products
Open-End Mortgages
Reverse Mortgage 101

The chart helps illustrate how a reverse mortgage works. In this example, the borrower begins the reverse
mortgage with a balance of $100,000 and an interest rate of 5%. For the month of June, they’re charged a monthly
interest of 5% on the $100,000 balance ($100,000 X .05 = $5000 ÷ 12 = $416.67), and a $100 servicing fee by
the lender for administrative tasks associated with the loan. Adding the beginning principal balance with the
interest and servicing fee ($100,000 + $416.67 + $100) results in a new balance in July of $100,516.67. This process
continues each month until the borrower leaves the home permanently.
Initial Principal Balance: $100,000

Interest Rate: 5%
June July August

Beginning
$100,000.00 $100,516.67 $101,035.49
Principal
Monthly
$416.67 $418.82 $420.98
Interest
Servicing $100.00 $100.00 $100.00
Total Due $100,516.67 $101,035.49 $101,556.47
Reverse Mortgage Benefits, Requirements, And Restrictions

The benefit of a reverse mortgage to the borrower is that they are not required to repay the mortgage balance
until they leave or sell the property.
The following are requirements necessary for the borrower to obtain a reverse mortgage:
• Borrower must be 62 years of age or older
• Home must be the borrower’s primary residence
• No other liens may exist on the property2
The following are restrictions that must be observed by a borrower with a reverse mortgage. If any of these
restrictions are violated, the borrower may be obligated to immediately repay the loan to the lender.
• Taxes and insurance must be paid on time
• Property must be maintained and kept in good repair
• No additional owners may be added to title
• Borrower may not rent the property
• Borrower may not declare bankruptcy
Products
Miscellaneous Products
Short Term Mortgages
Short term mortgages are also referred to as interim loans because their intent is to only be in place for a limited
period of time. The most common form of interim loans are construction loans and bridge loans.
Characteristics: Short term mortgages are typically 12 months or less in length. They usually have higher interest
rates because of their short repayment period and higher level of risk. Because they are used as a method of interim
financing with no intent to reduce the principal balance, short term mortgages are interest-only in their payment
type.
Types Of Short Term Mortgages

Construction Loans
Construction loans are used to finance the construction of a new home or addition to a home. They finance the
project based on the plans, materials, labor, and permit costs needed to complete the construction. Once the
home is built, the borrower is expected to refinance or pay off the principal balance. Some construction loans are
structured as a construction to permanent loan in which the balance from the construction loan is automatically
rolled over into a more standard mortgage when a Certificate of Occupancy (C.O.) is received. Receipt of a C.O. is
an indication that construction is completed and the home is available for residency. 1
Bridge Loans
Bridge loans serve as temporary financing for a home buyer when purchasing a new home if they are still paying a
mortgage on their current home. Bridge loans are usually available in two forms - secured and unsecured.
Secured bridge loans allow the lender to secure a lien interest in the borrower’s current home until it sells and the
borrower can repay the lender.
A lender may allow for an unsecured bridge loan (meaning the lender is not taking out a security interest in the
borrower’s current home) for the borrower on their new home if their current home is in process or under contract
for sale with a buyer.
Home Equity Loan
A Home Equity Loan (HEL) is a mortgage loan
in which the borrower accesses their existing Example Of A Home Equity Loan:
equity in the home. Unlike a HELOC where the
borrower uses their equity through a line of credit, The borrower owns a home with a value of
the money for the HEL is provided in a lump $200,000. They have no current mortgage
sum payment at closing from the lender to the on the home and would like to pay off
borrower. This is often referred to as a cash out
some credit cards and other high interest
transaction because the borrower is literally taking
cash out of their own equity value in the home. debts. The lender provides them with
$100,000 in exchange for a new $100,000
mortgage on the home. The borrower
uses the funds provided for whatever
they choose to do and the lender now
has a mortgage with the borrower for
the $100,000. In this circumstance, the
borrower would now have an LTV of 50%
(as well as an equity position of 50%).
1 Ask CFPB: What is a construction loan? Retrieved from http://www.consumerfinance.gov/askcfpb/108/what-is-a-construction-loan.htm

Products
Piggyback Loan
The piggyback loan is a type of mortgage that Example Of A Piggyback Loan:
provides a loan to cover the down payment. In the
A local non-profit agency may be offering
days prior to the financial crisis of 2008, this type
of product was used frequently because it allowed new homes to low income borrowers.
the borrower to avoid private mortgage insurance To assist the borrower in purchasing
on their mortgage. the home, the agency could provide a
There were two common forms - an 80/20 and an form of piggyback mortgage that would
80/10/10. 80/20 was when the primary mortgage supplement the borrower’s qualifications.
covered 80% of the home’s purchase price, while
The piggyback might allow the borrower
the piggyback loan covered 20% of the price. The
80/10/10 was when the 80, once again, covered no repayment as long as they live in the
80% of the home’s purchase price, and another home or some other form of payment plan
loan is provided for 10% of the purchase price. more conducive to the borrower’s needs.
The final 10% would be provided by the borrower
as a down payment. In all of these circumstances, the
Things To Know
piggyback loans are subordinated to the larger 80% primary
loan. Because of this subordination and higher risk, the A purchase money second mortgage is when a
piggyback typically carried a much higher rate of interest borrower gets a second mortgage to help cover
than the primary mortgage.
the cost of their down payment.
Piggyback loans are seldom seen today in standard
mortgage transactions. However, they can still be found in
special financing transactions through housing finance agencies.
Sub-Prime Mortgages
Sub-prime mortgages are a type of loan intended for borrowers with less than prime qualifications. Typically
factors such as lower income, poor or limited credit history, and minimal assets can lead to a borrower receiving
a sub-prime loan. Because of the borrower’s circumstances, these loans carry a higher level of risk and therefore
lenders will charge a higher rate of interest to offset the risk.
Jumbo Mortgages
Jumbo mortgages are a type of loan where the dollar amount of the mortgage exceeds the conforming loan limits
set by the Federal Housing Finance Agency (FHFA). This loan is considered riskier than normal because of the high
dollar amount. The lender will have greater exposure to risk should the borrower default. To protect against this
risk, the lender will usually require higher credit scores and a higher level of income compared to the borrower’s
monthly debt (debt-to-income ratio).
Niche Loans
Niche loans are for unique circumstances or needs. This loan is typically unavailable through major lenders and
usually requires higher rates of interest for the borrower. An Alt-A mortgage loan is an example of a niche loan.
Alternative A-Paper (Alt-A) Mortgages
Alt-A mortgages are a type of loan intended for borrowers who have good credit but don’t meet other
underwriting criteria for conforming prime loans. Borrower shortcomings such as high loan-to-value and debt-
to-income ratios or limited documentation of the borrower’s income make this loan higher risk and may require
higher interest rates.
Products
Unique Loan Types
Unique Loan Types

So far we’ve discussed a whole bunch of different loan products and categories that you’ll encounter in your new
role as a mortgage loan originator. Now it’s time to give you a brief look at some unique loan characteristics that are
currently available in the market or once were available in the market. Keep in mind that some of the characteristics
that used to be prevalent, may very well return as regulations and standards change and evolve.
Subordinate Liens Subord

inate
The term subordinate means lower in rank or position.
Lie
For instance, in our federal government the Vice n
Mortgag
President is subordinate to the President. Used as a es
(they come after the primary mortgage)

THESE ARE SUBORDINATE LIENS
verb, to subordinate something means to put it below
or behind something else. In the mortgage industry, we
THE HOME’S TOTAL VALUE IS $200K

use subordination (the act of subordinating a loan) to
establish rank or priority for which loan gets paid off first
Third Lien
in the case of a sale, foreclosure or another act on the
$25K
property’s title.
It is not uncommon for a property owner to have
multiple mortgages on their property. The homeowner Second Lien
may have a primary mortgage, a second mortgage $50K
and a third mortgage. In many cases, the borrower
may have used the primary or first mortgage to buy
First Lien
the home, then decided to use their equity by getting a
home equity loan (HEL) to pay off some debts. The HEL (Primary Mortgage)
would be in second position on the list of pay off priority $100K
because it came after the primary mortgage. A few THIS IS THE MORTGAGE
years later, after making payments on both the primary (used to purchase the home)
and second mortgages, the borrower may take out a

home equity line of credit (HELOC) to help pay for improvements on the home. The HELOC in this circumstance
would be the third mortgage.
There isn’t a specific way that a HEL or HELOC must be placed in priority. A homeowner could have a HELOC as their
primary mortgage - it depends on which lien comes first. The rank of lien priority can be amended if a borrower and
lender agree to subordinate (make lower in rank) an existing mortgage. Consider the HELOC we just described as
the primary or first mortgage. Perhaps the borrower wants to take out another mortgage - the new lender might
request that the HELOC lender subordinate the HELOC as a condition for loan approval. If the HELOC lender
declines, the new lender may choose to not do the loan.
A borrower can have an infinite number of mortgages on their home - first, second, third, fourth, etc. Typically, the
lower the rank of the lien, the higher the interest rate of the loan. This higher rate is due to the level of risk the lender
carries with being placed behind other lenders in the rank of who gets paid off first.
Interest-Only Loans
Interest-only loans are loans for which the borrower is only required to pay the interest portion of their payment. By
only paying the interest on the loan, the principal balance is never reduced.
Quite often I/O is just a limited feature of a loan product, such as in the case of the option ARM. With the option
ARM, the borrower is allowed to make I/O payments for the first 5-10 years, but after this initial period is required
to make fully amortizing payments. I/O is also an initial repayment feature of some balloon products. Most interim
(short term) loans are I/O products.

Products
Unique Loan Types
Reduced Documentation Loans

One of the loan products that fueled the fire in the mortgage meltdown of 2008 were reduced or no documentation
loans. These loans allowed borrowers to apply for and receive mortgage loans without full documentation to
support their application.
The basis for these loans grew out of a previous lending practice in which borrowers with some strong qualifications
and good relationships with the lender would be provided a loan - even though they might not fit the standard
qualification profile. This borrower, (often referred to as an Alt-A borrower) could meet most of the qualification
standards, but due to certain circumstance (such as a business owner who shows little income) could not qualify for
a prime mortgage. Since the borrower and lender had a good relationship, the lender was willing to provide the loan
without all of the standard qualifying information. Regardless of a loan’s limited documentation, the loan originator
will still need a verification of employment (VOE), credit report review, and an appraisal for the subject property.
Types Of Reduced Documentation Loans

These are the typical types of reduced documentation loans:
Required Information
Reduced Documentation
Income Assets
Loan Type
No income, no assets (NINA) None None
Stated income, stated assets (SISA) Stated by borrower Stated by borrower
No income, verified assets (NIVA) None Verified by Underwriter
Stated income, verified assets (SIVA) Stated by borrower Verified by Underwriter
Reduced Document Loans And The Mortgage Crisis

As discussed in the first unit the marketplace in the early 2000s was hungry for more and more loans that could
be written and sold in the secondary market. To feed this hunger, lenders began applying the process that was
used for Alt-A borrowers to less qualified individuals. To ease their concerns about these less qualified individuals,
the lender justified the risk by charging higher costs and fees to the borrower. These loans were called sub-
prime loans and after they were written and funded many of the borrowers defaulted on their debt obligation.
It is believed that if lenders did not loosen their standards (such as not requiring documentation to support the
borrower’s application) to accommodate these borrowers, much of the mortgage meltdown could have been
avoided.
Products
Unique Loan Types
Match the descriptions with the correct loan type. The options you have to chose from are:
• Reduced Documentation Loans • Qualified Mortgage

• Interest Only Loans • Subordinate Liens
• Negative Amortization • Short Term
1.
• Typical term lasts 12 months or less
• Higher interest rates
• Higher level of risk
2.
• Only the monthly interest is paid
• Typical term lasts 5-10 years
• Fully amortized payments
• Balloon payment
• Refinance the loan/sell the home
3.
• Second, third, fourth, etc. lien mortgages
• Liens are paid in order of their priority
• Can be HELs, HELOCs, or other loan products
4.
• Originator verifies employment, credit, and collateral
• No Income, No assets (NINA)
• Stated Income, Stated Assets (SISA)
• No Income, Verified Assets (NIVA)
• Stated Income, Verified Assets (SIVA)
• No Documentation (No Doc)

07 Mortgage Math 1
1. What components make up a borrower’s monthly

mortgage payment?
2. What is the difference between front end DTI and back

end DTI?
3. What are the formulas for the 3 different LTV

calculations?
Mortgage Math 1
Simple Interest Rate
Mortgage Math 1
One of the biggest areas of confusion for consumers when they borrow money is the difference between the simple
interest rate and the annual percentage rate (APR). While they seem like the same thing, they are actually much
different.
The simple interest rate (aka nominal interest rate) is the fee or cost charged to the borrower by the lender for the
borrower’s use of the lender’s money. In the financial industry this is often referred to as the interest rate, and it’s
usually provided as a percentage of the principal amount. With most mortgage loans a portion of principal and
interest is repaid each month which allows the borrower to pay-off the loan over time.
Simple Interest Rate Formula And Example

Principal x Interest Rate x Duration of Loan (in years) = Simple Interest
Assume a lender has a bag with $100,000 in it and the borrower wants to use that $100,000 to buy
something. The lender agrees to allow the borrower to use that $100,000 for five years. At the end of the
five years the borrower must not only repay the $100,000 to the lender, but also 5% for each year of use
of the money. So when it comes time to pay back the lender the borrower must not only give the lender
$100,000, but also the interest charged.
$100,000 x 5% x 5 = $25,000
$100,000 + $25,000 = $125,000
(Total amount to be repaid to the lender)
1. Simple Interest is the fee charged to the _____________________________ by the lender for using their
______________________________.
Mortgage Math 1
Calculations: PITI
Calculations: PITI
In this chapter we’ll cover the four components of a
P The principal portion of the payment
borrower’s monthly payment - the PITI payment.

I The interest portion of the payment
The PITI payment is typically what our industry considers to
be the monthly payment obligation for the borrower. T Monthly portion of the annual property tax
Before we can figure out the overall PITI payment, we need to
Monthly portion of the annual insurance
calculate each individual portion of the payment.
Interest-Only
I payments (this may include homeowners and
mortgage insurance)
The amount of interest paid with the loan is extremely
important. In essence, it’s the amount the client pays to
borrow the money.
When a borrower makes their loan payment, the amount of interest they pay covers the previous month’s
use of the money - this practice is known as paying in arrears. As an example, when a borrower makes
their July mortgage payment on July 1st, the interest portion of the payment is actually for June’s use of the
money. Think of it this way, why would you pay for something if you haven’t used it yet? This concept of paying
in arrears will be further covered in the calculation of daily interest in Mortgage Math 2. Below is the formula to
calculate only the interest portion of the monthly interest rate:
Interest-Only Calculation
Loan Amount x Interest Rate = Annual Interest
Annual Interest ÷ 12 = Periodic I/O Payment
Property Tax
Property tax is calculated monthly by dividing the annual property taxes by 12.
Monthly Property Tax Calculation

Annual Property Taxes ÷ 12
Insurances
There are two different types of insurances that can affect a client’s monthly payment - hazard insurance, sometimes
called homeowners insurance, and mortgage insurance. We will discuss these insurances in a later chapter.
Borrowers are required to have hazard insurance, therefore we must consider this when qualifying our clients. Some
clients may also have mortgage insurance, but this depends on their loan program. Let’s explore how to calculate
both.
Hazard Insurance
Hazard insurance protects the property from damage. All lenders require borrowers to have this insurance as a
condition of making the loan. The cost of hazard insurance is typically annualized, so for the purpose of determining
the monthly payment we simply divide the annual amount by 12.
Monthly Hazard Insurance Calculation

Annual Hazard Insurance ÷ 12 = Monthly Insurance
4
Mortgage Math 1
Calculations: PITI
Mortgage Insurance
(Private Mortgage Insurance - PMI / Mortgage Insurance Premium - MIP)
Mortgage insurance is another insurance that a borrower may have as part of their payment calculation. While not
part of all loan agreements, when required, mortgage insurance is something that we need to calculate as part of
the borrower’s monthly PITI payment. We will explore the concept of mortgage insurance in a later chapter.
Mortgage insurance is calculated by multiplying the mortgage insurance factor by the loan amount and then
dividing the result by 12 to determine the monthly PMI payment requirement.
Monthly Mortgage Insurance Calculation

Loan Amount x % of PMI or MIP = Annual PMI or MIP
Annual PMIor MIP ÷ 12 = Monthly PMI or MIP
Calculations: DTI
Debt To Income
Once we’ve figured out our borrower’s monthly income, we’ll need to examine how that income stacks up against
their bills. The method for evaluating this comparison is the debt-to-income (DTI) ratios. DTI calculations fall into
two categories: front-end and back-end debt-to-income.
Housing DTI
Housing (or front-end) DTI is used to determine the borrower’s ability to pay all their monthly housing-related
expenses. Typically, these housing expenses are tied to the borrower’s financial responsibilities for the home
and include the PITI payment as well as homeowner’s fees. These expenses do NOT include utilities (e.g. heat
and electricity). Front-end only includes things like the mortgage, taxes and insurance. In other words, what the
borrower must pay so that the mortgage holder or the tax man doesn’t kick them out of the house. You can live
in your house without electricity (even though it might be a little dark at night), but you can’t live there if the tax
collector seizes your home for not paying your property tax. These expenses are then compared to the borrower’s
monthly gross income.
Housing DTI Calculation

(PITI + Housing Expenses) ÷ Gross Monthly Income = Housing DTI
Mortgage Math 1
Calculations: DTI
Total DTI
Total (or back-end) DTI is used to consider all of the borrower’s non-cancellable monthly debt obligations,
including their housing-related expenses, to their gross monthly income. Non-cancellable debts include loan
payments (such as car and student loans), credit card payments and other miscellaneous items. The key is
that they cannot be canceled. If the debt can be canceled it should not be included in the calculation. Even
though the borrower might regularly spend money on things like food and utilities each month, they are not
considered part of the Total DTI.
Total DTI Calculation

Total Monthly Expenses ÷ Gross Monthly Income = Total DTI
Things To Know
One last note about total DTI: When calculating total DTI for Fannie and Freddie
loans a minimum of 5% of total revolving debt must be included in the monthly debt
calculation if no monthly minimum payment is listed.
1. Housing DTI (Front-end DTI):

• ___________________________________________________________________________________
2. Total DTI (Back-end DTI):
• ___________________________________________________________________________________
20 20 Hour
Hour SAFE
SAFE Comprehensive:Fundamentals
Comprehensive: Fundamentals of Mortgage
MortgageEducation
Education(NMLS
(NMLS10527)
10527)- Version 4 4
- Version 85
Mortgage Math 1
Calculations: Income
When determining a borrower’s ability to pay back the loan, we usually start by calculating their monthly income. In
some cases it’s easy - especially if the borrower is paid monthly. Unfortunately it’s not always that easy, so over the
next few pages we’ll be discussing how to calculate monthly income. One thing to mention before we start-when
considering a borrower’s income for qualification, we always use their gross income. Gross income is the amount the
borrower earns prior to the payment of taxes and non-taxable items like health insurance coverage. And to ensure
we always have an accurate average monthly income, we calculate income out to the year, then divide by 12 to
get the monthly income. As a rule, always figure out what a borrower is paid per year pre-tax, then divide by 12 to
determine their monthly income.
Hourly
If a borrower is paid an hourly wage (a certain amount for each hour worked), they’re considered an hourly
employee. The following calculations are used to determine their monthly income.
Weekly Income Calculation

We’ll begin first by determining their weekly income:
Base Hourly Rate x Hours Worked = Weekly Income
Monthly Income Calculation

Then we’ll use that weekly income to calculate their monthly income:
(Weekly Income x Weeks Worked) ÷ 12 = Monthly Income
Overtime Income Calculation

If the borrower regularly receives overtime income (the overtime rate is typically 1.5 times the normal
hourly rate but may vary), we’ll want to include that as well:
Overtime Rate X Overtime Hours Overtime Income
Weekly Income with Overtime Calculation

Once we’ve determined their overtime income, we’ll want to add that to their regular income:
Weekly Base Income + Weekly Overtime Income = Weekly Income with Overtime
Mortgage Math 1
Salary
Salaried employees can be paid in a variety of ways. The following calculations show the different types of salary
payments and how to calculate income:
Monthly Salary Calculation

Annual Income ÷12 = Monthly Income
Weekly Salary Calculation (Paid Every Week)

Weekly Salary x 52 = Annual Income
Annual Income ÷ 12 = Monthly Income
Bi-Weekly Salary Calculation (Paid Every Other Week)

Bi-Weekly Salary x 26 = Annual Income
Semi-Monthly Salary Calculation (Paid 2X Per Month)

Semi-Monthly Salary x 24 = Annual Income
Bi-Monthly Salary Calculation (Paid Every Other Month)

Bi-Monthly Salary x 6 = Annual Income
Semi-Annual Salary Calculation (Paid 2X Per Year)

Semi-Annual Salary x 2 = Annual Income

Mortgage Math 1
Documentation Required For Each Employment Type

Remember, you will be able to estimate your borrower’s income based on what they tell you, but you will not know
exactly what they make until we request income documentation from the borrower. This typically happens during
processing, but you can request that the borrower provide income documentation before you write their loan.
Depending on how they are employed, they will receive different income documentation. Below is a list of common
types of documentation required for each employment type:
1. Salary: 2 years W2s, 30-60 days worth of pay stubs
2. Independent Contractor: 2 years 1099s
3. Passive Income (social security/retirement): award letters, bank statements
4. Self Employed/Commission: 2 years tax returns
No matter how you are employed, all borrowers will also have to sign a 4506-C. This allows for the lender to go to
the IRS and get a transcript of the borrower’s tax returns.
Do not complete this activity until you have attended the class.
Elisha and Jamal are interested in buying a home. Before they can do so, they need to have an MLO review
their qualifications to determine if and what they can afford in terms of mortgage products and programs.
Jamal’s gross monthly income is $2,900 and his net income is $1,900. Elisha’s net income is $2,100 and gross
monthly income is $3,300. They have two car payments totaling $435 per month, utility bills equaling $210
per month, and credit card bills requiring $375 in payments each month. If the loan they’re considering has a
monthly PITI payment of $1,175, what are their front and back end DTIs?
Mortgage Math 1
Calculations: LTV
Calculations: LTV
Down Payment
Before we calculate the down payment, we need to clarify what a down payment is. The down payment is a
requirement of the lender and the loan program provider as part of getting a mortgage. The seller has nothing to do
with the down payment. As far as the seller is concerned they will receive the agreed upon sales price at closing. So
if the home sells for $100,000, the seller gets $100,000.
If the buyer uses a mortgage loan to purchase the home, the buyer will give the lender the down payment. The
lender then uses the down payment amount as a factor in determining the borrower’s loan amount. In the above
scenario with the $100,000 purchase price, let’s assume that the minimum down payment required for the loan is
3.5% of the purchase price. This means the borrower would pay the lender $3,500 ($100,000 x 3.5%) as the down
payment on the loan, and thus the loan amount would be $96,500 ($100,000 - $3,500).
There are two ways you can determine someone’s down payment. See below:
Down Payment Calculation #1

Appraised Value or Purchase Price - Loan Amount = Down Payment
Down Payment Calculation #2
Appraised Value or Purchase Price x % Down = Down Payment
We need to do this calculation as part of the process to help determine if the borrower has the money needed to
purchase the property. Each loan product has different minimum down payment requirements, and knowing the
down payment helps us inform the borrower of their options. It also helps us determine the borrower’s loan-to-
value, which is how we determine the borrower’s equity position.
1. The ________________________________ the down payment percentage, the _____________________________ the risk of
the loan.
20 20 Hour
Hour SAFE
MortgageEducation
Education(NMLS
(NMLS10527)
10527)- Version 4 4
- Version 89
Mortgage Math 1
Calculations: LTV
Loan to Value
One of the most important factors that impacts a borrower’s qualifications is the amount of equity they have in the
subject property. Equity simply means ownership or value. Equity is the amount of the home’s value that is free and
clear, or not wrapped up in a loan. You can find a home’s equity by subtracting the loan balance from the value of
the home.
In a purchase transaction, the down payment amount is the borrower’s initial equity position. If the borrower makes
a $5,000 down payment on a $100,000 home, their equity value = $5,000 while the lender’s equity value is $95,000.
Equity can also be described as a percentage. In this scenario, the borrower’s equity position is 5% and the lender’s
is 95%.
Equity can be determined in a variety of ways, but the most accepted practice for equity determination is through
loan to value (LTV) calculations. There isn’t a more simple way of describing LTV: it’s the loan amount compared
to the value of the home. In these calculations, the value of the home is based on either the purchase price or the
appraised value - whichever is less. So if the purchase price of a home is $100,000, but the home appraises for
$95,000, the value used for the calculation is $95,000.
When calculating LTV, we use the borrower’s current principal balance as the loan amount. If a borrower took out the
loan three years ago at $100,000, but they’ve been making payments and the balance is now $90,000, then $90,000
is the amount to be used when determining LTV.
Lastly, if the LTV is being used for a refinance loan, the purchase price doesn’t matter. Only the appraisal amount
will be used for determining value (unless multiple appraisals are done, in which case, the lowest of the appraised
values will typically be used).
There is more than one LTV calculation, and the type of LTV calculation to use when determining equity depends on
the transaction and the type of mortgages or liens involved.
LTV is the amount of the primary (1st) mortgage compared to the home’s value. Here is how you calculate it:
LTV Calculation
Loan Amount ÷ Appraised Value or Purchase Price = LTV
1. The ________________________________ the LTV, the _____________________________ the risk of the loan.
Mortgage Math 1
Calculations: LTV
Combined Loan To Value (Total Loan To Value)

Combined loan to value (CLTV) may also be described as total loan to value (TLTV). Fannie Mae uses CLTV while
Freddie Mac uses TLTV. This is the amount of all of the borrower’s mortgages or liens compared to the home’s value
and is calculated like this:
CLTV (TLTV) Calculation

1st Loan Amount + All Loan Amounts = Total Loan Amount
Total Loan Amount ÷ Appraisal Value or Purchase Price = CLTV or TLTV
Example Of CLTV:
Kenisha wants to get a refinance with a primary mortgage of
$150,000, a second mortgage of $50,000, and a third mortgage of
$25,000. Her appraised value is $300,000. Her CLTV is 75%.
$150,000 + $50,000 + $25,000 = $225,000 (total of loan balances)
$225,000 ÷ $300,000 = 75% (CLTV or TLTV)
High Combined Loan To Value (High Total Loan To Value)

The final equity calculation we’ll discuss is high combined loan-to-value (HCLTV) or in the case of Freddie Mac, high
total loan-to-value (HTLTV). HCLTV is used when a home equity line of credit (HELOC) is involved in the transaction.
Rather than use the HELOC’s current balance (like we would do with CLTV) we would replace that balance with the
borrower’s maximum limit on the HELOC. Here is the calculation:
HCLTV (HTLTV) Calculation

All Loan Balances (on close-ended loans) + Credit Limit On HELOCs
÷ Appraisal Value/Purchase Price = HCLTV or HTLTV
Example Of HCLTV:
Let’s build on the previous equation with Kenisha as an example and assume that her
third mortgage is a HELOC. Kenisha has a primary mortgage of $150,000, a second
mortgage of $50,000, and a third mortgage HELOC with a balance of $25,000 and a
maximum limit of $40,000 and her appraised value is $300,000. Her HCLTV is 80%.
$150,000 + $50,000 + $40,000 = $240,000
(Combination of loan balances, except the HELOC where we use the maximum limit
instead of the loan balance)
$240,000 ÷ $300,000 = 80% (HCLTV or HTLTV)
20 20
Hour SAFE
Hour Comprehensive:
Fundamentals of Mortgage
MortgageEducation
Education(NMLS
(NMLS10527)
10527) - Version
- Version 4 4 91
Mortgage Math 1
Practice Problems
Practice Problems
For extra practice, complete the math problems found within this section.
PITI
1. Our borrower’s current principal balance is $175,000 and they have an interest rate of 5.5%. If they have a
monthly principal payment for this month of $531 with an annual homeowner’s insurance bill of $700 and
annual property tax bill of $3,600, what is this month’s PITI payment?
Interest-Only Payment
2. Mary and Susan have a loan with a current principal balance of $250,000. If they have an interest rate of 4.5% on
the loan, how much do they owe for this month’s interest payment?
3. Jessica is considering buying a new home and trying to determine if she can afford the monthly payment. She’s
most concerned about the cost of property tax which she has calculated to be $423 per month. She also knows
that her MIP payment will be $49.50 along with an annual homeowner’s insurance bill of $1350. If the amount
of her first principal payment will be $615 and her initial loan amount will be $165,000 with 6%, what is the
expected cost of her first monthly mortgage payment?
40hr/wk Income From Hourly

4. Joe works as a steam press operator making $18.70 per hour. He works a standard 40 hour week and
occasionally earns overtime, but not on a regular basis. If he made $41,924 last year, what is his average monthly
income?
Income from Salary

5. Shayla earns an annual salary of $102,462. What is her qualifying income for a mortgage loan?
Mortgage Math 1
Practice Problems
Housing DTI
6. Rasheda has the following monthly bills – Electricity = $52, Gas = $76, Cable TV = $49, PITI = $1120 and a
monthly income of $2800. What is her front-end DTI?
Total DTI
7. Ezra has a lot of bills to juggle each month: Visa card = $650, car payment =$625, daughter’s private school =
$1,200, utilities = $325, monthly PITI = $4150. His annual income is $187,000. What is his total DTI?
Down Payment
8. House sale price is $250,000. The loan program requires a minimum down payment of 5%. What is the down
payment amount?
LTV
9. Jerry bought his home for $345,000. He wants to refinance his current mortgage and take some money out to
pay bills. The appraised value on the home is now $300,000. If his current mortgage balance is $215,000 what is
his LTV?
CLTV/TLTV
10. Shelia has a home worth $345,000 with two mortgages: $100,000 purchase mortgage and a HELOC with a
maximum limit of $50,000 and a balance of $3,000. What is her TLTV?

08 Programs
1. What is the difference between conventional mortgages

and non-conventional mortgages?
2. What is the difference between a conventional

conforming loan and a conventional non-conforming
loan?
3. What are the qualifying requirements (4C’s) for FHA, VA

and USDA mortgages?
Programs
The 4C’s
Programs
In this chapter we’ll discuss Conventional and Non-Conventional mortgage loan programs. Each program offers
their own version of fixed rate mortgages, ARMs and reverse mortgages. Some include products with unique
characteristics - for example a product like the Graduated Payment Mortgage is available only from the FHA, but no
other government agency.
The 4C’s
We’ll talk more about underwriting later in this course, but for now you need to know that each lender underwrites
loans before closing. Through this process, they evaluate whether the borrower meets certain qualification
requirements to be approved for a mortgage loan. The qualifications GSEs and lenders evaluate fall into what we
call the 4Cs: credit, capacity, collateral, and cash.
When we describe loan programs through this section, you will see that each loan program also has unique
qualification requirements. In the Mortgage Math 1 chapter, we do a deep dive on what the qualification ratios
described in the 4Cs are, and how they are calculated. For now, you will want to know the unique qualifications for
each loan program, because they will tell you which program is the best fit for each client and their needs.
Credit Capacity
This is where we will look at the borrower’s credit This is where we will look at the client’s gross
report, which tells us the borrower’s credit score monthly income in comparison to their monthly
and summarizes their current debt obligations. debt (debt to income ratio). This will tell us what is
The credit report/score is a good indication of how affordable for the client. See more in the Mortgage
reliable our borrowers have been in paying back Math 1 chapter.
debts. See more in the Application chapter.
Collateral Cash
This is where we measure the loan amount in Also known as assets, this is any money the client
comparison to the home’s value (loan to value). See has in a bank account, retirement account, etc.
more in the Mortgage Math 1 chapter.
Things To Know
Remember from our Agencies chapter, GSEs, or Government Sponsored Enterprises, are private
entities created for a public purpose. Fannie Mae and Freddie Mac, are the GSEs that are involved
in the mortgage industry. Fannie and Freddie establish standards for conventional conforming
mortgages that are then bundled as financial products and sold to investors in the secondary
market. By the way, do you remember which federal agency oversees the GSEs? (HUD!)
Conventional Loans
Conventional means setting the standard. Conventional mortgages were the first type of mortgages available, so
they set the standard. When mortgages were first created, they were only available through private lenders and this
was the only way a borrower could finance the purchase of a home. At the time, they were not called conventional
mortgages, but as the industry evolved they became conventional because they were the original standard.
Today conventional mortgages are still private programs (meaning they are not government backed or insured),
but they are categorized into two different groups: Conventional Conforming mortgages and Conventional Non-
Conforming mortgages. Conforming loans meet the underwriting standards of Fannie Mae and Freddie Mac. Non-
conforming mortgages do not meet these guidelines, however are still not sponsored by the government.
Programs
Conventional Conforming Loans

Fannie And Freddie Mac
The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac) are government sponsored enterprises (GSE) that set the underwriting standards for Conventional
Conforming mortgages. Even though Fannie and Freddie are GSEs, they are NOT insured or guaranteed by the
government.
Remember, GSEs are private entities created for a public purpose. Fannie and Freddie were created to reduce cost
and improve the availability of money in the mortgage marketplace.
The way that Fannie and Freddie accomplish this purpose is by setting underwriting standards for mortgage loans.
If a lender makes a loan that meet these standards, it is considered a “conventional CONFORMING” mortgage,
because it conforms to Fannie and Freddie’s standard. These standards are typically higher than conventional non-
conforming loans and include a minimum level for credit scores, DTI, LTV, reserves, and a maximum loan amount
limit. If a loan conforms to their standards, Fannie and Freddie will buy the mortgage from the lender. This frees up
money for the lender to make more loans.
Fannie Mae
In 1938, President Franklin Roosevelt and the United States Congress created the Federal National Mortgage
Association (Fannie Mae) as an entity responsible for buying mortgages from lenders. The lenders could then use
the influx of capital to provide more loans. The agency along with FHA supported a methodology that created a
new wave of American home ownership for low and middle income borrowers.
Fannie Mae typically buys loans from larger lenders such as high volume depository institutions.
Freddie Mac
In 1968, Fannie Mae was spun off from the government into a publicly traded company. President Lyndon Johnson
made this decision due to the heavy toll the Vietnam War was taking on the federal budget. To counterbalance
Fannie Mae’s potential monopoly, the Federal Home Loan Mortgage Corporation (Freddie Mac) was created in
1970. Freddie Mac went public in 1989.
Freddie Mac typically works with small lenders. These lenders are often referred to as thrifts.
Conventional Conforming Loan Qualifying Standards
Fannie and Freddie ensure liquidity in the marketplace by purchasing loans that meet their standard. These
standards include limits on the size of loans established annually by the Federal Housing Finance Agency (FHFA)
based on changes in median home price. The limitations on loan amounts, as shown in the chart, determine
whether or not a loan qualifies as a conforming loan.
Conventional conforming mortgage loans can be fixed-rate mortgages, ARMs, hybrid ARMs, or super conforming
mortgages. Super conforming mortgage loans are for high-cost areas that require larger loan amounts. During
the financial crisis of 2008, many loan programs that supported loan amounts exceeding the FHFA loan limits
were pulled from the market. Recognizing the need to service higher loan amounts, Fannie Mae and Freddie Mac
worked with FHFA to increase loan limits for high-cost areas. These higher loan amounts are super conforming
loans.1
Location 1 Unit 2 Units 3 units 4 units
Contiguous States and Puerto Rico $647,200 $828,700 $1,001,650 $1,244,850

Alaska, Guam, Hawaii, and US Virgin Islands $970,800 $1,243,050 $1,502,475 $1,803,000
Conforming mortgages with limited risk are considered A-paper or prime loans and would involve a borrower with
a FICO score greater than 680, an LTV less than 80%, and a DTI of less than 36%.
1 https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Conforming-Loan-Limits-for-2022.aspx

Programs
Credit Capacity
To qualify for a conventional conforming loan the The DTI ratio standards for conforming loans are
consumer’s FICO score should be 620 or higher. generally a 28% housing DTI ratio (front-end) and a
36% total DTI ratio (back-end) with an allowance of up
to 45% with compensating factors such as substantial
assets.
Non-taxable income, such as social security, disability,
charitable donations, life insurance payouts, child
support, or any public assistance, can be grossed up
by 25% (for a total of 125% of the income).
A 2-year average of overtime and/or bonuses the
consumer receives should be considered. 75% of rental
income can be utilized in determining total monthly
income.
If a revolving debt does not state a monthly payment
on the credit report, 5% of the debt must be included
in the consumer’s total monthly liabilities.
Collateral Cash
A standard appraisal must be completed by a The consumer will need to prove asset reserves for
licensed/certified appraiser. Maximum LTV will certain programs. For example, mortgage loans for
vary depending on loan program and occupancy investment properties usually require up to 6 months
status. For investment properties, requirements of reserves to be verified.
are more strict. For purchase loans, the maximum If the consumer is bringing money to the closing of a
LTV is 95%. mortgage loan transaction, then the source of those
funds must be verified.1
1 Fannie Mae. Selling Guide: Fannie Mae Single Family, pp. 320-401. Retrieved from https://www.fanniemae.com/content/guide/sel052813.pdf
Conventional Conforming Loan Particulars

Fees
Fannie Mae and Freddie Mac do not set any limitations for mortgage loan fees. Fees must be compliant with
federal regulations.
Unique Features
Conventional loans allow consumers to get a loan for a second home or an investment property, in addition to a
primary home.
Securitization
Fannie and Freddie package the loans they purchase into collateralized debt obligations (CDO) called
mortgage backed securities (MBS), which they then sell to investors in the financial market. We’ll review
this more in a later unit.
Programs
Conventional Conforming Purchase Loans

Down Payment
As an overall minimum, Fannie Mae and Freddie Mac require a 95% LTV (5% down payment) for 1-unit primary
residences. Second homes and investment properties require a lower LTV (greater down payment) due to the
increased risk factor. The minimums for eligible programs may vary depending on the following factors:
• Number of property units
• Occupancy: principal, second, or investment property
• Automated underwriting vs. manual underwriting
• Credit score, if applicable
• Transaction type: purchase, limited cash-out refinance, or cash-out refinance
• Mortgage program type: fixed, ARM
Seller Concessions
In a purchase transaction, the seller may pay a percentage of the buyer’s closing costs. If the buyer obtains a
conforming mortgage loan, the maximum amount the buyer can receive from the seller is 6% of the purchase
price if the buyer puts a down payment of 10% or more toward the purchase. If the buyer decides to put down less
than 10%, the maximum seller concessions are 3%. Lastly, if the buyer is purchasing an investment property, the
maximum seller concessions are 2% regardless of how much the buyer puts down.

Programs
Conventional Non-Conforming Loans
Conventional Non-Conforming Loans

A non-conforming mortgage loan is a conventional loan that does not meet the requirements established by
Fannie Mae and Freddie Mac. This type of financing is considered riskier than a conforming mortgage loan. Non-
conforming loans usually have lower qualification standards and higher costs and fees. A non-conforming loan can
either remain in the lender’s portfolio or be securitized by the lender and then sold to an investor as an MBS.
What Is A Conventional Non-Conforming Loan?

Non-conforming mortgages may be considered non-conforming even if the loan only misses one of Fannie or
Freddie’s qualifying standards. An example of this could be the Alt-A borrower who shows lower-income, but was
still considered less-risky by the lender.
Because conventional non-conforming loans are by their nature NON-CONFORMING, there are no specific set
qualifying requirements.
To be clear, there’s nothing wrong about non-conforming mortgages. Depending on the circumstance, they may fit
a particular borrower’s need. And simply because someone has lower or different qualifications doesn’t mean that
the loan they receive is a bad product or from a unscrupulous lender.
Types Of Conventional Non-Conforming Loans

Forms of non-conforming mortgage loans include:
• Jumbo Loans: Mortgages that exceed the loan limits established by the Federal Housing Finance Agency
(FHFA) and thus do not meet the standards set for conforming mortgages.
• Niche Loans: Provided under special or unique circumstances by private lenders.
Example: A borrower has little to no credit and/or work history, but a high level of net worth and the
lender makes the loan based on their net worth; think of a young NBA player who just signed a multi-
million dollar contract.
• Non-Traditional ARMs: An option ARM could be an example of a non-traditional ARM.
• Graduated Payment Mortgages (GPM): Because of its negatively amortizing features, a GPM could be a
non-conforming loan.
• Sub-Prime Mortgages: Loans for borrowers with lower qualifications, such as poor credit or bankruptcies.
Non-Conventional Mortgage Loans (Government Loans)

Non-conventional mortgages are also known as government mortgages. The reason they’re considered non-
conventional is because they were created to meet a public need not being filled by conventional mortgage loan
programs.
Non-conventional mortgage loans are offered from three different program providers: the Federal Housing
Administration (FHA), the Department of Veteran Affairs (VA), and the United States Department of Agriculture
(USDA). While the FHA loan program is accessible for all Americans that meet its qualification standards, both VA
and USDA loans do come with some restrictions as to who can apply and qualify for their products.
Each one of these programs provide loans that are accompanied by some kind of government insurance or
guaranty. It is this guaranty that provides lenders with the assurance that they will be compensated even in the case
of borrower default. This encourages lenders to offer non-conventional loans to their borrowers.
The next few pages will discuss the different programs, which are “backed by the full faith and credit of the United
States government.”
Programs
FHA Mortgage Loans

The Federal Housing Administration (FHA) offers a variety of mortgage products to consumers. In comparison
to conventional conforming products, FHA loans have lower qualification requirements and therefore are more
accessible to consumers. These qualifications include lower credit score, LTV, DTI, and reserves, but share similar
loan limit requirements of conventional conforming loans.
FHA Products
The following are some of the more common FHA loan products:
• 203b Fixed Rate Mortgages: 15, 20, 25, 30 year terms
• 203(k) Rehab and Repair: Used for repairing a home
• 204(g) Good Neighbor Next Door (GNND): This program provides a 50% discount for law enforcement
officers, teachers, firefighters, and emergency medical technicians to purchase homes in revitalization
areas. Eligible single-family homes are listed exclusively for sale through the Good Neighbor Next Door
Sales program. Properties are available for purchase through the program for 5 days. Borrowers must agree
to live in the home for a minimum of 3 years.2
• 232: Residential Care Facilities financing
• 234(c): Used for condominiums
• 242: Hospital financing
• 245(a) Growing Equity Mortgage (GEM): This is where a borrower pays a little extra to gain more equity
sooner
• 251 Adjustable Rate Mortgages (ARM): 5/1 and 7/1
• 255 Home Equity Conversion Mortgage (HECM): The FHA Reverse mortgage (AKA - HECM) was introduced
in 1987 as part of the National Housing Act. Designed to provide governmental stability to the reverse
mortgage marketplace, the HECM program can be used to purchase or refinance a home.
• 513 Energy Efficient Mortgages (EEM): Originally piloted by a congressional mandate in 1992 and
expanded as a national program in 1995, Energy Efficient mortgages helps homeowners reduce their
utilities usage by adding energy saving features to their home. An EEM allows the homeowner to purchase
or refinance their home and incorporate the cost of energy improvements into the mortgage without
qualifying for, or making a down payment on, the improvement costs. EEMs can be used in conjunction
with most existing FHA programs. The borrower must be eligible for a maximum FHA-insured loan using
standard underwriting procedures and make a 3.5% down payment.
The cost of the energy improvements plus the cost of reports and inspections needs to be less than the following
amounts:
• 5% of the value of the property
• 5% of 115% of the median area price of a single family dwelling
• 5% of 150% of the conforming Freddie Mac limit.3
2 U.S. Department of Housing and Urban Development.. II. Origination Through Post-Closing/Endorsement A. Title II Insured Housing Programs Forward Mortgages Retrieved from http://portal.hud.gov/hudportal/
documents/huddoc?id=40001HSGH.pdf
3 Department of Housing and Urban Development.II. Origination Through Post-Closing/Endorsement A. Title II Insured Housing Programs Forward Mortgages Retrieved from http://portal.hud.gov/hudportal
documents/huddoc?id=40001HSGH.pdf
Programs
FHA Loan Qualifying Standards
Credit Capacity
Mortgage late payments, bankruptcies, and The ratios used to qualify a mortgage loan applicant
seriously delinquent accounts could prevent a based on their ability to repay an FHA loan are
borrower from being eligible for this mortgage loan. generally a 31% housing DTI ratio and a 43% total DTI
A credit score of 580 makes a borrower eligible ratio.
for maximum financing. A 500-579 score limits a
borrower to a 90% LTV eligibility. And a score below
500 disqualifies a borrower.
Collateral Cash
The livable condition of the home and its appraised At closing, the borrower may need to bring cash to
value will determine whether or not it qualifies for an cover closing costs and prepaid items (property taxes
FHA loan. The consumer may be required to make and insurance, or a down payment requirement on
minor home repairs, such as adding hand rails for a a purchase loan). The borrower must demonstrate
staircase or repairing water damage. For purchase that they have these funds available through asset
loans, the maximum LTV is 96.5%. For a refinance verification (checking or savings account statement,
loan, a maximum LTV of 97.75%. money market account, 401K retirement account,
etc.). Gift funds received from a relative are acceptable
as long as there is a statement (gift letter) from the gift
donor.
FHA Mortgage Loan Particulars

Fees
For an FHA loan, mortgage lenders are able to charge borrowers “customary and reasonable” costs needed to
close the mortgage loan. The following are considered to be customary and reasonable:
• Lender origination fee
• Attorney’s fee
• Appraisal fee
• Home inspection fee
• Title insurance
• Title examination fee
• Document preparation fee
• Property survey fee
• Credit report fee
• Transfer stamps
• Recording fee
• Taxes
As an additional note, the FHA does not consider a processing fee or an expediting fee to be customary
and reasonable.
Unique Features
If a property with FHA financing is re-sold within 90 days of the date of its purchase, the property will not be
eligible for a FHA mortgage loan.
Programs
Mortgage Insurance
The FHA mortgage program thrives because of the protections provided through Mortgage Insurance Premiums
(MIP) to lenders. MIP provides support for lenders in the case of borrower default. There are two forms of MIP -
both of which are required with FHA loans. Here’s a basic explanation of how mortgage insurance premiums work.
At the time of closing, the borrower pays their UFMIP and then includes their MIP payment as part of their monthly
payment to the mortgage servicer. If the borrower defaults (doesn’t pay) the mortgage payment and the home is
foreclosed upon, the lender can sell the home to recoup (get back) the principal balance owed by the borrower.
If the house sells for less than the balance due, the FHA will provide the lender with the difference. Through the
collection of mortgage insurance, FHA provides certainty and support to lenders. This insurance makes lenders
more willing to write loans for borrowers who meet FHA’s lower qualifying standards because they know they are
protected in case of default.
• UFMIP
Up Front Mortgage Insurance Premium: This is a one-time fee charged to the borrower at closing. It is a
standard 1.75% of the loan amount and may be rolled into the amount financed by the borrower4.
• MIP
Mortgage Insurance Premium: This is a fee calculated annually and paid monthly that is included with
the borrower’s PITI payment (MIP is part of that second “I” for insurances). The amount required for MIP
is based upon the term, loan amount, and initial LTV of the mortgage.
FHA Purchase Transactions
Down Payment
With an FHA purchase loan, a borrower must provide at least 3.5% of the purchase price of the home as the down
payment. Because of this, the maximum LTV for most FHA purchase loans is 96.5%. (The maximum LTV for most
FHA refinance mortgage loans is 97.75%) For properties under construction or existing construction less than a
year old, the maximum LTV is 90%—the borrower would have to make a down payment of 10% of the purchase
price. The minimum credit scores for FHA financing affect qualifications. Therefore, not all consumers will qualify
for the low minimum down payment amount.
Seller Concessions
In a purchase transaction the seller is able to pay a percentage of the buyer’s closing costs. If the buyer obtains a
FHA mortgage loan, the maximum amount the buyer can receive from the seller is 6% of the purchase price. These
seller concessions cannot be considered as a cash reserve for the borrower, and they may only be applied towards
allowable closing costs and prepaid items. Regardless of the amount of seller concessions in an FHA purchase
transaction, the borrower must still provide at least a 3.5% down payment.
Qualifying Standards For FHA HECM Loans
Qualifying differs with FHA’s HECM product. As a reminder, a HECM is the FHA’s reverse mortgage program. The
HECM is focused specifically on the value of the property involved. While the borrower’s credit history and financial
capacity needs to be verified, there are no minimum requirement thresholds. Timely payment of the borrower’s
property taxes, hazard and flood insurance premiums (if applicable) will be verified as well.
Instead of traditional LTV ratios to determine how much money the borrower can receive, the underwriter
calculates the Principal Limit (PL) based on:
• Age of the youngest borrower
• Current interest rate
• Maximum claim amount (lesser of the appraised value, sales price, or mortgage limit of $822,325).5
• Initial Mortgage Insurance Premium
A HECM mortgage loan becomes due and payable upon certain conditions such as death of the last surviving
borrower. In cases where there is a non-borrowing spouse, if the borrower passes then the due and payable
status will be deferred (postponed) for as long as the non-borrowing spouse continues to meet all qualifying
requirements for the loan.
4 FHA Single Family Housing Policy Handbook (Handbook 4000.1).

5 “Mortgagee Letter 2018-12.” HUD, 12/14/2018. https://www.hud.gov/program_offices/housing/sfh/lender/origination/mortgage_limits
Programs
HECM Purchase
The FHA HECM allows seniors to purchase a new primary residence with its reverse mortgage program. Using the
loan proceeds of a reverse mortgage to purchase a home enables senior homeowners to relocate closer to family
or to downsize to homes that meet their physical needs.
If the home being purchased is newly constructed, it must be 100% complete at the time of inspection and initial
application. Seller concessions are not applicable to HECMs. The cash investment in the property must equal the
difference between the amount of the insured mortgage, excluding any upfront MIP, and the total cost to purchase
the property (closing costs).
HECM Particulars
HECM costs include ongoing and initial costs. Accrued interest and annual Mortgage Insurance Premium (MIP) are
ongoing costs. The following are initial costs:
• UFMIP - 2%
• MIP - .5%
• Origination Fee - Up to $2,500 for loans less than $125,000. For loans $125,000 or greater the fee is 2% of
the first $200,000 and then 1% of anything beyond the first $200,000 with a maximum of $6,000 total.
• Third-Party Costs - Appraisal, title insurance, survey, inspection fees, recording fees and taxes, credit report
fee, attorney’s fees, etc.
• Servicing Fee - Covers the cost of managing the administrative responsibilities of the loan.
VA Mortgage Loans
VA mortgage loans are non-conventional loans that are guaranteed by the Department of Veterans Affairs.
Loan Eligibility
Mortgage loans provided by the Department of Veterans Affairs (VA) are specifically and only for active duty and
retired military personnel and eligible spouses, along with surviving spouses. VA loans were initially created to
provide financial support for returning military veterans and their families after World War II. Since that time, the
program has flourished through the well-deserved benefits provided to VA borrowers.
A VA loan is only available on primary homes and may not be used for investment properties or secondary homes.
The transaction can be for a purchase, refinance, construction, land contract, or assumption loan. Unlike FHA
loans, VA loans do not impose a maximum loan amount for qualification.
Eligibility for a VA mortgage requires more than a borrower’s qualification as a veteran; it also depends on the
length and character of the veteran’s service. The borrower’s level of eligibility is documented on a Certificate
of Eligibility (COE). To request a COE for VA home loan benefits, a veteran submits a VA Form 26-1880 to the
Atlanta Regional Loan Center. The COE is mailed directly to the veteran. Veterans in the Reserves, National
Guard, or on active duty must also obtain a signed statement of service issued by their commanding officer. A
veteran dishonorably released or discharged from military service does not qualify for a VA mortgage. A DD Form
214 is needed to prove a veteran was released or discharged from active duty under any condition other than
dishonorable.
Products
VA loans are available in fixed rate, adjustable rate, and energy efficient mortgage loan products. Even though
they’re government loans, they carry much of the same qualifying standards as conventional conforming
mortgages.
VA guarantees 30-, 25-, 20- and 15-year fixed rate mortgage programs as well as ARM programs.
VA ARM programs have a 1% annual interest rate cap and a 5% lifetime interest rate cap for 1- and 3-year hybrid
ARMs. As with all ARMs, the interest rate caps remain throughout the life of the loan.
VA Energy Efficient Mortgage (EEM): Just like FHA EEMs, VA EEMs are loans to cover the cost of making energy
efficiency improvements to a home. They can be made in conjunction with a VA loan for the purchase of an
existing home or a VA refinancing loan.
Programs
VA Loan Qualifying Standards
The VA program also uses the 4 Cs to determine the creditworthiness of a mortgage loan applicant.
Credit Capacity
Credit history standards are similar to other The VA requires a pay stub from within the last 60 days.
government programs as well as Fannie Mae and The ratio used to qualify a mortgage loan applicant
Freddie Mac programs. The VA specifically requires based on their ability to repay a VA loan is usually a
that the borrower’s qualifying credit report must be 41% total DTI. The VA also includes a residual income
less than 120 days old. threshold as a factor for determining loan suitability for
applicants. Because regular expenses such as food,
clothing, and gasoline are paid out of the residual, VA
uses the residual income factor to ensure that the new
mortgage will not put an unnecessary strain on the
prospective borrower’s household budget. Residual
income requirements vary by region and family size.
Even though these residual income requirements are
a factor in determining borrower qualification, a failure
to meet the threshold does not cause immediate
application rejection.
Collateral Cash
Once the appraisal is complete, the VA will issue a At closing, the borrower may need to bring cash to
Certificate of Reasonable Value (CRV) that shows cover closing costs and prepaid items (property taxes
the property’s current market value based on the and insurance, or a down payment requirement on
appraisal. The CRV does not include information a purchase loan). The borrower must demonstrate
regarding any defects associated with the property. that they have these funds available through asset
A VA appraisal is valid for up to 180 days. Maximum verification (checking or savings account statement,
LTV is 100%. money market account, 401K retirement account, etc.).
Gift funds received from a relative are acceptable as
long as there is a statement (gift letter) from the gift
donor.
Programs
VA Loan Particulars
Funding Fee, Entitlement, And Guaranty
Rather than insurance, the VA requires a funding fee on its loans that work to help support the costs of entitlement
and guaranty for their Veteran borrowers.
Below is a high-level overview of these concepts. See the Insurances section for more details.
Funding Fee
This is a one time fee, required by the VA to be paid VA Funding Fees
by the borrower and added to the loan amount. The (Based on LTV, may be included in the loan amount
fee amount depends on the veteran’s circumstances,
such as if they had a previous VA loan. The fee provided the loan amount does not exceed the allowable
ranges from 0.5% to 3.60%. For example, the funding VA limits)
fee on a purchase VA loan with no down payment is
Active National
a set 2.30%. The funding fee is waived for veterans Loan Down
who are eligible for military disability classification Duty/ Guard/
Type Payment %
and surviving spouses of veterans deceased due to Veteran Reserve
military activities.
First Time Use Of VA Loan Guaranty Benefits
The funding fee may be waived if the Veteran has
a documented disability due to military service. A 0% down 2.30% 2.30%
funding fee refund may be allowed when a veteran
paid the fee despite being exempt (disability)
Purchase 5% down 1.65% 1.65%
or when there was an overpayment due to a
miscalculation.1
10% down 1.40% 1.40%
Entitlement
This is the amount that a veteran can be Cash-out Refi N/A 2.30% 2.30%
guaranteed for a VA mortgage loan; it is on the
COE. The entitlement is the basis upon which a Second Or Subsequent Use Of
guaranty will be provided to the lender in case VA Loan Guaranty Benefits
of borrower default. The basic entitlement that
VA offers is $36,000 for loans of $144,000 or less. 0% down 3.60% 3.60%
For loans greater than $144,000, VA offers an
increased entitlement amount of 25% of the loan Purchase 5% down 1.65% 1.65%
amount to help with down payments in higher
cost areas. Entitlement is not given in the form 10% down 1.40% 1.40%
of cash or checks directly to the veteran, and it
cannot be exchanged for cash. 2 Cash-out Refi N/A 3.60% 3.60%
Guaranty
Various Other Types Of Transactions
This is the amount VA may pay a lender in the event
of loss due to foreclosure. The maximum guaranty VA
will issue is 25% of the value of the loan amount for IRRRL N/A 0.50% 0.50%
homes valued at $453,100 or less. This guaranty can
come from a client’s available entitlement. There are Assumptions N/A 0.50% 0.50%
some rare exceptions made for expanded guaranty
limits in some of the more high-cost U.S. counties.
VA determines the maximum guaranty amount for these counties by establishing limits. VA uses the same loan
limits as Fannie and Freddie, which are set by FHFA. The maximum guaranty amount (available for loans over
$144,000) is 25% of this loan limit. A veteran with full entitlement available may borrow up to the limit and VA will
guarantee 25% of the loan amount. If the veteran’s loan amount exceeds the limit, they may be required to supply
a down payment to meet the required 25% guaranty. If a veteran has previously used entitlement that has not
been restored, the maximum guaranty amount available to that veteran is reduced accordingly.3
1 U.S. Department of Veteran Affairs. Lenders Handbook – VA Pamphlet 26-7, pp.8-17-22. Retrieved from http://www.benefits.va.gov/WARMS/ docs/admin26/handbook/ChapterLendersHanbookChapter8.pdf
2 U.S. Department of Veteran Affairs. Loan Limits. Retrieved from http://www.benefits.va.gov/homeloans/purchaseco_loan_limits.asp
3 U.S. Department of Veteran Affairs. 2012 VA County Loan Limits. Retrieved from http://www.benefits.va.gov/homeloans/documents/docs/Loan_ Limits_2012_Dec_2011.pdf
Programs
Fees
For a VA loan, mortgage lenders may charge borrowers “customary and reasonable” costs needed to close the
mortgage loan. Brokerage fees cannot be charged on a VA mortgage loan. The typical origination fee charged by
a mortgage lender for a VA mortgage is 1%.
Unique Features
With VA loan programs, it is essential that certain forms, such as the COE and DD Form 214, are provided. Often
a Leave and Earnings Statement (LES) is requested from a borrower. This is essentially a pay stub for military and
government workers.
Additionally, in order to qualify for a VA loan, clients must meet a specific residual income threshold, which varies
depending on the size of the family and location.
VA Purchase Loans
Down Payment
The VA offers purchase and refinance loan programs that require no down payment or equity, and therefore 100%
financing is available.
Seller Concessions
If the buyer obtains a VA mortgage loan, the maximum amount of concessions the buyer can receive from the
seller is 4% of the purchase price.
Programs
USDA Mortgage Loans

USDA mortgage loans are non-conventional loans guaranteed by the U.S. Department of Agriculture.
USDA Basics
Just as VA loans are restricted to military personnel, United States Department of Agriculture (USDA) loans are
restricted to properties in designated rural areas. Rural is defined very broadly in USDA requirements and may
include towns and small cities. For the sake of simplicity, let’s consider that for a property to be called rural, it
should be in open country and not associated with an urban area.
The purpose of USDA loans is not for farms (we know, you’d think that a loan from the Department of Agriculture
would be for farms - in fact USDA expressly prohibits their loans to be used for income producing properties
like farms). Instead, USDA loans are really meant for people who work in the agriculture industry or support that
industry. Think about how few apartment buildings or rental properties are located in rural areas. Finding housing
if you work on a farm or for a business that works with the farming industry could be very challenging, so the need
for housing financing in rural areas is a necessity.
USDA Products
Section 502 Direct Housing Loan Program
Also known as USDA Direct, this program is available in terms of 33-38 years and is available to low income
borrowers.
Single Family Housing Guaranteed Loan Program
Also known as SFHGLP or Guaranteed, this program is only available in the form of a 30-year fixed rate mortgage
and is designed for moderate income borrowers.
USDA Backing
As the FHA requires MIP and VA requires the Funding Fee, the SFHGLP requires a Guarantee Fee paid at closing
and an Annual Fee that is paid in monthly installments beginning 12 months after loan closing. Both the
Guarantee Fee and the Annual Fee function similarly to other government loans - they provide assurances to
lenders in case of borrower default.1
USDA Loan Qualifying Standards
The USDA program uses the 4 Cs to determine the creditworthiness of a mortgage loan applicant.
Credit Capacity
Mortgage late payments, bankruptcies, and The ratios used to qualify a mortgage loan applicant
seriously delinquent accounts could prevent a based on their ability to repay a USDA loan are
borrower from being eligible for this mortgage loan, generally a 29% housing DTI ratio and a 41% total DTI
but there are no specific credit rating requirements. for the SFHGLP (guaranteed loan). For the 502 Direct
Housing Loan, USDA requires the borrower to prove
they have low income based on area median income.
Collateral Cash
A standard USDA appraisal is needed. Properties No specific asset verification requirements exist.
cannot be located in a floodplain — defined as
landforms subject to repeated flooding. Maximum
LTV is 100%.
Programs
USDA Mortgage Loan Particulars

Fees
For a USDA loan, there are no fee limitations. Fees must comply with federal regulations.
Unique Features
These mortgage loans are distinct because they are made in rural areas. Some USDA loan products can
be longer than 30 years. And some USDA loans can be used for home repairs finished after closing.
USDA Purchase Loans

Down Payment
The USDA offers purchase loan programs that require no down payment, and therefore 100% financing is
available.
Seller Concessions
With a USDA loan, the amount of seller concessions a buyer can receive in a purchase transaction is unlimited. If,
however, the amount of seller concessions exceeds 6%, a comment from the appraiser is required explaining why
a greater amount is needed.
Mortgage Programs
Conventional Non-Conventional
Not backed by the government Backed by the government
Conforming Non-Conforming FHA VA USDA
Meets
standards set No specified
by Fannie Mae standards
and Freddie
Mac
Programs
Complete the chart below.
Credit Capacity Capacity Collateral Mortgage Unique

Insurance Loan
(Minimum (Maximum (Maximum (Maximum Charac.
Credit Score) Housing Total Back- LTV)
Front-End End DTI)
DTI)
(LTV >80%)
Conventional Private
Conforming Mortgage
Insurance
Conventional
Non- No Specified Standards
Conforming
UFMIP
FHA
& MIP
Funding Fee,
VA Entitlement,
Guaranty
Guarantee
USDA Fee, Annual
Fee
1. If a loan conforms to their standards, Fannie or Freddie may ___________ the mortgage from the
________________________.
Breakout session:
1. Why were non-conventional loans created?
09 Application
1. What are the 6 pieces of information that make up a

completed application?
2. What is the difference between a co-borrower and a co-

signer?
3. Why is permissible purpose necessary?
4. In which section of the URLA is the MLO required to ask

government monitoring questions? Why is the MLO
required to ask these questions?
Application
Complete Application VS. The Application
Application
The mortgage loan application can be one of two things. In the eyes of some of the biggest laws and rules that
govern our industry like RESPA (The Real Estate Settlement Procedures Act, Regulation X), TILA (The Truth in
Lending Act, Regulation Z) and their jointly corresponding TRID (TILA-RESPA Integrated Disclosure Rule) the
meaning of a complete application is simply when the consumer provides the mortgage loan originator with the six
pieces of information needed to apply for credit.
On the other hand, the actual form we use in our industry to record the consumer’s information, qualifications and
loan information is called the Uniform Residential Loan Application (URLA or 1003).
In this chapter we’ll touch on what the law says is a complete application and the responsibilities borrowers and
co-signers have. We will then discuss the physical application form and process, including a breakdown of the URLA
into easy to understand sections.

Complete Application
What does it mean to complete an application for credit? You may think it means filling out some forms, providing
some documents and crossing your fingers, but in mortgage law it really means when the consumer provides the
mortgage loan originator with the six key pieces of information needed to apply for credit.
This complete application can be provided to an MLO in writing, through an electronic submission process, or
verbally. If it is provided verbally, the MLO must keep a written or electronic record. However, these 6 pieces will
typically be recorded on the Uniform Residential Loan Application.
The six pieces of information include:
• Address of the property to be mortgaged
• Loan amount sought
• Borrower’s Income
• Estimated value of property
• Borrower’s Name
• Borrower’s Social Security Number
HMMM...
1. The complete application ≠ Filled out or _______________________________________________.
Application
Let’s simplify this into an acronym to help remember the 6 items:
A ADDRESS OF THE PROPERTY
L LOAN AMOUNT
I INCOME
E ESTIMATED PROPERTY VALUE
N NAME
S SOCIAL SECURITY NUMBER
Take another look at those six items and consider how they’re the only things needed to apply for credit.
How can that be? Well…
We need the property address so that an appraisal and title work can be done.
The loan amount will allow us to determine the LTV once the appraisal is complete, but prior to that we can
compare it with the estimated property value.
The borrower’s income will help us determine the borrower’s DTI. As a side note, this will also probably
provide us with the information to confirm their employment.
The property’s estimated value will allow us to provide an initial determination of collateral qualification.
The borrower’s name… that’s it.
The borrower’s social security number is needed to pull a credit a report. The information in the credit
report will provide not only the consumer’s credit score, but will also show if they initially meet the
standards for qualification. The credit report reveals a wealth of information as it relates to the borrower’s
debt obligations that must be considered when calculating their DTI.
4
Application
Borrower Information
Who’s Responsible?
During the mortgage loan origination process both the mortgage loan originator and the borrower have
responsibilities in providing and ensuring that the application is correct.
Consumer
The consumer is ultimately responsible for the information they provide on the application. Providing accurate
information allows consumers to properly qualify for a mortgage loan that fits their situation.
Simple mistakes such as misspellings and the omission of information are typical and considered bona fide errors.
However, falsifying any information to gain approval for a mortgage loan is considered fraud and is punishable by
law. By signing the application, the consumer acknowledges the truthfulness of the information they have provided.
Mortgage Loan Originator

Technically the mortgage loan originator assists the borrower with completing the application (because the
borrower is the one responsible for the information they provide). The MLO is the expert and therefore helps
determine the suitability of mortgage loan products and programs for a consumer. There must be an advantage,
or tangible net benefit, for a mortgage loan to be suitable for a borrower. For example, with a refinance, simply
providing a lower monthly payment may not be a tangible net benefit if the length of the mortgage term is
extended. On the other hand, if providing a lower monthly payment over a longer term helps the borrower meet
their current financial obligations more effectively, it is a tangible net benefit.
When taking an application, the loan originator must assist the consumer in filling out the application accurately
and must check for any mistakes. It is considered fraud and is punishable by law if the loan originator falsifies or
alters any information on the URLA. During this time, it is important for the loan originator to properly explain all
possible risks associated with the borrower’s new loan.
The following are some additional examples of tangible net benefit:

• Lower interest rate
• Consolidation of debt
• Shorter amortization schedule
• Changing from an adjustable rate to a fixed rate
• Eliminating a negative amortization feature
• Eliminating a balloon payment feature
• Receiving a cash-out from the new loan in an amount greater than all closing costs incurred in connection with
the loan
• Avoiding the likelihood of foreclosure
• Eliminating mortgage insurance
Application
(co)Borrower vs. (co)Signer

A co-borrower is somebody who is both on title (has ownership rights) and on the loan. A mortgage loan can have
as many co-borrowers as desired.
A co-signer is somebody who is on the loan but does not have ownership of the property. A co-signer is an
individual who provides their qualifications to assist the borrower in receiving the loan. Typically, a co-signer is
included on the loan application because the borrower is unable to qualify without the co-signer’s qualifications.
Co-signers do not have ownership rights to the property.
Regardless of whether they are a borrower or co-signer, all applicants on the loan application will have equal
responsibility for the debt. The difference is the consequence of the debt not being paid. For co-borrowers, if the
debt is not paid, the borrowers will lose their home and damage their credit history. For the co-signer, because they
do not have ownership rights to the property, they won’t lose their home, but it will still damage their credit.
Accuracy
Since the borrower is the one responsible for what goes on the application, we want to make sure that the
information is as accurate as possible. Certainly there will be times when the borrower makes an innocent error with
the information they provide.
Perhaps they work hourly and make $25/hour. Normally, their weekly income is $1,000, but occasionally they work
overtime and make $1,200 per week. You happen to talk to them while they’re looking at their most recent pay stub
and right at the bottom it says $1,200, so they tell you, “I make $1,200 per week.” This could certainly be an innocent
error. Perhaps when asked about their property tax bill, they tell you they think it’s $3,000/year. They realize later
it’s closer to $4,500. That’s okay, most people don’t think about taxes, so it’s not unusual for them to mistake the
number.
We should do our best when assisting the borrower to get the most accurate information possible. Even the
simplest error could result in improper initial qualification for the borrower. This could cause the loan to be
suspended in process and ultimately lead to the loan being denied. Nobody wants that, so when you’re helping the
borrower fill out the URLA, make sure they understand how important accuracy is with the information they provide.
If possible, tell them in advance some of the questions you’ll be asking so that they’re prepared with the answers.
Even better, let them know what documents will be needed by the underwriter when processing and verifying their
loan, and have them bring the paperwork with them for the application discussion. That way they’ll already have the
necessary documents and you can review them together to ensure the information is correct.
1. The responsibilities of a borrower and signer are:

• Borrower: __________________________________________________________
• Signer: __________________________________________________________
20 20 Hour
Hour SAFE
MortgageEducation
Education(NMLS
(NMLS10527)
10527)- Version 4 4
- Version 115
Application
Mortgage Fraud
We’ll talk more in depth about mortgage fraud in a couple of the other units in this course but we wanted to take a
moment to touch on it here. The time of application is crucial in establishing with your borrower the importance of
being truthful and honest with the information that they provide on the application. They may not realize it but lying
on the application is a punishable offense with as much as a $1 million fine and/or 30 years in prison. Given the
severity of the penalty, it’s wise that the borrower understands not only how important it is to tell the truth but also
that if they insist on lying, it’s fraud.
Credit Report
Typically one of the first things a mortgage loan originator will do as part of the application process is to look at the
consumer’s credit report. This is known in the industry as a credit pull. You will likely do this before you do anything
else, because the information it provides can tell you very quickly if the consumer will be able to qualify at all and,
if so, for what type of product and program. To do the credit pull you’ll need the borrower’s name, social security
number, date of birth, and current address.
Once the MLO reviews the credit report, they can determine the likelihood that the borrower may qualify for the loan
product and program they need. Given the volume of information provided on the credit report, many consumers
and MLOs choose not to move forward in the application process based on derogatory information provided on the
report.
Permissible Purpose
The MLO will also need permission from the consumer to access the report. This is known as permissible purpose.
Permissible purpose not only requires the consumer to agree to the credit pull, but the pull must also have a
valid purpose (PERMISSION + PURPOSE = Permissible Purpose). For us, the application for a mortgage loan is a
purpose.
Information On The Credit Report
The information on the credit report provides the borrower’s credit score and credit history including:
• Open and Closed Accounts - What credit accounts do they currently have as well as previous accounts?
• Payment History - Did they pay their bills on time and what kind of bills were they?
• Public Records Information - Do they have any legal judgments against them? Bankruptcies?
1. The maximum penalty for mortgage fraud is ______________________________ and/or a ______________________________.
With your group, discuss the following:

1. What can be found on the credit report?
2. How is that information useful when qualifying a borrower?
Application
Uniform Residential Loan Application

The Uniform Residential Loan Application (AKA: URLA, form 1003, the application) is the standard mortgage
application form used in almost all mortgage processes. Fannie Mae, Freddie Mac, and Ginnie Mae (FHA, VA and
USDA) require that all information needed for a mortgage loan be recorded on the URLA. While there is no law that
requires the URLA to be used for mortgage loans, if the lender ever expects to sell the mortgage in the secondary
market or meet non-conventional mortgage standards, they’ll need an URLA.
In this section, we’ll review each part of the URLA and briefly discuss what information is required. Just as a
reminder, bona fide errors in the complete application or the URLA are common and are not an indication of fraud.
But, to help reduce these errors, instructions are provided throughout the URLA to assist the consumer and the loan
originator in properly completing the application form.
The URLA is a dynamic document; if the borrower is not required to complete a section, it will not be visible to the
client while signing. The URLA is broken into nine sections, which include:
1 Borrower Information
2 Financial Information - Assets and Liabilities
3 Financial Information - Real Estate
4 Loan and Property Information
5 Declarations
6 Acknowledgments and Agreements
7 Military Service
8 Demographic Information
9 Loan Originator Information
Continuation Sheet
20 20
Hour SAFE
Hour Comprehensive:
MortgageEducation
Education(NMLS
(NMLS10527)
10527) - Version
- Version 4 4 117
Application
To start the application, it is noted that it must completed by the lender. The Agency Case Number is the number
assigned by the program provider such as FHA, VA, etc., and the Lender Case Number is the number the lender
assigns to track the loan internally throughout the process.
Section 1: Borrower Information To be completed by the Lender:

Lender Loan No./Universal Loan Identifier Agency Case No.
The purpose of the section is to establish that the Uniform Residential Loan Application
Verify and complete the information on this application. If you are applying for this loan with others, each additional Borrower must provide
consumer is responsible for the information on the information as directed by your Lender.
Section 1: Borrower Information. This section asks about your personal information and your income from
application. employment and other sources, such as retirement, that you want considered to qualify for this loan.
1a. Personal Information

To reinforce this responsibility, the borrower is expected Name (First, Middle, Last, Suffix) Social Security Number – –
(or Individual Taxpayer Identification Number)
to initial this section agreeing that they are completing Alternate Names – List any names by which you are known or any names
under which credit was previously received (First, Middle, Last, Suffix)
Date of Birth
(mm/dd/yyyy)
Citizenship
U.S. Citizen
the form to apply for credit. / / Permanent Resident Alien
Non-Permanent Resident Alien
Type of Credit List Name(s) of Other Borrower(s) Applying for this Loan
This section also provides a snapshot of the borrower’s I am applying for individual credit.
I am applying for joint credit. Total Number of Borrowers:
(First, Middle, Last, Suffix) – Use a separator between names
history, which includes: personal information, current and

Each Borrower intends to apply for joint credit. Your initials:
previous employment/self-employment information, and Marital Status Dependents (not listed by another Borrower) Contact Information
income sources.
Married Number Home Phone ( ) –
Separated Ages Cell Phone ( ) –
Unmarried Work Phone ( ) – Ext.
(Single, Divorced, Widowed, Civil Union, Domestic Partnership, Registered
Email
1a.
Reciprocal Beneficiary Relationship)
Current Address
Street Unit #
Pay note to the section discussing Married, Unmarried City
How Long at Current Address? Years Months Housing
State
No primary housing expense
ZIP
Own Rent ($
Country
/month)
or Separated. People who are divorced or widowers are If at Current Address for LESS than 2 years, list Former Address Does not apply
considered Unmarried. To be considered Separated Street

City State ZIP
Unit #
Country
requires a legal document from a court of law How Long at Former Address? Years Months Housing No primary housing expense Own Rent ($ /month)
Mailing Address – if different from Current Address Does not apply

stipulating the separation agreement. If the borrower Street Unit #
City State ZIP Country
says they split up with their spouse you may need to
dig a little deeper and determine if they’re still married, 1b. Current Employment/Self-Employment and Income Does not apply
unmarried or separated. Employer or Business Name

Street
Phone ( )
Unit #
–
Gross Monthly Income
Base $ /month
Overtime $ /month
Bonus $ /month
Position or Title Check if this statement applies: Commission $ /month
I am employed by a family member,
Start Date / / (mm/dd/yyyy) Military
property seller, real estate agent, or other
How long in this line of work? Years Months party to the transaction. Entitlements $ /month
Other $ /month
Check if you are the Business I have an ownership share of less than 25%. Monthly Income (or Loss)
Owner or Self-Employed I have an ownership share of 25% or more. $ TOTAL $ 0.00 /month

1c. IF APPLICABLE,
Freddie Complete
Mac Form 65 • Fannie Information
Mae Form 1003 for Additional Employment/Self-Employment and Income Does not apply
Effective 1/2021 Gross Monthly
1c. IF APPLICABLE,
Employer Complete
or Business Name Information for Additional Employment/Self-Employment
Phone ( ) and– Income Does notIncome
apply
Base $
Street
Employer or Business Phone ( Unit
Name Information for Additional Employment/Self-Employment ) # and– Income Gross Monthly Income /month
1c. IF APPLICABLE, Complete OvertimeDoes$not apply /month
City
Street State ZIP Country
Unit # Base $ /month
Employer or Business Name Phone ( ) – Gross Monthly
Bonus $ Income /month
Overtime $ /month
City
Position or Title State ZIP if this statement
Check Country
applies: Base
Street Unit # Commission $ /month
I am employed by a family member, Bonus $ /month
Start Date
Position or Title / / (mm/dd/yyyy)
Check if this statement applies: Overtime
Military $ /month
City State ZIPproperty seller, realCountry
estate agent, or other Commission $ /month
How Entitlements $ /month
Startlong
Datein this line
/ of work? Years
(mm/dd/yyyy)Months
Iparty
am employed by a family member,
to the transaction. Bonus $ /month
/ Military
property seller, real estate agent, or other Other
Position or Title
HowCheck
long if
inyou
this are
line the Business Years
of work? I have anMonths
Check
ownership share of less
if this
than
statement
25%.
applies:
Monthly Income (or Loss) Commission $
Entitlements $
/month
/month
Iparty to the
am employed transaction.
by a family member, TOTAL $ $ 0.00 /month
Start Dateor Self-Employed
Owner / / (mm/dd/yyyy)
I have an ownership share of 25% or more. real $ estate agent, or other Military
Other /month
Check if you are the Business property
I have an ownership share of less than seller,
25%. Monthly Income (or Loss)
How long in this line of work? Years Months Entitlements $ /month
Owner or Self-Employed
party to the transaction.
I have an ownership share of 25% or more. $ TOTAL $ 0.00 /month
Other $ /month
Check if you are the Business I have an ownership share of less than 25%. Monthly Income (or Loss)
Owner or Self-Employed I have an ownership share of 25% or more. $ TOTAL $ 0.00 /month
1d. IF APPLICABLE, Complete Information for Previous Employment/Self-Employment and Income Does not apply
Provide at least 2 years
1d. IF APPLICABLE, of current
Complete and previous
Information employment
for Previous and income.
Employment/Self-Employment and Income Does not apply
Provide
Employer ator
least 2 years
Business of current and previous employment and income.
Name Previous Gross Monthly
1d. IF APPLICABLE, Complete Information for Previous Employment/Self-Employment and Income Does not apply
Street Unit # Income $ /month
Employer
Provide ator Business
least Name
2 years of current and previous employment and income. Previous Gross Monthly
City
Street State ZIP Country
Unit # Income $ /month
Employer or Business Name Previous Gross Monthly
City
Position or Title State ZIP Country
Street UnitBusiness
# Income $ /month
Start Date Check if you were the
Position
City or Title / / (mm/dd/yyyy)
State ZIPOwner or Self-Employed
Country
End
StartDate
Date // // (mm/dd/yyyy)
(mm/dd/yyyy)
Check if you were the Business
Position or Title Owner or Self-Employed
End Date / / (mm/dd/yyyy)
Check if you were the Business
Start Date / / (mm/dd/yyyy)
Owner or Self-Employed
End Date / / (mm/dd/yyyy)
1e. Income from Other Sources Does not apply
Include income
1e. Income from
from other
Other sources below.Does
Sources Under
notIncome
apply Source, choose from the sources listed here:
• Alimony • Child Support • Interest and Dividends • Notes Receivable • Royalty Payments • Unemployment
Include income
• Automobile from other
Allowance sources below. Under• Mortgage
• Disability Income Source, choose from
Credit Certificate the Assistance
• Public sources listed here:
• Separate Maintenance Benefits
1e. Income
• Boarder
Alimony from Other •Sources
Income Foster Care
Child Support Does not applyand
• Mortgage
Interest Differential
Dividends Retirement
• Notes Receivable • Social
RoyaltySecurity
Payments Unemployment
• VA Compensation
• Capital GainsAllowance
Automobile • Housing
Disabilityor Parsonage • Payments
Mortgage Credit Certificate • Public Assistance
(e.g., Pension, IRA) • Trust
Separate Maintenance • Other
Benefits
Include income from other
• Boarder Income
sources below. Under• Mortgage
• Foster Care
Income Source, choose from
Differential the sources listed here:
• Retirement • Social Security • VA Compensation
NOTE:
• CapitalReveal
• Alimony
Gains alimony, child support,
• Child
orseparate
Support
• Housing maintenance,
Parsonage
• Interestor
Payments
other
and income
Dividends ONLY •IFNotes
you want it considered
Receivable
(e.g., Pension, IRA)
in determining
• Royalty
• Trust
Paymentsyour qualification
• Unemployment
• Other
• Automobile
for this loan. Allowance • Disability • Mortgage Credit Certificate • Public Assistance • Separate Maintenance Benefits
NOTE:
• BoarderReveal
Incomealimony, child support,
• Foster • Mortgage
Careseparate maintenance, Differential
or other income ONLY•IFRetirement
you want it considered in determining
• Social Security your qualification
• VA Compensation
Income
• Capital
for Source – use list above
Gains
this loan. • Housing or Parsonage Payments (e.g., Pension, IRA) • Trust Monthly Income
• Other
NOTE:
IncomeReveal alimony,
Source child
– use list support, separate maintenance, or other income ONLY IF you want it considered in determining your
above $ qualification
Monthly Income
for this loan.
$
$
Income Source – use list above Monthly
$ Income
$
Provide TOTAL Amount Here $ $
$ 0.00
$
Provide TOTAL Amount Here $ 0.00
$
Provide TOTAL Amount Here $ 0.00
Borrower Name:
Application
Section 2: Financial Information - Assets and Liabilities

The purpose of this section is to show the borrower’s assets and non-cancellable liabilities (the bills they’re
obligated to pay). Using this information the MLO could determine the borrower’s Back-End or Total DTI.
Section 3: Financial Information - Real Estate

The purpose of this section is to provide the borrower’s property owned and expenses related to the property. Using
this information, the MLO could determine the borrower’s current Front-End or Housing DTI.
Section 2: Financial Information — Assets and Liabilities. This section asks about things you own that Section 3: Financial Information — Real Estate. This section asks you to list all properties you currently own
are worth money and that you want considered to qualify for this loan. It then asks about your liabilities (or debts) that you pay and what you owe on them. I do not own any real estate
each month, such as credit cards, alimony, or other expenses.
3a. Property You Own If you are refinancing, list the property you are refinancing FIRST.
2a. Assets – Bank Accounts, Retirement, and Other Accounts You Have Address Street Unit #
Include all accounts below. Under Account Type, choose from the types listed here:
• Checking • Certificate of Deposit • Stock Options • Bridge Loan Proceeds • Trust Account Intended Occupancy: Monthly Insurance,Taxes, For 2-4 Unit Primary or Investment Property
Status: Sold, Investment, Primary Association Dues, etc.
• Savings • Mutual Fund • Bonds • Individual Development • Cash Value of Life Insurance
• Money Market • Stocks • Retirement (e.g., 401k, IRA) Account (used for the transaction) Pending Sale, Residence, Second if not included in Monthly Monthly Rental For LENDER to calculate:
Property Value or Retained Home, Other Mortgage Payment Income Net Monthly Rental Income
Account Type – use list above Financial Institution Account Number Cash or Market Value
$ $ $ $
$
Mortgage Loans on this Property Does not apply
$
Monthly Type: FHA, VA,
$ Mortgage To be paid off at Conventional, Credit Limit
$ Creditor Name Account Number Payment Unpaid Balance or before closing USDA-RD, Other (if applicable)
$ $ $ $
Provide TOTAL Amount Here $ 0.00 $ $ $
2b. Other Assets and Credits You Have Does not apply
3b. IF APPLICABLE, Complete Information for Additional Property Does not apply
Include all other assets and credits below. Under Asset or Credit Type, choose from the types listed here:
Assets Credits Address Street Unit #
• Proceeds from Real Estate • Proceeds from Sale of • Unsecured Borrowed Funds • Earnest Money • Relocation Funds • Sweat Equity City State ZIP Country
Property to be sold on or Non-Real Estate Asset • Other • Employer Assistance • Rent Credit • Trade Equity
before closing • Secured Borrowed Funds • Lot Equity Intended Occupancy: Monthly Insurance, Taxes, For 2-4 Unit Primary or Investment Property
Asset or Credit Type – use list above Cash or Market Value Pending Sale, Residence, Second if not included in Monthly Monthly Rental For LENDER to calculate:
$
$ $ $ $
$
$ Mortgage Loans on this Property Does not apply
$ Monthly Type: FHA, VA,

Mortgage To be paid off at Conventional, Credit Limit
Provide TOTAL Amount Here $ 0.00 Creditor Name Account Number Payment Unpaid Balance or before closing USDA-RD, Other (if applicable)
$ $ $
2c. Liabilities – Credit Cards, Other Debts, and Leases that You Owe Does not apply $ $ $
List all liabilities below (except real estate) and include deferred payments. Under Account Type, choose from the types listed here:
• Revolving (e.g., credit cards) • Installment (e.g., car, student, personal loans) • Open 30-Day (balance paid monthly) • Lease (not real estate) • Other
Account Type – To be paid off at 3c. IF APPLICABLE, Complete Information for Additional Property Does not apply
use list above Company Name Account Number Unpaid Balance or before closing Monthly Payment Address Street Unit #
$ $ City State ZIP Country
$ $ Intended Occupancy: Monthly Insurance, Taxes, For 2-4 Unit Primary or Investment Property
$ $ Pending Sale, Residence, Second if not included in Monthly Monthly Rental For LENDER to calculate:
$ $
$ $ $ $
$ $
Mortgage Loans on this Property Does not apply
Monthly Type: FHA, VA,
2d. Other Liabilities and Expenses Does not apply
Mortgage To be paid off at Conventional, Credit Limit
Include all other liabilities and expenses below. Choose from the types listed here: Creditor Name Account Number Payment Unpaid Balance or before closing USDA-RD, Other (if applicable)
• Alimony • Child Support • Separate Maintenance • Job Related Expenses • Other Monthly Payment
$ $ $
$
$ $ $
$
$
Borrower Name:
Borrower Name: Freddie Mac Form 65 • Fannie Mae Form 1003
Uniform Residential Loan Application Effective 1/2021
Freddie Mac Form 65 • Fannie Mae Form 1003
Effective 1/2021
Application
Section 4: Loan and Property Information

The purpose of this section is to give information about the property, who owns the property and why the loan is
being applied for. Using this information, the MLO could determine the borrower’s new or proposed Front-End or
Housing DTI
If applicable, this section will also require the borrower to provide any rental income received on the property and to
include all gifts and/or grants being received and used for the purchase of the property.
Section 5: Declarations
Section 5 is an opportunity for the MLO to double check and ensure that nothing has been missed during
discussions with the borrower about potential liabilities not provided on the credit report. Liabilities include lawsuits
that could negatively impact the borrower’s ability to pay their mortgage. There’s also a series of questions dealing
with principal residency and other properties owned. If the borrower lies on this section of the application, the
lender may have legal recourse to call the loan due or change the terms of the mortgage agreement. If they call the
loan due, it means the borrower must pay on demand.
Section 4: Loan and Property Information. This section asks about the loan’s purpose and the property you Section 5: Declarations. This section asks you specific questions about the property, your funding, and your past
want to purchase or refinance. financial history.
4a. Loan and Property Information 5a. About this Property and Your Money for this Loan
Loan Amount $ Loan Purpose Purchase Refinance Other (specify) A. Will you occupy the property as your primary residence? NO YES
Property Address Street Unit # If YES, have you had an ownership interest in another property in the last three years? NO YES
If YES, complete (1) and (2) below:
City State ZIP County
(1) What type of property did you own: primary residence (PR), FHA secondary residence (SR), second home (SH),
Number of Units Property Value $ or investment property (IP)?
Occupancy Primary Residence Second Home Investment Property FHA Secondary Residence (2) How did you hold title to the property: by yourself (S), jointly with your spouse (SP), or jointly with another person (O)?
1. Mixed-Use Property. If you will occupy the property, will you set aside space within the property to operate
NO YES B. If this is a Purchase Transaction: Do you have a family relationship or business affiliation with the seller of the property? NO YES
your own business? (e.g., daycare facility, medical office, beauty/barber shop)
2. Manufactured Home. Is the property a manufactured home? (e.g., a factory built dwelling built on a permanent chassis) NO YES C. Are you borrowing any money for this real estate transaction (e.g., money for your closing costs or down payment) or
obtaining any money from another party, such as the seller or realtor, that you have not disclosed on this loan application? NO YES
If YES, what is the amount of this money? $
4b. Other New Mortgage Loans on the Property You are Buying or Refinancing Does not apply D. 1. Have you or will you be applying for a mortgage loan on another property (not the property securing this loan) on or
NO YES
Loan Amount/ Credit Limit before closing this transaction that is not disclosed on this loan application?
Creditor Name Lien Type Monthly Payment Amount to be Drawn (if applicable) 2. Have you or will you be applying for any new credit (e.g., installment loan, credit card, etc.) on or before closing this loan that
NO YES
is not disclosed on this application?
First Lien Subordinate Lien $ $ $
E. Will this property be subject to a lien that could take priority over the first mortgage lien, such as a clean energy lien paid
First Lien Subordinate Lien $ $ $ NO YES
through your property taxes (e.g., the Property Assessed Clean Energy Program)?
4c. Rental Income on the Property You Want to Purchase For Purchase Only Does not apply 5b. About Your Finances
Complete if the property is a 2-4 Unit Primary Residence or an Investment Property Amount F. Are you a co-signer or guarantor on any debt or loan that is not disclosed on this application? NO YES
Expected Monthly Rental Income $

G. Are there any outstanding judgments against you? NO YES
For LENDER to calculate: Expected Net Monthly Rental Income $
H. Are you currently delinquent or in default on a Federal debt? NO YES
I. Are you a party to a lawsuit in which you potentially have any personal financial liability? NO YES
4d. Gifts or Grants You Have Been Given or Will Receive for this Loan Does not apply
J. Have you conveyed title to any property in lieu of foreclosure in the past 7 years? NO YES
Include all gifts and grants below. Under Source, choose from the sources listed here:
• Community Nonprofit • Federal Agency • Relative • State Agency • Lender K. Within the past 7 years, have you completed a pre-foreclosure sale or short sale, whereby the property was sold to a
• Employer • Local Agency • Religious Nonprofit • Unmarried Partner • Other NO YES
third party and the Lender agreed to accept less than the outstanding mortgage balance due?
Asset Type: Cash Gift, Gift of Equity, Grant Deposited/Not Deposited Source – use list above Cash or Market Value
L. Have you had property foreclosed upon in the last 7 years? NO YES
Deposited Not Deposited $
Deposited Not Deposited $ M. Have you declared bankruptcy within the past 7 years? NO YES
If YES, identify the type(s) of bankruptcy: Chapter 7 Chapter 11 Chapter 12 Chapter 13
Borrower Name:
Borrower Name: Freddie Mac Form 65 • Fannie Mae Form 1003
Uniform Residential Loan Application Effective 1/2021
Effective 1/2021
Application
Uniform
Section 6: Acknowledgments and Residential
Agreements. Loan Application
This section tells you about your legal obligations when
you sign this application.
Section 6: Acknowledgments and Agreements. This section tells you about your legal obligations when
you sign this application.
Acknowledgments and Agreements
Section 6: Acknowledgment and Section
Definitions: 6: Acknowledgments and Agreements.
Acknowledgments and Agreements
Thisapplication
• If this section tells you about
is created as (oryour convertedlegal obligations
into) an “electronic when
•you sign this
"Lender" includes application.
the Lender’s agents, service providers, and any of application”, I consent to the use of “electronic records” and
Agreement their
Definitions:
•• "Other
"Lender"
successors
Loan
Acknowledgments
and
Participants"
includes
assigns.
theand includes
Lender’s
Agreements (i) any
agents, actualproviders,
service or potential andowners
any of of
• If this application is created as (or converted into) an “electronic by
“electronic
applicable
application”,
signatures”
Federal
I consent and/or
as the
to thestate
terms
useelectronic
are defined
of “electronic
in
transactions
and
records”laws.
governed
and
atheir
loansuccessors
resulting from this
and assigns. application (the “Loan”), (ii) acquirers of • I“electronic
intend to sign and have
signatures” assigned
the terms thisare application
defined in either using my: by
and governed
In Section 6 the borrower signs to indicate • any
"Other
• (iv)
beneficial
Definitions:
"Lender"
a loan includes
or other interest
Loan Participants"
anyresulting
guarantor, from (v) this
the any
includes
servicer
Lender’s
application
in the
of the
agents,
Loan,
(i) any (iii) any
actual
Loan,
service
(the and(ii)
mortgageowners
or potential
(vi)acquirers
providers,
“Loan”), anyand of any
these
ofof
(a) electronic
insurer,of • Ifapplicable
this
•application”,
I intend
application
(b) a written
Federal
to sign
signature;
signature
I consent
and have
createdor
is and/or
to theand
as (orelectronic
state
signed agree
use
convertedtransactions
of that
this“electronic
application
into) an “electronic
if a paper version
records”
either
laws.
and
usingof this
my:
parties' serviceor providers, successors in theor assigns. (a) application is converted into an areelectronic
defined inapplication, the by
that the information they’ve provided on the their
•I agree
"Other
successors
any beneficial
(iv) anyto, Loan acknowledge,
guarantor,
and
other
Participants"
assigns.
interest
(v) anyand includes
servicer (i)
represent
Loan,
any
(iii) any mortgage insurer,
actual or
the following:
of the Loan, potential
and (vi) any of these owners of
“electronic
applicable
(b)
electronic
application
a
of
written
my
signatures”
Federal
written
signature;
will
signature be
and/or
as the
signature
an
or terms
and electronic
state electronic
agree
on this
thatrecord,
if
application
a and
transactions
paper
and governed
the representation
version
will be
laws.
my
of this
binding
aparties'
loan resulting from
service providers, this application
successors (the
or “Loan”), (ii) acquirers of
assigns. • I intend to sign and
application is have
converted signedinto thisan application
electroniceither using my:
application, the
application is honest and truthful. (1)
•I The
The Complete
any information
agree
(iv) any
beneficial orIother
to, acknowledge,
guarantor,
Information
(v)
interest ininthe
have provided
any servicer
for this
and represent this
of this
Application
Loan,
the Loan,
(iii) any mortgage
application
the following: is true, accurate,
and (vi) any of these
insurer,
• I agree
electronic
(a) electronic
application
that
my the
(b) aofwritten written
signature.
signature;
will be an
application,
signature signature
orelectronic record, and the representation
andifagreedelivered
on this that or
if atransmitted
application paperwill versionbetomy the Lender
of binding
this
(1)and complete
The Complete as of the date
Information I signed
for this application. or Other Loan Participants as an electronic record with my electronic
parties'
•• IfThe service providers,
theinformation
information I submitted successors
changes or Application
assigns. application
electronic is converted
signature. into an electronic application, the
I have provided in thisor I have newisinformation
application true, accurate, signature, will
application be as
will effective
be an and
electronic
• I agree that the application, if delivered or transmitted to the Lenderenforceable
record, as
and a paper
the application
representation
Section 7: Military Service I before
agree
and
• application,
(1)
to,
closing
complete
Theinformation
If the Complete
acknowledge,
of of
as
including
thethe Loan, and
date
providing
Information
I submitted
I mustrepresent
I signed
forany
changesthis
this the
change andfollowing:
supplement this
application.
updated/supplemented
Application
or I have new information real
signed
(5)
or Other
signature,
ofbymy me
Loan
electronic
Delinquency will be
in
written writing.
signature
Participants
signature.
ason an this application
electronic
as effective and enforceable as a paper application
record will
withbe my electronic
binding
• estate
The
before sales
information
closing contract.
ofI the
haveLoan,provided I mustinchangethis application
and supplement is true, accurate,
this • ITheagree
signed that
Lenderby me the
and inapplication,
Other
writing. Loan ifParticipants
delivered ormay transmitted to the Lender
report information about
• Forand purchase
complete transactions:
as of theproviding The
date I signed terms
any this and conditions
application. of any real
This purpose of this section is to give any application,
• estate
If
are true,
sales
accurate,
including
sales contract
the information
estate contract.
and
signed bychanges
I submitted
complete to
updated/supplemented
me in connection
the
or I have new
best of my
withinformation
knowledge
real
this application
and •
or
myOther
(5)
other
The
account
Delinquency
signature,
Loan
defaults
Lender
toParticipants
will be
and
credit bureaus.
onOtherasmyeffective
account
Loan
as an
and
electronic
Late payments,
mayenforceable
Participants be reflected
may
record missedwithpayments,
asina my
report
paper
my electronic
application
credit
information report
or
and
about
• before
For purchaseclosingtransactions:
of the Loan, IThe must change
terms andand supplement
conditions of anythis real signed
will likelybyaffect
me in my writing.
credit score.
military background for both the borrower and/ belief.
application,
connection
estate
I havecontract
estate sales
sales with
not entered
including
contract.this real
into
providing
signed
estate
byany meanyother
transaction.
are true, accurate, and complete to the best of my knowledge and
agreement,
inupdated/supplemented
connection with written or
realoral, in
this application
(5)
my account to credit bureaus. Late payments, missed payments, or
• Ifother
IDelinquency
have troubleon
defaults making
my accountmy paymentsmay be I understand
reflected in my that I may
credit contact
report and
•• The Lender and Other Loaninto Participants may rely on the information awill
• The HUD-approved
Lender
likely affect and Other my housing
credit counseling
Loanscore. Participants organization
may report for advice about
information about
or deceased spouse’s military service.
For purchase
belief. I have transactions:
not entered The terms
any otherand conditions
agreement, of any
written real
or oral, in actions I trouble
cantotake to meet mypayments
mortgage obligations.
contained
estate
connection salesinwith the application
contract this signed
real estate before
by me inand after closing
connection
transaction. withofthis theapplication
Loan. •my account
If I have credit
making bureaus.my Late payments, I understand missedthat payments,
I may contactor
•• Any intentional other defaults on my account may be reflected in myfor credit report and
are true,
The Lender and or
accurate, Othernegligent
and complete
Loan misrepresentation
to the best
Participants mayofrely myofon
information
knowledge
the information may
and (6)a HUD-approved
will
Authorization
likelyI canaffect my
housing
for Use and counseling
Sharing organization
of Information advice about
result
belief.inI have
contained theinimposition
notapplication
the entered of:intobefore any other agreement,
and after closingwritten
of the Loan.or oral, in By signing
actions below, take intocredit
meetscore.
addition mytomortgage
the representations obligations.and agreements
(a)
connection civil liability
with this on me,
real including
estate monetary
transaction. damages, if a If I have
•made trouble
above, I making authorize
expressly my payments the I understand
Lender and that ILoan
Other may contact
• Any intentional or negligent misrepresentation of information may (6) Authorizationhousing
a HUD-approved for Use counseling
and Sharing of Information
organization for(i)advice about
• The person
Lender theand suffers
Otherany of:loss
Loan because the
Participants may person
rely on relied
the on any
information Participants
By signing to obtain,
below, in use, andtoshare with each other andthe loan
result in imposition actions I can take to addition
meet my the representations
mortgage obligations. agreements
(a) misrepresentation
contained civilin on me,that
the application
liability I haveand
before
including made onclosing
after
monetary this application,
damages, of the if aLoan. and/or application
made above, and related
I expressly loan information
authorize the Lender and documentation,
and Other Loan(ii) a
(b) criminal
• Any intentional
person suffers penalties
or negligent on me including,
any lossmisrepresentation
because the person but not limited
of information to,
relied on anymay fine or consumer
(6) Authorization
Participants credit
to obtain,report
for Use on
use,and me, and
andSharing
share with(iii) my each other (i) the loan as
tax
of Informationreturn information,
result in imprisonment
the imposition
misrepresentation or of:
boththatunder I havethe made provisions of Federal law
on this application, and/or By necessary
signing to
application perform
below,
and theloan
in addition
related actionsto the listed
information below,
representations for soand
and documentation, longagreements
as they (ii) have
a
(a) (18
civil U.S.C.
liability §§ 1001
on me, et seq.).
including monetary
(b) criminal penalties on me including, but not limited to, fine or damages, if a an
made interest in my loan or
consumer credit report on me, and (iii) my taxand
above, I expressly its servicing:
authorize the Lender returnOther Loan
information, as
person
(2) The Property’simprisonment suffers any
Security loss because
or both under thethe person relied
provisions on anylaw
of Federal (a) process
Participants
necessary and
totoperform
obtain, underwrite
the andmy
use,actions shareloan;
listed with each for
below, other (i) theasloan
so long they have
The Loanmisrepresentation
I have applied foretthat I have
inseq.).
this made onwill
application thisbeapplication,
secured byand/or an(b)
application verify in
interest any
and mydata loancontained
related orloan in my consumer
information
its servicing: credit report, (ii)
and documentation, mya
(18 U.S.C. §§ 1001
a(2) (b) criminal
mortgage or deed penalties
of trustonwhich me including,
provides but the notLenderlimited to, fine or
a security consumer loan
(a) process application
credit and report and
on me,my
underwrite other andinformation
loan; supporting
(iii) my tax return information, as my loan
The Property’s Security
interest
The Loan
imprisonment
in Ithe
have propertyor both under
described this in
theapplication.
this provisions of Federal law (b) application;
necessary verify toanyperform the actionsinlisted
data contained below, forcredit
my consumer so long as they
report, myhave
(18 U.S.C.applied
§§ 1001 foretinseq.). application will be secured by an (c) inform
interest incredit
my loan
loan application andor investment
and its other
servicing: decisions by
information the Lender
supporting my loan
a mortgage
(3) The Property’s or deedAppraisal,of trust which Value, provides the Lender a security
and Condition (a) and
process Other and Loan Participants;
underwrite my loan;
•(2)Any
interestThe Property’s
appraisal
in the propertyor valueSecurity
of the property
described in thisobtained
application. by the Lender is application;
(d)
(b) perform
(c) verify
inform any audit,
creditdataand quality
contained control,
investment in my and legalby
consumer
decisions compliance
credit
the Lenderreport,analysis
my
TheforThe LoanbyI have
use appliedand
the Lender forOther
in thisLoan application will be secured by
Participants.
(3) Property’s Appraisal, Value, and Condition and Other
loan
and reviews;
application and other information supporting my loan
Loan Participants;
•a• Themortgage
Any Lender
appraisal
or
and deed
or Other
value
of trust
Loan
of the
which
property
provides
Participants havethenot
obtained
Lender
bymade
the
a security
any is
Lender (e) perform
application; analysis and modeling for risk assessments;
interest
representationin the property or warranty, described express in this application.
or Participants.
implied, to me about the (d) perform audit, quality control, and legal compliance analysis
for use by the Lender and Other Loan (c) monitor
(f) inform
and reviews; the account
credit and investment for this loan decisionsfor potential
by the Lender delinquencies and
• property,
(3) The TheLender itsand
Property’s condition,
Other or itsParticipants
Appraisal,
Loan value.
Value, andhave Condition
not made any (e)anddetermine
performOtheranalysis any assistance
Loan Participants;
and modeling that may be available
for risk assessments; to me; and
•(4) Any appraisal
representation ororvalue of
warranty,
Electronic Records and Signatures the property
express or obtained
implied, by
to methe Lender
about theis (g)
(d) other
perform actions
audit, permissible
quality control,under and applicable
legal law.
compliance analysis and
for use byits the Lender (f) monitor the account for this loan for potential delinquencies
• The Lender
property, and Otherand
condition, Loan
or itsOther Loan Participants.
Participants
value. may keep any paper record and reviews;any assistance that may be available to me; and
determine
The Lender
• and/or electronicand Other record Loanof Participants
this application, have not made
whether or anythe Loan
not (e) perform analysis and modeling for risk assessments;
(4) Electronic Records
representation or warranty, and Signatures
express or implied, to me about the (g) other actions permissible under applicable law.
• is
The approved.
Lender (f) monitor the account for this loan for potential delinquencies and
property, itsand Other Loan
condition, or itsParticipants
value. may keep any paper record
determine any assistance that may be available to me; and
and/or electronic record of this application, whether or not the Loan
(4) Electronic Records and Signatures
is approved. (g) other actions permissible under applicable law.
• The Lender and Other Loan Participants may keep any paper record
and/or electronic record of this application, whether or not the Loan
is approved.
Borrower Signature Date (mm/dd/yyyy) / /

Additional Borrower Signature Date (mm/dd/yyyy) / /

Borrower Name:
Section 7: Military Service.
Uniform Residential Loan Application This section asks questions about your (or your deceased spouse's) military service.
Borrower
Effective Name:
1/2021
Uniform
MilitaryResidential
ServiceLoan Application
of Borrower
Borrower
Effective Name:
Military1/2021
Service – Did you (or your deceased spouse) ever serve, or are you currently serving, in the United States Armed Forces?
NO YES
If YES, check
Freddie all that
Mac Form 65 apply: Currently
• Fannie Mae Form 1003 serving on active duty with projected expiration date of service/tour / / (mm/dd/yyyy)
Effective 1/2021 Currently retired, discharged, or separated from service
Only period of service was as a non-activated member of the Reserve or National Guard
Surviving spouse
Section 8: Demographic Information. This section asks about your ethnicity, sex, and race.
Demographic Information of Borrower
The purpose of collecting this information is to help ensure that all applicants are treated fairly and that the housing needs of communities
and neighborhoods are being fulfilled. For residential mortgage lending, Federal law requires that we ask applicants for their demographic
information (ethnicity, sex, and race) in order to monitor our compliance with equal credit opportunity, fair housing, and home mortgage
disclosure laws. You are not required to provide this information, but are encouraged to do so. You may select one or more designations for
"Ethnicity" and one or more designations for "Race." The law provides that we may not discriminate on the basis of this information, or on
whether you choose to provide it. However, if you choose not to provide the information and you have made this application in person, Federal
regulations require us to note your ethnicity, sex, and race on the basis of visual observation or surname. The law also provides that we may not
discriminate on the basis of age or marital status information you provide in this application. If you do not wish to provide some or all of this
information, please check below.
Ethnicity: Check one or more Race: Check one or more

Hispanic or Latino American Indian or Alaska Native – Print name of enrolled
Mexican Puerto Rican Cuban or principal tribe :
Other Hispanic or Latino – Print origin: Asian
Asian Indian Chinese Filipino
For example: Argentinean, Colombian, Dominican, Nicaraguan, Japanese Korean Vietnamese
Salvadoran, Spaniard, and so on. Other Asian – Print race:
Not Hispanic or Latino For example: Hmong, Laotian, Thai, Pakistani, Cambodian, and so on.
Black or African American
I do not wish to provide this information
Native Hawaiian or Other Pacific Islander
Native Hawaiian Guamanian or Chamorro Samoan
Sex Other Pacific Islander – Print race:
Female
Male
For example: Fijian, Tongan, and so on.
White
To Be Completed by Financial Institution (for application taken in person):

Was the ethnicity of the Borrower collected on the basis of visual observation or surname? NO YES
Was the sex of the Borrower collected on the basis of visual observation or surname? NO YES
Was the race of the Borrower collected on the basis of visual observation or surname? NO YES
20 Hour SAFE Comprehensive: Fundamentals of Mortgage

The Demographic InformationEducation
was provided(NMLS
through:10527) - Version 4
121
Face-to-Face Interview (includes Electronic Media w/ Video Component) Telephone Interview Fax or Mail Email or Internet
Section 7: Military Service. This section asks questions about your (or your deceased spouse's) military service.
Military Service of Borrower
Military Service – Did you (or your deceased spouse) ever serve, or are you currently serving, in the United States Armed Forces? NO YES
Application If YES, check all that apply: Currently serving on active duty with projected expiration date of service/tour
Currently retired, discharged, or separated from service
/
Only period of service was as a non-activated member of the Reserve or National Guard
/ (mm/dd/yyyy)
Uniform Residential Loan Application Surviving spouse
Section 8: Demographic Information Section 8: Demographic Information. This section asks about your ethnicity, sex, and race.
Demographic Information of Borrower
In Section 8, the MLO is required to ask The purpose of collecting this information is to help ensure that all applicants are treated fairly and that the housing needs of communities
monitoring questions in compliance with and neighborhoods are being fulfilled. For residential mortgage lending, Federal law requires that we ask applicants for their demographic
information (ethnicity, sex, and race) in order to monitor our compliance with equal credit opportunity, fair housing, and home mortgage
disclosure laws. You are not required to provide this information, but are encouraged to do so. You may select one or more designations for
ECOA, fair housing laws and HMDA. The "Ethnicity" and one or more designations for "Race." The law provides that we may not discriminate on the basis of this information, or on
whether you choose to provide it. However, if you choose not to provide the information and you have made this application in person, Federal
borrower can choose not to answer, but the regulations require us to note your ethnicity, sex, and race on the basis of visual observation or surname. The law also provides that we may not
discriminate on the basis of age or marital status information you provide in this application. If you do not wish to provide some or all of this
information, please check below.
MLO is required to make a best faith effort to Ethnicity: Check one or more Race: Check one or more
answer the questions based on visual evidence Hispanic or Latino
Mexican Puerto Rican Cuban
American Indian or Alaska Native – Print name of enrolled
or principal tribe :
or surname when applicable, such as face-to- Other Hispanic or Latino – Print origin: Asian
Asian Indian Chinese Filipino
Japanese Korean
face interviews. For example: Argentinean, Colombian, Dominican, Nicaraguan, Vietnamese
Salvadoran, Spaniard, and so on. Other Asian – Print race:
Not Hispanic or Latino For example: Hmong, Laotian, Thai, Pakistani, Cambodian, and so on.
Black or African American
Section 9: Loan Originator Information
Native Hawaiian or Other Pacific Islander
Native Hawaiian Guamanian or Chamorro Samoan
Sex Other Pacific Islander – Print race:
This section is to be completed by the MLO, Female
Male
For example: Fijian, Tongan, and so on.
and it is the one place on the URLA where I do not wish to provide this information
White
the MLO must sign the document to say they
assisted in completing the application. To Be Completed by Financial Institution (for application taken in person):
Was the ethnicity of the Borrower collected on the basis of visual observation or surname? NO YES
Was the sex of the Borrower collected on the basis of visual observation or surname? NO YES
Continuation Sheet Was the race of the Borrower collected on the basis of visual observation or surname?
The Demographic Information was provided through:

NO YES
The continuation sheet is the last page of the Face-to-Face Interview (includes Electronic Media w/ Video Component) Telephone Interview Fax or Mail Email or Internet
URLA and can be used to add any information Section 9: Loan Originator Information. To be completed by your Loan Originator.
that could not fit on the form in previous
Loan Originator Information
sections. As many Continuation Sheets as are Loan Originator Organization Name
necessary can be included with the URLA. Even Borrower
Address
Uniform
Name:
Residential Loan Application
if no information is listed on the Continuation Loan Originator
Effective 1/2021 Organization NMLSR ID# State License ID#
Loan Originator Name
Sheet, it still must be included as part of the Loan Originator NMLSR ID# State License ID#
full application form. There is a signature Email Phone ( ) –
line at the bottom of the Continuation Sheet

Signature Date (mm/dd/yyyy) / /
where the borrower must sign. Should more
Continuation Sheets be needed, the borrower
will be required to sign each sheet.
1. Section 8 is:
• ___________________________ for the MLO.
• ___________________________ for the borrower.
Borrower Name:
122 © 2022 Rocket Mortgage. All Rights Reserved. Trade Secret, Confidential, and Proprietary.
Uniform Residential Loan ApplicationAny duplication or dissemination of these materials is strictly prohibited.
Effective 1/2021
Application
Lender Loan Information

The Lender Loan Information is a separate piece
to the URLA that must be completed by the lender.
This document provides a look into the terms and
conditions of the loan.
Page one of the Lender Loan Information includes
• Property and Loan Information
• Title Information
• Mortgage Loan Information
Page two of this document includes:
• Qualifying the Borrower - Minimum Required
Funds or Cash Back
Equal Credit
10 Opportunity Act (ECOA)
1. Give at least 5 factors that a lender cannot use to

discriminate against a borrower.
2. What is the overall purpose of ECOA?
3. What is the purpose of ECOA’s Valuation Rule?
4. What are the 4 different “Notice of Action Taken”

disclosures? What do each of those disclosures tell the
borrower?
ECOA
ECOA Simplified
ECOA
The Equal Credit Opportunity Act, Regulation B
The Equal Credit Opportunity Act (ECOA, Regulation B) was enacted by Congress in 1974 to address the issue
of discrimination in lending practices. While the act of extending credit is discriminatory by nature, since some
consumers qualify, and others do not, the discrimination has not always been based on qualifications alone.1
In the past, specific minorities found it difficult to obtain mortgage financing due to discrimination based on factors
such as race, creed, or color. ECOA was added to the Consumer Credit Protection Act (CCPA) as Title VII of the
existing law to eliminate the discriminatory treatment of consumers who apply for loans.
The purpose of ECOA is to promote the availability of consumer credit to all applicants by prohibiting credit
decisions based on race, color, religion, national origin, gender, marital status, or age. The Act also prohibits credit
decisions made based on an applicant’s income being derived from any public assistance program or based on an
applicant having exercised their rights under the CCPA. ECOA is overseen by the CFPB.
ECOA Simplified
Under the rules of ECOA creditors cannot make a loan with unfavorable terms or deny credit to someone for any of
the Nine Prohitibited Factors or the property location.
ECOA applies to the extension of credit by providers who regularly extend or renew credit.
To help better determine if lenders are properly following ECOA guidelines, MLOs are required to request the
applicant’s race, ethnicity, gender and marital status for government monitoring purposes. MLOs must also record
this information on the URLA.
ECOA recommends self-testing and self-correction as a voluntary program conducted to evaluate a creditor’s
compliance with ECOA. The benefit to the creditor to perform self-testing involves the creditor not having to
disclose to any government agency the findings or admit a violation has occurred, if corrective action was taken.
Corrective action happens when a creditor identifies the practices that led to a violation, assesses of the scope of
violation, remedies it, and corrects it.
ECOA’s regulatory authority is the CFPB.
1 “Equal Credit Opportunity Act (ECOA).” CFPB Consumer Laws and Regulations, June 2013. https://files.consumerfinance.gov/f/201306_cfpb_laws-and-regulations_ecoa-combined-june-2013.pdf.
1. Hector and Keyanna apply for a mortgage loan to purchase a new home. Hector is unemployed, but Keyanna
earns a good income and has a high credit score. While they are filling out the application, they tell the
MLO they’re buying a new home because they’re expecting a baby in the coming year. After reviewing the
application, the MLO denies Hector and Keyanna’s application.
Is this discrimination? Why or why not?
ECOA
ECOA In Depth
ECOA In Depth
General Permissible Acts Under ECOA
The following actions are not considered a violation of ECOA:
• Inquiries regarding race, ethnicity, gender, immigration/citizenship status, marital status or age for federal
monitoring programs in compliance with fair lending laws or to determine if the borrower is eligible for special
programs.
• Inquiries relating to a borrower’s marital status if one of these reasons apply:
• The purpose is to include a spouse in the credit transaction
• The credit transaction is in a community property state. The purpose of the inquiry is to learn if the
borrower has a spouse whose signature must be obtained on the security agreement for the lender to be
able to foreclose under the property laws of the state in which the security property is located.
• The borrower uses their receipt of alimony or child support as a basis for qualification and repayment
• Inquiries about whether the borrower’s income is derived from a public assistance program (for verifying the
probable continuance of income when such income is being used to qualify for the mortgage loan).
• Inquiries regarding an elderly borrower’s age (to qualify the borrower for a program that is in the borrower’s
favor, such as a reverse mortgage).
The Nine “Prohibited Factors”
The lender may not discriminate based on nine prohibited factors. These prohibited factors include:
1. Gender
2. Race
3. Color
4. Religion
5. National origin
6. Marital status
7. Age
8. Whether any or all an applicant’s income comes from any public assistances program (including Social
Security)
9. Whether the applicant has, in good faith, exercised any right under the Consumer Credit Protection Act e.g.,
participation in credit counseling
Circumstances When It Is Acceptable To Deny Credit

It is acceptable to deny a loan or credit to an applicant if the applicant does not qualify based on qualifying criteria
prescribed within the loan or credit program. These criteria may include:
• Income
• Loan to value ratios
• Credit history
• Collateral
• Age (in cases of reverse mortgages or minimum age requirements to enter into a binding contract)
1. What is the purpose of ECOA?
ECOA
ECOA In Depth
3 Common Forms Of Discriminatory Behavior

Overt Evidence
Overt evidence of credit discrimination occurs when the behavior in question is obviously discriminatory. An
example of overt evidence of discrimination would be a sign hanging in the front window of loan originator’s office
that said, “We Don’t Write Loans for Women.”
Disparate Treatment
Disparate treatment in terms of credit discrimination is demonstrated when a lender treats an applicant or
borrower differently based on one or more of ECOA’s prohibited factors.
Disparate Impact
Disparate impact differs from disparate treatment in that seemingly legal behavior on the part of the creditor has
a negative effect on a group of people protected under the nine prohibited factors of ECOA. Disparate impact
typically needs broader scope to be revealed. An example of disparate impact might be when members of a
community who are considered a minority are legally denied credit due to low qualifications, but as a result no one
in the community can acquire financing.
Example Of Disparate Treatment

XYZ credit agency offers to originate mortgages for residential borrowers.
A male named Steve arrives at XYZ’s offices to apply for a mortgage. He
is greeted by an XYZ staff member and asked to take a seat in the waiting
room. A female named Mary arrives at XYZ 15 minutes later and expresses
the same intent as Steve - to apply for a mortgage. She is immediately
ushered into the back office by the staff and meets with a loan originator. An
hour later Mary concludes her business and exits the office. As Mary leaves
another female, Susan, arrives and requests to meet with a loan originator
to apply for a mortgage. Susan is escorted into the office and Steve remains
sitting in the waiting room.
XYZ is exhibiting disparate treatment by allowing the women to apply for
credit while treating Steve differently even though they all came to XYZ
seeking the same service.
When the discrimination is obvious:
Being treated differently because of who you are:
Seemingly legal behavior that has a negative impact on a protected group:
ECOA
ECOA In Depth
Types Of Action
Whenever a specific decision is made in determining the applicant’s credit application status, an action must be
taken. When such action occurs, a disclosure called the Notice of Action Taken is required to be delivered to the
applicant. Types of action include:
• Credit is approved / counteroffer made

• Application is incomplete
• Credit offer is unused / not accepted by the applicant
• Credit is denied
Adverse Action Characteristics
Adverse action is defined under ECOA as a
denial or revocation of credit or a change of Example Of Adverse Action
terms of existing credit.
Jack applies for a mortgage loan and after
Typically an applicant may be denied credit (and
thus experience an adverse action) when one or reviewing Jack’s credit report the lender
more of the following characteristics do not meet decides not to extend credit to Jack. The
the lender or program’s qualifying standard: lender made this decision based on Jack’s
• The consumer’s creditworthiness low credit score. Because this is an adverse
• Credit standing action, the lender provides Jack with an
• Credit capacity Adverse Action Notice telling Jack that his
• Character: application for credit has been denied and
the circumstances involved in the denial.
• General reputation
• Personal characteristics
• Mode of living
20 Hour SAFE Comprehensive:

20 Hour Fundamentals
SAFE Comprehensive: Fundamentalsof Mortgage
of Mortgage Education
Education (NMLS(NMLS 10527)
10527) - Version 4 - Version 4 129
ECOA
ECOA In Depth
ECOA Valuation Rule

Because property value and appraisals serve as a key factor in qualifying the borrower for credit, ECOA’s Valuation
Rule requires that a copy of the appraisal be provided to the borrower as soon as the MLO has finished processing
the report. The borrower will be notified of this right though a disclosure called the Notice of Right to Receive an
Appraisal. The borrower can waive their right to immediate delivery, but they will still receive it with their closing
documents.
Making the appraisal available is helpful for both the MLO and the borrower. One of the most significant challenges
our industry faces is incorrect property value estimates by applicants. In many cases, borrowers believe their home
to be of higher value than the amount provided by the appraisal. Giving the borrower access to the appraisal report
provides documentation for the borrower - especially if their loan was denied or circumstances changed due to a
lower value than expected.
Under the ECOA Valuation Rule, the applicant can waive their right to promptly receive a copy of the written
appraisal. The timing requirement for these copies may be waived by the consumer if they wish to receive any copy
at or before closing, or account opening. The creditor must receive this waiver from the consumer at least 3 business
days prior to closing or account opening. If the consumer does provide a waiver and the loan does not close, or the
account is not opened, the creditor must provide these copies no later than 30 days after it is determined closing
will not occur or the account will not be opened.
ECOA And The Application Process

Because the process of applying for a mortgage loan includes evaluation of the borrower we must be careful to only
make approval decisions based on non-discriminatory factors. This next section will focus on ECOA’s impact on the
application process.
1. Borrower’s have the right to receive a ______________________________________________ after it is completed.
ECOA
ECOA In Depth
Factors Considered When Determining Credit Worthiness

While ECOA does provide all applicants with the same rights in seeking credit, that does not mean that everyone
who applies will be approved for credit. As we know, the Four Cs (credit, capacity, collateral and capital) can and
ultimately will impact whether the borrow will be approved for credit.
Types Of Acceptable Income Considered For A Loan Review
Mortgage lenders will consider a vast array of income to support a loan application. The most important factor
for all these sources is documentation and proof. Here are some of the most common forms of income used for
qualification:
• Salary or hourly income
• Sole proprietorship income
• Partnership income
• S corporation income
• Corporation income
• Military income
• Investment income
• Social Security income
• Non-taxable income
• Rental or property income
• Unemployment income
Information Required On A Loan Application
If an applicant applies for credit and does not qualify, the creditor may allow a co-signer on the credit application.
It is not necessary for the co-signer to be the applicant’s spouse, but the co-signer must meet the qualification
requirements for the loan to be approved.
In addition to evaluating an applicant’s creditworthiness, the MLO is obligated under the rules of ECOA to collect
specific government monitoring data. MLOs are required to ask for and record information about the applicant’s
ethnicity, race and sex. This information in the form of a voluntary questionnaire for the borrower is in Section 8 of
the URLA. If the borrower chooses not to answer the questions (the law and instructions on the URLA specifically
state they are not required to do so), the MLO is required to make determination through visual observation or
surname.
Disclosures Required Under ECOA
NOTICE OF ACTION TAKEN
As we stated previously, there are 4 different types of action that can be taken on a loan application. Under ECOA,
the applicant must be notified by the creditor whenever an action is taken or a decision is made about their credit
application status through disclosures. The applicant will be notified through a disclosure called the Notice of
Action Taken. As a reminder, here are the 4 different types of action that can be taken:
• Credit is approved / counteroffer made (within 30 days of application)
• Application is incomplete (30 days after request for additional application information)
• Credit offer is unused / not accepted by the applicant (90 days after offer / counteroffer)
• Credit is denied (aka Adverse Action Notice; within 30 days of application)
• In cases where multiple applicants are involved in the transaction, it is only necessary that the Adverse
Action Notice be given to the primary applicant when it is apparent that the applicant is such. If the
borrowers have legal ties (like spouses living at the same address) the primary applicant is typically the
one listed first on the URLA.
The following information must be included on the Notice of Action Taken:
• Written statement of the type of action taken, along with an explanation (or the applicant’s right to an
explanation)
• Creditor information
• ECOA’s Statement on Discrimination and the CFPB’s information
20 20
Hour SAFE
Hour Comprehensive:
MortgageEducation
Education(NMLS
(NMLS10527)
10527) - Version
- Version 4 4 131
ECOA
ECOA In Depth
NOTICE OF RIGHT TO RECEIVE AN APPRAISAL

The Notice of Right to Receive an Appraisal is due to the borrower at the time of application or within 3 business
days if mailed.
This disclosure could use some improvement in its title. It’s actually a little misleading. As we described earlier in
this chapter under ECOA’s Valuation Rule, the borrower is entitled to a copy of their appraisal once it has been
processed by the MLO. Notice we didn’t say “everybody gets an appraisal.” The rule and this disclosure actually
say that the borrower will receive a copy of their appraisal report if one is performed on the property. So if the
borrower doesn’t qualify based on the initial application, no appraisal will be done and thus no copy of the
appraisal will be available.
As alternatives to an appraisal, other methods of property value determination could include online data analysis
tools or a broker’s price opinion (BPO). A BPO is a method of determining property value in which a real estate
broker does a value analysis based on their knowledge of the home and comparables in the community. Whatever
method is used, the borrower must be provided a copy if one is completed.
ECOA Penalties
Civil penalties up to $5,000 per day with definitive patterns of discriminatory behaviors penalized up to $25,000.
Punitive Damages:
• ECOA Individual violations as high as $10,000

• Class actions ≤ $500,000 or 1% of net worth whichever is lower
• Actions can be taken against a mortgage professional or institution within 5 years of the violation.
ECOA Record Keeping
The following must be retained for a minimum of 25 months by the MLO:
• Notices of Action Taken

• Incomplete application disclosures
• Monitoring program disclosures
• Complaints or other written statements from a consumer2
2 Equal Credit Opportunity Act (Regulation B). 12 CFR §1002.12.
Consumer
11 Contact Laws
1. What are the purposes of the Disposal Rule and the Red
Flags Rule?
2. What does Regulation P (from GLBA) require financial

institutions to do regarding client’s non-public
information?
3. What is the purpose of the FTC Safeguards Rule?
4. Explain two requirements of the Do Not Call laws.
5. Name 3 requirements of the E-SIGN Act.

Consumer Contact Laws
Fair Credit Reporting Act - FCRA, Regulation V

The laws in this chapter - the Fair Credit Reporting Act, the Gramm-Leach-Bliley Act, the Do Not Call Laws, the
E-sign Act and Mortgage Acts and Practices - focus on how the MLO contacts and interacts with the borrower. Be
sure to consider how these laws will impact your future career.

Congress enacted the Fair Credit Reporting Act (FCRA) in an effort to ensure accurate and fair credit reporting by
consumer reporting agencies. This act regulates consumer reporting agencies (CRAs); it regulates both those that
provide and those that use consumer credit information. FCRA regulates how CRAs use and report a consumer’s
information, and is overseen by the CFPB.1
Due to the growing concern of identity theft and the proper procedures needed to prevent it, the Fair and Accurate
Credit Transactions Act (FACTA) amendments were incorporated into FCRA. These amendments require lenders to
help protect against identity theft and to properly dispose of consumer information. Under FACTA, consumers can
obtain a free credit report once a year from CRAs, such as Equifax, Experian, and TransUnion, and consumers must
receive a credit score disclosure when their credit report is reviewed.2
The official site to request the free report is AnnualCreditReport.com.
Simplifying FCRA & FACTA

FCRA requires CRAs to adopt reasonable procedures that ensure a consumer’s information is handled confidentially
and accurately in an equitable and fair way. The act limits access to a consumer’s information and requires that only
parties with a permissible purpose receive a copy of the consumer’s credit report from a CRA . 3
Lenders and consumer reporting agencies must guarantee the accuracy of a consumer’s credit report. The report
and maintenance of accurate information is extremely important for the consumer. Inaccurate information can
prevent an otherwise qualifying consumer from obtaining credit.
FACTA added provisions to the law that include the following responsibilities for CRAs:
• All derogatory (negative) credit information must be reported on a consumer’s report (credit report) for no
longer than 7 years.
• Bankruptcies must be reported for no longer than 10 years.
• The consumer’s credit score and a description of key factors that affect their credit score must be included
in the report.
• Indication of an account closed or disputed by a consumer must be reported.
• For a disputed account, responses must be provided within 30 days to the consumer.4
2 Fair Credit Reporting (Regulation V). 12 CFR §1022.73.
3 Fair Credit Reporting Act (Regulation V). 12 CFR §1022.1
4 Fair Credit Reporting Act (Regulation V). 12 CFR §1022.43.
1. FCRA ensures information on our consumers’ credit reports is handled accurately and confidentially by our
_______________ and those who ________________________________.
2. CRAs are required to ensure that credit reports are _________________________.
The Disposal Rule

All persons under the jurisdiction of FACTA must take reasonable measures to protect against identify theft by
disposing of the consumer’s information. FACTA considers reasonable measures as burning, pulverizing, or
shredding papers; and destroying or erasing electronic files or media containing consumer report information so
that they cannot be read or reconstructed.
Fraud Alerts
Under FCRA and FACTA the following are necessary measures to prevent identity theft:
• One-Call Fraud Alert: CRAs must place a one-call fraud alert on a consumer’s credit report if the consumer
claims a suspicion that they are or will be a victim of identity theft. This fraud alert must be filed in the
consumer’s credit report for a period of not less than 12 months.
• Extended Fraud Alert:CRAs must place an extended fraud alert on a consumer’s credit report if the
consumer submits an identity theft report to the CRA. A fraud alert must be filed for at least 7 years.
• Active Duty Alert: CRAs must place an active duty alert on a consumer’s credit report if the consumer, who
is on active military duty, requests a notice of their status during their time away. This alert must be filed for
at least 12 months.
• CRAs must display their contact information on a consumer report.
• CRAs must block the information of a consumer that requests such alerts listed above and do so within 4
business days of request so that no new credit extensions can be made during the period of the freeze.5
• As an MLO, you need to be familiar with the different types of fraud alerts because you will see them when
you pull credit. You will be notified as soon as you try to access the credit information of someone with a
fraud alert.
Red Flags Rule
FCRA and FACTA require the development, implementation, and administration of identity theft prevention
programs at CRAs. This framework, known as the Red Flags Rule, requires that an identity theft prevention program
include 3 basic elements to address the threat of identity theft:
1. Identify relevant red flags by detecting patterns and practices that indicate possible identity theft
2. Create reasonable guidelines to address a credit transaction occurring on an inactive account (inactive for
more than 2 years) and provide notice to the consumer
3. Verify guidelines and procedures established for proper implementation through internal controls (quality
control), a compliance officer, and training programs
The Red Flags Rule is regulated by the Federal Trade Commission (FTC).
5 Fair Credit Reporting Act (Regulation V). 15 USC §1681c-1.
1. _______________________________________ of the CRAs.
2. _______________________________________ requires the consumer to agree to the credit pull, but the pull must also
have a valid purpose.
3. _______________________________________ states client information needs to be properly disposed of.
4. CRAs have the ability to place _______________________________________ on a borrowers credit.
5. _______________________________________ protects a borrower’s information by making sure companies are being
proactive about identity theft.
Disclosures Required Under FCRA/FACTA
Penalties Under FCRA & FACTA

Action can be taken against a mortgage professional or institution for 2 years after the date of discovery of the FCRA
or FACTA violation, and must be taken within 5 years of the violation.
Obtaining information under false pretenses or misleading consumers in regards to disclosures can result in a fine
and 2 years of imprisonment. The civil penalty for willful non-compliance of FCRA and FACTA is actual damages,
punitive damages, and any attorney’s fees.
Disclosures Required Under FCRA/FACTA

Notice of Right to Receive Credit Score
• Must be delivered to the consumer at time of completed application or within 3 business days if mailed.
• Informs the borrower of their right to obtain their credit score after making an inquiry for financing and how
to request a copy of their credit report.
Gramm-Leach-Bliley Act - GLBA

The Gramm-Leach-Bliley Act (GLBA) is also known as the Financial Services Modernization Act of 1999. The
provisions of most interest to the MLO are the regulations that focus on the protection of a consumer’s non-public
personal information.
Simplifying GLBA
GLBA is divided into many parts. The two key components that will impact your work as an MLO are the privacy
protections found under Regulation P and the requirements for formal planning and protection in the FTC
Safeguards Rule.
The regulatory authority for the privacy and pretexting protections (Regulation P) found in GLBA is the CFPB. All
other rules of the act, such as the Safeguards Rule, are regulated by the Federal Trade Commission (FTC).
The terms used to describe consumer and customer in financial service industries are formally defined in GLBA.
These definitions help to determine how that individual’s information is handled by institutions during the
transaction process.
Consumer Customer
An individual who obtains or has obtained a financial service

A consumer who has a continuing “transactional relationship”
or product that will be used primarily for personal, family, or
with a financial institution.
household purposes.
Examples: Applying for a loan, obtaining cash from a foreign

Examples: Obtaining a loan from a mortgage lender, opening
ATM (an ATM that is not associated with your financial
a credit card account.
institution).
Privacy - Regulation P
Regulation P, the first part of GLBA, requires financial institutions to exercise certain conduct with relation to
a consumer’s and customer’s non-public information.1 Examples of non-public information are your driver’s
license number, social security number, account numbers and account balances; all information that is not
made public.
Below are the objectives and requirements of this regulation:
• Financial institutions must follow certain principles when disclosing non-public information about
consumers to non-affiliated third parties.
• Consumers must have an opportunity to prevent a financial institution from disclosing their non-
public information with most non-affiliated third parties.
These protections are regulated and enforced by the CFPB and include privacy policy, opt out, and
pretexting rules.
Pretexting/Phishing
In order to further protect a customer’s financial information, GLBA outlines certain protections against
pretexting. Pretexting, otherwise known as phishing, is the act of obtaining an individual’s non-public
personal information through false pretenses (without authorization).
Perhaps you didn’t know what it was called when you received that mysterious e-mail from the long
forgotten member of some faraway royal kingdom who wanted to hide his millions in your bank account
and all you had to do was provide your name, social security number and bank account information. Now
you know, it’s called phishing!
Privacy Policy Disclosures
Institutions must provide privacy notices in such a way that the consumer can expect to receive the actual
notice in writing or electronically if so desired.
The threshold for expectation of receiving the actual notice is met if the institution:
• Hand delivers a printed copy of the notice to the borrower
• Mails a printed copy to the borrower’s most recent address
• In cases of electronic transmission, the notice may be posted on an electronic site with the
consumer required to acknowledge receipt
• In isolated transactions such as usage of an ATM, it is acceptable to post the notice on the device’s
screen requiring the consumer to acknowledge receipt of the notice
• For annual notices only, the reasonable expectation is met if the customer accesses a website or
portal to conduct their business and agrees to receive the notice via that website.
In circumstances where the customer requests that the institution not send the notices it is acceptable that
the institution’s privacy policy remains available to the customer upon request.
1 “Title 12, Part 1016 - Privacy of Consumer Financial Information (Regulation P).” e-CFR, 12/20/2018. https://www.ecfr.gov/cgi-bin/text-idx?SID=59182ea1acf4b099ba9f49d6ad48aa1e&mc=true&node=p
t12.8.1016&rgn=div5.
1. P_____________________________________________
2. O_____________________________________________
3. P_____________________________________________
Initial Privacy Notice

Financial institutions must provide an initial privacy notice explaining what information the institution gathers,
where this information is shared, and how the institution safeguards that information. This initial privacy notice
must be given to:
• A customer no later than when a customer relationship is established; and
• A consumer before the institution discloses any non-public personal information about the consumer to
any non-affiliated third party (if applicable). If the institution does not provide this information to non-
affiliated third parties, then the privacy notice is not required.
Annual Privacy Notice
Throughout a customer relationship, financial institutions must provide an annual privacy notice to their
customers. The annual notice contains the same information as the initial privacy notice, as well as a notice of the
right to opt out of information being shared, and an explanation of how to do so.
Opting Out
Financial institutions are required to disclose to a consumer that they have a reasonable opportunity to opt out
of allowing information to be shared in both the Initial Privacy Notice and the Annual Privacy Notice. Opting out
allows the consumer to prevent their nonpublic information from being shared with the institution’s non-affiliated
third parties. The opt out notice should include an explanation of the kind of information that the institution may
disclose, as well as reasonable means to opt out. This disclosure must be in writing or in electronic form, and must
be provided to the consumer before their information is shared. There is no specific time frame associated with
the opt-out period, just that it must be a reasonable period of time.
FTC Safeguards Rule
The FTC, the second part of GLBA, issued
the Safeguards Rule, which requires financial The Financial Institution’s Plan Must:
institutions to develop a written information

• Denote at least one employee to manage the safeguards
security plan that describes how the company is
• Construct a thorough risk management policy in
prepared for, and plans to continue, protecting
departments handling non-public information
consumers’ non-public personal information. It
• Develop, monitor, and test a program to secure the
applies to the information of any consumers (past information
or present) of the financial institution’s products
• Adapt and improve the safeguards as needed with changes
or services. The Safeguards Rule forces financial in how information is collected, stored, and used1
institutions to take a closer look at how they
manage private data and to do a risk analysis on 1 Federal Trade Commission. Bureau Complying with the Safeguards Rule. Retrieved from http://business.ftc.gov/
documents/bus54-financial-institutionsand-customer-information-complying-safeguards-rule AND Gramm-Leach- Bliley Act.
their processes. 15 USC §6808
1. What is the purpose of the Safeguards Rule?
Do Not Call Laws
Do Not Call Laws

The significant advancements in technology and data collection allow many industries to use telemarketing
as an effective tool to reach both current and potential customers. With the growth of telemarketing came
consumer complaints related to unwanted calls. Due to consumer unhappiness, Do Not Call regulations
were created. Because of the significant use of telemarketing techniques within the mortgage industry, it is
necessary to review these regulations.
The Do Not Call regulations put the consumer in control of which phone calls they receive. These regulations
stemmed from several laws and eventually resulted in the Do Not Call Registry
With different scopes, the Federal Communications Commission (FCC) and the Federal Trade Commission
(FTC) regulate telemarketing rules established by these acts. The FCC is capable of overseeing interstate
(national) and intrastate (in-state) calls. The FTC typically focuses its regulatory energies on interstate calls,
which are calls made from one state, such as Wyoming, to another state, such as Maine.
Persons regulated by Do Not Call laws include any telemarketing company or individual, that uses
solicitation to gain business.
Telephone Consumer Protection Act (TCPA)

The Telephone Consumer Protection Act (TCPA) regulates the conduct of telephone solicitations and sets
certain standards. Under this act, the Federal Communication Commission (FCC) requires that solicitors
maintain a Do Not Call list for those consumers who wish to avoid solicitation, and it limits telephone
solicitation between the hours of 8 a.m. and 9 p.m.1
Do Not Call Improvement Act

The Do Not Call Improvement Act was passed to amend the Do Not Call Implementation Act. Under this act,
consumers who register their phone number with the Do Not Call Registry will remain in the registry forever
(instead of only 5 years), unless the number is invalid, disconnected, reassigned, or the consumer requests
to be taken off. In addition, telemarketers must stop calling a phone number within 31 days of its registration
into the Do Not Call Registry and from calling cell phone numbers. Cell phone numbers are automatically
entered into the Do Not Call Registry.
Telemarketing rules require that records from call activities be kept for a period of 24 months following the
action. These records include:
• Advertising materials such as brochures, call scripts and promotional materials

• Name and address of prize recipients who are awarded prizes or promotional gifts in excess of $25
• Name and address of customers, the good or service purchased, and the amount paid
• The name (or fictitious name), home address and telephone number of the telemarketing solicitor
• Any verified authorizations or informed consent provided by the consumer2
• Fines for violation of the Do Not Call Act can be as high as $43,280 per violation.
1 https://transition.fcc.gov/cgb/policy/Telemarketing-Rules.pdf
2020Hour
HourSAFE
SAFEComprehensive:
Comprehensive:Fundamentals
FundamentalsofofMortgage
MortgageEducation
Education(NMLS
(NMLS10527)
10527)- Version
- Version4 4 139
E-Sign Act
E-Sign Act
Electronic Signatures In Global and National Commerce Act
Technological advances in the processing of contractual agreements such as mortgages led to the creation and
implementation of the Electronic Signatures In Global and National Commerce Act (E-SIGN Act) on October 1,
2000.1
The E-SIGN Act is the general rule governing electronic records and signatures for commerce in the United States
and those transactions in the global marketplace. The Act allows for the use of electronic records to satisfy any
statute, regulation, or rule of law requiring that such information be in writing. The E-SIGN Act also indicates that
oral communications do not qualify as an electronic record.
The regulatory authority for the E-SIGN Act is dependent on the law governing the item being E-Signed. For
example, if the item being signed is the Truth-In-Lending Disclosure, then the regulatory authority would be the
CFPB which has regulatory authority over the Truth In Lending Act (TILA).
Current technology allows for the limited verification of identity for an electronic signer. The most widely spread
practice for verification involves dual or multiple levels of authentication. Multiple verification usually involves a “click
to sign” action coupled with additional non-public personal information the signer must provide and corroborate.
Newer technologies are now being implemented that include adding bio-metric data such as fingerprints, actual
signatures, voice recognition and retina scans. It is likely that as technology improves and the need for more and
more electronic signatures grow that verification practices will continue to evolve.
The E-Sign Act requires that:
• Prior to making an agreement involving electronically-delivered documents, a disclosure must be provided

indicating that the consumer has the right to receive the signed agreement in paper form.
• A statement indicating whether the provided disclosure is specific only to the agreement that was e-signed
or to a group of documents with which the e-signed agreement is associated.
• The steps needed for the consumer to withdraw their consent to the agreement.
• How the consumer can obtain a paper copy of the agreement regardless of whether or not they agreed to
utilize the electronic method for agreement.
• Before agreeing to the use of electronic records, the consumer must be provided with a statement
indicating the hardware and software needed to access and use the electronic record. Should the hardware
or software requirements change, the E-Sign Act requires that the consumer must be notified of the
change.
Mortgage Acts And Practices - Advertising
Mortgage Acts And Practices - Advertising

MAP, Regulation N
Mortgage Acts and Practices — Advertising (MAP, Regulation N) protects consumers from mortgage-related
misrepresentations in advertising and is regulated by the CFPB.
The activities that apply to this rule include any commercial communication by a mortgage professional. A
commercial communication is defined as a statement, illustration, or depiction meant to generate interest in the
purchase of goods or services. Commercial communications can be in or on any form of media, such as packages,
magazines, radio, web pages, billboards, cellular networks, and letters. 2
Violations can be penalized by any attorney general or other officer of a state, or by the CFPB.
Copies of commercial communication must be retained for 2 years from the last date of the commercial
communication. Documents about available mortgage loan programs must also be retained for 2 years.
Act Regulator Purpose
FCRA/FACTA CFPB
GLBA: Reg. P CFPB
GLBA: Safeguards FTC
Do Not Call Laws
E-Sign Act
Mortgage Acts And Practices

- Advertising
Borrower Ethics
12 and Industry Fraud
1. What is an undisclosed kickback and why is it

considered borrower fraud?
2. Explain these three fraud methods: verbal, conspiracy

and modified documentation.
3. Why would someone commit appraisal fraud?
4. What happens in a builder bail-out fraud scheme?
5. What is predatory lending and what is one example of

predatory lending?
Borrower Ethics And Fraud
Ethics And Money

In this chapter we’ll review aspects of borrower ethics with a focus on human nature. We’ll also discuss the murky
issues involving the difference between telling an untruth or committing fraud, and give brief examples. Finally we’ll
finish with a scenario that is all too common in the world of mortgage origination.
Ethics And Money

Even though this course is not a psychology or sociology class, we need to spend some time talking about human
behavior. The way a borrower acts and conducts their business is directly connected to the way they think and
understand the world around them. People are influenced in so many ways - by their family, friends, culture and
society in general - that it would be foolish for us to assume that the way we see something is the way that our
borrower sees it.
We spend a lot of time in this course talking about the law. Our clients on the other hand have their own lives and
jobs to do. So it’s very likely that they will not have the same level of understanding about mortgages nor will they
interpret their responsibilities and requirements the way we do.
Because of this, we need to explore some basic aspects of human nature - especially when it comes to money.
Human Nature
Self-esteem is the trigger inside of us that wants to present ourselves in the best way possible. You may think that
you perform your morning grooming for others, so that they can see you as your best possible self, but as famed
philosopher David Hume pointed out, the real reason we behave in this manner is out of our own self-interest. We
want to see ourselves in the best light. Hume’s perception of self-interest is another way to describe self-esteem.
What does this have to do with mortgage loans? A great deal actually. As we discussed in the Application unit the
origination process is tied directly to the information that the borrower provides. Remember, who’s responsible
for the information on the application? The borrower. The information they provide for the application is crucial to
whether or not the loan will be approved or denied. Based on what we know about self-esteem, do you think it’s
possible that your client might bend the truth a little bit when answering your questions about their income and
financial well-being? The answer is yes.
The challenge here is whether the client is bending the truth willingly or simply because they don’t know any better.
As psychologist Robert Feldman found in a University of Massachusetts study, “we’re trying not so much to impress
other people but to maintain a view of ourselves that is consistent with the way they would like us to be.” As Feldman
says, “people lie reflexively.” Essentially, we don’t even recognize that it is a lie we’re telling.
Ultimately, we lie because our self-esteem requires us to project an image that fits with who we believe we are.
As this relates to the borrower and the application process, consider how your client might answer a question
related to their income - especially if the income fluctuates due to overtime, bonuses or commissions. Will they
provide a conservative number based on the average of their last few years of work, or are they more likely to tell you
a more generous number formed through a forecast of what they expect to earn in the current year?
Most people will provide the second option. Why?
Our understanding of self-esteem tells us it’s likely that they’ll go with the higher number because that’s who they
think they are (as Feldman said - “view of ourselves”), especially because they know they’ll need a certain level of
income to qualify for the mortgage (“the way they would like us to be”). Oftentimes, they may not even realize they
have exaggerated.
In the end, human nature and self-esteem control how people behave. This behavior can impact the interaction
between MLOs and borrowers. In the next section, we’ll discuss how to interpret this behavior to ensure an ethical
and successful loan origination process.
Ethics And Money
Does A Lie = Fraud?

In a simple sense, a lie is an act of fraud. The word lie is defined in Merriam-Webster’s Dictionary as “making an
untrue statement with intent to deceive.” The same dictionary says fraud is “an act of deceiving or misrepresenting.”
We don’t know about you, but those definitions sound pretty similar.
If the world we live in was black and white (i.e., there are only two choices - black or white, this or that, open or
closed) determining whether a person was committing fraud would be pretty easy. If they lied - they would be
committing fraud. It would be that simple.
But it’s not.
Think back to the last section in which we described self-esteem and human nature. Self-esteem tells us that people
lie with the intent to deceive often not only because they want to make themselves feel better, but also because they
believe that is how others expect them to be. So… is lying fraud?
Well, maybe!
Consider the following conversation you’ve probably had in the past:
You’re having lunch with your friend and your friend says, “What do you think of my new haircut?”
You were really hoping they wouldn’t ask. In fact, you’ve tried your best to avoid the topic all through the meal, but
now you’ve got to answer. In your head you’re thinking it looks like someone took a blender to your friend’s head and
no matter how much gel, mousse or other product they put in their hair, it will still look like a small furry animal died
there.
“Oh, you got a haircut?” You say. “Wow, I’m sorry I didn’t even notice.”
In this interaction you’ve just lied. You intended to deceive your friend by not telling them the truth about their new
look.
Now compare that conversation to this:
“I am not a crook,” former President Richard Nixon said when he denied any involvement in the Watergate scandal.
President Nixon told a lie as well. He deceived the American people and government officials for almost two years in
an attempt to avoid losing his office.
The difference between these lies is morality. Your lie to your friend would be considered moral because it did not
harm them. Nixon’s lie is considered immoral because it did cause harm. The writings on ethics by philosopher John
Stuart Mill sum it up best in declaring that a lie is moral or immoral based on the consequences the lie produces.
If we add Mill’s take on morality to the question of whether or not a lie is fraud, we have a much better indicator.
The lie you told your friend about their hair was moral because the consequence did not cause harm. In President
Nixon’s case, his lie was immoral because of the negative impact it had on our country.
One last thing to add to our fraud equation is the question of active intent. Active intent is when someone is faced
with the reality of their lie chooses to continue forward with the lie. They willingly or knowingly act in a way that
supports the lie.
In our President Nixon example, once the President was confronted by the Congress to turn over evidence from the
White House, audio taped conversations between the President and his aides were erased. The President’s desire to
destroy evidence shows active intent.
Ethics And Money
The Formula For Fraud

While there is no legal basis to formula we’re about to discuss MLOs can use it to help determine if their client is
attempting to deceive. The formula consists of three components.
1. Is the information factually correct?

At the beginning point of the discussion with the borrower, the MLO should set the proper expectations for
honesty and truthfulness in the process. Being honest and providing correct information will provide for the best
loan process experience for the borrower.
Did the borrower provide true information on their application?
2. Are there consequences to the mortgage loan?
Once the borrower has provided their basic information, but before the MLO completes the initial application
process, it might be a good time for the MLO to review the impact false information can have on the loan.
Negative impacts to the borrower include a suspended or denied application, or the lender could provide a loan
that is improperly qualified.
3. Is there intent?
This is a chance for the borrower to reconsider the information they’ve provided to the MLO. At this step the
MLO may be requesting documents for verification and the borrower will have to determine if they gave proper
information initially, or if they need to change some of the things they told the MLO. If the borrower insists on
submitting false information, their actions should be considered fraud.
By using this test and the steps provided above the MLO can taken an ethical approach to their interaction with
the borrower, and be certain that they’ve taken the extra steps necessary to ensure they’ve done the right thing.
So let’s add it up. If we take a lie, add the question of morality, and then consider active intent, we have a pretty
good system for determining fraud.
1. _________________________ determines fraud
Ethics And Money
Example Of Fraud:
Let’s apply our equation to the mortgage industry!
Assume a borrower lies about their income on the application hoping to get a higher
loan amount than they would qualify for. To support this lie, the borrower manipulates
(alters) their pay stubs to show a higher income amount. Based on what we’ve already
covered let’s see if this is fraud:
1. The borrower intends to deceive the lender = LIE
2. If the lender makes the loan to the borrower at the higher amount, there’s a possibility
that the borrower may not be able to make the payments with their lower actual income,
and default on the loan. The possibility of default is bad for the lender = IMMORAL
3. The borrower manipulated their pay stubs to support their lie = ACTIVE INTENT
In this case we have a fraudulent act!
Example Of NOT Fraud:

A borrower tells the MLO that their income is $2,000 per week because the last time
they were paid, that’s how much they earned. The borrower hopes the lender will use
the $2,000 amount as the basis for qualification because it will allow him to get the
mortgage he needs to buy the home he wants. As part of the loan process the lender
reviews the borrowers pay stubs and finds his income to be lower than the $2,000 per
week he provided during the initial application call. Let’s review to see if this should be
considered fraud:
1. The borrower intends to deceive the lender = LIE
2. If the lender makes the loan to the borrower at the higher amount, there’s a
possibility that the borrower may not be able to make the payments with their lower
actual income, and default on the loan. The possibility of default is bad for the lender
= IMMORAL
3. The borrower submitted legitimate documents for processing = NO ACTIVE INTENT
In this case we do not have fraud.
Borrower Fraud
Borrower Fraud
Suspicious Activity
To protect the lender and ensure they are meeting the ethical requirements, mortgage loan originators should be on
the lookout for suspicious activity on the part of the borrower.
Suspicious activity includes a borrower with:
• Multiple properties and mailing addresses

• Unusual or unverifiable income sources
• Lack of necessary documentation
• Untraceable funds
Keep in mind, just because someone demonstrates one or more of these behaviors doesn’t mean that they’re
committing fraud, but they should trigger a higher level of scrutiny on the MLO’s part.
If you encounter circumstances such as these, ask more questions to better determine the reasons behind the
activities. This is another opportunity for you, as an MLO, to provide quality service to your client by digging deep
and ensuring the best possible experience and loan available.
If after further examination you still believe that your borrower is committing fraud, you are obligated to report this
behavior to the proper authorities at the state or federal level.
If there is anything you should take away from this discussion about borrower fraud, it is how important your role as
a mortgage loan originator is in helping to stop fraud before it happens. The MLO’s interaction with the borrower
such as asking proper questions and providing quality counsel and education will lead many borrowers away from
mistakes that could be very costly for them. We’ll say it one last time, the penalty for mortgage fraud includes up to a
$1 million fine or 30 years in prison or both.
Impact Of Borrower Fraud

Typically when a borrower commits mortgage fraud they do so with the desire of benefiting from the property
gained or the improved circumstance of the new loan. While on its face this seems innocent because the borrower
commits the fraud without intending to harm anyone, the impact of their fraud can have far-reaching victims.
If the borrower is unable to repay the loan due to lack of income, the owner (lender or investor) of the loan
may be harmed. If the borrower is unable to handle the expense of maintaining their property due to the over-
whelming cost of repaying the loan, the appearance of the home may negatively impact the value of surrounding
properties. Additionally if the borrower defaults on the mortgage the scar of foreclosure and vacant property can
also hurt nearby property values. In situations in which wide spread foreclosure occurs an entire community can
be devastated. All of these are examples of unintentional impacts caused by a borrower’s seemingly innocent yet
fraudulent actions
Types Of Borrower Fraud

State and Federal regulation and requirements for mortgage law have increased the amount of information lenders
must review before approving a potential borrower’s mortgage loan application. With the increased vigilance in
ensuring that a borrower is truly qualified for the mortgage they receive, lenders are becoming more reliant upon
the borrower’s income as a key factor for mortgage approval. Alas, this increased focus on income has created
renewed activity related to actions by borrowers to fabricate inflated earnings that will ensure they meet the lender’s
requirements.
Borrower Fraud
While modern technology allows many lenders to process mortgage loan applications faster, it has also made
forgery easier for the most novice culprit. Unethical borrowers intent on providing fraudulent income information
to lenders can do so today with the ease of a few keystrokes on a computer. Software that allows for document
modification through cutting and pasting or other graphic manipulation is readily available in the consumer market.
Because of this, mortgage loan originators and ultimately the lender’s underwriter must be extremely attentive
when reviewing the documentation provided by the borrower for review. Documents that cannot be clearly read
or with information (dates, addresses, amounts, etc.) that doesn’t match up with reported information are red flag
indicators that fraud is being perpetrated.
Fraudulent actors in an effort to satisfy a loan’s income requirements often submit falsified W2s, pay stubs, bank
statements and even tax return forms such as the 1040. Because this practice is so prevalent most lenders will
combat this by contacting a borrower’s employer to verify income. Lenders will also use a Form 8821 or 4506-C
to request a tax transcript of prior tax returns from the IRS so that they can verify the information the borrower
provided for review is correct.
Someone committed to acting unethically is likely to do so regardless of the counsel they receive from the mortgage
loan originator. However in cases where a potential borrower is unaware of the ramifications of their actions, the
mortgage loan originator has the responsibility of educating the borrower as to the necessity for behaving in an
ethical manner. Communicating to the borrower the downsides associated with submitting fraudulent income
information can help prevent fraud before it begins.
Asset Fraud
Asset fraud on the part of the borrower simply involves the borrower providing false information about their
assets. Things like artificially increasing their account balances or creating fictitious accounts to make their
qualifications better. As the technology and pace for MLOs improves to verify and confirm borrower assets, so do
a fraudulent actor’s ability to manipulate the system. Moving monies from account to account or using borrower
funds to temporarily inflate account balances are just a few of the ways this fraud can be perpetrated.
Income Fraud
Income fraud involves the borrower falsifying income information to provide a better qualification profile. Income
fraud can occur through verbal, or conspiratorial means as well as through document modification.
A recent increase in income fraud has been through conspiracy methods in which a fraudulent borrower will
conspire with a friend who will claim the borrower works for them in a part-time contractual capacity. The friend
may provide a loan to the borrower through repeated payments that seem to be income when initially reviewed.
Once the loan closes the borrower will return the loaned payments to the friend. This is income fraud because the
contract income was actually a loan.
Bank Fraud
Bank fraud is a form of borrower fraud similar to asset fraud. Bank fraud relies on the fraudulent borrower’s
manipulation of accounts through money transfers and short term loans.
An example of bank fraud is something known as check kiting. This happens when the fraudster will write a check
from one account to another without the funds to cover the amount written on the check. At the time the check
is deposited in the borrower’s account, it appears that they have the money. If reviewed at the right moment,
the borrower could use the account balance to support their application qualifications. This is fraud because the
borrower is demonstrating a balance on paper that doesn’t actually exist.
Bank fraud scenarios such as this require a high level of sophistication on the part of the borrower and fairly
limited underwriting standards on the part of the lender.
Borrower Fraud
Occupancy Fraud
There are 3 different ways a borrower can occupy a property:
• Primary Residence: The borrower lives in the property for more than 6 months out of the year. The
borrower’s primary residence is most likely the address on their IDs, and where they get their mail.
• Secondary/Vacation Home: The borrower lives in the property less than 6 months out of the year. This
property must be a reasonable distance from their primary home.
• Investment Home: The borrower does not live in the property, and intends for someone else to live there.
Typically a family member/friend lives here, or the property is rented out.
Occupancy fraud occurs when the borrower applies for a mortgage claiming a less risky occupancy type than they
actually intend to use the home for. As we already know, the riskier the loan, the higher the qualification standards
and costs. So a borrower might claim that the mortgage they seek is for their primary residence rather than an
investment property - even though they intend to use the home as a rental unit.
The borrower may do this because they know that they may need at least a 25% down payment for an investment
property, and the interest rate is likely to be substantially higher than for a primary residence. Certainly, the
borrower’s knowledge and intent demonstrate this as fraud.
Occupancy fraud is one of the most prevalent forms of borrower fraud occurring today. In some cases, the fault
lies as much with the mortgage loan originator as with the borrower.
Consider this - what if the MLO did not do a very good job of explaining the differences between occupancy
types (primary, second home, or investment property) and the borrower simply assumed there was no difference?
The borrower could receive a loan based on primary occupancy qualifying standards. While this example is an
incorrect qualification of occupancy, I think we can all agree that the borrower is not responsible in this example
for fraud.
1. Which occupancy type is least likely to be defaulted on? _______________________________

2. Why would someone commit occupancy fraud?
Fraud Methods
Fraud Methods
Verbal Fraud
Fraud through verbal actions can be tricky to determine. A verbal action could be something as simple as talking to
a client as we assist them in filling out the URLA. As we’ve already covered, it’s quite possible for the client to lie to
you, but not with actual fraudulent intent. This is even more difficult to determine if the fraud is occurring through
verbal means.
For instance, if the borrower is providing information on the phone to their mortgage loan originator, and tells the
MLO an incorrect level of income, it’s hard to determine if that’s fraud. If we apply our TRUTH/LIE + MORALITY +
INTENT formula to this case, here’s how it might play out in a phone call:
MLO: You said that you’re paid hourly and you make $20 per hour. You work full-time, so your income is $800 per
week?
Borrower: I usually work some overtime so it’s more like $900 per week.
MLO: Great! Is that $900 regularly or does it fluctuate?
Borrower: Oh, it’s definitely at least $900.
Here’s where the benefit of how the FRAUD formula can help. We assume that the borrower is telling us the truth,
but at the same time we want to give them counsel on providing accurate information.
MLO: How we qualify your income is important. So one of the things we ask borrowers to do once we get the
loan into process is provide documents like pay stubs and W2s to help us verify your income. Because you receive
overtime that fluctuates, we may want to take an average over the last two years so that we’ve got a clear picture
and ensure that you’re receiving credit for everything you’ve earned. If you’ve got those documents handy we can
review them.
Remember - we assume our borrower is being truthful. However, that last piece from the MLO helps the borrower
know what to expect next in the process, and also gives the borrower the opportunity to reconsider if they’re
stretching the truth.
If the borrower is lying and knows that they’re lying and decides to continue the lie by saying, “I’m looking at my
W2 from the last two years and it shows $46,800 for last year and $49,000 for the year before” - this is verbal fraud.
Conspiracy Fraud
A conspiracy is when more than one person works together to commit an act. A conspiracy to commit mortgage
fraud on the part of a borrower is when the borrower is working with others who commit fraud.
An example could be a borrower providing their conspirator’s name and phone number as their place of
employment. When the MLO, processor or underwriter calls the phone number to confirm the borrower’s
employment information, the conspirator provides false information to the caller.
Modified Documentation
Today’s technology makes it very easy for a fraudulent actor to commit fraud through document modification.
Using a computer scanner and some simple software, a borrower could change pay stubs, W2s, tax returns or other
documents to support a fraudulent claim (or maybe they could just forge a doctor’s note - see below).
2020Hour
HourSAFE
SAFEComprehensive:
MortgageEducation
Education(NMLS
(NMLS10527)
10527)- Version
- Version4 4 151
Borrower Fraud
It’s important to consider that fraud requires intent, so if the borrower makes
a bona fide error (things like misinterpreting information, misspelling a name
or entering an incorrect date by accident), it is definitely not fraud.
Now that we’ve discussed different ways borrower fraud occurs, let’s look at
some specific types of borrower fraud. Keep in mind these fraud methods
and how they might be used as we review the types of fraud.
Examples Of Borrower Fraud

Property Flipping
Property flipping means buying a house, and then selling it in a short period of time at a higher price, creating
a profit for the seller. Property flipping, when bona fide work is performed to warrant the increased sales price, is
completely legal and ethical. Property flipping in cases in which a home is purchased at a price lower than market
value (such as a foreclosure auction) and then resold at market price is also legal.
When false representation of improvement and property value occur, property flipping becomes fraudulent. This
fraud scheme typically involves an appraiser who inflates the value of the home; a seller and even buyers in a cash-
out property flip purchase.
In a cash-out property flip the buyer may approach the seller and make a considerably higher offer than the asking
price. As a condition of this offer, the buyer may ask for part of the difference, between the offered price and asking
price, back in cash after closing.
Regardless of the type of property flipping, some red flags include appraisals that lack sufficient information to back
the value given, the property being sold at a higher value than the market area, or the seller claiming significant
renovations without proof.
Straw Buyer
Another way an unqualified buyer may attempt to obtain a mortgage loan is by employing a straw buyer. As it
relates to mortgage loan qualification, the real buyer will use the straw buyer’s name and qualifying information on
the mortgage application to mask the actual buyer’s intent to purchase the property.
The straw buyer is often paid for their participation, but may also do so voluntarily. For example, family members
may voluntarily agree to purchase a home with the intention of transferring ownership to another family member
after closing. Although it may be done with good intentions, this seemingly innocent act is considered mortgage
fraud.
As the first point of contact with the borrower, the mortgage loan originator must be diligent to ensure that a straw
buyer is not being used for qualification. Some common red flags indicating a potential straw buyer scheme include
the use of funds from more than one entity for the down payment or to pay fees, exercising a power of attorney
when closing the loan, possible signs that the buyer will not occupy the residence (such as an unrealistic commute),
or a big downgrade in value or size from the buyer’s previous home.
Buy And Bail

One qualification fraud scheme that is becoming more prevalent is a direct result of the recent mortgage meltdown
and foreclosure crisis. The “buy and bail” scheme involves a borrower buying a new home and then immediately
bailing, or going into foreclosure, on their old home.
During the recent financial crisis, many homeowners found that their home was no longer worth the balance of
their current mortgage debt or because of loss of income were unable to pay the mortgage. Faced with these
challenges, some homeowners took advantage of the situation and used foreclosure as a way to cancel the
mortgage debt.
To accomplish this, the borrower would make every effort to keep their qualification factors (the 4 Cs – cash, credit,
capacity and collateral) current and in good standing until they were able to qualify and purchase a new home.
To supplement their qualifying information the borrower will often create fraudulent documents such as rental
agreements showing that they intend to rent their current mortgaged residence to offset the cost of the new home,
or fake income documents as were discussed in the previous section.
Once the mortgage is approved and the purchase of the new home closes, the borrower vacates the old home and
occupies the new home. At the same time, the borrower allows the old home to be foreclosed upon and may no
longer be liable for the debt on the previous property (this is a simplistic explanation for the purpose of example
because liability is dependent upon the mortgage contract and the legal jurisdiction).
The mortgage loan originator can help prevent the occurrence of buy and bail schemes by looking out for the
following red flags: the buyer’s new home being significantly lower in value than their current home, rental
agreements without deposits, or current loan terms that may increase the chance of foreclosure.
Seller-Buyer Collusion
One of the most frequent instances of buyers and sellers working together to defraud the mortgage lender can
be found in undisclosed kickbacks. While there is nothing unethical or fraudulent in the buyer and seller working
together to accomplish the most favorable transaction for both parties, it is necessary for their activities to be open
and transparent for all of the parties involved – including the lender.
Undisclosed Kickback
When selling a home, the seller is allowed to offer seller concessions to the buyer to help with any repairs needed
for the home (on some USDA programs), or to help pay for closing costs. Each program has a maximum amount
of allowable seller concessions, and these concessions can go towards closing costs and prepaid escrow deposits,
but never towards the down payment. For example, in an FHA loan, no matter how much the buyer receives in
seller concessions, they must bring the 3.5% down payment to the closing table.
If the buyer doesn’t have the money for a down payment, they may resort to accepting undisclosed kickbacks (an
undisclosed kickback is a financial incentive that a seller gives a buyer at closing without informing the lender) to
help qualify for an otherwise unobtainable mortgage. This could involve agreeing to a higher than originally set
purchase price, so the seller is repaid from the borrowed money, or it might involve the buyer paying the seller
after closing using their own funds. Regardless, it involves misrepresentation on the application and is considered
mortgage fraud.
To thwart the impact of undisclosed kickbacks, the lender should be aware of some red flags including: a different
sales price in the Closing Disclosure and sales contract, family members or business relations on both sides of the
transaction, funds paid to undisclosed third parties on the Closing Disclosure, and alteration of the sales price to
fit the appraised value.
Silent Second Mortgage
A fraud element that may be used by an unethical buyer and seller to subvert a loan’s down payment requirement
involves a silent second mortgage on the property. While second liens are perfectly legal, they become fraudulent
when the second lien is not disclosed to a lender participating in the property’s financing.
A seller’s silent second involves the seller giving the buyer a loan for the down payment, and then immediately
after closing the seller records a second lien on the property ensuring repayment, without informing the lender.
Lenders can avoid the problems of silent second mortgages by looking out for red flags such as “boiler plate” sales
contracts that have very limited details (because the seller and buyer have a separate seller’s contract containing
the majority of the details including verbiage for the silent second).
Short Sale Fraud

You Might Be Curious...
As a result of the recent financial crisis and mortgage
Short Sale Fraud Red Flags
meltdown many homeowners found themselves in the
difficult position of owing more on their home than In order to prevent fraud there are a number of
the home was worth. This situation known as being red flags that lenders should be wary of when
“underwater” coupled with other financial pressures caused entering into a short sale. These include:
some homeowners to re-evaluate their responsibilities as • The borrower going into default without
mortgagors and seek a way to get out from under with their warning and making no attempt to find
current mortgage debt. a solution for the debt. This would be
To accomplish this many used the short sale process to meet immediately followed by a short sale offer.
their needs. Typically in a short sale, a homeowner will need • The homeowner citing various unusual and
to demonstrate to their lender that they’ve exhausted every contradictory reasons for defaulting on the
option to sell their home for a price at or above the current mortgage.
mortgage balance, and now have a potential buyer willing
• No other evidence on the part of the
to purchase the home at an amount less than the balance.
borrower that they are having financial
If the lender agrees to accept the lesser amount from the
difficulties with the exception of the
buyer, a short sale transaction can occur. The result of the
mortgage delinquency (all other accounts
sale is that the previous owner may be released from their
and credit are intact).
mortgage obligation and the buyer receives a clean title on
the property. • Someone with the same last name or
obvious affiliation makes the short sale offer.
Short sales reached an epidemic level in late 2010. Consider
for a moment that by the end of 2012 38% of all home The price offered for the short sale is less than
sales in Wayne County, Michigan were short sales. With the the home’s current market value.
prevalence of short sales occurring, it was only natural that The current (delinquent) homeowner is
less than ethical individuals would find a way to game the supposed to receive cash back at closing (this is
system and profit from fraudulent activity. It was estimated usually listed on the contract as fees for services
in 2011 that short sale fraud cost the mortgage industry over or repairs).
$375 million (an increase of over 20% from 2010).
The following sections on Flopping and Non-Arms Length Sales should provide some clarity to short sale fraud.
We’ll also provide some potential red flags that lenders can be aware of to protect themselves from fraudulent
schemes.
Flopping
One of the more recent forms of mortgage fraud - flopping, is a symptom of the significant rise in short sales. A
typical flopping scheme works as follows:
• The home’s current owner convinces their lender that they are unable to sell their home for an amount that
will allow the homeowner to payoff their existing mortgage balance. The homeowner will request that the
lender consider a short sale.
• The homeowner then works to ensure that no quality bids are made on the property. This may be
accomplished by making the property appear undesirable to potential buyers by enhancing cosmetic
problems (smells, flaking paint, false water damage) that can be easily remedied.
• An accomplice working with the owner approaches the lender with an extremely low bid on the property.
Based on analysis and limited investigative resources the lender accepts the low bid and releases its lien
on the property so that the seller can transfer clean title to the accomplice. The accomplice then resells the
home at a much higher price than was paid and splits the profit with the original owner.
Flopping schemes work best when a lender is overwhelmed by the volume of troubled mortgages on their books
and does not have the time or money to do thorough research on properties and homeowners looking to short
sell. It is estimated that in 2011 the average profit gained by fraudsters through flopping was $55,000 per short
sale.1
1 http://money.cnn.com/2012/10/23/real_estate/mortgage-fraud-flopping/
Non-Arms Length Sale

Another scheme currently en vogue related to short sales is the Non-Arms Length Sale. The basis of the Non-Arms
Length sale is based on the willing desire of individuals to perpetrate fraud so that they can live in their home at a
reduced cost and is a variant of a straw buyer scenario. Here’s how the scheme works:
• The current homeowner works with an accomplice (typically a relative or someone in a business relationship
with them). The accomplice makes a short sale purchase of the home and receives a new smaller mortgage
on the property. The accomplice then deeds the title back to the original owner so that they may remain in
the home and service the mortgage at a much reduced cost.
• To avoid this most lenders will require that the borrower sign an “arm’s length affidavit.” This affidavit
requires the borrower to promise that they will not sell their home to someone with whom they have an
existing relationship.
A real world example of a non-arms length sale occurred in 2013 in California when a borrower and her Realtor
committed short sale fraud. Agustin Simon was underwater on her home, and along with her Realtor Minerva
Sanchez, plotted to sell the property to Sanchez’s son via a short sale. The plot was to then have him deed the title
right back to Simon. Simon provided him with $355,000 to purchase the home. In addition to Sanchez receiving
her normal commission as the listing real estate agent, she also received 75% of the commission paid to her son’s
real estate agent. As a result, Simon’s bank, Tri-Counties Bank, lost $247,000, and Freddie Mac lost $107,348.2
2 http://mortgagefraudblog.com/real-estate-agent-arrested-for-alleged-role-in-short-sale-fraud-scheme/
1. It is the MLO’s responsibility to educate the borrower on the ___________________________________________ and

___________________________________ involved with fraud.
Industry Fraud
Appraisal Fraud
Industry Fraud
The act of fraud is not exclusive to the borrower. In fact the largest fraudulent mortgage schemes are those
involving industry professionals. The inside knowledge possessed by mortgage professionals is what allows their
schemes to succeed and escalate. In this section we’ll summarize some of the more prevalent industry fraud
schemes perpetrated by industry professionals. Keep in mind as you read through this chapter that the descriptions
contained here are simplified for clarity and that most fraud schemes are more complex and typically coupled with
other illegal actions.
Appraisal Fraud
This is a major contributor to unethical lending practices in the mortgage industry. In the past, mortgage
professionals would work with appraisers and influence their determination of a property’s value. This often resulted
in inflated appraisal values, and ultimately more money lent than the home’s true value. Real estate agents and
consumers were also known to work with appraisers to get a higher value. These higher valuations allow scheme
participants to profit illegally and also create a risk to the lender because the true collateral does not support the
loan amount.
Builder Bail-out
A builder bail-out occurs when a builder wants to quickly Examples Of Builder Bail-Out:
sell units in a subdivision, tract, complex, or condominium The builder uses mortgage brokers or
and uses fraudulent schemes to sell the remaining other companies to originate loans with
properties. The seller (the builder) may give hidden down false qualifications.
payment assistance or seller concessions to sell the A builder employs straw buyers to
property and leave a financial institution with an LTV greater purchase the properties when the
than 100%. Builders rely on consistent credit and cash builder can no longer lure investors or
flow to maintain operation. In economically or financially speculators.
stressful conditions, a builder may have a strong sense A builder convinces buyers to purchase
of urgency to sell remaining properties to cover financial property by offering to pay excessive
incentives that are undisclosed to the
obligations.
lender, including down payments, no-
money-down promotions, and closing
cost assistance.
1. Consumer fraud is _________________________ and _________________________

2. Industry fraud is _________________________ and _________________________
Industry Fraud
Predatory Lending
Predatory Lending
Earlier in the course we discussed the Dodd-Frank Act and the rules created around UDAAPs (Unfair Deceptive or
Abusive Acts or Practices). The UDAAP rules were created as a direct reaction to fraudulent behavior on the behalf of
industry members in the form of predatory lending.
Predatory lending occurs when mortgage professionals take advantage of their knowledge and position to convince
unprepared or unsophisticated borrowers into getting loans that may be harmful for the borrower. The basis of
the phrase can be found in the word “prey” which means to hunt. In the case of predatory lending, the mortgage
professional preys on borrowers to make an illegal profit.
Typically in cases of predatory lending loan originators and lenders are the industry players involved. Predatory
lending harms many including lenders and investors, as well as borrowers and the communities in which they live.
Chunking
This type of fraud is also known as Ponzi
scheme and investment club. In a chunking Example Of Chunking:
scheme, a third party convinces a borrower to William attended a seminar that discussed ways to increase
invest in a property, or multiple properties, with income by investing in real estate with no money down. Chris, a
the third party acting as the borrower’s agent. third party who presented at the seminar, encouraged William
to invest in two real estate properties. With Chris’s help, William
Without the borrower’s consent, the third party
completed the required application and provided documentation
submits loan applications on the borrower’s for the loans. William was unaware that Chris owned numerous
behalf to multiple financial institutions for properties in the name of a limited liability company and
various properties. The applications are submitted applications on 12 properties, not just the two William
submitted as owner-occupied or as investment consented to. William attended two of the closings with a different
properties with all falsified documents. Once representative of the LLC as the seller of the properties. Then Chris
acted as an agent for William, with power of attorney, for the other
the loan is disbursed, the third party keeps the
10 closings. William ended up with 12 mortgage loans instead
loan proceeds and leaves the borrower with of the two he knew of, and the lenders were stuck with loans to a
multiple loans and financial institutions with borrower without the ability to repay the debts and were forced to
major financial losses. This elaborate scheme is foreclose on the properties.
a multi-person collaboration. It usually requires
the assistance of an appraiser, broker, and title
company to make sure the third party, acting
as the borrower’s agent, will not have to bring
money to the closings.
Steering
Just like with predatory lending, steering often falls under the UDAAP regulations because it occurs when mortgage
professionals use their knowledge and position to take advantage of borrowers. The MLO’s understanding of
products, programs and pricing allows them to direct borrowers into loans that are more advantageous to the
mortgage professional rather than the borrower.
Examples of steering include directing consumers to products that compensate the MLO better than other products
or not making the borrower aware of the risks associated with the loan.
Obviously the one who stands to lose the most in cases of steering is the borrower.
Industry Ethics
The Impact Of Mortgage Fraud - 10 Years Later
Industry Ethics
If you’ve reached this point in the course and you think mortgage fraud and its impact on our communities is
not that big of a deal, you may want to think again. Read the following story from the Cleveland Plain Dealer and
Cleveland.com, about the impact of mortgage fraud on Northeast Ohio and then answer the questions at the end
at the of the story. Be prepared to discuss your thoughts in class.
The Impact Of Mortgage Fraud - 10 Years Later1

By Eric Heisig, Cleveland.com
CLEVELAND, Ohio — A decade after the foreclosure crisis wreaked havoc on Cleveland and the rest of the country,
the area’s real-estate market is doing better but has not fully recovered from years of mismanagement and rampant
fraud.
Lenders lost millions of dollars and many went out of business in the wake of the subprime mortgage crisis that
began in 2007. Those who purchased homes were left with mortgages they could not pay, leading to foreclosure.
As the problem got worse, investigations undertaken by a mortgage fraud task force led to hundreds of indictments
against real-estate agents, appraisers, brokers and homeowners. While the actions of these people are not the sole
reason for the housing market’s collapse here, prosecutors noted that they exacerbated an already dire situation.
On the 10-year anniversary, cleveland.com is looking back at some of the major figures who did their part to
contribute to Northeast Ohio’s foreclosure crisis. Many have been released, others remain in prison.
Please note that this list is not exhaustive. There were many, many other defendants convicted in these cases. This is
just a snapshot of those who either led schemes or resulted in the largest losses.
Uri Gofman
Gofman, a Beachwood businessman, had family, friends and others invest in his
real estate company, Real Asset Fund. He bought more than 450 homes — nearly
all on Cleveland’s East Side or in the eastern suburbs — and falsely claimed workers
completed improvements, or he inflated the value of improvements to refinance and
sell the homes to unqualified buyers, prosecutors said.
With help from real estate broker Tony Viola and other mortgage brokers and title
companies, Gofman defrauded lenders using fraudulent down payments and loan
applications and distributions involving $44 million in loans.
A federal jury found Gofman guilty of multiple mortgage fraud-related counts, but
were deadlocked on others. He later pleaded guilty to 23 other charges and was
sentenced in January 2012 to 8 1/2 years in prison. He was also charged, and pleaded
guilty, to charges in Cuyahoga County Common Pleas Court.
Industry Ethics
Tony Viola
Next to Gofman, prosecutors said Viola was one of the masterminds whose actions
largely contributed to the mortgage crisis in Cleveland.
Federal prosecutors said Viola took part in a scheme to provide false information on
mortgage applications, obtain loans for fake sales between he, Gofman and other
participants, and kept the money while allowing banks to foreclose on most of the
homes. The scheme involved more than 450 homes and $44 million in loans.
“This mortgage fraud scheme had an immense impact on this community,”
Assistant U.S. Attorney Mark Bennett said during Viola’s sentencing in 2012.
Viola, 51, is serving a 12 1/2-year sentence at a prison camp in McKean, Pennsylvania.
A county jury acquitted him of similar state charges. Viola represented himself at the
state trial.
Despite multiple rejections, he continues to challenge his case, and he and his supporters frequently write to
cleveland.com to profess his innocence.
Anthony Jerdine
Jerdine, of Pepper Pike, worked to buy a home in South Russell in 2007 through a land
trust agreement for $710,000. He then resold it the same day for $2 million to another
man based on a fraudulent appraisal, federal prosecutors said.
Others Jerdine worked with completed and submitted a fraudulent loan application,
and defrauded Washington Mutual Bank by having the company issue a mortgage
loan worth more than $1.5 million.
Jerdine pleaded guilty to conspiracy to commit bank fraud and money laundering,
bank fraud, and multiple counts of money laundering. U.S. District Judge Donald
Nugent sentenced Jerdine, 45, in 2012 to more than eight years in federal prison.
He was released in May 2016.
Lavon Ruderson
Ruderson appraised properties beyond their real market value. This is appraisal fraud.
It allowed Wilson and straw buyers to get the extra money from the loans for their own
use.
Ruderson appraised several homes on Cleveland’s East Side for $80,000 to $95,000,
though the homes were worth half that amount. The scheme involved 28 properties,
and loan companies lost nearly $2 million.
A federal judge sentenced Ruderson, 47, to more than five years in prison after a jury
found her guilty. She is set to be released next year...
Industry Ethics
Susan Alt
Susan Alt, 64, of Thousands Oaks, California, acquired about $3 million in a mortgage
fraud scheme involving seven homes in Chagrin Falls, Gates Mills, Toledo and Port
Clinton. She pleaded guilty to 31 state charges in 2010.
Prosecutors said Alt masterminded the scheme, along with real estate agents, title
agents, mortgage brokers, an appraiser and straw buyers. It involved fraudulent
mortgage applications and upscale homes.
Alt put much of the money she earned from the scam into fine dining and hotels.
Common Pleas Judge Eileen Gallagher sentenced Alt in 2010 to nine years in prison.
Judge Nancy Margaret Russo, who heads the county’s re-entry court, freed Alt in 2016
after Alt was recommended for the program.
Alt completed the program in February.
Stephen Holman
Stephen Holman, who was employed as a mortgage loan officer for the now-defunct
Buckeye Lending, worked with his brother Timothy Holman and others in a scheme
that involved seven properties in Solon.
Prosecutors said Stephen Holman and his brother persuaded straw buyers to allow
properties to be put in their name “by promising they could purchase the properties
with no money down and would receive cash back at closing,” according to a federal
indictment.
Both state and federal prosecutors brought similar charges. A county jury found him
guilty of several fraud-related counts, and he pleaded guilty to federal charges.
County Common Pleas Judge Nancy Margaret Russo sentenced Stephen Holman in
2009 to 12 years in prison. She freed him from state custody in December, but the
46-year-old is now serving a 41-month federal prison sentence imposed by a judge in
a corresponding federal case.
Postscript
The laws and actions we discuss in the course become all the more real after reading this story. The long-term
impact of the fraudulent actions of these individuals (as well as numerous others not featured here) continues to
haunt Northeast Ohio as home values still struggle to reach the level of national averages. Some borrowers are only
realizing today that they may have participated in one of these individual’s schemes and must now deal with the
burden of over-valued and wrongly titled properties.
YOUR SCENARIO IS________________________________
1. Is this industry fraud, borrower fraud, or both?
2. What form(s) of fraud is this an example of?
3. Who did this fraud hurt?
13 Insurances
1. Name the different types of mortgage insurance for

each loan program.
2. What is the difference between basic hazard insurance

and homeowner’s insurance?
3. What is the difference between replacement value and

market value?
4. What organization establishes flood zones? Why is

flood insurance necessary in some transactions?
5. What are the two types of title insurance? Which one is

mandatory, and which one is optional?
Insurances
Mortgage Insurance, Funding Fees And Guaranties
Insurances
Most people think they have a basic understanding of insurance. In a basic sense, insurance provides protection
against loss. Our friends at Dictionary.com say insurance is “coverage by contract in which one party agrees to
indemnify or reimburse another for loss that occurs under the terms of the contract.”
We would like to use Dictionary.com’s version as an introduction to this chapter because if we break it down, the
pieces of the definition will help us focus on the upcoming discussion.
• “Coverage by contract”. Insurance in our business requires an agreement between at least two parties. Because
a loan is involved, we will often have three parties involved - the homeowner (borrower), the lender, and the
insurer.
• “Indemnify or reimburse.” Insurance isn’t some kind of magic shield that deflects danger and stops damage.
Instead, it provides money or some other kind of support to fix whatever might be damaged if danger occurs.
• “Under the terms of the contract.” Insurance only protects the parties against a specific danger or issue. For
instance, your car insurance doesn’t cover the costs when you visit your doctor to be treated for an illness.
It’s important that we understand Dictionary.com’s definition because in this chapter we’ll discuss the categories of
insurance (heads-up there are three - mortgage, hazard, and title) you’ll encounter in your role as a mortgage loan
originator. Each category protects the insured parties from different kinds of trouble that can occur for borrowers
and lenders once the loan is closed and payments begin.
As you read this chapter, be sure to distinguish what type of insurance is needed and by whom, and why the
insurance is necessary.

The first category of insurance we’ll cover is mortgage insurance. Mortgage insurance is a form of protection for
the lender in case the borrower defaults (doesn’t pay) their mortgage debt obligation. This insurance is not used to
cover the borrower in terms of their monthly payment. Mortgage insurance is used as a last recourse after a non-
paying borrower is foreclosed upon and the lender sells the home to obtain the principal balance owed on the
home by the borrower.
The purpose of mortgage insurance is to fill the gap between what the foreclosed upon property sells for, and what
the lender is owed. If the home sells for enough money to cover the debt, the lender will not require compensation
from the insurance. If the home sells for less than what is owed, the insurance should cover the difference.
1. Insurance is protection against a _____________________________________________, secured by the payment of a

_________________________________ scheduled premium.
2. Mortgage insurance protects the lender from losing money if the borrower stops paying their mortgage, the
home goes into ___________________________, and the lender sells it for _____________________________________________
the borrower still owes.
Insurances
The reason mortgage insurance is so important to our industry is that it provides certainty to the lender that even if
the borrower defaults on the loan, the lender is protected against loss. This certainty allows the lender to be more
willing to make loans, which means more opportunity for borrowers to get the loans.
Depending on the type of loan product we’re discussing, mortgage insurance may have different names. Providers
of those loans are very touchy about calling something insurance when they refer to it as a fee or guarantee. So be
careful - it’s important to use the name that’s associated with the program or product even though as we’ll explain,
they’re all just forms of mortgage insurance.
One last thing - the borrower is responsible for paying the mortgage insurance. Depending on the program the
payment may be required at the beginning of the loan, as part of the borrower’s monthly payment or a combination
of both.
Example Of Mortgage Insurance:

For example, a lender makes a mortgage loan to Hector for $100,000.
Unfortunately after faithfully paying the mortgage for five years and
reducing his principal balance to $87,000, Hector falls on hard times
and cannot continue making his monthly payment. The lender works
with Hector to find a way to solve the problem, but in the end no
solution is available. Hector moves out and the lender is forced to
foreclose on the property.
The lender sells the home in an attempt to get the money back
that Hector owes them for the loan. The housing market in Hector’s
neighborhood is in the midst of a downward trend, and the home
only sells for $75,000. This means that the lender still needs $12,000
($87,000 - $75,000) to make up the difference. The mortgage insurance
fund pays the lender the $12,000 to make up the shortfall.
2020Hour
HourSAFE
SAFEComprehensive:
MortgageEducation
Education(NMLS
(NMLS10527)
10527)- Version
- Version4 4 165
Insurances
Conventional Mortgages - Private Mortgage Insurance, PMI

In general both conforming and non-conforming conventional mortgage loans require mortgage insurance if the
borrower has an LTV ratio higher than 80% (equity < 20%). So if the borrower has a $100,000 loan amount and their
current equity position is less than $20,000, they are typically required to carry mortgage insurance on the loan.
The type of mortgage insurance used for conventional mortgages is called private mortgage insurance (PMI).
Remember, conventional mortgages in their most basic sense are considered private mortgages because they’re
not government loans. You can use this as the key to link conventional mortgages to private mortgage insurance.
Just to reiterate what we covered in the introduction to this chapter, each mortgage program uses different
terms to describe how they insure their loans. Conventional mortgages call it PMI.
The amount of PMI required to be paid on the loan each month is tied directly to the loan’s risk profile. This is why
PMI is only required on conventional loans with LTV higher than 80%. Once the borrower achieves a 20% equity
position in the home, they’re considered to be pretty well vested (committed) to the property and unlikely to default
on their debt obligation. Those houses that are defaulted on at lower than 80% original LTV are also less likely to
have lost more than 20% of their original value. This is why many home buyers strive to make a 20% down payment
when they buy a home. A down payment of 20% or more on a conventional mortgage allows them to avoid the
expense of PMI.
PMI can be paid in a variety of ways. It can be paid monthly in conjunction with the borrower’s PITI payment, at
closing in lump sum form, or sometimes by the lender (LPPMI - Lender Paid PMI). Because monthly PMI payments
are the most common, we’ll focus our discussion on that method.
In most circumstances the amount of PMI required on the loan will be set at the time of closing based on the LTV.
This setting of the PMI amount is called casting. There is typically a specific PMI factor associated with a range of LTV
ratios. In this way, LTV determines the PMI factor, or the amount borrowers pay for PMI.
Calculating PMI
The PMI is calculated by multiplying the PMI factor by the loan amount and then dividing the result by 12 to
determine the monthly PMI payment requirement. This monthly PMI payment will be required every month until
the borrower reaches at least 80% LTV.
The loan amount is $100,000. Their PMI factor is 0.37% (or 0.0037). $100,000 X .0037 = $370 ÷ 12 = $30.83. Based
on this equation, the borrower will be required to add $30.83 to their monthly payment until they reach at least
80% LTV.
PMI Cancellation Act
What did we mean before by “at least 80% LTV?”
There is a law that we will talk about again in the “Fairness Laws” called the Homeowners Protection Act (HPA).
HPA is also known as the PMI Cancellation Act, and provides the opportunity for the borrower to request that their
PMI be canceled at 80% LTV. This is approved/allowed, provided they’ve been on time with their payments and
two other factors:
• The home’s value has not declined since the time the loan closed.
• There are no new liens on title since the time the loan closed.
Verifying these two factors will incur expense for the borrower in the form of a new appraisal and title work.
Because of these expenses, many borrowers will allow for the PMI to remain until the LTV reaches 78%. At 78% the
lender is obligated under the rules of the PMI Cancellation Act to remove the borrower’s PMI requirement.
Insurances
FHA Loans - UFMIP & MIP

Now that we have a pretty good grasp on mortgage insurance based on our discussion in the introduction and
through the block on Private Mortgage Insurance (PMI), let’s talk about FHA loans. As we said earlier, each form
of mortgage insurance has a different name depending on the program. FHA requires two forms of mortgage
insurance on its loans: Mortgage Insurance Premium (MIP) and Up-Front Mortgage Insurance Premium (UFMIP). FHA
borrowers must pay both as a condition of receiving an FHA loan.
Both MIP and UFMIP function like other mortgage insurances - they are designed to provide a safety net for the
lender in case the borrower defaults and the proceeds from a foreclosure sale fall below the remaining loan amount.
In cases of this shortfall with FHA loans, the premiums paid on UFMIP and MIP cover the lender’s loss.
1. FHA’s UFMIP is a one-time fee of _____________ of the loan amount for most FHA loan products.
Insurances
Upfront Mortgage Insurance Premium - UFMIP

Up Front Mortgage Insurance Premium is a one-time fee on FHA loans, paid by the borrower at closing. UFMIP
is a standard 1.75% of the loan amount. It can be paid with funds at the closing table or rolled into the amount
financed.
As an example, if our borrower receives a $150,000 loan, the UFMIP for the loan would be $2,625 ($150,000 X
1.75%). The borrower could pay the $2,625 at closing or roll it into the loan and thus pay the UFMIP as part of the
monthly payment.
Mortgage Insurance Premium - MIP
Mortgage Insurance Premium (MIP) - sometimes referred to as monthly mortgage insurance premium - is the FHA
mortgage insurance that must be paid monthly by FHA borrowers. Like PMI, the premium amount is calculated
annually and then distributed equally across the 12 monthly payments. These premium amounts and the factors
used to determine them are available in the FHA chart below.
In the chart you’ll see that the FHA has
divided their loans into two general
Mortgage Term Of More Than 15 years
categories based on loan term: those
Base Loan
with terms beyond 15 years and loans LTV MIP (bps) Duration
with terms 15 years or less. You’ll also Amount
see information about LTV, the MIP and Less than <90.00% 80 11 years
duration. or equal to >90.00% but <95.00% 80 Mortgage term
You’ll notice that in the chart they use $625,500 >95.00% 85 Mortgage term
something called bps (basis points) to <90.00% 100 11 years
describe the MIP factor. Basis points (bps) Greater than
>90.00% but <95.00% 100 Mortgage term
is just financial lingo for 1% of 1%. So if $625,500
one percent is written mathematically >95.00% 105 Mortgage term
as .01, 1% of 1% is .0001, or one one- Mortgage Term of Less than 15 years
thousandth. So the MIP factor in the first Base Loan
available line of the chart is 80 bps or LTV MIP (bps) Duration
Amount
.008. Less than <90.00% 45 11 years
You’ll also see that the length of time the or equal to
borrower will be required to pay MIP is >90.00% 70 Mortgage term
$625,500
shown in the far right duration column.
<78.00% 45 11 years
For loans with LTVs of 90% or less, Greater than
borrowers are only required to pay MIP >78.00% <90.00% 70 11 years
$625,500
for 11 years. If the LTV at closing is higher >90.00% 95 Mortgage term
than 90%, the borrower will be required to
pay MIP for the full term of the loan.
PM I MIP
• __________________________ loans
• __________________________ loans
• Monthly mortgage insurance payment
• Monthly mortgage insurance payment
• _______________ either for ______ years,
• _______________________ at ________ LTV,
or for the ______________________ term
or borrower can request it end at 80%
of the loan depending on intial LTV
Insurances
VA Loans - Funding Fees, Guaranty And Entitlement

Mortgage loans provided by the United States Department of Veterans Affairs carry a component that protects
the lender in case of default, but it’s not called mortgage insurance. Instead, the VA refers to a system involving
entitlement, guaranty and funding fees. At the end of the day, it all functions pretty much like mortgage insurance,
but it’s called entitlement and guaranty, and the borrower pays for it through the one-time VA funding fee.
Here’s a summary explanation of how it works based on general principles:
How It Works
A Veteran receives a level of entitlement that is based on service record. Basic entitlement provides the borrower
with a $36,000 guaranty on loans of $144,000 or less. If the loan amount is greater than $144,000, the basic
guaranty is 25% of the loan amount.
The guaranty is a commitment to the lender by the VA that if the borrower should default and the home is sold
through foreclosure, the VA will make up the shortfall to the lender from the guaranty. So, if a borrower has basic
entitlement and a full guaranty benefit, the lender knows that if foreclosure occurs there will be money available to
cover the loss.
While the VA doesn’t come right out and say it, the cost for the guaranty is in some ways paid for by the borrower’s
funding fee. The basic funding fee for a first-time VA borrower without a down payment is 2.30% of the loan
amount. Fees range from 0.5% to 3.6% depending on the circumstances of the loan. Circumstances include down
payment amount, loan purpose as well as number of times the borrower has previously used a VA loan. One of the
major benefits earned by a Veteran is the right to waive the funding fee if they have a disability incurred because
of their service, so it’s possible that a VA borrower will not have a funding fee requirement.
1. VA’s Funding Fee is a one-time fee of _________________________ of the loan amount.
Insurances
VA Loan Scenario
Adam is an Army Veteran seeking to buy his first home. He contacts his friend Taylor at Fast Loans about getting a
mortgage. Taylor takes him through the standard application process and finds that Adam qualifies for a VA loan.
Adam buys a home for $135,000. He uses the no down payment option for his loan and rolls the 2.30% funding
fee into the loan. The seller covers Adam’s closing costs through seller concessions, so the only thing Adam is
responsible for is the loan. After the roll in of the funding fee, Adam’s total loan amount is $138,105.
Over the next 6 years, a lot changes for Adam. He gets married, starts his own business and becomes a father. He
makes his monthly mortgage payments on time and leads a generally happy life.
In the seventh year, things change again. Adam’s business fails. To make matters worse, one day he comes home
from a hard day of pounding the pavement looking for work, only to find that his wife and child are gone. All the
furniture’s gone too. There’s a note left on the floor in the living room where the couch used to be in his wife’s
handwriting:
“Sorry, but I can’t be married to you anymore. Little Adam’s at my folks’ house, I’m headed to Mexico with a friend.”
This is all too much for Adam and he has some kind of breakdown. He just walks out the front door and never
comes back.
A few months after Adam’s breakdown, Fast Loans is forced to foreclose on the house. They can’t find Adam, and
no one has been paying the bills, much less cutting the grass. The house is in shambles and Fast Loans sells the
home through foreclosure.
At the time of the foreclosure sale, Adam still owes Fast Loans $102,000. Because the house is in such disrepair,
the home only sells for $90,000. Fast Loans is out $12,000 ($102,000 - $90,000). This is where the VA Guaranty
comes in to play. Remember, Adam’s basic guaranty was $36,000. The VA provides Fast Loans $12,000 from
Adam’s guaranty to make up the difference.
Sounds like mortgage insurance - right?
Okay, but our story doesn’t end here. Let’s say some time passes and Adam resurfaces after spending the last
decade strolling the beaches of California collecting sea glass. He’s straightened himself out, started a new life
and he’s making a mint in the sea glass art business. In fact, he’s known as the King of Sea Glass by people who
collect the stuff.
All this time Adam’s been living frugally, getting his finances in order and hoping that someday he can buy
another house. He even shares joint custody of his son with his ex-wife’s parents (she never came back from
Mexico).
By chance, he runs into his old friend Taylor at the grocery store. He tells her how sorry he is that he screwed up
with the house and how he’s gotten his life together. She tells him she understands and says she actually bought
one of his pieces at an art gallery - she’s a big fan of sea glass. He tells her that someday he’d like to take another
shot at buying a house, but he’s not sure if he could ever qualify again. She tells him that it may be possible and
if he wants they can sit down at her office and take a look. She tells him that he should check out if he has any
remaining guaranty available from his VA entitlement.
And that’s why the story didn’t end. The VA allows a borrower to use remaining entitlement and guaranty benefits
on a new loan (if there are any available) - even if the previous loan ended in foreclosure with a portion of the
guaranty being tapped to cover the loss.
In Adam’s case $12,000 of his guaranty was used which left him with $24,000 of available guaranty ($36,000 -
$12,000). The remaining guaranty can be used for a new loan (provided he qualifies). The new loan may have
different down payment and additional requirements because of the limited guaranty, but nonetheless the
guaranty may still be available.
While the scenario is a simplified one, it should help to explain how the VA funding fee, entitlement and guaranty
work for VA borrowers.
Insurances
USDA Loans - Guarantee And Annual Fee

The final version of programs and mortgage insurance we’ll discuss is for USDA mortgage loans. Like the VA, the
USDA does not call their financial protections for lenders in case of default mortgage insurance - instead they refer
to Guarantee Fees and Annual Fees.
While USDA offers multiple loan programs, the Guarantee Fee and Annual Fee, along with the protection they
provide to the lender, are only available for loans offered through their guaranteed loan program (i.e., Single Family
Housing Guaranteed Loan Program - SFHGLP).
The protection that USDA provides to lenders with these loans is the same methodology seen with other mortgage
insurances. Should the borrower default on the loan and the lender sell the home at a loss, they may be able to
recoup (get back) a portion of the loss through payment from the USDA.
The USDA is able to fund this protection through payment of the borrower’s initial Guarantee Fee which is paid at
closing (1% for purchase and refinance loans) and Annual Fee (0.35% of the unpaid balance).
The Annual Fee does not come due until 12 months after loan closing and is paid in monthly installments. As an
example, if a borrower has an unpaid balance of $50,000 after the first year of making payments on their loan, the
Annual Fee requirement would be $175 ($50,000 X 0.35%).
Therefore $14.58 ($175 ÷ 12) would be added to each loan payment for the next year.
1. USDA’s Guarantee Fee is a one-time fee of _______ of the loan amount for the Single Family Home
Guaranteed Loan Program only.
2. USDA’s Annual Fee is _______ of the loan’s remaining balance, calculated yearly on the SFHGLP only.
Insurances
Hazard Insurance
Hazard Insurance
In this chapter we will break down what hazard insurance is and what it isn’t. We’ll also discuss what obligations the
borrower has to the lender as well as the expectations servicers have. Finally, we’ll discuss one of the unique hazard
products, flood insurance, that your borrower may be required to carry, and touch briefly on other special hazard
products that you may encounter in your role as a mortgage loan originator.
One of the things that a mortgage lender will absolutely require of their borrower is hazard insurance protection. To
be clear, hazard insurance protects the home in the event of disasters like storms, fires, floods and earthquakes.
If one of these things happens and the home is damaged, the hazard policy covers the cost of repair or provides
some other remedies such as reconstruction services.
Basic Homeowner’s Insurance

In most cases, a basic homeowner’s insurance (HOI) policy will include the hazard insurance coverage for the
natural disasters we described above. If the property is in a high-risk area for a specific type of hazard, that
coverage may not be available as part of the basic policy and a special hazard policy may be required for that
specific hazard. As an example, flood insurance is a form of special hazard insurance required when a home is
located in a flood zone.
Basic HOI may also include things like the cost for replacing contents of the home (e.g., the borrower’s TV, computer
and furnishings) as well as temporary housing services if needed due to the damage caused by the hazard. Those
items are not part of the hazard coverage.
HOI Simplified
Homeowner’s insurance (HOI) includes hazard insurance; hazard insurance does not include HOI.
Replacement Value
The law allows lenders to require that borrowers carry hazard insurance on the mortgaged property, but only to
the extent of the replacement value of the home. Replacement value is the amount of money needed to rebuild
the home where it stands.
Replacement value does not take into account property location or market value - only the cost of the materials,
labor, plans, permits, etc. It’s entirely possible for a small home in an exclusive community to have a low
replacement value of $75,000 even though it could sell on the open market for $750,000. Meanwhile a large home
in a declining neighborhood might sell for $25,000, but cost $250,000 to rebuild.
This conflicting dilemma is one that you should be aware of because as an MLO, you may encounter a borrower
attempting to finance a home which cost them a minimal amount, but will require a significant amount of hazard
insurance due to its high replacement value.
1. Hazard insurance is the most basic type of homeowner’s insurance that covers the
________________________ cost of the home in case of disasters.
2. Required for ______________________________, with every program. Additional policies like flood insurance
may also be required depending on ________________________.
Insurances
Hazard Insurance
Force-Placed Insurance
Force-placed insurance is hazard insurance obtained by a servicer on behalf of the creditor of a mortgage loan
when no hazard insurance coverage is present on the mortgaged property. This could happen if a borrower allows
their hazard insurance to lapse after the loan closes.
Servicers may not charge a borrower for force-placed insurance unless there is reason to believe that the borrower
did not meet the mortgage contract requirement of maintaining their own hazard insurance on their property.
Before the servicer can place and charge for such insurance the borrower must be provided with a Force-Placed
Insurance Notice. This written notice must be delivered at least 45 days before the servicer assesses an insurance
charge and contains the following:
• The date of the notice
• The servicer’s name and address, as well as the borrower’s name and address
• A statement that requests the borrower to promptly provide hazard insurance information for the property
and identifies the property by its physical address
• A description of the requested insurance information and how the information may be provided
• A statement that the borrower’s hazard insurance is expiring or has expired, and that the servicer does not
have evidence of hazard insurance coverage past the expiration date
• A statement that hazard insurance is required on the borrower’s property, and that the servicer has
purchased or will purchase insurance at the borrower’s expense
• A statement that insurance the servicer has purchased or will purchase may cost significantly more than
insurance purchased by the borrower, and may not provide as much coverage
• The servicer’s telephone number for borrower inquiries
Flood Insurance
As you read before, when a home is located in a high-risk area for a particular kind of hazard, the lender may require
the borrower to carry a specific hazard policy for that threat. An example of this type of policy is flood insurance.
During the appraisal process, the appraiser will determine based on available data if the home is located in a flood
zone. If this is the case, ensuring that flood insurance is carried by the homeowner will be a condition set by the
underwriter prior to loan approval. The appraiser or surveyor must determine the flood zone designation for the
property’s location and this will determine whether the homeowner needs to obtain flood insurance.
Flood insurance only covers the home above grade. Above grade means only the house on the ground, not
under the ground. Basements are not covered, nor is the land upon which the house sits. So if the flood washes
away the ground, flood insurance will not cover the cost of replacing the dirt the house is on.
In many cases, homeowners required to obtain flood insurance can do so through the Federal Emergency
Management Agency’s (FEMA) National Flood Insurance Program (NFIP) or through a private insurer. Even
with a private insurer, the federal government retains responsibility for the underwriting losses.
1. Which of the 4Cs is hazard insurance related to?
2. Why would a lender require the borrower to get hazard insurance?
Insurances
Hazard Insurance
An area called a Special Flood Hazard Area (SFHA), designated by zones A, AO, AH, A1-30, AE, A99, AR, AR/
A1-30, AR/AE, AR/AO, AR/AH, AR/A, VO, V1-30, VE, and V, is defined as an area of land that has a 1% chance
of being flooded within any given year. This is also called the base or 100-year flood mark.
Flood insurance coverage must be equal to whichever of the following is the least:
• 100% of dwelling’s replacement cost

• The maximum insurance available from the NFIP
• The unpaid principal balance (UPB) of the mortgage1
• Zones A and V are high-risk where flood insurance is required. The maximum limit of coverage depends
on whether you choose to buy a federal or private flood insurance policy. Coverage from the NFIP typically
can’t exceed $250,000 for your home’s structure and $100,000 for your personal property. Private flood
insurers can provide much higher limits.
1 Fannie Mae. Determining Required Hazard and Flood Insurance Coverage. Retrieved from https://www.fanniemae.com/ content/RoboHelp/genservjobaids/index.html#Determining_Required_Hazard_and_Flood_
Insurance_Coverage.htm
Insurances
Title Insurance
Title Insurance
We’re down to the last of the three insurances which is title insurance. Title insurance protects the policyholder
against unexpected claims against title. Remember, when we talk about title in our business we’re talking about
ownership. Title is not a piece of paper or a document, it’s simply another word for ownership. Therefore title rights
are ownership rights.
What Is Title?
The basis for the term title and ownership goes back to medieval times when royalty basically owned everything.
Members of the royal family all had titles like King, Queen, Prince, Princess, Duke, Duchess, or the King’s Sister.
As a simple and partially historic fact example, King Henry VIII was the King of England from 1509 - 1547. Because
he was the King, he pretty much owned everything in the British Empire. If you know anything about Henry, he was
a bit of a scoundrel and occasionally he needed to reward people or buy them off. One of the ways he did this was
by granting them a “title.”
For instance, when Henry wanted to divorce his fourth wife, Anne of Cleves, he granted her the title “the King’s
Sister” and gave her Hever Castle to live in. So with the title of “the King’s Sister,” came ownership of Hever Castle
(and we suspect a great many chuckles behind her back… seriously, “the King’s Sister”, she should have held out for
something a little more impressive like maybe “Hever Clever” - hey it rhymes). This is where the concept of title as
ownership was initially created.
As title relates to our business, people often just refer to title as one all-encompassing activity that includes the
investigation and the insurance, but to be clear they are two different things. The title process in the mortgage
industry actually consists of two different things - title work (research and investigation of the ownership of a
property) and title insurance (protection for claims against that ownership).
Title Work
The title investigation process is requested by the lender’s underwriter to ensure that the information provided by
the borrower about the property and their ownership rights are correct. The investigation includes a review of the
records associated with the property to see if there are any encumbrances (claims against title). Encumbrances
could include existing mortgages, tax liens, judgment liens, or mechanics liens. We’ll cover the title process in more
depth in the third party services block.
Insurances
Title Insurance
Title Insurance Policies

Once the title work is completed, and provided the research findings meet the expectations of the title company
and the underwriter, the title company will provide a Commitment to Insure. The commitment to insure is the
title company’s statement that if the loan closes they are prepared to provide title insurance in the case of a claim
against title.
The title company will offer two title insurance policies: Lender’s Title Insurance and Owner’s Title Insurance. Both
policies protect the policyholder in case of title claims, but they are designed for different policyholders.
Lender’s Title Insurance

Lender’s title insurance is a policy that the lender will require, and the borrower must pay for. It protects the lender
from any claims on title over the term of the loan. Let’s say there was a missed tax lien that pops up a few years
after closing - someone needs to pay it, and the title insurance does just that.
Owner’s Title Insurance
Owner’s title insurance functions in much the same way as lender’s title insurance by protecting the property
owner against claims on title, however it is optional. Owner’s title insurance can be written beyond the length of
the mortgage and for the entire period of ownership for the buyer.
Things To Know
Summary And Master Title Policies
When the loan initially closes, a Summary Title Insurance Policy is
issued. This is a simplified form of the insurance policy providing
all the guaranties and protections as previously described. The
Summary Policy is created whether the insurance is for the lender or
the owner. Once the paperwork for the loan is finalized and filed, a
Master Title Insurance Policy is issued that includes the filing specific
within the language of the policy.
1. _________________________ title insurance is required and will be paid by the _________________________ at closing.
2. Title insurances ___________________________________________________________________________________.
14 Third Party Services
1. What are at least 3 different types of third-party

services? Why do we need each of these third-party
services?
2. What is the Valuation Independence Rule? Why do we

need this?
3. What is the purpose of USPAP?
4. What are the three different types of appraisal

approaches? What are some specifics for each?
5. What is the most common appraisal form?
6. What are the 5 steps in the title process and what takes
place with each step?
Third Party Services
Credit Reporting

You may remember from our block on RESPA that there are many more players involved in a mortgage loan
transaction than just the lender. While the lender provides the financing, there’s a whole host of others needed to
make the transaction work. These other participants are referred to as third party services, or settlement services.
Each one of these services comes with a fee that is charged by the service provider. In most instances this fee is
passed on to the borrower. How the fee is handled is governed by the rules of RESPA. This chapter will provide a
brief overview of what these services are and how they work.
Credit Reporting
As we’ve discussed previously, the credit pull is one of the first steps that an MLO will typically take when beginning
the application process with the borrower.
The beginning of the loan origination process is not the only time that the MLO will look at the borrower’s credit
report. Most underwriters will also review the borrower’s credit just prior to closing to ensure nothing has changed.
For example, if the borrower opens a new line of credit while the mortgage loan is in process, it could impact the
borrower’s credit profile and may cause them to no longer qualify for the loan.
Credit reports are typically provided to our industry by the three major consumer reporting agencies (CRAs):
• Equifax
• TransUnion
• Experian
Credit Reporting
Many providers of consumer credit will use a tri-merged report in which all 3 credit reporting agencies are
represented in a singular form.
These companies are the main third party service providers for credit reporting. There is a fee for using these
companies, which most lenders pass on to the borrower as a credit reporting fee. A consumer’s credit profile may
change daily; the credit report is typically valid 90-120 days, depending on the loan program. Each reporting
agency calculates credit scores differently, but the following factors are commonly involved:
• Payment History (≈35% of the credit score): Paying bills on time is one of the best ways for a consumer to
maintain a good credit rating.
• Credit Use (≈30% of the credit score): The ratio of current revolving debt (credit card balances) to the total
available revolving credit (credit limits).
• Credit History (≈15% of the credit score): The length of the consumer’s credit history.
• Credit Type (≈10% of the credit score): Whether credit is made up of installment, revolving, or other consumer
finances.
• Inquiries (≈10% of the credit score): If there have been recent searches for credit and/or the amount of credit
obtained recently. While a consumer’s attempts to obtain new credit can have an adverse effect on their
credit score, it is generally understood by the credit reporting agencies that multiple credit reviews (pulls) by a
specific segment of lenders for large ticket items, such as a mortgage or car, during a fixed shopping period of
approximately 14-28 days should not negatively impact a consumer’s credit score.
How Adverse Information Affects Your FICO Credit Score
Consumer With 780 FICO Consumer With 680 FICO

Event
Score Score
Bank card payment 30

90-110 point drop 60-80 point drop
days delinquent
Mortgage charge-off or
140-160 point drop 95-115 point drop
foreclosure
Filing for bankruptcy 220-240 point drop 130-150 point drop
These score impacts are estimates and will vary depending on individual circumstances
Source: Consumer Financial Protection Bureau
1. Credit reports focus on _____________________________________________________________________________________

__________________________________________________________________________________________.
Property Inspection
Property Inspection
In most circumstances, a property inspection is not the appraisal. We’ll go into depth on the appraisal later, but for
the moment consider that the property appraisal determines the property’s value while the inspection determines if
something may impact the home’s structure in a negative way.
Depending on the loan program, sewer, pest or other inspections may be required. State and local law may also
require specific types of property inspection. As an example, VA requires termite and pest inspections in some
states.
Property Survey
The property survey is usually conducted by a property surveyor and may be required in some mortgage loan
transactions. The surveyor determines the property’s physical boundaries by performing an on-site evaluation
through measurement and inspection. The survey may be requested by the lender or the title company depending
on the location of the property and the loan program.
Appraisal
While it is necessary for the borrower to qualify for the mortgage loan, just as important to the final approval by the
underwriter is the value of the subject property. For a mortgage application to be approved, the value of the home
must meet minimum value thresholds. The determination of that value is the appraisal.
Appraisal Basics
Once the borrower receives an initial approval and the underwriter has confirmed the accuracy of the application
with necessary documentation, an appraisal is ordered. Given the importance for the appraiser to operate
independently, many MLOs will use a third party appraisal selection company to assist in finding and assigning
an appraiser to perform the appraisal. This additional step ensures that no undue influence can be put on the
appraiser.
The appraiser is required to provide a written report of their property valuation. The appraisal may include a visual
inspection inside and outside of the property, and it may also include the exterior of the home and rooms inside.
The appraiser does not include outlying buildings (such as detached garages) in their determination of value. Nor
do they include certain basement or below grade rooms in the home unless they meet a finished standard (no
exposed cinder block, rafters, etc.).
The appraiser takes photographs of the home, and of comparable properties to provide illustration for their report.
They also include a map showing the property’s location.
1. Property inspections focus on _____________________________________________________________________.

2. Property surveys focus on _________________________________________________________________________.
3. With your group, discuss why credit reporting, property inspections, and property surveys are important for the
lender.
Appraisal
Rules and Regulations

Valuation Independence
Section 42 of TILA (the Valuation Independence Rule) requires that the appraiser operate independently
of outside influences in the conduct of their job. TILA prohibits coercion of the appraiser and any improper
characterization of value.
TILA establishes boundaries for conduct between interested parties (MLOs, borrowers) and the appraiser, but that
does not mean that all interactions are illegal. For instance, the appraiser can be informed of recent renovations
to the home. The appraiser may even request receipts from the homeowner if available to determine costs. The
underwriter can request additional information and explanation from the appraiser after receiving and reviewing
the report. Underwriters may also request multiple appraisals to be performed on the property if necessary.
USPAP
The Uniform Standards of Professional Appraisal Practice (USPAP) is administered by the Appraisal Foundation
and provides the guiding principles of the appraisal industry (it’s their SAFE manual).1
The basic USPAP requirements for appraisals require the appraiser to:
• Identify the client
• Identify the reason for the appraisal (e.g., loan, owner’s information, buyer’s information)
• Describe the real estate
• Identify how the property is held (e.g., fee simple, leased fee)
• Identify the appraisal approach (i.e., market, cost, income)
• Provide relevant dates
• Describe the basis for and scope of the report
• Describe assumptions and hypothetical conditions
• Include a summary
• Describe what the property is currently being used for
• Identify whether the report can also be used by someone other than the client, and if so, how and why
• Sign and certify the report
1 “Uniform Standards of Professional Appraisal Practice (USPAP) 2018-2019.” The Appraisal Foundation, 2018. http://www.uspap.org/files/assets/basic-html/.
1. Appraisals focus on _________________________________________________and are typically required.

2. The appraised home value must be _____________________________________________ the loan amount.
Appraisal
Program-Specific Appraisal Guidelines

Each mortgage program includes some unique qualities and requirements for the appraisals done for their loans.
• Fannie Mae and Freddie Mac provide many of the industry standards and their requirements serve as the
benchmark for the entire industry. Fannie and Freddie include an AIR (Appraisal Independence Requirement)
with all their loans that mirrors TILA’s Valuation Independence rule. Fannie and Freddie appraisals are good for
120 days.
• FHA follows the standards set by Fannie Mae and Freddie Mac, with one exception. The borrower’s health and
safety are FHA’s chief concern as it relates to the appraisal, and therefore they require that any repairs needed
to ensure health and safety must be made prior to closing.
• VA requires a Certificate of Reasonable Value (CRV) as its valuation documentation. The CRV does not list
items in need of repair and is valid for 180 days. In addition to the CRV, the lender may require a full appraisal.
• USDA loans require that the home must be in livable and stable condition. The USDA does allow for repairs to
be made after closing. The appraiser must provide an explanation if seller concessions exceed 6%.
Appraisal Adjustments
Appraisals in many ways are based on comparable property values. To ensure that the homes used for comparison
meet an equitable standard, the appraiser uses a system of adjustments to compensate for the resulting
difference in value. Each type of adjustment allows for a maximum threshold difference. If the adjustment item
exceeds the threshold either a viable explanation is required, or a new comparable property must be found.
The adjustments and corresponding thresholds are as follows:
• Line Adjustments ≤ 10% for each line item - When comparing one specific item in the subject property to the
same in a comparable property (such as number of bedrooms) and the value provided, the difference cannot
exceed ten percent. As an example if the subject property sales price is $100,000 and the bedroom value
in the subject property is $15,000 and the comparable property bedroom value is $18,000, the difference is
$3,000. $3,000 ÷ $100,000 = 3%. So in this case the line adjustment is well within the tolerance.
• Net Adjustments ≤ 15% for overall comparison - When comparing all the factors involved between the subject
property and the comparable property, the net combination of items cannot exceed fifteen percent. For
example, if there are two adjustments, one of +$3,000, and one of -$2,000, the net adjustment is $1,000
($3,000 - $2,000). Using our previous $100,000 example, this would be a 1% difference and still within the 15%
tolerance.
• Gross Adjustments ≤ 25% for overall comparison - When comparing all the factors involved between the
subject property and the comparable property, the gross combination of items cannot exceed twenty-
five percent. For example, if there are two adjustments, one of +$13,000, and one of -$15,000, the gross
adjustment is $28,000 ($13,000 + $15,000). If we use our $100,000 subject property value again, this
$28,000 gross adjustment would exceed the 25% threshold and the appraiser would need to find a different
comparable property.
Appraisal
Appraisal Approaches
There are three approaches to determine a property’s value through appraisal. These are the sales comparison
approach, the cost approach, and the income approach.
The Sales Comparison Approach is also known as the Market Approach and relies on 3 recent sales in the
surrounding area (usually within a 1 mile radius). This is the most common approach and can be used for purchases
or refinances.
The Cost Approach is used for construction loans, remodeling, repairs, improvements and additions. The value
is based on an analysis of the cost of materials, labor, planning and oversight. This approach can also be used to
determine replacement value for insurance purposes.
The Income Approach is used for income producing properties (e.g., rental property). This approach determines the
amount of cash flow the property can produce based on market rents and upkeep costs. A calculation using the net
operating income of the property divided by the capitalization rate (the investor’s expected return) is used to help
determine the property’s value.
Appraisal Forms
The Uniform Residential Appraisal Report (URAR, Form 1004) is the form most commonly used for appraisals. The
URAR is considered a full appraisal because it includes an interior and exterior inspection of the evaluated property.
All three valuation approaches (sales comparison, cost, income) should be considered for the 1004 report, but the
appraiser must select the most suitable approach and justify the reasons. The URAR is not, however, meant to report
the appraisal of a manufactured home, condominium, or cooperative.2
The following are some other common forms used in specific appraisal circumstances:
• Exterior Only (Form 2055)
• May be used if the lender only requests an evaluation of the home based on the exterior inspection
• The appraiser may do outside measurements, review county records and take exterior photographs3
• Small Residential Income Property Report (Form 1025)
• Used for unique investment home types such as multi-unit dwellings with unique layouts and varied unit
sizes (e.g., a duplex that was redeveloped from a single family home)4
• Individual Condominium Report (Form 1073)
• Used for condominium evaluations5
The 3 different appraisal approaches are:

1.
2.
3.
2 Fannie Mae. Uniform Residential Appraisal Report. Retrieved from https://www.fanniemae.com/content/guide_form/1004.pdf

3 Fannie Mae. Exterior-Only Inspection Residential Appraisal Report. Retrieved from http://appraisalservices.com/download/new%202055.pdf
4 Fannie Mae. Small Residential Income Property Appraisal Report. Retrieved from http://appraisalservices.com/download/new1025.pdf
5 Fannie Mae. Individual Condominium Appraisal Report. Retrieved from http://appraisalservices.com/download/new1073.pdf
Title
Title
The title process investigates the legal ownership of the home as well as what liens or obligations may be associated
with the property. The underwriter will request a title report on the property to ensure that there are no unforeseen
circumstances that might impact the mortgage transaction, such as additional property owners, unpaid obligations,
or lien priority of existing mortgages.
Other areas of concern include easements and right of ways which obligate the property owner to allow for certain
specific uses of all or sections of the property. These obligations and easements are called encumbrances because
they restrict how the property can be used or sold.
The information in the title report should match the information the borrower provided at application. If it does not,
the success of closing the loan may be jeopardized.
There are multiple steps in the title process, ultimately concluding with the purchase of title insurance should the
loan close.
Title Process
A title company agent or attorney that is selected by the borrower performs title work. The goal is for the lender,
at a minimum, to obtain a title insurance policy. When the title commitment is submitted to the lender, it usually
comes in a package that includes the insured closing letter, the preliminary Closing Disclosure (HUD-1 Settlement
Statement), payoffs, and wiring instructions for the funding of the mortgage loan.
Title Search
The lender will provide the title company or attorney with the borrower’s name and property address. Based on
this information, the title abstractor or attorney will do a search of the county records to establish the status of the
property (e.g., ownership, liens, judgments). It is the abstractor’s responsibility to review the property’s title and
verify that there are no unsettled liens or claims against the property.
Completed Title Report
This report is the product of the title search. Even though a mortgage applicant may be buying a property (in
the case of a purchase) or already own the property (refinance), they may not be entirely aware of (or truthful
about) the number of liens against the property. That’s why it’s crucial for a lender to obtain a title report for any
property upon which they intend to make a mortgage loan. The title report shows a summarized history of the
legal ownership of a real property, including any recorded documents that affect title. These records involve taxes,
special assessments, judgments, mortgages, and other encumbrances (liens) that have ever affected the real
property. The title report is also known as the “Abstract of Title.”
Technical Review
The title report will be analyzed by the title insurance company to determine accuracy. Once this review is cleared,
the title commitment, which is a promise to issue a title insurance policy, is ready to be delivered.
1. Title = _____________________________________________________
2. Title work focuses on __________________________________________________and is always required.
Title
Preparation Of Commitment To Insure

Once all open liens, judgments, and ownership interests are established, the title company will issue a title
binder or policy to the lender. This binder identifies ownership, requirements that must be satisfied, and
exceptions. Exceptions will be listed to show what the title insurance policy will not cover.
Title Insurance
Title insurance policies protect lenders or homeowners against losses due to disputes over the ownership of
real property or claims against the title that may have been missed in the original title search. They are generally
paid for with a one-time premium by the borrower. There are two types of policies that are typically issued:
Borrower’s title insurance and lender’s title insurance. Lender’s title insurance is always required, however, the
borrower’s title insurance is optional.
Underwriting
While the appraisal and title process are being worked on, the underwriter assesses the risk of the loan by
comparing what information was given on the loan application to verification documentation. In some cases,
the underwriter will put the loan through an automated underwriting system (AUS) to see if the loan should be
approved or denied. Below are a list of the automated underwriting systems:
1. DU (Desktop Underwriter)/ DO (Desktop Originator): used for Fannie Mae loans
2. LPA (Loan Product Advisor): used for Freddie Mac loans
3. TOTAL (Technology Open to Approved Lenders): used for VA and FHA loans
4. GUS (Guaranteed Underwriting System): used for USDA loans
2020Hour
HourSAFE
SAFEComprehensive:
MortgageEducation
Education(NMLS
(NMLS10527)
10527)- Version
- Version4 4 185
15 Mortgage Math 2
1. What is the difference between a lender rebate and a

discount point?
2. Explain the difference between the simple interest rate

and the Annual Percentage Rate (APR).
3. How is loan payoff calculated?

Mortgage Math 2
What’s The Point?
Mortgage Math 2
What’s The Point?
If you’ve worked in the finance industry, you may have heard the term point(s) used to describe a measurement of
value, and it’s no different in our business. In the mortgage industry, a point is equal to 1% of the loan amount. So if
the loan is $500,000, one point would be $5,000 ($500,000 x 1%). It’s that simple! You may not need that calculator!
Many mortgage loan originators will charge one point to originate a borrower’s mortgage. So in that case, if the
borrower has a $100,000 mortgage loan and the MLO charges them 1 point to originate (write) that mortgage, the
origination fee is $1,000 (1% of the loan amount). If the loan were $310,000 the one point fee would be $3,100.
Points are also used to help the borrower pay to reduce their interest rate. These are called discount points. Even
though a point is 1% of the loan amount it does NOT equal one interest rate percentage.
Because the value of money and interest rates change

constantly, using points as increments of cost creates
a simpler way for the financial industry to keep pricing
consistent. Here’s An Example:
Points can also be used by the borrower to assist them Let’s say that the borrower has a $100,000
in paying their closing costs through a lender rebate. mortgage loan and they qualify for a 4%
A lender rebate is when the lender increases the interest rate on that loan.
borrower’s interest rate (at the borrower’s request) to They would like a lower monthly payment,
cover closing costs. Let’s say the borrower qualifies for and a 3.75% rate would provide a payment
that better fits their needs.
a 4% rate, but doesn’t have the money needed to pay
the loan’s closing costs. The lender can offer a rebate To get the rate reduced to 3.75% will cost
the borrower $1,000 based on the current
to the borrower to cover those costs.
value of money in the marketplace.
In mortgage-speak the borrower is paying 1
discount point ($1,000 = 1% of $100,000) to
“buy down” their rate from 4% to 3.75%.
1. _____________________ rate: the rate the borrower is eligible for based on their qualifications, loan program,
and loan product.
2. 1 point = 1% of the _______________________ _______________________
Mortgage Math 2
What’s The Point?
The chart below shows how discount points and lender rebates can impact loan costs. It also demonstrates how
the discount or rebate will impact the loan’s interest rate and the borrower’s monthly payment. In the example, the
borrower’s qualifying rate is 4% on a $100,000 loan. This rate is also known as the par rate or zero point rate because
the rate has not been modified with discount points or rebates. In the example, the borrower’s cost for his zero
point loan is $4,000. At 4% the borrower’s monthly payment would be $1,000 per month.
The line above the zero point rate shows what happens when the borrower pays one discount point to reduce his or
her interest rate by .25% (from 4% to 3.75%) - also referred to as a permanent buydown. This modification will cost
the borrower one point ($1,000 or 1% of the loan amount). Thus the borrower’s cost on the loan would be $5,000
($4,000+$1,000) and the borrower’s new monthly payment would be $975.
On the other hand if the borrower wanted to reduce the costs of their loan, they could do so by using a lender
rebate. The line below the zero point rate shows the borrower’s interest rate increasing by .25% through a 1 point
lender rebate. The rebate causes the borrower’s cost for the loan to be lower: $3,000 ($4,000-$1,000). This increase
in interest rate will result in a higher monthly payment for the borrower ($1,100 per month).
Points
Note Rate Cost Monthly Payment
(1% of Loan Amount)
Permanent Buydown
Discount Points 3.5% 2.0 pts $6,000 $925/month
(Good for long term)
3.75% 1.0 pts $5,000 $975/month
PAR 4% 0.0 pts $4,000 $1,000/month
4.25% -1.0 pts $3,000 $1,100/month

Lender Rebate
Lender Credit
4.5% -2.0 pts $2,000 $1,250/month
(Good for short term)
1. _____________________ rate: the rate the borrower receives at closing.

2. Discount point: rate goes _____________________, closing costs go _____________________.
3. Lender rebate: rate goes _____________________, closing costs go _____________________.
Mortgage Math 2
Annual Percentage Rate

There’s one other math concept we wanted to touch on up front because it may make some of our ongoing
discussions easier to follow. Heck, you don’t even need your calculator for this one.
One of the biggest areas of confusion for consumers when they borrow money is the difference between the simple
interest rate and the annual percentage rate (APR). While they seem like the same thing, they are actually much
different.
Whereas the simple interest rate is just the fee the borrower pays for using the lender’s money, there are also many
other costs that may be involved in a credit transaction. These fees are known as the cost of financing. They include
the simple interest we discussed above as well as additional fees such as origination charges, discount points and
other lender fees. When expressed in dollar form these costs are called finance charges.
To better evaluate the true costs of a borrower’s loan we need to consider not only the simple interest rate, but also
all of the other financing costs. When these costs are added together for the full term of the loan, distributed on
an annual basis and expressed as a percentage in relation to the loan’s initial principal balance, it is known as the
annual percentage rate (APR). Because the APR includes all of the financing costs it provides a much clearer picture
of the cost of the loan. The APR is also dependent on the length of the loan, so it is important to compare loans with
the same length of term.
The below example is a simplified version of how APR works. The calculation for APR on a mortgage loan is
complicated and dependent on the running principal balance of the loan. Most financial calculators include APR
functions and you can find numerous spreadsheet programs and online sites that provide the calculation. As we get
further into your training you will not be required to calculate APR, but it is necessary that you understand how it is
determined.
Things To Know
Principal x Interest Rate x Duration of Loan (in years) = Simple Interest
ALL financing costs ÷ Loan Term ÷ Initial Principal Balance = Annual Percentage Rate
Annual Percentage Rate Example

Assume a lender has a bag with $100,000 in it and the borrower wants to use that $100,000 to buy
something. The lender agrees to allow the borrower to use that $100,000 for five years. At the end
of the five years the borrower must not only repay the $100,000 to the lender, but also 5% interest
for each year of use of the money. They also owe additional finance charges of $3,000.
Simple Interest = Principal x Interest Rate x Duration of Loan (in years)
$100,000 x 5% x 5 = $25,000
APR = All Financing Costs ÷ Loan Term ÷ Initial Principal Balance
$25,000 + $3,000 = $28,000 ÷ 5 ÷ $100,000 = 5.6%
Mortgage Math 2
Per Diem Interest
When the borrower pays off their mortgage debt, the payoff amount isn’t typically just the remaining loan balance.
Depending on which day of the month the loan is paid off, the payoff may also need to include per diem interest (or
interest for every day since the last payment was made).
Per Diem Interest

New mortgage loan agreements seldom close on the first day of the month, and existing loans are rarely paid off
on the last day of the month. Because of this, considerations must be made for the daily costs for interest. In this
section, we’ll break down per diem (per diem is Latin for “per day”) interest.
As we already discussed with PITI payments, lenders and servicers expect to earn interest on the loans they make. In
fact, they expect to get paid for EACH DAY of interest for which the money is being used (loaned). This daily interest
component must be included when a new loan is started or an existing loan is paid off.
Remember, all interest is paid in arrears (or backwards), so if a borrower is paying off their loan on the 15th of June,
they must pay for 15 days of interest for those 15 days of June.
y1 e1
Ma Jun Jul
y1
Interest May 1 - May 31 15 days of interest
Pay off the loan June 15
1. Interest is paid in ________________, which means you pay for the ___________________ month’s interest.
2. You will use _____________________ per month, for every month, when calculating per diem interest.
Mortgage Math 2
Per Diem Interest
Calculating Per Diem Interest

Before we get into the daily interest calculation, there is one more thing you should know. In the world of calculating
interest, there are always 30 days in each month regardless of the number of calendar days. This means that even
though there are typically 28 days in February or 31 days in July, we still calculate interest based on 30 days. Keep in
mind to get to the daily interest, you’ll have to first do the monthly interest calculation we already discussed:
Monthly Interest Calculation

Loan Amount x Interest Rate = Annual Interest
Annual Interest ÷ 12 = Periodic I/O Payment
Monthly Interest Calculation Alternate

Annual Interest Rate ÷ 12 = Periodic Interest Rate
Periodic Interest Rate x Loan Amount = Periodic I/O Payment
Once you have the monthly interest you can then calculate daily interest:
Per Diem Interest Calculation

Monthly I/O Payment ÷ 30 = Per Diem Interest
Then you simply multiply to get the total daily interest based on the payoff date.
Now it’s your turn:
The borrower wants to pay off their mortgage on August 8th. The principal balance due on the loan is $86,249 and
the interest rate is 5.25%. What is the daily (per diem) interest on the loan?
Mortgage Math 2
Loan Payoff
Loan Payoff
The reason it was necessary for us to figure out the daily (per diem) interest is because the calculation is necessary
for paying off an existing mortgage or starting a new one. Now we can use that information to determine the loan
payoff amount. The payoff is determined by adding the principal balance due to the amount of total daily (accrued)
interest.
For example, if the borrower owes $100,000 at a 5% interest rate, if they pay off the loan on the 15th of the month,
their payoff amount would be $100,208.35. How did we get that answer?
• Principal Balance Due: $100,000 Day Interest
• Interest Rate: 5% 1 $13.89
• $100,000 x .05 = $5000 (annual interest)
2 $13.89
• $5000 ÷ 12 = $416.67 (monthly interest)
3 $13.89
• $416.67 ÷ 30 = $13.89 (daily interest)
• $13.89 x 15 = $208.35 (total daily interest) 4 $13.89
• $100,000 + $208.35 = $100,208.35 (loan payoff) 5 $13.89
6 $13.89
Loan Payoff Calculation 7 $13.89
Total Daily Interest + Principal Balance = Loan Payoff Amount
8 $13.89
Now it’s your turn: 9 $13.89

Valencia is selling her home and the sale will close on March 10th. Her current 10 $13.89
mortgage has a principal balance of $215,980 and an interest rate of 6.75%. What is her
payoff amount? 11 $13.89
12 $13.89
13 $13.89
14 $13.89
15 $13.89
Total $208.35
Mortgage Math 2
Prorated Taxes
Prorated Taxes
At loan payoff, we also need to consider what the seller owes for prorated property taxes. Property taxes are paid
annually and, therefore, it’s likely that the buyer and seller will need to split the amount due for the year the sale
occurs.
The calculation for accomplishing this is known as proration. By performing the proration calculation, we can
distribute the property tax payment according to how long the seller and the buyer own the home during the year.
Before we can do this calculation though, you should be aware that property taxes are based on the number of
calendar days in the year, and there are 365 property tax days per year (unless it’s leap year and then there are 366).
Now it’s your turn:
Ed buys his home on August 5, 2017. The annual property tax on the home is $4,745. What are the prorated
property tax responsibilities for Ed and the seller (and before you ask, 2017 is a non-leap year)?
Prorated Tax Calculation

Annual Property Tax ÷ 365 = Daily Property Tax
# of Days in Property (this year) x Daily Property Tax = Prorated Taxes
Practice
Scenario 1
Margaret and Anthony are in the process of selling their house and upgrading to a larger home to accommodate for
their growing family. With the sale of their home, they will need to pay off their existing mortgage, and make sure
they are paying their portion of property taxes. Their home was appraised for $276,000 and their loan balance is
currently at $178,000. Their current total PITI payment is $2,047.62. They have a 4.5% interest rate. Their annual HOI
cost is $1,050, and their annual property taxes are $2,108. With their new home, their property taxes will increase
to $2,402 per year. Their utilities usually end up being about $200 a month, and their car payment is $402 a month.
Their payoff date will be March 13, 2017. Based on the scenario, calculate the following:
1. What is Margaret and Anthony’s per diem interest?
2. What is Margaret and Anthony’s payoff amount?
Bonus Question
Using the scenario above, answer the question below.
3. How much will they owe in property taxes?
Scenario 2
Ali is in the process of getting a new mortgage, and would like to drop his rate from a 5.25% to a 4.5%. This decrease
would cost him 2 points. Ali’s loan amount will be $230,750 with a PITI payment of $3,490. His closing costs are
currently $3,067.
1. How much will it cost Ali to drop his rate from a 5.25% to 4.5%?
Truth In Lending
16 Act (TILA)
1. What is the ultimate purpose of TILA?
2. What are some advertising requirements required by

TILA?
3. List out the different sections of TILA, with a brief

description of what they are about.
4. What are the disclosures required by TILA? What is the

purpose of each of those disclosures?
TILA
TILA Governs
TILA
Truth In Lending Act, Regulation Z
The Truth in Lending Act (TILA, Regulation Z) was passed along with a series of laws designed to improve civil rights
and consumer protections. TILA’s main focus is to ensure that consumers make informed decisions when applying
for and receiving financial credit.1
In the next sections, we’ll cover what the law is and what it isn’t. Then we’ll break down the law to give you the basics
you’ll need to conduct your job within its guidelines. After that, we’ll break down the specific sections of the law that
impact our industry. We’ll finish up the section with the disclosures the law requires as well as penalties and record
keeping requirements.
TILA Governs
TILA governs people and organizations that regularly provide consumer credit. Forms of consumer credit include
mortgages, auto loans, and credit cards. The law requires the delivery of standardized disclosures with information
about the terms and costs of financing. TILA also includes advertising standards and prohibitions.
Loans covered by TILA include:
• Entities that offer credit to consumers: mortgages are a form of credit and subject to regulation when
the homeowner’s dwelling of 1-4 units secures the mortgage debt and is used for personal, family, or
household purposes.
• Card issuers that make credit subject to finance charges or make the credit payable under a written
agreement that requires repayment in more than four installments.
• Any person who extends consumer credit more than 5 times in the preceding calendar year. If a person
did not meet these numerical standards in the preceding calendar year, the numerical standards shall be
applied to the current calendar year.
• Any person who originates more than one credit extension subject to the requirements of a high-cost
mortgage under HOEPA or one or more such credit extensions through a mortgage broker.2 (HOEPA loans
are high-cost loans and we’ll go deeper on HOEPA in a few pages).
1 “Truth in Lending Act.” CFPB Laws and Regulations, April 2015. https://files.consumerfinance.gov/f/201503_cfpb_truth-in-lending-act.pdf.
2 Truth in Lending Act (Regulation Z). 12 CFR §1026.1
1. TILA provides borrowers with information needed to make an ____________________________________ about

consumer credit.
TILA
TILA Does Not Govern
TILA Does Not Govern

TILA is NOT responsible for business or commercial credit. This means that if a company wants a loan to
finance its new headquarters or buy some inventory, that type of loan does not fall under the rules of TILA.
The regulations set by TILA do not apply to the following individuals or businesses:
• Those who extend business, agricultural or organizational credit

• Transactions involving credit in excess of $61,0003 if not secured by real property or a dwelling
• Public utility credit that includes any credit that covers services provided via wire, pipe or connected
facilities
• Credit extended by a broker registered with the Securities Exchange Commission or the Commodity Futures
Trading Commission
• Home fuel budget plans
• Student loans made, insured, or guaranteed by the Higher Education Act of 19654
TILA Simplified
TILA’s purpose is to promote the informed use of consumer credit. The law enables consumers to shop for the
best loan for their needs by ensuring they have the information necessary to make an educated decision. TILA also
includes sections that define high cost and higher priced loans with prescribed limitations on their use. As it relates
specifically to mortgage loan originators, TILA has rules that govern their behavior and compensation.
Two of the ways that TILA ensures borrowers can make an educated decision about their loan is through the timing
requirements for disclosures, and mandatory waiting periods between disclosure delivery and loan closing. In the
case of a refinance on primary residences and reverse mortgages, TILA allows borrowers to cancel the transaction
after closing in certain circumstances.
TILA requires that creditors advertise in a truthful manner, meaning that they can only advertise products and
programs that are available. Because of the complicated financial information involved, TILA requires that terms for
the loan be provided through advertising in a clear and conspicuous manner. Examples of a clear and conspicuous
manner include showing the information in a stand-alone manner or through fonts and styles that draw the
consumer’s attention. TILA’s advertising provisions also require that trigger terms (loan elements that require
additional information to understand actual costs) cannot be included in an advertisement unless accompanied by
the details necessary to fully comprehend how the term impacts the loan. An example of a trigger term is the simple
interest rate. If a lender advertises the simple interest rate, they must also include the annual percentage rate (APR)
so the consumer has a full picture of the financing costs in relation to the amount borrowed.
3 https://www.federalregister.gov/documents/2021/11/30/2021-25910/truth-in-lending-regulation-z
2020Hour
HourSAFE
SAFEComprehensive:
MortgageEducation
Education(NMLS
(NMLS10527)
10527)- Version
- Version4 4 197
TILA
TILA In Depth
TILA In Depth
The purpose of the Truth in Lending Act (TILA - Regulation Z) is to promote the informed use of consumer credit
through disclosures about its terms and cost.
TILA protects consumers by requiring creditors to advertise to consumers in a truthful way that is not misleading,
enabling consumers (through a documented process) to withdraw from credit transactions related to their principal
residence and by providing information related to high-cost and higher-priced loans.
Permissible Fees and Finance Charge Requirements

TILA allows the inclusion of many fees or finance charges on a loan transaction. The finance charge is the cost
of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the consumer and
imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit. It does not
include any charge of a type payable in a comparable cash transaction (e.g., taxes1).
Applicable charges that are always included are interest, transaction fees, loan origination fees (aka “consumer
points”), credit guarantee insurance premiums (mortgage insurance), charges imposed on the creditor for
purchasing the loan (which are passed on to the consumer), discounts for inducing payment by means other than
credit, mortgage broker fees, fees for preparing TILA disclosures, real estate construction loan inspection fees, fees
for post-consummation tax or flood service policy, and any required credit life insurance charges. In other words, if
the service or fee is necessary for financing to take place it will typically be governed by TILA.
Charges that may be allowed in certain circumstances (“if bona fide and reasonable in amount”) are varied.
Charges that are not allowed include charges payable in a comparable cash transaction (e.g. taxes), fees for
unanticipated late payments, overdraft fees not agreed to in writing, seller’s points, membership fees, seller’s
discounts, interest forfeited as a result of interest reduction required by law, and charges absorbed by the creditor as
a cost of doing business2.
1 Truth in Lending Act (Regulation Z). 12 CFR §1026.15.
1. If the service or fee is __________________________ for __________________________ to take place, it will typically be
governed by TILA.
TILA
TILA In Depth
Business Day
In general, the Truth in Lending Act defines a business day as a day when the creditor’s offices are open to the
public for carrying out the majority of its business functions.
A business day means all calendar days except Sundays and legal public holidays such as New Year’s Day, the
Birthday of Martin Luther King, Jr., Washington’s Birthday, Memorial Day, Independence Day, Juneteenth, Labor
Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.
Advertising Requirements
The Truth in Lending Act requires the following when it comes to the advertisement of financing secured by a
dwelling:
• Only currently available credit terms may be advertised by the creditor.

• Any disclosures of information made in an advertisement must be clear and conspicuous (the standard
for “clear and conspicuous” varies dependent on the delivery method of the advertising, but in general
the information should be reasonably understandable and provided in a way that draws attention to its
importance).
• If a simple interest rate is advertised it must be stated in conjunction with (and no more prominently than)
the annual percentage rate (APR). If the APR can change after consummation, it must be indicated in the
advertisement.
• If the down payment, number of payments, amount of any payment, or the amount of any finance charge
are provided in the advertisement, these are known as trigger terms. Any of these trigger terms requires
that the following then be included in the advertisement:
• The amount or percentage of any down payment needed.
• The terms for repayment for the full term of the loan (e.g., interest rate, length of loan3).
• The annual percentage rate and if the rate may increase after consummation. The phrase “annual
percentage rate” must be spelled out in those words.
• If the amount of credit exceeds the fair market value of the dwelling this must be stated in the
advertisement. Such advertisement should also state that the consumer should consult a tax advisor for
more information regarding tax liability for this particular type of loan.
TILA also prohibits the following in advertising:
• Misleading advertising of fixed rates and payments

• Misleading comparisons in advertisements
• Misrepresentations of government endorsements
• Misleading lender’s name
• Misleading statements of debt elimination
• Misleading use of the term “counselor”
• Misleading foreign language advertisements4
3 Truth in Lending Act (TILA - Regulation Z). 12 CFR §1026.24.
4 Truth in Lending Act (TILA - Regulation Z). 12 CFR §1026.24
1. Advertising must be done in a ____________________________________________________________________.

2. __________________________________ require that additional information be provided.
TILA
Important Sections Of TILA

Because TILA governs more kinds of credit than just mortgages, it has numerous sections. For the purposes of your
work as a mortgage loan originator we’ll focus on the following:
Sections
19 Mortgage Disclosure Improvement Act
23 The Right of Rescission
32 Home Ownership Equity Protection Act
35 Higher Priced Mortgage Loans
36 The Loan Originator Rule
42 Valuation Independence
43 Ability to Repay and Qualified Mortgages
TILA, Section 19 - Mortgage Disclosure Improvement Act (MDIA)

The Mortgage Disclosure Improvement Act (MDIA) requires a 7 business day waiting period between the delivery of
the initial disclosures and loan closing. This waiting period may be waived by the borrower in cases of a bona fide
emergency. If a change of circumstance occurs, then a revised disclosure must be provided and an additional 3
business days must be added to wait for closing.
One very important requirement of MDIA is the “Intent to Proceed” provision for all closed-end mortgages. This
requires that the borrower must provide their intent to proceed with the loan process prior to the charge of any fee
(with the exception of the credit report fee). The intent to proceed is not a commitment to the final terms of the loan
but is simply an indication that the borrower reviewed the early disclosures provided (specifically the Loan Estimate)
and wants to move forward with the process.
If the borrower is seeking an ARM, the delivery of the Consumer Handbook on Adjustable Rate Mortgages (CHARM
Booklet) and the Early ARM Disclosure are also required prior to the payment of any non-refundable fee.
Annual Percentage Rate Requirements

You may recall we’ve talked about finance charges once before, when we introduced annual percentage rate.
APR is a uniform measurement of the cost of a loan, including interest and finance charges, expressed as a yearly
percentage rate. (See Mortgage Math 2 to review how APR is calculated.)
1. MDIA requires _________________________________________ on the delivery of credit-related disclosures to borrowers,

and specific _________________________________________ between the delivery of disclosures and closing.
2. MDIA also requires that borrowers provide their _________________________________________ once they have received
their loan estimate, prior to the charge of any fee.
TILA
Permissible Annual Percentage Rate Tolerances

TILA has thresholds in place to ensure that, if pricing fluctuates during processing, the resulting change in APR is
communicated appropriately to the borrower. The tolerance for the increase in the annual percentage from the
early disclosure to the closing disclosure on a TILA-governed transaction is .125% (1/8) on fixed rate mortgages
and .25% (1/4) on variable rate (adjustable rate) mortgages (e.g., if the APR listed on the Loan Estimate for a 30-
year fixed rate mortgage is 4%, the APR can be no more than 4.125% on the Closing Disclosure).
If allowable circumstances during the loan origination process such as a change in borrower qualification causes
the borrower’s rate to change beyond the tolerance, disclosures impacted by the rate change must be re-
disclosed to the borrower. These changes are referred to as a change in circumstance. Examples of things that
could cause a change in circumstance are a change in the value of the property after the appraisal, or a change in
the borrower’s credit score while they are in process.
If at the time of closing it is discovered that the rate listed on the Closing Disclosure is greater than the tolerance
compared to the rate listed on the Loan Estimate (or re-disclosed LE), the creditor has 30 days from closing to
remedy the error by reducing the interest rate on the loan to remain within the tolerance.
Waiting Period to Close Requirements
TILA requires that the borrower must wait 7 business days from receipt of the initial disclosure (Initial Truth In
Lending for open-end mortgages, Loan Estimate for all other mortgages) before the loan can close. This waiting
period is designed to provide the borrower an opportunity to evaluate and understand their loan before they sign
anything making them contractually obligated for the debt. This waiting period can be waived in the case of a
bona fide emergency.
TILA, Section 23 - The Right of Rescission
The right of rescission allows consumers who have closed on non-purchase mortgages (reverse mortgages or
refinance loans) on their primary residence to back out of the transaction after closing. This right of rescission only
applies to reverse and refinance loans and includes anyone with title (ownership) rights to the home - even if they
are not a borrower. Any owner may execute their rescission right to cancel the transaction for any reason. Conditions
involving the property must be returned to status quo (normal - as if the loan process never occurred) if the right to
rescind is exercised.
The right of rescission is communicated to all owners of the property at closing through the delivery of the
Notice of Right to Cancel disclosure (all owners get two copies). The time frame for canceling the transaction is
3 business days from closing. After 3 business days, the loan will be consummated (meaning that the borrower
is contractually obligated to the agreement). If all of the owners do not receive the Notice of Right to Cancel,
the time frame for rescission becomes 3 years from the date of closing1.
1. If changes in APR exceed this amount, the new costs must be redisclosed to the borrower:
FIXED RATE MORTGAGES ADJUSTABLE RATE MORTGAGES

Increase by _____________ Increase by _____________
2. Waiting Periods:
• Initial disclosure to close: _________ business days
• Re-disclosures to close: _________ business days
TILA
Consummation VS. Closing

There is a difference between closing and consummation. Closing is when all parties COMMIT to the loan.
Consummation is when the borrower becomes CONTRACTUALLY OBLIGATED to the loan. Even though you would
think once someone signs a contract they’re obligated to pay the bill, this isn’t always the case with mortgage
loans. TILA’s Right to Rescind allows reverse mortgage and refinance (on a primary home) borrowers to cancel the
agreement even after it is signed. With rescission rights, these borrowers have 3 business days from closing to
change their mind and cancel the agreement.
In cases where the right to rescind exists, lenders will typically not fund the loan until the 3 business day period
passes. Once the loan is funded, the agreement is consummated and the documents are filed with the county.
Waiting until the rescission period passes to fund and record the mortgage allows the lender to avoid hassles in
case the borrower has second thoughts. Some state laws include rescission periods for loans other than those
covered in the TILA rules, but you can worry about those later when you’re preparing for your state licenses.
TILA, Section 32 - Home Ownership Equity Protection Act (HOEPA)
HOEPA provides protections for borrowers receiving high-cost (aka “covered”) loans. HOEPA defines what high-cost
loans are and includes numerous provisions to limit the type of loans allowed. A specific disclosure must also be
provided to borrowers who seek a high-cost loan. The reason the HOEPA provisions exist is to protect consumers
with limited finances or credit challenges from excessive costs when financing their home.
What Is A High-Cost Loan?

There are three main criteria that can be used to determine if a loan is high-cost.
Total Points And Fees Compared To The Loan Amount? 2
If the loan is $22,696 or more, the points and fees cannot exceed 5% of the loan amount. As an example, if the
loan amount is $50,000 and the total cost of points and fees is $2,500.01 or more, then the loan is considered
a high-cost loan. If the loan amount is less than $22, 696 then points and fees cannot exceed 8% of the loan
amount or $1,148 (whichever is lower).
The Loan’s APR Compared To The APOR
If the loan’s APR is more than 6.5% above the APOR (average prime offer rate - the average APR for low risk
consumers in the current market) on a first lien, 8.5% above the APOR on a first lien for a mobile home, or 8.5%
above the APOR on a subordinate lien, the loan is considered high cost.
Prepayment Penalty
If the creditor charges a prepayment penalty beyond 36 months or if any prepayment penalty exceeds 2% of the
principal balance, the loan is considered high cost3.
Minimum Terms For Balloon Loans
While the requirements for HOEPA loans make it unlikely that a balloon loan fits the criteria there are a few
scenarios in which balloons may meet HOEPA standards:
• The balloon may not have a term of less than 5 years
• The payment schedule is adjusted to meet the seasonal or irregular income pattern of the borrower
• The loan is a bridge loan (12 months or less) to facilitate the financing of a new home purchase while the
borrower is attempting to sell their current home
• The lender is serving an under-served or rural area and the loan meets ATR/QM requirements
2 https://www.federalregister.gov/documents/2021/11/02/2021-23478/truth-in-lending-regulation-z-annual-threshold-adjustments-credit-cards-hoepa-and-qualified
3 Home Ownership and Equity Protection Act (Section 32 of TILA). 12 CFR, §1026.32.
TILA
Prohibitions Under Section 32

If a loan is a high cost loan, it cannot contain a balloon payment, negative amortization, or a DTI >50%.
Requirements Under Section 32:
If a borrower is getting a high cost loan, then the borrower must receive counseling prior to closing.
HOEPA Disclosure
If the loan meets the standard of a high-cost loan, the mortgage loan originator must provide a HOEPA Disclosure
(also known as the Covered Loan Notice) to the borrower at least 3 business days prior to consummation.
The disclosure includes many of the features already provided to the borrower in other TILA disclosures, such as
the statement of no obligation, the APR, regular payment amount and the amount borrowed.
Points And Fees With HOEPA Loans
Regulations associated with HOEPA loans do not allow the borrower to finance the loan’s costs (aka rolling in the
points and fees). As it relates to this requirement, HOEPA does not consider the following as points and fees:
• Any premium, paid before or at closing, associated with any federal or state agency program for guaranty
or insurance (e.g., UFMIP or funding fee)
• Mortgage insurance paid before or at closing
• Up to 2 discount points for the purpose of reducing the interest rate
Under HOEPA, fees paid to brokers may be paid by the creditor or borrower, but if they’re paid by the borrower
they must be considered to be a finance charge and included with the points and fees calculation to determine if
the loan meets the high cost threshold4.
Things To Know
On the next page we will discuss Higher-Priced
Mortgage Loans (HPML).
There’s often confusion distinguishing between a
HOEPA loan and an HPML loan. To simplify matters
take a look at this chart and graphic.
One final note, it is entirely possible (and not
unusual) for a HOEPA loan to be an HPML loan.
APOR Thresholds For 1-Lien Mortgages
Features Section 32 Section 35
Primary X X
APOR > 6.5% = HOEPA
Open-end X
Closed-end X X
Counseling Required X
Mandatory Escrow X
APOR > 1.5% = HPML
Must Follow ATR X X
2nd Appraisal Required
X
(sometimes) APOR
4 Home Ownership and Equity Protection Act (TILA Section 32), 12 CFR, §1026.32.
TILA
TILA, Section 35 - Higher-Priced Mortgage Loans (HPML)

The TILA provisions for HPML were written to help protect borrowers who have qualification limitations. A lender
or servicer may cancel the mandatory escrow account for HPMLs if the borrower pays off their mortgage debt in
full and/or at the request of the borrower, 5 years after closing provided the unpaid balance is less than 80% of the
original value of the home and they are current with their payments. Because of this, lenders will charge a higher
rate of interest to alleviate their risk. In the case of HPMLs, the P stands for price. In the business of lending, we price
loans by using interest rates.
What Is A Higher-Priced Mortgage Loan?

APOR Thresholds For HPML
HPMLs are closed-end loans on a borrower’s primary residence where the APR meets or exceeds the APOR
threshold by the following:
• 1.5% for first lien mortgages
• 2.5% for jumbo first lien mortgages
• 3.5% for subordinate lien mortgages
Requirements For HPML
TILA’s requirements for HPML include mandatory escrow accounts and full physical appraisals.
TILA also requires a second appraisal if the seller has acquired the home within a 90-day period and the sale
price in the current transaction exceeds the seller’s original purchase price by more than 10%; or if the seller
has acquired the home within a 91 - 180-day period and the sale price in the current transaction exceeds the
seller’s original price by more than 20%. This second appraisal requirement is to protect against sub-standard
improvements made to the home by house flippers (someone who buys a home and quickly resells it at an
inflated value).
Higher-priced mortgage loans less than $28,500 are exempt from the special appraisal requirements5.
TILA, Section 36 - The Loan Originator Rule
The Loan Originator Rule was added to TILA by the CFPB to address concerns over the influence of compensation
practices on MLO behavior. The rule also includes some provisions related to servicing rules.
The rule specifically outlaws steering consumers into products that provide higher compensation for the MLO, and
further enhances this protection for consumers by limiting how the MLO can be compensated.
There are also servicing requirements outline in Section 36 of TILA. The servicing requirements in Section 36 ensure
that servicers process payments on the day they are received, handle late payments appropriately and provide
payoff statements within 7 business days of request.
5 https://www.federalreserve.gov/newsevents/pressreleases/bcreg20211201a.htm
The Loan Originator Rule:

1. Defines _________________________________________________________________ for MLOs.
and
2. Contains certain __________________________________ requirements.
TILA
Compensation For MLOS

MLOs may be paid based on the size (amount) of the loan, a salary, and additional compensation such as
bonuses.
MLOs are prohibited from:
• Receiving payment more than once for a single loan (this means that a mortgage broker cannot be paid a
broker fee and an origination fee on the same loan. Prior to Section 36, this was legal)
• Receiving payment based on the terms of the loan (e.g., the MLO cannot be paid more for an ARM than a
fixed rate mortgage)
• Steering consumers to loans that generate higher compensation for the loan originator (unless the loan is
in the best interest of the consumer)
As an additional note on the issue of steering, the rule provides the opportunity for the mortgage loan
originator to obtain safe harbor in complying with the anti-steering requirement by presenting to the
qualifying consumer multiple loan options: one that offers the lowest interest rate, one with no risky
features, and one with the lowest cost for origination points, fees, and discount points6.
Servicing Rules Under TILA
The servicing requirements in Section 36 require that servicers process payments on the day they are received,
handle late payments appropriately and provide payoff statements within 7 business days of request.
There is also a provision under Section 36 that prohibits servicers from ‘fee pyramiding’ or ‘fee stacking’ which is
the process of charging a late fee for the late payment or non-payment of a previously unpaid late fee.
TILA, Section 42 - Valuation Independence
TILA’s Valuation Independence Rule is a direct response to the impact inflated appraisals had on the real estate
market and the mortgage industry at the time of the mortgage meltdown. Section 42 specifically outlaws the
coercion and undue influence on property appraisers by parties such as MLOs and borrowers. This section forbids
someone from requiring or compelling (through acts such as intimidation or bribery) an appraiser to provide a
specific value on the property being appraised.7
TILA, Section 43 - Qualified Mortgages (QM) and Ability to Repay (ATR)

Section 43 was added to TILA by the CFPB to establish specific minimum standards for mortgage loans (qualified
mortgages; QM) and requirements for the review of a borrower’s ability to repay (ATR). For a mortgage to be
considered a qualified mortgage, the borrower must meet the ATR standards.
The Statement And The Guidance

During the mid-2000’s, prior to the mortgage meltdown and the rules created to resolve the financial crisis,
regulatory agencies saw the potential for the problems that ultimately changed the face of the mortgage industry.
In response to this concern these agencies created two directives advising the industry of the possible future
pitfalls and how to address the issues. These two directives - the Statement on Subprime Mortgage Lending (the
Statement) and the Guidance on Nontraditional Mortgage Product Risks (the Guidance) were not binding laws
but provided the basis for what would ultimately become the Qualified Mortgage rules implemented by the CFPB.
The Statement focused on the problems that might occur in providing high cost or sophisticated product types to
borrowers with limited qualifications or troubled borrowing histories. In some ways the warnings in the Statement
led to the language in Dodd-Frank dealing with UDAAPs.
6 12 CFR §1026.36. Loan Originator Compensation.

7 12 CFR §1026.42. Valuation Independence.
2020Hour
HourSAFE
SAFEComprehensive:
MortgageEducation
Education(NMLS
(NMLS10527)
10527)- Version
- Version4 4 205
TILA
The Guidance provided recommendations with warnings on how lenders should administer high risk mortgage
products and dealt with three key areas:
Loan terms and underwriting standards
Risk management policies for lenders and MLOs
Consumer protection issues
Ability To Repay Explained
The Ability to Repay (ATR) is based on the standards first established in the Statement and the Guidance. The ATR
is based on the following 8 borrower considerations:
1. Income and assets
2. Employment
3. The amount of their new monthly mortgage payment
4. Other mortgage payments
5. Monthly mortgage-related obligations
6. Current debt obligations
7. DTI and residual income
8. Credit history
Qualified Mortgages
Qualified mortgages (QM) are mortgages that meet a specific standard regardless of the program from which
they are provided. The specifications associated with QM create more certainty for investors when they buy loans
from lenders in the secondary market.
Qualified VS. Non-Qualified Mortgages
Qualified mortgages (QM) are loans that are considered less risky due to the standards and thresholds required
during the qualification and underwriting process. A mortgage loan must meet the following eight criteria to be
considered a QM:
1. The regular periodic payments do not result in an increase of the principal balance (negative amortization),
allow the consumer to defer repayment of the principal (interest-only), or contain a balloon payment (a
balloon-payment mortgage loan is a qualified mortgage if made and held in the portfolio of a small creditor
operating primarily in rural or underserved areas. Loans are only eligible if they have a term of 5 years or
longer, a fixed-interest rate, and meet certain basic underwriting standards. These loans are not subject to the
43% DTI requirement)
2. The loan does not include balloon payments that are twice as large as the average of earlier scheduled
payments
3. Income and financial resources (assets) of the consumer are verified and documented
4. For fixed rate loans, the underwriting process is based on a payment schedule that fully amortizes the loan
over the entire loan term (to maturity), and takes into account all applicable taxes, insurance, and other
assessments
5. For adjustable rate loans, the underwriting process is based on the maximum interest rate allowed during the
first 5 years of the loan. It is also based on a payment schedule that fully amortizes the loan over the entire
loan term (maturity), taking into account all applicable taxes, insurance, and other assessments
6. The loan complies with guidelines established by the CFPB relating to ratios of total monthly DTI or alternative
measures of ability to repay. Currently the maximum total DTI ratio required for a qualified mortgage is ≤ 43%
TILA
7. The total points and fees payable in connection with the mortgage loan do not exceed 3% of the total loan
amount (i.e., the points and fees threshold). “Bona fide discount points” in most cases are excluded
• Loans greater than or equal to $114,847 points and fees cannot exceed 3% of the loan amount.
• Loans greater than or equal to $68,908 but less than $114,847 points and fees cannot exceed $3,445.
• Loans greater than or equal to $22,969 but less than $68,908 points and fees cannot exceed 5% of the loan
amount.
• Loans greater than or equal to $14,356 but less than $22,969 points and fees cannot exceed $1,148.
• Loans less than $14,356 points and fees cannot exceed 8% of the loan amount.8
8. The term of the mortgage loan does not exceed 30 years (except if extended by the CFPB in high-cost areas)
There are two additional designations that are frequently associated with QM loans:
• “GSE-eligible” qualified mortgage - For loans eligible to be purchased, guaranteed or insured by
government-sponsored enterprise, HUD (FHA programs), VA, or USDA:
• Same loan feature limitations as a general qualified mortgage in which negative amortization, interest-
only, and balloon payments are not allowed
• Same term limit of 30 years, and the same 3% points and fees limitation
• All other underwriting criteria are applicable per GSE or agency requirements
• Small creditor qualified mortgage - A small creditor is defined under section 1026.35 of TILA as a financial
institution whose assets equal less than $2 billion at the end of the year and whose total originated loans
equal 2,000 or less of 1st lien closed-end residential mortgages (subject to ATR requirements). For loans
made by small creditors the same general qualified mortgage criteria applies, with the exception of the
43% DTI rule. If the small creditor considers and verifies a consumer’s housing and total DTI ratios then no
specific DTI limit applies.
For QM mortgages there is also a limitation for prepayment penalties. A prepayment penalty is a charge to a
borrower, on a closed-end mortgage loan, for paying all or part of the principal before the maturity date of the
loan. Prepayment penalties are allowed on fixed rate, qualified mortgage loans that are not higher-priced if the
following additional criteria are met:
• The prepayment penalty period does not extend beyond 3 years
• The maximum prepayment penalty cannot be more than 2% in the first 2 years, and 1% in the 3rd year
• The creditor can only offer the consumer a covered transaction with a prepayment penalty if the creditor
also offers the consumer an alternative covered transaction without a prepayment penalty
• A creditor must also keep evidence of compliance with the QM rule for 3 years after the closing of a
transaction subject to these rules
Non-qualified mortgages (Non-QM) are loans that do not meet the QM standard. Loans that do not meet QM
standards cannot be sold to Fannie Mae or Freddie Mac and are either sold to private investors or held by the
lender in their own loan portfolio.
8 https://www.federalregister.gov/documents/2021/11/02/2021-23478/truth-in-lending-regulation-z-annual-threshold-adjustments-credit-cards-hoepa-and-qualified
1. Compare with the group the differences between TILA and RESPA. For example, what is the purpose of
each, what/who do they govern, what are some disclosures each requires? Continue your answers onto
the next page if needed.
TILA
Disclosures Required Under TILA

TILA requires a number of disclosures be given to the borrower throughout the loan process to provide guidance,
notification and education for the consumer.
Required disclosures:
• General TILA Disclosures

• Loan Estimate
• Closing Disclosure
• HOEPA Disclosure (Covered Loan Notice)
• Notice of Right to Cancel
• CFPB’s Home Loan Toolkit
• Consumer Handbook on Adjustable Rate Mortgages
• Early ARM Disclosure
• TILA Servicing ARM Adjustment Disclosures
• Open-End (Reverse & HELOC) Mortgages ONLY
• Initial TIL
• Final TIL
• What You Should Know About Your HELOC
General TILA Disclosures
The general rules of TILA require that the mortgage loan originator disclose the following to the consumer as part of
the consumer credit origination transaction:
• Statement recommending that the consumer retain a copy of all loan-related disclosures
• Statement that terms are subject to change and the consumer may receive a refund of third party fees
• Statement that borrower default could result in the loss of the property
• Statement of no obligation
LOAN ESTIMATE (LE)
Required under the general rules of TILA and the TILA-RESPA Integrated Disclosure Rule
• Provides an estimate of all costs for the transaction
• Given to all borrowers at the time of application or within 3 business days if mailed
CLOSING DISCLOSURE (CD)
Required under the general rules of TILA and the TILA-RESPA Integrated Disclosure Rule
• Provides all the final costs of the transaction
• Given to all borrowers 3 business days prior to consummation of the loan
HOEPA DISCLOSURE (COVERED LOAN NOTICE)
Required for borrowers with high cost loans
• Repeats much the information provided in earlier disclosures
• Must be given to the borrower at least 3 business days prior to consummation
TILA
NOTICE OF RIGHT TO CANCEL (RIGHT TO RESCIND)

Required under Section 23: The Right of Rescission
Only available on primary residences for non-purchase transactions (reverse or refinance mortgages)
• Given to all parties with ownership (title) interest in the property (each gets 2 copies) at closing
• Borrower can rescind within 3 business days of closing
• If a copy of the notice is not given to an individual with ownership interest, then the rescission right is
extended to 3 years
HOME LOAN TOOLKIT (SPECIAL INFORMATION BOOKLET)
Purchase Transactions Only
• Must be delivered separately to the consumer AT APPLICATION (or within 3 business days if mailed)
• Informs the consumer of the mortgage process
Includes:
• Explanation of affordability
• How to shop for a mortgage loan
• Review of the Loan Estimate and Closing Disclosure
Adjustable Rate Mortgage (ARM Disclosures)
CONSUMER HANDBOOK ON ADJUSTABLE RATE MORTGAGES (CHARM BOOKLET)
Required under Section 19: MDIA
• Educates the consumer on risks and advantages of ARMs
• Due to the borrower at application (or prior to the payment of a non-refundable fee)
EARLY ARM DISCLOSURE
Required under Section 19: MDIA
• Educates the consumer on the specifics of their ARM (rate, adjustments, caps, index, etc.)
• Due to the borrower at application (or prior to the payment of a non-refundable fee)
Rate Adjustment Disclosures Provided During Servicing
INITIAL INTEREST RATE ADJUSTMENT DISCLOSURE
Required under Section 36: The Loan Originator Rule
• Due 210 to 240 days prior to rate adjustment
• Includes information about the servicer and possible alternatives to avoid paying the new interest rate
• Provides the effective date of the new interest rate and the new payment amount as well as any other
changes to loan terms
ONGOING (SUBSEQUENT) INTEREST RATE ADJUSTMENT DISCLOSURE
• Required under Section 36: The Loan Originator Rule
• Due 60 to 120 days prior to rate adjustment
• Includes information about the servicer and possible alternatives to avoid paying the new interest rate
• Provides the effective date of the new interest rate and the new payment amount as well as any other
changes to loan terms
TILA
TILA Penalties
TILA Open-End Mortgage Only Disclosures

INITIAL TRUTH IN LENDING STATEMENT (TIL)
• Provides an estimate of the costs for financing
• Must be delivered to the consumer at application (or within 3 business days if mailed) for reverse mortgages
and HELOCS only
Includes:
• Interest Rate
• Financing Charges
• Annual Percentage Rate information
WHAT SHOULD YOU KNOW ABOUT YOUR HELOC (WHEN YOUR HOME IS ON THE LINE)
• Due at application or within 3 business days
• Educates the consumer on the structure of a HELOC as well as what to look for when shopping for a HELOC
plan
FINAL TRUTH IN LENDING STATEMENT (TIL)
• Due date at close or one day prior if requested by the borrower
• Used to compare the financing costs listed on the Initial TIL
TILA Penalties
Penalties for the violation of TILA include:
• Monetary fines ranging from $400-$4,000

• Class action = up to $500,000 or 1% of the creditor’s net worth, whichever is less
• Willfully or knowingly breaking TILA rules may result in fines as high as $5000 and 1 year in prison
• Violations of the Loan Originator Rule can result in actual damages of 3x the amount paid to the originator
TILA Record Keeping

The record keeping requirements for TILA are:
• Records relating to TILA must be retained for 2 years after the disclosure is made or action is required to be
taken1
• Loan originator compensation records and records pertaining to ATR/QM must be retained for 3 years
Fairness Laws And
17 Financial Crime Laws
1. What is the purpose of FHA?
2. What does HMDA require financial institutions to do?
3. According to the PMI Cancellation Act, in what ways

could a borrower cancel their PMI?
4. What is money laundering? Why are the USA PATRIOT

Act and BSA/AML concerned with preventing money
laundering?
5. What is the difference between a CTR and a SAR?

Fairness Law
Fair Housing Act (FHA)
In this chapter, we’ve grouped the Home Mortgage Disclosure Act (HMDA, Regulation C), the Fair Housing Act (FHA)
and the Homeowners Protection Act (HPA) as laws specifically involving fairness for consumers. We’ve also taken
the laws related to financial crime that impact the mortgage industry and gathered them here. The fairness laws
were designed to level the playing field for consumers seeking mortgage loans, and in some cases, these laws go
far beyond our daily responsibilities in the mortgage industry. The financial crime laws may seem as if they are far
from your responsibilities, but the opportunity for illegal acts is prevalent in our business. As you read through this
chapter, pay attention to how these laws may have already impacted your life.
Fairness Law
The fair housing laws and the Fair Housing Act (FHA) were enacted to prohibit discrimination in the financing, sale,
and rental of dwellings.1
The laws ensure equal opportunity in all HUD programs and equal access to housing. Discrimination based on the
following is not allowed:
• Race
• Color
• National origin
• Religion
• Sex
• Familial status
• Disability
Please note: ECOA prohibits discrimination in extension of credit while the FHA prohibits discrimination in
housing.
The regulatory authorities for the fair housing laws are HUD and the Department of Justice (DOJ). HUD administers
the Fair Housing Act, but the Department of Justice is the regulator and enforcer.
Any transaction involving a purchase, rental, or financing of a dwelling is covered.
The following are exempt under the Fair Housing Act:
• Owner-occupied buildings with no more than 4 units

• Single family housing sold or rented without the use of a broker if the owner does not own more than 3
such single family homes at a time
• Housing operated by private clubs or organizations that limit the occupancy to members only
1. FHA prohibits discrimination in ____________________________________.

2. FHA is regulated by the ____________________________________.
Fairness Law
The original act was amended in 1989 by the Fair Housing Amendments Act to do the following:
• Prohibit discrimination based on disability or familial status (presence of children under the age of 18 and
pregnant women)
• Establish new administrative enforcement tools for HUD attorneys to bring actions before administrative
judges on behalf of victims of housing discrimination
• Revise and expand DOJ jurisdiction to bring suit on behalf of victims in federal district courts
The act also contains accessibility provisions for individuals with disabilities. The provisions relate to design and
construction on multifamily dwellings built on or after March 13, 1991. Redlining is a prime example of a Fair
Housing Act violation.
Any customer or consumer can bring action within 1 year of discovering a violation. Civil and criminal charges may
be assessed.
With your group, answer the following questions around ECOA and FHA:
1. How is the purpose
PLEASE of
DOECOA and BELOW
NOT WRITE FHA similar?
THIS LINE - THIS CONTENT WILL BE BE USED FOR CLASS DISCUSSION.
2. What is the main difference between the purpose of ECOA and FHA?
3. Who in the mortgage loan origination timeline would be required to follow ECOA?
4. Who in the mortgage loan origination timeline would be required to follow FHA?
2020Hour
HourSAFE
SAFEComprehensive:
MortgageEducation
Education(NMLS
(NMLS10527)
10527)- Version
- Version4 4 213
Fairness Law
Home Mortgage Disclosure Act - HMDA, Regulation C

The Home Mortgage Disclosure Act (HMDA) was enacted by Congress in 1975 and implemented as Regulation C.
The creation of HMDA came from concerns about credit shortages in specific geographic areas, especially urban
neighborhoods. HMDA requires financial institutions to maintain and annually disclose data about home purchases,
home purchase pre-approvals, home improvement, and refinance applications involving 1 to 4-unit and multi-
family dwellings.
The Home Mortgage Disclosure Act defines a dwelling in a fairly broad way. According to HMDA a dwelling is
defined as a residential structure. No language is included that an attachment to real property is required. The law
lists the following as dwellings covered by HMDA:
• Principal residences
• Second homes and vacation homes
• Investment properties
• Residential structures attached to real property
• Detached residential structures
• Individual condominium and cooperative units
• Manufactured homes or other factory-built homes
• Multifamily residential structures or communities, such as apartment buildings, condominium complexes,
cooperative buildings or complexes, and manufactured home communities
HMDA’s regulatory authority is the CFPB.
HMDA loan data requirements apply to financial institutions such as banks, savings associations, credit unions, and
other mortgage lending institutions.
Institutions originating fewer than 100 closed-end mortgage loans in either of the two preceding calendar years will
not have to report such data.
1
Loan data from state chartered or state licensed financial institutions are exempt from HMDA because these
institutions are already subject to state disclosure requirements. However, institutions must specifically apply for this
exemption2.
1 https://www.consumerfinance.gov/rules-policy/final-rules/home-mortgage-disclosure-regulation-c/
2 Home Mortgage Disclosure (Regulation C). 12 CFR §1003.3.
FILL IN THE BLANK:
1. HMDA helps illustrate patterns of discrimination by requiring financial institutions to __________________________

_______________________________________________________________ via the L/AR to the CFPB. The only way to violate
HMDA is not disclosing that information.
Fairness Law
The following loan types are also excluded from the data collection requirements under HMDA:
• Loans originated or purchased by an entity acting as a fiduciary agent

• Loans on unimproved land
• Temporary loans (bridge or construction)
• The purchase of an interest in a pool of loans (such as mortgage-backed securities)
• The purchase solely of the right to service loans
• Loans acquired as part of a merger3
HMDA requires lending institutions to submit a Loan/Application Register (L/AR) to the CFPB no later than March 1st
of every year. A modified L/AR (without application or loan number, application date, and date of action taken) must
be available to the public by March 31st.
The L/AR must include the following information:
• The purpose of the loan (home purchase, home improvement, refinancing)

• The type of property involved (single family, multifamily)
• The loan type (conventional loan, FHA loan, VA loan)
• The location of the property
• Information about race, ethnicity, and sex gathered in the URLA’s Section 8: Demographic Information
• The gross income of the borrower(s)
• Whether or not the loan was granted
• If the loan was denied, the reason why it was denied
• Whether the interest rate charged was over a certain threshold
• If the loan was subsequently sold in the secondary market, the purchasing entity4
Civil penalties may be levied for violations of HMDA (bona fide errors are excluded). The L/AR must be retained and
available for public inspection for three years.

2020Hour
HourSAFE
SAFEComprehensive:
MortgageEducation
Education(NMLS
(NMLS10527)
10527)- Version
- Version4 4 215
Fairness Law
Homeowners Protection Act - HPA
Homeowners Protection Act - HPA

The Homeowners Protection Act (also known as the PMI Cancellation Act) provides specific provisions that allow
homeowners to cancel private mortgage insurance (PMI). It also requires the return of unearned premiums and
establishes notification and disclosure requirements. HPA covers conventional mortgage loans that exceed 80% LTV
in which the borrower is paying private mortgage insurance (PMI). Please note - we did not say MIP. HPA only covers
conventional mortgages and PMI.
HPA is regulated by the CFPB.
The Notice of Right to Cancel PMI disclosure must be provided to the borrower at the time of closing for
conventional loans over 80% LTV. The content of this disclosure educates the borrower on how PMI may be canceled
upon request or automatically.
The lender and/or servicer must automatically terminate the PMI when the loan’s principal balance reaches 78% of
the original value (as long as the borrower is current on mortgage payments). Unlike when the borrower requests
cancellation, there is no provision in the automatic termination section of the act that protects the lender against
decreasing property value or subordinate liens.
Borrowers may request in writing a cancellation and termination of PMI when the following conditions are met:
• The principal balance of the loan reaches 80% of the original value
• The borrower has a good payment history
• The borrower is able to represent to the mortgage holder that the value of the property has not declined
below the original value and certify that the borrower’s equity is not subject to a subordinate lien1
For individual actions, actual cost or statuary damages are not to exceed $2000. The borrower must bring action
within 2 years of discovering action.
1 Homeowners Protection Act. 12 USC §4903.
1. Allows PMI cancellation request when ______________________.

2. Requires cancellation of PMI when ______________________.
3. Disclosed to borrowers through the ______________________________________________________________.
Financial Crime Laws
USA PATRIOT Act

In your role as an MLO you may participate in transactions involving large sums of money. Because of this, you’ll
need to have an understanding of some financial crimes including money laundering. In fact, in your new role you’ll
have some unique responsibilities in the battle against terrorism.
USA PATRIOT Act

Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism
As a response to the September 11, 2001 terrorist attacks, the U.S. Congress enacted the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001.
In relation to the mortgage industry, Title III of the act focuses on identity theft and money laundering through
financial transactions in support of terrorist activities.
The most important aspects of Title III for mortgage professionals are the required establishment of the following:
• An anti-money laundering program by the lending institution.

• The sharing of information with other financial institutions and law enforcement agencies.
• A customer identification program (CIP) that includes the collection and verification of customer
information, including name, date of birth, social security number, and address; the 5-year maintenance of
records after the account is closed; and the notification to customers that their identity must be verified in
order to attempt a transaction1. The expectation is that the institution can track the customer’s transaction
activity throughout the process and report that activity, if necessary, to the proper agency.
1 USA Patriot Act. Retrieved from http://www.fincen.gov/statutes_regs/patriot/index.html
BSA & AML
BSA & AML

Bank Secrecy Act and Anti-Money Laundering
The Currency and Foreign Transactions Reporting Act is commonly referred to as the Bank Secrecy Act (BSA) or the
Anti-Money Laundering Law (AML). BSA/AML requires financial institutions, including mortgage lenders, to report
suspicious activity that may indicate money laundering, tax evasion, or other criminal activities. Money laundering is
transforming the monetary proceeds derived from criminal activity into funds with an apparently legal source.
Originally created as a method to thwart drug traffickers and tax cheats, BSA/AML gained renewed importance
following the September 11, 2001 terrorist attacks. Due to concerns about funding methods terrorists used for their
illegal activities, lawmakers amended the rules associated with BSA/AML and related portions of it with the USA
Patriot Act.
Anti-Money Laundering Program Requirements

The BSA authorizes the Financial Crimes Enforcement Network (FinCEN) and the Secretary of the Treasury to take
measures against financial crimes by requiring financial institutions to implement strict Anti-Money Laundering
(AML) programs and other procedures to prevent illegal activities.
An AML program must include the following components to guard against financial crimes:
• Develop internal policies and control systems that ensure compliance with the BSA for record keeping and
reporting
• Appoint a compliance officer to oversee the program’s daily operations
• Implement an ongoing training program to train people to detect potential financial crimes
• Perform an independent audit when necessary
1. MLOs are required to report ___________________________________________________ that may indicate money

laundering.
BSA & AML
Reports Used Under BSA/AML

FINCEN Form 104 Currency Transaction Report (CTR):
A CTR must be filed for each transaction in currency of more than $10,0001.
FINCEN Form 105 Report Of International Transportation Of Currency Or Monetary Instruments Report (CMIR):
Each person (including a bank) who physically transports or mails monetary instruments in an aggregate amount
exceeding $10,000 into or out of the United States must file a CMIR2.
Report Of Foreign Bank And Financial Accounts (FBAR):
Each person (including a bank) subject to the jurisdiction of the United States and with an interest in, signature,
or other authority over one or more bank, securities, or other financial accounts in a foreign country must file an
FBAR if the aggregate value of such accounts at any point in a calendar year exceeds $10,0003.
Suspicious Activity Report (SAR):
Banks must file an SAR for any suspicious transaction relevant to a possible violation of law or regulation within 30
days of initial presentation and review of fraudulent activity. If no specific suspect is identified, the time period can
be extended to 60 days4.
1. Regulated and enforced by _______________________________________________________________
Disclosures
18 And Documents
1. Why was TRID created?
2. Why do both the Loan Estimate and the Closing

Disclosure include a “confirm receipt” or “statement of
no obligation?”
3. When is the Loan Estimate due to a borrower? How

should a borrower use their Loan Estimate?
4. When is the Closing Disclosure due to a borrower? How

should a borrower use their Closing Disclosure?
5. What is the intent to proceed and why is that

necessary?
Disclosures And Documents

In this chapter we’ll be reviewing many of the disclosures we discussed in other chapters related to the laws that
require their delivery to the borrower. We’ll begin the chapter with a deep dive on the TILA-RESPA Integrated
Disclosure Rule (TRID) which provides authority under TILA to combine disclosures required under TILA and RESPA
into singular disclosures. These TRID disclosures cover the requirements expected under both laws. We’ll focus most
of the discussion in this chapter on TRID because the delivery of these two disclosures plays a prominent role in
borrower education for closed-end loans.
In simple terms, to disclose means to tell or inform. In our business, there are three types of disclosure requirements:
basic, written, and form.
The basic disclosure means that the law compels (requires) the MLO to disclose to the borrower certain information
like, “you should keep all of the documents you receive for this transaction.” Basic disclosures do not have specific
requirements for how they must be provided to the borrower, but most MLOs provide them in written form to ensure
the borrower can keep a copy.
Written disclosures are just what they sound like: disclosures that must be provided in writing.
Form disclosures are disclosures that must be provided to the borrower on a specific type of form. For example, the
Loan Estimate and Closing Disclosure are two forms that must be used when a borrower is in process for a closed-
end mortgage.
What’s TRID?
The Dodd-Frank Act required improved consumer mortgage disclosures, and so the CFPB developed the TILA-
RESPA Integrated Disclosure Rule (TRID), also known as the Know Before You Owe Rule (KBYO), to simplify the
information provided to mortgage borrowers in the disclosures required by TILA and RESPA. In essence, TRID used
the information found in two already existing early disclosures - the Good Faith Estimate (GFE) from RESPA and
the Initial Truth in Lending statement (TIL) from TILA – as a basis for the creation of the Loan Estimate. Likewise,
TRID used the information found in two already existing final disclosures - the HUD-1 Settlement Statement (HUD-
1) from RESPA and the Final Truth in Lending statement (TIL) from TILA – as a basis for the creation of the Closing
Disclosure.
3 Types of Disclosure Requirements:

1. _______________________ Disclosure: must be provided to the borrower, but not necessarily in writing.
2. _______________________ Disclosure: must be provided to the borrower in writing, but not necessarily on a specific
form.
3. _______________________ Disclosure: must be provided to the borrower on a specific form.
What’s TRID?
Simplifying TRID
The TILA-RESPA Integrated Disclosure Rule calls for combining some of the disclosure requirements under RESPA
and TILA into more consumer-friendly documents. The details of settlement costs and finance charges that
were once provided to the borrower in separate forms are now combined in the Loan Estimate and the Closing
Disclosure. TRID applies to all closed end mortgages.
TRID does NOT apply to open-end forms of credit. This means that reverse mortgages and HELOCs are exempt
from the requirements of TRID.
TRID was created to simplify the information provided to mortgage loan borrowers. The early disclosure requirement
for TRID is met by the Loan Estimate, which provides an estimate of settlement and finance costs. The Closing
Disclosure is provided as a final disclosure and provides the final costs for settlement and financing.
TRID also added some new specific requirements to the mortgage loan origination process. The requirement to gain
an “intent to proceed” from the borrower which resides in Section 19 of TILA (MDIA) is a result of TRID. To review, a
borrower must provide their intent to proceed with the loan process to the MLO prior to being charged any fees. The
intent to proceed may be provided verbally, electronically or in written form. The MLO is obligated to retain a record
of this intent for a period of 3 years from the date upon which it was received.
Charges And Fees Disclosed

The TRID disclosures provide information about numerous costs and fees that previously were disclosed on multiple
disclosure documents. This reduction in paperwork simplifies the process for consumers. The following costs and
fees are available on the TRID disclosures and broken down into two categories - Loan Costs and Other Costs:
Loan Costs Other Costs

Governed by TILA Governed by RESPA
• Origination charges • Taxes and government fees

• Services required by the lender • Prepaid items
• Escrow payments
• Owner’s title insurance
2020Hour
HourSAFE
SAFEComprehensive:
MortgageEducation
Education(NMLS
(NMLS10527)
10527)- Version
- Version4 4 223
The Loan Estimate
The Loan Estimate

The Loan Estimate (LE) is a three-page document containing an estimate of credit terms and closing costs.
The LE is delivered at the time of application. Think of it as the borrower’s menu – it tells the borrower what
everything costs.
Information on the Loan Estimate is valid for 10 business days from the date of disclosure. This means that
the borrower must provide their intent to proceed within 10 business days.
If the borrower does not provide their intent within the 10-day period, a new LE must be generated based
on the new current circumstances. These new circumstances may include changes in the borrower’s
qualification profile.
The LE must be retained for three years from the date of consummation by the MLO or lender.
The Loan Estimate should help the consumer recognize and comprehend the expense, risk, and
characteristics of the loan for which they are applying.
The Loan Estimate contains a good faith estimate of the charges in dollar form a borrower may face
throughout the loan process. These estimates are good for 10 business days from when the Loan Estimate is
provided. It also contains other essential
information related to the loan, e.g., the
interest rate and the annual percentage
rate.
Revised LEs must have reasons for
revision. A main thing to note about the
Loan Estimate is that a mortgage loan
originator cannot charge or collect any
fee, except for a credit report fee, until the
Loan Estimate has been disclosed and the
potential borrower has explicitly expressed
their “intent to proceed.”
If an MLO provides a consumer with a
written estimate of terms or costs specific
to that consumer before the consumer
receives the Loan Estimate, the MLO shall
clearly and conspicuously state at the
top of the front of the first page of the
estimate in a font size that is no smaller
than 12-point font: “Your actual rate,
payment, and costs could be higher. Get
an official Loan Estimate before choosing
a loan.”
The Loan Estimate
The Loan Estimate Page-by-Page

Loan Estimate - Page One
Page one is a summary of the transaction and is directly comparable to the Closing Disclosure in terms of the
information provided.
Loan Term
This section provides the important information about Loan Amount, Interest Rate, a projected Monthly Principal
& Interest payment, and whether or not the loan contains a Prepayment Penalty or Balloon Payment. This section
also asks the question, “Can this amount increase after closing?” If the answer listed is yes, this could signify that
the loan has the possibility of negative amortization or is an ARM.
Projected Payments
This section breaks down the estimated total monthly mortgage payment. This shows whether a loan has any
associated mortgage insurance or fee.
This section also breaks down if there is
an escrow account and an estimate of
how much the escrow payment could
be. Another thing this section breaks
down is whether the payment will change
throughout the life of the loan.
Costs At Closing
The final section on page one is titled
Costs at Closing. This separates and
explains the Estimated Closing Costs
and the Estimated Cash to Close. The
Estimated Closing Costs are broken down
further on page two. The Estimated Cash
to Close includes the Estimated Closing
Costs as well as any extra funds a borrower
would need, such as the down payment.
The Loan Estimate
Loan Estimate - Page Two

Page two is titled Closing Cost Details and is an initial overview and estimate of nearly all the costs a borrower may
be charged for obtaining the loan as well as any costs for necessary third party services. It breaks down into three
sections: Loan Costs, Other Costs, and Calculating Cash to Close.
Loan Costs
The first section on page two of the Loan Estimate is titled Loan Costs and is divided
into subsections A - D.
• Subsection A is titled Origination Costs. These are the costs the mortgage loan
originator charges for originating the loan. These costs may include any discount
points a borrower will pay or any rebates the borrower will receive. The cost of
these services cannot change at closing.
• Subsection B is titled Services You Cannot Shop For. These are necessary costs of
the loan process. Some main costs that fall under this category are an appraisal
fee, a credit report fee, and a flood determination fee. A borrower cannot
shop for these services for a couple different reasons. For example, a borrower
cannot choose who does their appraisal as it could easily lead to fraud. Another
example is a borrower cannot choose where their credit report comes from, since
there are only three generally accepted credit reporting agencies and normally
a lender will look at all three, using the middle score for qualification purposes.
The cost of these services as a whole may change by up to 10% at closing.
• Subsection C is titled Services You Can Shop For. It includes other necessary
costs of the loan process. A couple main charges under this subsection are a
pest inspection fee, a survey fee, and title-related fees. Typically, a mortgage
loan originator will provide a list of suggestions for these services, although
a borrower can choose whoever they desire to perform these services. If the
borrower chooses a provider suggested by the MLO, the threshold for change
is the same with the cost variance of 10% listed for subsection B. If the borrower
chooses a provider not recommended by the MLO there are no limits on a
variance of cost.
• Subsection D is titled Total Loan Costs. It is the sum of subsections A, B, and C.
Other Costs
The second section on page two of the Loan Estimate is titled Other Costs. It is
broken down into additional subsections E - J.
• Subsection E is titled Taxes and Other Government Fees. The main fee here is the
transfer tax. It is the cost the government charges for processing and recording
the transfer of ownership interest in the property.
• Subsection F is titled Prepaids. The main costs under this subsection are
homeowners insurance, property taxes, prepaid interest, and any applicable
mortgage insurance, guaranty, or funding fee. A borrower must pay these
various charges in advance of when they are technically due, hence the term
prepaid. A borrower often pays for 1 to 12 months of these items prior to or at
closing.
• Subsection G is titled Initial Escrow Payment at Closing. This subsection breaks
down any necessary escrow payments needed at or before settlement.
• Subsection H is titled Other. The services found here are usually optional, such
as an owner’s title policy or a pest inspection fee.
• Subsection I is titled Total Other Costs. It is a sum of the costs in subsections E, F,
G, and H.
• Subsection J is titled Total Closing Costs. It is a sum of the Total Loan Costs
(subsection D) and Total Other Costs (Subsection I).
The Loan Estimate
Calculating Cash To Close

The third section on page two is titled calculating Cash to Close. This is an estimated summation of all funds
necessary for the borrower to close their loan. The main things in this section are the Total Closing Costs
(Subsection J) as well as any down payment, earnest money deposit, or other adjustments. Many times in a
purchase transaction a borrower puts down an earnest money deposit that gets deposited into a trust account.
Since the borrower paid this in advance, it is subtracted from the total amount of funds required.
Loan Estimate - Page Three
Page three is titled Additional Information About This Loan. It shows the information about the mortgage loan
originator or originators involved in the loan process. It also breaks down into three sections: Comparisons, Other
Considerations, and Confirm Receipt.
Comparisons
The first section on page three is titled
Comparisons. It is meant to be used by the
borrower as a tool for shopping for other
comparable loans. This section includes
a breakdown of how much principal and
interest a borrower will have paid off in the
first 5 years of their loan. This section also
includes the Annual Percentage Rate (APR)
and the Total Interest Percentage (TIP). As
the Loan Estimate states, the TIP is “the total
amount of interest that you will pay over
the loan term as a percentage of your loan
amount.”
If there is a changed circumstance that
causes the APR to change by more than 1/8
of 1% on fixed-rate loans or 1/4 of 1% on
ARMs, the initial LE needs to be re-disclosed
with the updated costs.
Other Considerations
The second section on page three is titled
Other Considerations. This section’s intent
is to give the borrower a heads-up on
some of the other features of the loan or
loan process. The main considerations are
to provide the borrower with information
involving Appraisal, Assumption,
Homeowner’s Insurance, Late Payments,
Refinance considerations and Servicing.
Confirm Receipt
The third and final section on page three is titled Confirm Receipt. This is where the borrower(s) sign the Loan
Estimate to confirm they have received it. As prescribed by the Mortgage Disclosure Improvement Act (MDIA), it
contains a statement of no obligation: “You do not have to accept this loan because you have signed or received
this form.”
The Closing Disclosure

The Closing Disclosure (CD) is a five-page document containing the final amounts of all the costs involved in the
transaction. It provides the final costs of the entire transaction. Think of it as the borrower’s receipt.
The CD is due 3 business days prior to
consummation of the loan. Remember,
consummation is different than closing
so depending on the transaction (like a
refinance on a primary residence) closing
could actually take place 3 business days
prior to consummation, in which case the
CD could be provided at closing.
The borrower may request the CD 24 hours
before consummation and many lenders will
simply provide it as a courtesy to avoid any
confusion.
The CD must be retained for 5 years from
the date of consummation. If there are any
errors on the CD, the MLO or lender has 30
days from the date of closing to correct the
error.
If there are any numerical errors on the
CD, the MLO or lender has 30 days from
consummation to correct the errors. For
non-numerical errors, the time frame is 60
days.
Creditors also must provide a corrected
Closing Disclosure to correct non-numerical
clerical errors and document cures for
tolerance violations no later than 60
calendar days after consummation. Refunds
due to tolerance errors must also be within
60 calendar days after consummation.
The Closing Disclosure Page-by-Page

Closing Disclosure - Page One
On the very top of page one of the CD is the Closing Information, the Transaction Information, and the Loan
Information. This is listed clearly at the top, so the borrower has a breakdown of many of the important features of
the transaction.
One thing to note under Closing Information is that it may list the Sale Price, the Appraised Property Value, or the
Estimated Property Value. What is listed depends on what type of transaction the loan is. If it is a purchase, then
the Sale Price will be listed. If it is a refinance where an appraisal was done, then the Appraised Property Value will
be used. If it is a refinance where no appraisal was obtained, then the Estimated Property Value can be used.
Loan Terms, Projected Payments And Costs At Closing
The rest of page one breaks down to three sections: Loan Terms, Projected Payments, and Costs at Closing. The
amounts and features listed here should be nearly identical to the LE. Some parts are more apt to change than
others. An example of a common difference would be the Escrow amount increasing or decreasing from the
estimate listed on the LE to the actual cost listed on the CD.
Closing Disclosure - Page Two

Page-two of the CD is a further breakdown and
itemization of the information on page two of the
LE. It contains two sections: Loan Costs and Other
Costs. The CD goes further than the LE, because
it shows who is paying what, and when the cost is
being paid. Loans Costs also has a subsection titled
Services Borrower Did Shop For, which needs further
explanation. If the borrower shopped for a service that
was on the written List of Settlement Service Providers
that the mortgage loan originator provided, it falls
under the tolerances on the LE that we described
earlier. Once again, the aggregate total of these costs
should not increase by more than 10% of what was on
the LE. But if a borrower uses a service not on this list,
then the change in cost for these services from the LE
to the CD can be any amount.
Other Costs
Other Costs, as the name states, discusses some of the
other costs a borrower will face in the loan interaction.
These include costs such as taxes, insurance, home
inspection fee, real estate commission, and title
insurance.
Example Of Services The Borrower Can Shop For:

Marty is an MLO. Benny is a borrower. Marty provides a Settlement Service
Provider list to Benny. On it, there is Tina’s Title Co. Benny chooses not to use
Tina’s Title, and instead uses Tiny Tim’s Title, which is not on the list Marty
provided. Marty puts an estimate amount for title services on the LE. The
amount for title services on the CD can change by any amount, and still follow
the guidelines set forth for tolerances.
Closing Disclosure - Page Three

On the top of page three of the CD is Calculating Cash to Close.
This is a continuation of the Total Closing Costs and a further
breakdown of the information on the previous page. Under the
section Calculating Cash to Close is the subsection simply titled,
Did this change? This is to help provide clarity to the borrower on
what has or has not changed from the LE to the CD. If something
has changed, it shows where to find and compare these figures.
This helps both the originator and the borrower to see if these
figures have stayed within the legal tolerances.
On the bottom half of page three of the CD is the section titled
Summaries of Transactions. This is where the CD starts to break
costs down much further than the LE, which does not contain all
the information located here. This section of the CD also has two
columns: Borrower’s Transaction and Seller’s Transaction. This
section further shows what is due at closing. It provides clarity for
all parties involved by showing who the funds are going to and
who they need to come from. Some main items found here are
seller concessions (i.e., seller credits) or other existing loans.
Closing Disclosure - Page Four
The header for this page and page five is Additional Information
About This Loan. Page four has only one section, and it is titled
Loan Disclosures. This is where a borrower can read about some
of the main features their loan does or does not contain. Some of
these features are a Demand Feature, Negative Amortization, or
Assumption.
Another focus of this section is to highlight whether the borrower
will have an escrow account and make the borrower aware their
escrow payment may change in the future. A final disclosure
found at the bottom of the page states matter-of-factly, “You
may lose this property if you do not make your payments or
satisfy other obligations for this loan.” This straight-forward
statement is another way the CD helps a borrower understand the
responsibilities involved with financing a home.
Closing Disclosure - Page Five

Page five is the final page of the CD. It contains four sections: Loan Calculations, Other Disclosures, Contact
Information, and Confirm Receipt. It also has a box labeled Questions? This gives the contact information for the
CFPB.
Loan Calculations
Under the Loan Calculations section, the borrower can find how much in total dollars and cents they will pay
over the life of the loan. This figure presupposes the borrower makes all payments as scheduled. This amount
is a summation of a few different factors: the principal balance of the loan, the finance charge, any mortgage
insurance or fee, and other loan costs. Two other important percentages here are the APR and TIP. These should
closely reflect what the borrower saw on the LE. As a reminder, if there was a changed circumstance that caused
the APR to change by more than 1/8 of 1% on fixed-rate loans or 1/4 of 1% on ARMs, the initial LE should have
been re-disclosed to the borrower prior to the delivery of the CD.
Other Disclosures
The Other Disclosures section informs the borrower
about a few more features of their loan. Two common
ones are Refinance, which states that any future
financing of this property is subject to approval, and
Appraisal, which reminds the borrower about their
right to receive a copy of the appraisal used to value
the home.
Contact Information
The Contact Information section shows the main
points of contact for all real estate and mortgage
professionals involved in the transaction.
Confirm Receipt
The final part of the CD is titled Confirm Receipt.
As with the LE, it is a statement of no obligation
that informs the borrower, “By signing, you are only
confirming that you have received this form. You do not
have to accept this loan because you have signed or
receive this form.” This is to help let the borrower know
that they can still legally walk away from the transaction
at this point.
Match the disclosures that are delivered at application with their purpose within the crossword below.
Across Down
1. MSDS: Informs the consumer that 2. Homeownership Counseling

their loan may be assigned to another Organizations List: Informs
company for ___ the consumer of local ___
organizations
6. Initial Privacy Notice: Informs the
consumer of what information the 3. LE: Informs the consumer of the
financial institution gathers, how this ___ costs of the transaction including
information is ___, how the institution third party services and financing
safeguards that information, and how
the consumer can opt out 4. Home Loan Toolkit: Informs the
consumer of the ___ process
8. Initial TIL: Informs the consumer of
the estimated cost for financing a ___ 5. What You Should Know About Your
mortgage HELOC: Informs the consumer of the
structure of a HELOC and what to look
10. CHARM Booklet: Informs the for when shopping for a ___
consumer of ___ and advantages of
ARMs 7. Early ARM: Informs the consumer
on the specifics of their ___ (e.g., rate,
11. Notice of Right to an Appraisal: adjustments, caps, index)
Informs the consumer that they will
receive a copy of their ___ report if one Word Bank: Appraisal, Servicing,
is performed on the property Counseling, HELOC, Mortgage,
Arrangement, OpenEnd, Estimated,
12. ABA: Informs the consumer of the ARM, Shared, Risks
business ___ between two parties

Fill in the blanks with the disclosures that are delivered before closing with their purpose. Utilize the word bank if
necessary.
Word Bank: E-SIGN Act Disclosures General TILA Disclosures Notice of Action Taken
1. ________________________________________________________________
• Statement recommending that the consumer retain a copy of all loan-related disclosures
• Statement that terms are subject to change and the consumer may receive a refund of third party
fees
• Statement that borrower default could result in the loss of the property
• Statement of No Obligation
2. ________________________________________________________________
• Prior to making an agreement involving electronically-delivered documents, a disclosure must be
provided indicating that the consumer has the right to receive the signed agreement in paper form.
• A statement indicating whether the provided disclosure is specific only to the agreement that was
e-signed or to a group of documents with which the e-signed agreement is associated.
• The steps needed for the consumer to withdraw their consent to the agreement.
• How the consumer can obtain a paper copy of the agreement regardless of whether or not they
agreed to utilize the electronic method for agreement.
• Before agreeing to the use of electronic records, the consumer must be provided with a statement
indicating the hardware and software needed to access and use the electronic record. Should the
hardware or software requirements change, the E-Sign Act requires that the consumer must be
notified of the change.
3. ________________________________________________________________
• Informs the consumer when a decision is made on their credit application status (i.e., approved,
incomplete, denied, not accepted)
Fill in the blanks with the disclosures that are delivered at closing with their purpose below. Utilize the word bank if
necessary.
Word Bank: Ongoing Interest Rate Disclosure Notice of Right to Cancel

Notice of Right to Cancel PMI Annual Privacy Notice
Annual Escrow Statement Initial Escrow Statement
Covered Loan Notice Initial Interest Rate Adjustment
Closing Disclosure Notice of Transfer of Servicing
1. ________________________________________________________________
• Informs the consumer of the cost for financing; compared against the Loan Estimate
2. ________________________________________________________________
• Informs the consumer of the amount needed for escrow and breaks down each payment
3. ________________________________________________________________
• Informs the consumer of the details of their loan and that they could lose their home
4. ________________________________________________________________
• Informs the consumer that they can rescind within 3 business days of closing
5. ________________________________________________________________
• Informs the consumer how PMI may be canceled upon request or automatically
Fill in the blanks with the disclosures that are delivered at ownership with their purpose.
Word Bank: Ongoing Interest Rate Disclosure Notice of Right to Cancel

Notice of Right to Cancel PMI Annual Privacy Notice
Annual Escrow Statement Initial Escrow Statement
Covered Loan Notice Initial Interest Rate Adjustment
Closing Disclosure Notice of Transfer of Servicing
1. ________________________________________________________________
• Informs the consumer of what information the financial institution gathers, where this information is
shared, how the institution safeguards that information, and how the consumer can opt out of the
notice
2. ________________________________________________________________
• Informs the consumer that their loan is being placed with a new servicer
3. ________________________________________________________________
• Informs the consumer of any escrow overages or shortages
4. ________________________________________________________________
• Informs the consumer of their first rate change, new payment amount, as well as any other changes
to loan terms, and of possible alternatives to avoid paying the new rate
5. ________________________________________________________________
• Informs the consumer of the effective date of the new interest rate and the new payment amount as
well as any other changes to loan terms, and of possible alternatives to avoid paying the new rate
Closing
19 And Ownership
1. What is the difference between closing and

consummation?
2. What are the role responsibilities of the closing/

settlement agent?
3. What is the difference between a wet and a dry

settlement?
4. Why is it important to determine who holds title during

the term of the mortgage?
5. What is the servicer’s role in the origination process and

what does Section 6 of RESPA say about the servicer’s
role in the process?
6. How does Section 36 of TILA impact servicers during

the mortgage process?
7. What is securitization and why is it needed?
8. How is a loan modification different from a refinance?

Closing
Closing 101
Closing
In this section, we’ll discuss what MLOs consider to be the end of the loan process, but if you turn the table
(the closing table that is), you’ll see that for your client this is just the beginning! This chapter will cover closing,
settlement types, funding methods, and the recording of the documents.
Closing 101
You’ve probably heard the term closing table before. If you come from a background in sales, you recognize this to
mean the place where the sales professional and the buyer come to an agreement on the terms of the transaction.
If you’re new to the business world and the mortgage industry in general, you might be envisioning a conference
room with a big table. At the table are seated all of the parties involved in the transaction - the seller, the buyer,
the real estate agents representing the seller and buyer, the mortgage loan originator, the lender, and the closing
agent. While you may imagine all of those people at a table, in reality the closing table is more of a myth than a
reality.
Consummation VS. Closing

We’ve touched on this before, but let’s revisit. There is a difference between closing and consummation.
Closing is when all parties COMMIT to the loan.
Consummation is when the borrower becomes CONTRACTUALLY OBLIGATED to the loan.
Even though you would think once someone signs a contract they’re obligated to pay the bill, this isn’t always the
case with mortgage loans. TILA’s Right to Rescind allows reverse mortgage and refinance (on a primary home)
borrowers to cancel the agreement even after it is signed. With rescission rights, these borrowers have 3 business
days from closing to change their mind and cancel the agreement.
In cases where the right to rescind exists, lenders will typically not fund the loan until the 3 business day period
passes. Once the loan is funded, the agreement is consummated and the documents are filed with the county.
Waiting until the rescission period passes to fund and file the loan allows the lender to avoid hassles in case the
borrower has second thoughts.
Some state laws include rescission periods for loans other than those covered in the TILA rules, but you can worry
about those later when you’re preparing for your state licenses.
Closing A Purchase
In the case of a purchase transaction, the closing agent will typically meet with the borrower first and have them
sign the necessary documents and collect any payment of closing costs. Closing costs could include the down
payment, loan fees, and prepaid items. This payment must be provided in the form of certified funds such as a
bank check or wire transfer. By paying it this way there’s certainty that the funds are available, and this also provides
a paper trail for record keeping purposes.
When all parties sign When the borrower is contractually

their documents obligated to the loan
Closing
Closing 101
Once the closing agent collects signatures and payment from the borrower, the closing agent then meets with
the seller. At this meeting the seller will sign any necessary documents, and depending on the settlement terms,
(we’ll talk about this later in this chapter) may provide the buyer’s payment from the lender. Once both parties have
signed their documents and have paid/have been paid, the closing agent will take the documents and file them
with the county.
Things To Know
A closing agent is the facilitator for the closing process
of a mortgage loan. See the Closing Agent section of
this chapter for more details.
Simultaneous Closings
Before we talk about who signs what and when, it’s necessary to explain that when real estate is purchased with a
loan (the mortgage) there are actually two transactions occurring simultaneously (at the same time).
One transaction involves the agreement between the seller and the buyer. The seller sells the home to the buyer
for a specific sum of money. In exchange for the money, the seller conveys (gives) title to the buyer. If no mortgage
is involved, the buyer pays the seller and the necessary documents are signed. Done deal.
When a mortgage is used by a buyer to purchase a home, the process becomes more complicated. This is where
the term simultaneous closing comes into play.
With a simultaneous closing, not only is the transaction between buyer and seller taking place, but there
is also another transaction taking place between borrower (the buyer) and their lender. It’s almost like
a three-way hand-off in which the seller turns over title to the buyer/borrower, then the lender turns
over the money to the seller. But the lender can’t give the seller the money without the buyer/borrower
promising to pay the lender. With a simultaneous closing the seller and buyer/borrower have a purchase
closing while the buyer/borrower and lender have a loan closing. Both must occur at the same time for
all parties involved to be satisfied with the agreement. Think about it this way, the seller is not going to
give up the keys to their house unless someone gives them the money, and the buyer/borrower cannot
give them the money without pledging the rights to the house to the lender. A refinance transaction is much
simpler because the borrower already has title to the property and thus there are only two parties - the borrower
and the lender - involved.
Closing A Refinance
For the most part, a refinance closing follows the same steps as the purchase closing. The one big difference is that
with a refinance, the borrower already owns the home so there’s only one signing meeting rather than two.
In a refinance closing, the borrower meets with the closing agent, signs the necessary documents, and pays any
required closing costs. In many cases, the borrower will roll those closing costs into the new loan, but this is not a
requirement. There is a possibility that the borrower will bring cash to close (which we already understand has to be
certified funds and not really cash). Once the documents are signed, the closing agent will then take the documents
to the county for recording.
2020Hour
HourSAFE
SAFEComprehensive:
MortgageEducation
Education(NMLS
(NMLS10527)
10527)- Version
- Version4 4 239
Closing
Settlement Types
Who Must Be Present At Closing

At a minimum anyone with ownership interest in the property, anyone with debt obligation interest in the loan,
and/or their representatives must be present at closing. Either party may send a Power of Attorney to the closing to
represent them as well.
The lender is typically represented by the closing agent at the closing. The MLO is not required at the closing but
may attend.
In general, the interested parties may bring or invite anyone they want to attend the closing. As a side note, in the
state of South Carolina the MLO is required to inform the borrower that they have the right to bring an attorney of
the their choosing with them to closing as an advisor or representative.
The Closing Agent

The closing agent (aka settlement agent or escrow agent) is the facilitator for the closing process of a mortgage
loan. If you think of the players in the closing process (e.g., the borrower, the lender, the seller) as musicians, the
closing agent is the conductor. The closing agent controls what documents need to be signed, when and where
the signing will occur, and how the documents will be filed.
They will also notarize (legally witness) the signatures made at closing and provide an explanation of the
documents and fees.
Beyond these basic responsibilities, the closing agent may prepare the documents prior to close, arrange for the
setup of escrow accounts, and disburse funds to the necessary parties. Because of the responsibility with funds,
the closing agent is typically required to be bonded or insured for this purpose.
The closing agent is often an employee of the title company, or an attorney, but this is not a requirement.
Settlement Types
How a loan is settled (closed/ consummated) is tied directly to how and when it is funded. In our industry, there are
two basic methods for settling a mortgage loan: wet settlement or dry settlement.
Wet Settlement
A wet settlement is one in which the funds are disbursed to the parties at the time of closing. Or to be more literal,
while the ink from the signatures on the documents signed at closing is still wet.
A wet settlement is typically used for purchase transactions. If the method for settlement is wet, the loan also
consummates at closing due to the exchange of funds.
Some states prohibit wet settlements regardless of the type of loan.
Dry Settlement
Now that you know what a wet settlement is, we’ll bet you have a pretty good idea of what a dry one is as well. The
dry settlement is one in which the funds are disbursed after closing. Or more literally, after the ink has dried on the
documents signed at closing.
The dry settlement is used for transactions covered by TILA’s Right to Rescind (non-purchase loans) as well as many
other loans in which it is unnecessary or illegal to disburse funds at the table (thus triggering consummation).
1. __________________________________________________________ is when funds are disbursed (distributed) at closing.

Typically used for purchase transactions.
2. __________________________________________________________ is when funds are disbursed (distributed) after closing.
Typically used for refinance and reverse transactions.
Closing
Funding Methods
Funding Methods
Now that we’ve figured out how to close and settle our loans, it might be a good time to discuss how the loans are
actually funded. By funding we mean who actually provides the money for the loan.
There’s a lot more to it than a lender just writing a check. The three main funding approaches in the mortgage
industry are table funding, warehousing funding, and direct funding. Each functions differently in how the loan and
the flow of money works.
Table Funding
With table funding the loan is closed at the table by the loan originator in their own name. For example, if the loan
is originated by a mortgage broker using table funding as their approach, they would be responsible for processing
and underwriting the mortgage and serve as the lender at the closing table.
As the loan closes, a new lender (i.e., investor) immediately advances funds for the loan and the loan package is
transferred to the new lender. The loan documents are then filed in the new lender’s name.
Table funding is a great tool for many MLOs because it allows them to maintain a relationship with their client
throughout the entire loan process and with a minimal amount of expense, because the loan is transferred to
another lender immediately at closing.
Warehouse Funding/Lending
Warehouse funding (aka warehouse lending) is a practice in which an investor provides funds from which the
MLO may draw to close mortgage loans. These funds are sometimes referred to as a warehouse line of credit.
In warehousing lending, the MLO closes the loan in their own name (like table funding), but instead of instantly
transferring the loan over to the investor, the loan is held by the MLO until they sell it in the secondary market. Once
the loan sells in the secondary market, the MLO pays the investor for the use of their funds with the warehouse line.
The use of warehouse lending is popular with many MLOs because it allows them to be the lender on record. Some
consider warehouse lending to be riskier for MLOs because of the possibility that they will be unable to sell the loan
in the secondary market and will thus be unable to repay the warehouser for the use of the line of credit.
Direct Funding/Lending
Direct funding is just like it sounds - the MLO is responsible for funding the loan. There are no intermediaries or
investors involved when a loan is directly funded. The loan is funded directly by the lender.
1. _____________________________________: MLO closes the loan in their own name, but the funds come from a lender.
Once the loan closes, the MLO transfers the loan to the lender.
2. _____________________________________: MLO closes the loan in their own name, but the funds come from an
investor. Once the loan is sold on the secondary market, the MLO pays the investor back.
3. _____________________________________: MLO closes the loan in their own name, with their own funds.
Closing
Recording
Recording
Closed, settled, funded… now what? Can we start collecting payments? Not yet.
As the last step in the closing process (some refer to everything that occurs after the closing table as post-close,
so we could say this is the next post-close step), the appropriate documents must be filed with the Registrar of the
county in which the property is located. This filing process is known as recording.
After the loan is consummated, the closing agent’s final obligation is to record the documents. In an earlier unit,
we discussed the issues of lien priority and who gets paid first when title is conveyed to a new owner. Making sure
the documents are filed and recorded in a timely manner will ensure that the lien is placed in its proper position of
priority for future settlements.
Typically, the security instrument (which collateralizes the home as the pledged asset by the borrower) is recorded
with the county. If the transaction is a purchase, the deed, which shows who owns the property, (ownership is also
referred to as title) will also be filed.
Fill in the below spaces with the types of documents that the Closing Agent files at recording.
Shows ownership Deed of Trust or Mortgage
Remittance And Ownership
Servicing

After the loan closes the borrower begins the process of paying the owner of the loan. The process of sending
payment is known as remittance. If a borrower has a 30-year mortgage, that means they’ll be remitting 360 times
(12 monthly payments x 30 years)!
Servicing
The servicer is the collector of the borrower’s monthly mortgage payment. Servicers collect and record borrower
payments, administer the loan, handle ongoing communication with the borrower, manage the borrower’s escrow
account (if applicable), process/evaluate borrower proposals such as loan modifications and disburse payment
receipts to loan owners.
Some lenders will service their own loans while others will sell the loan’s servicing rights to another organization.
Servicing rights are different than owning the loan. For doing their work, servicers are typically paid a fee or a
percentage of the loan payment based on the loan’s principal value.
RESPA’s Servicing Rules

Under Section 6 of RESPA, servicers must set specific policies and procedures within their organization to meet
certain RESPA-required objectives. The following four objectives are foremost:
1. Provide timely and accurate information; whether in relation to an information request, complaint,
foreclosure process, or death of a borrower. Ensure that borrowers are well informed about procedures for
submitting error notices and requests for information.
2. Properly process and evaluate loss mitigation applications (loss mitigation is when a borrower seeks to
resolve a defaulted loan with the servicer through arranging temporary terms such as extended payments
or waived fees). Follow proper regulations with regard to the pre-foreclosure process.
3. Properly oversee and ensure compliance of all employees with relation to procedures and laws. Certain
procedures must be followed with relation to a borrower’s escrow account and/or hazard insurance policy.
4. Ensure that necessary information about probable or actual transfer of servicing are disclosed to the
borrower, and ensure that all documentation is transferred during actual servicing transfer situations.
TILA’S Servicing Rules
Section 36 of TILA has three basic standards that servicers must follow. Whereas RESPA’s servicing rules focus on the
management and administration of the borrower’s loan, TILA’s servicing rules impact the timing of payments and
the information associated with the loan’s mechanics.
Payment Processing
Servicers must process a borrower’s periodic (monthly) payment properly by crediting a borrower’s payment to the
loan account on the date the payment is received. This prompt application may be delayed if the delay in crediting
does not result in any charges to the borrower or in the reporting of negative information to the consumer reporting
agencies.
2020Hour
HourSAFE
SAFEComprehensive:
MortgageEducation
Education(NMLS
(NMLS10527)
10527)- Version
- Version4 4 243
Recording
With regard to late fees on periodic payments, servicers can only charge a fee if the payment is received after the
due date or after the courtesy period noted on the mortgage contract. Late fees cannot be charged solely because
the borrower failed to pay a late fee on a previous mortgage payment.
Payoff Statements
Servicers must provide borrowers, upon request, an accurate statement of the outstanding balance that would be
required in order to satisfy the borrower’s mortgage as of a specified date. This payoff statement must be provided
within a reasonable time, but no later than 7 business days after the borrower’s request. In certain circumstances
such as if the loan is in foreclosure, where the payoff statement cannot be provided within 7 business days, it must
simply be provided within a reasonable time.
Periodic Statements
For each billing cycle of a closed-end mortgage loan, a periodic (monthly) statement must be provided to the
borrower with the following information:
• The amount due, including the payment due date and the amount of any late payment fee that will be imposed
if the payment is not received. If the transaction has multiple payment options, the amount due must be shown
under each of the payment options.
• An explanation of the amount due, including a breakdown of how the principal, interest, and escrow (if
applicable) will be applied. The total of all payments received since the beginning of the current calendar year
must also be shown.
• Any partial payment information regarding how the payment will be applied.
• A toll-free telephone number and, if applicable, an e-mail address that may be used by the borrower to obtain
information about their account.
• Basic account information such as the outstanding principal balance of the loan and current effective interest
rate.
• If the borrower is more than 45 days delinquent, a separate statement must be attached. This statement or
letter must notify the borrower of possible risks that may be incurred such as foreclosure, account history
information, the total payment required to become current on the loan account, and a reference to a
homeownership counselor.
The periodic statement must be provided to the borrower within a “reasonably prompt” time after the payment due
date, or the end of any courtesy period, of the previous billing cycle. The statement does not need to be provided
more often than once a month, regardless of the billing cycle time frame. Reverse mortgage loans, timeshare plans,
and certain fixed-rate mortgage loans with coupon books are exempt from this disclosure requirement.
Securitization
Securitization
Securitization is what happens to a loan after it is sold into the secondary market. By selling these loans, the lender
has fresh capital with which to make more loans.
Loans can be packaged or bundled together into a financial security (investment) product that they will then sell in
the investment market place. These bundles are commonly referred to as mortgage backed securities (MBS).
Types of MBS
The two most common forms of MBS are pass-throughs and collateralized mortgage obligations (CMO). Pass-
throughs function as a financial trust in which investors buy shares. Investors are then paid their share of the
payments made on the mortgages in the trust.
CMOs consist of many MBSs combined. The CMO is then categorized into slices which are called tranches. The
tranches are created based on the interest rate of the mortgages in the CMO. Tranches with higher interest rates
have higher investor risk, while those with lower interest rate have lower investor risk.
The MBS Marketplace

The MBS marketplace is made up of institutional investors and GSEs (government-sponsored enterprises). Lenders
can sell their conventional conforming mortgages to Fannie Mae and Freddie Mac, or to investors. Because
conventional conforming loans meet Fannie and Freddie’s standards, they are considered of high quality in the
market. These high quality loans are then packaged by Fannie or Freddie as agency MBSs and sold in the financial
markets.
Loans that do not meet Fannie and Freddie’s standards can also be sold in the secondary market. They cannot be
packaged with conventional conforming loans, and are called non-agency MBSs.
Government (non-conventional) mortgage loans can be packaged into non-agency MBSs that are guaranteed by
Ginnie Mae.
Ginnie Mae serves a specific purpose with non-conventional mortgages in that it functions in the secondary market
as a packager and guarantor of MBSs comprised of government loans. Whereas with conventional conforming
mortgages, Fannie and Freddie buy the mortgages in the secondary market and then package them as MBSs,
Ginnie Mae may buy government mortgages and package them as MBSs, but more prevalently Ginnie Mae provides
insurance and serves as the guarantor to investors who buy government loan MBSs in case the MBS product fails.
1. The act of ___________________________________ or ___________________________________ loans to sell to investors is

called securitization.
Repayment
Reconveyance
Repayment
In this chapter, we’ll discuss potential options the borrower has to meet the commitment of their mortgage
obligation to the debt-holder. This could include paying off the loan in its entirety or encountering obstacles that
cause the servicer to seek resolution without repayment.
Reconveyance
Reconveyance occurs when the borrower pays off the mortgage debt in full. This repayment can occur by following
the monthly payment schedule or by paying the loan off early. When the loan is paid off, the lender is obligated
to provide a document to the borrower showing that the homeowner has met their financial obligation and a
guarantee that the mortgage encumbrance has been removed from the property’s title rights (clearing the title).
At the time of reconveyance, the lender is also required to file a Deed of Reconveyance in the county records. The
Deed of Reconveyance shows:
• Names of lender and borrower

• Address and legal identification of the property
• Initial loan amount
• Where in county records the original transaction documents were filed
Sale
If the borrower sells the home they must repay the lender the current principal balance owed on the mortgage. This
responsibility can be found in the Due on Sale Clause located in the mortgage contract. The basic language of the
Due on Sale Clause requires that the balance be paid to the lender if the property is sold or title is transferred.
Refinance
A refinance mortgage is one in which the borrower pays the principal balance due on their mortgage with funds
from a new lender. This refinance mortgage then replaces the borrower’s current mortgage. To be clear, a refinance
loan is a brand new loan that replaces the old loan.
Common reasons a borrower will refinance their mortgage:
• Cash out (C/O): The borrower taps into their available equity and receives funds at closing as part of their
new loan agreement.
• Rate and term (R/T): The new mortgage provides a better interest rate or loan term for the borrower.
• Change of product type:
• ARM to fixed - the borrower wants the certainty of a fixed payment or the current rates are low enough
on fixed products to justify the change.
• Closed-end to open-end: the borrower wants the flexibility of an open-end loan (or vice versa).
• Forward mortgage to reverse mortgage: Borrower is 62 years of age or older and wants to avoid monthly
payments.
A borrower can fully pay off their loan by:

1. Reconveyance: when the lender provides documentation that the _________________________
_________________________ has been _________________________ (clear title) because the loan has been paid off.
2. Sale: when the loan is paid off with _________________________ from the sale of the home.
3. Refinance: when the loan is paid off by getting a _________________________ mortgage.
Repayment
Sale
Default
Default occurs when the borrower does not make their payment on time. To be clear, in the language of the
mortgage agreement (the contract between lender and borrower), default occurs when the borrower does not meet
their obligation. If the payment is late, the borrower is considered in default.
The only way that default can be remedied (cured) is by paying the monthly payment amount PLUS the late fee. The
default is cured by the borrower meeting their debt obligation.
When a borrower is in default, the servicer will attempt to work with the borrower to resolve the issue. If payment
(including the late fees) is not made within 90 days, the servicer will typically issue a Demand Letter.
The Demand Letter is also known as the Acceleration Notice. Acceleration means that the borrower is now required
to pay the entire principal balance due immediately. The acceleration is triggered by the default.
Forbearance
Forbearance is a form of short-term relief for a borrower seeking to avoid foreclosure due to missed payments.
The missed payments are typically due to some form of hardship such as job loss or illness. Forbearance allows
the borrower to “get back on track” without losing their home through short-term payment reductions through an
agreement by the lender to not foreclose while the borrower seeks a long-term solution.
Modification
Loan modification is a revision or change of the existing mortgage agreement. Modifications may be provided by
the lender or servicer when the borrower is unable to afford their current mortgage payment and it is determined
that the borrower will be unable to refinance the mortgage.
A modification is different than a refinance in that it is a change to the existing agreement, not a new loan. The
modification may provide a lower interest rate, lower payments through extension of the loan term, or even a
forgiveness of a portion of the debt.
Foreclosure
If a borrower defaults on a loan, it allows the lender to gain possession of the property secured by the mortgage
loan. Because foreclosure processes vary state to state, HUD has issued a timeline of events that a borrower can
expect to experience if they enter into a foreclosure process. What follows is a summary of that timeline along
with generalizations for ease of understanding. Because state law governs mortgage and foreclosure proceedings,
consider the following a brief explanation of the foreclosure process.1
When a borrower starts missing payments, their servicer will contact them and attempt to collect payment or
understand the situation leading to the delinquencies. The servicer will attempt to work with the borrower to cure
the default. Generally, after 3 consecutive months of delinquencies, the servicer will issue a Demand Letter or Notice
to Accelerate. This tells the borrower the specified period of time they have to bring the mortgage current and avoid
foreclosure.2
After 4 months of missed payments foreclosure proceedings can begin, and the servicer will refer the borrower to an
attorney. If an arrangement has not been made to bring the debt current, a property sale will be scheduled through
the local sheriff or public trustee. Depending on the type of foreclosure allowed in the state, the lender might gain
the property’s title. Some states allow for a “redemption” period, which is the time after the sale of the home when
the borrower may still be able to pay their outstanding debt and reclaim the property.3
1 U.S. Department of Housing and Urban Development. Foreclosure Process. Retrieved from http://portal.hud.gov/hudportal/HUD?src=/topics/avoiding_foreclosure/foreclosureprocess
2 (2012) Consumer Financial Protection Bureau. Ask CFPB: How does foreclosure work? Retrieved from http://www.consumerfinance.gov/askcfpb/287/how-doesforeclosure-work.html
3 U.S. Department of Housing and Urban Development. Redemption. Retrieved from http://portal.hud.gov/hudportal/HUD?src=/topics/avoiding_ foreclosure/redemption
2020Hour
HourSAFE
SAFEComprehensive:
MortgageEducation
Education(NMLS
(NMLS10527)
10527)- Version
- Version4 4 247
Repayment
Default
Lender And Borrower Rights

As long as a lender or servicer adheres to state law, they have the right to pursue recovery of their lost assets
(either property or monetary) in the event that a borrower becomes delinquent. They may sell the property
that they obtain title for, and can also seek reimbursement of any legal fees that were incurred throughout the
foreclosure process.
The borrower may seek legal counsel or the help of a homeownership counselor at any point in the foreclosure
process. They may also petition their servicer for alternative methods to avoid foreclosure or challenge the validity
of a foreclosure claim in court.
Prior to the seizure of property by the lender or servicer from the borrower, many states offer some final borrower
protections. With pre-foreclosure redemption, the borrower can avoid foreclosure by paying the lender or servicer
the loan’s principal balance as well as any accrued interest and fees. Post-foreclosure redemption occurs after the
foreclosure sale and allows the borrower to reclaim their home by paying the foreclosure sale price, plus interest
and fees, to the purchaser of the property.
One of the most important factors involved with the rights of the borrower and the lender deals with whether the
state follows lien or title theory.
Legal Theories Of Ownership
Lien Theory
When a borrower has a property secured by a mortgage lien, the lender doesn’t actually hold onto the legal title.
Therefore, to proceed with a foreclosure the lender or servicer would first need to petition a court to obtain title
before taking ownership of the property.
Title Theory
The lender actually holds legal title to the property secured by the debt until that debt is paid in full. Once the
debt is paid in full, the lender will re-convey the property and title back to the borrower. If the debt cannot be
paid, the lender can exercise their right to foreclose without petitioning a court.
Types of Foreclosure
Judicial Foreclosure
The lender or servicer is required to file a suit in court. In some states, such as lien theory states, this type of
foreclosure is actually required so that the lender can state their case for recovering their losses through the
acquisition and sale of the property. This type is allowed in all states.
Non-Judicial (Power of Sale) Foreclosure
The lender or servicer has included a power of sale clause in the mortgage that allows them to sell the home in
the event of a default. Instead of filing a suit in court, the home will go straight to auction. This type is not allowed
in all states.
Strict Foreclosure
The lender or servicer files suit in court to reclaim the full amount of the defaulted debt. If the borrower fails to pay
it within the specified period of time, the lender gains title to the property and is not obligated to sell it. This type
of foreclosure is allowed only in a few states.
________________________________ ________________________________
Security Instrument: Mortgage Deed of Trust
Type of foreclosure: Judicial Non-Judicial
Ethics
20 And The MLO
1. What does it mean for an MLO to act ethically?
2. What are some examples of an MLO acting in an

unethical manner?
3. Why is it so important for an MLO to act ethically?

Ethics And The MLO
Ethics
Ethics And The MLO

Ethics
Webster’s Dictionary defines ethics as “the principles of conduct governing an individual or a group.”
This chapter is focused on introducing you to the challenges a mortgage loan originator faces every day.
Your Responsibilities As A Mortgage Loan Originator

Adhering to the law is a necessity of our business, but is acting ethically just another way of saying, “I obey the law?”
The answer is no. Ethical behavior requires the mortgage loan originator to not only follow the law, but also to
ensure that we do not take advantage of the consumer.
The concept that it is the consumer’s responsibility to know the risks associated with a transaction does not apply
in the mortgage industry. It’s really the other way around. It’s the mortgage loan originator’s responsibility to ensure
that the borrower understands everything associated with the transaction.
Because of this you can consider ethics to be THE LAW + (plus), meaning for a mortgage loan originator to act
ethically they must not only follow the law, but they must go above and beyond the law to ensure that the consumer
knows what they are doing.
The following scenario is designed to help you understand the challenges that face mortgage loan originators and
their clients on a regular basis. Be ready to discuss the scenario in class, the ethical dilemmas involved, and how you
would respond.
The Dilemma...
Jacob is a consumer who wants to buy a new home. He’s owned his current house for the last 8 years and while he
works hard to make his mortgage payments on time, sometimes he runs a little behind.
Balancing the costs and expenses of being a single dad with two teenage girls, Jacob occasionally paid his
mortgage or other bills late so that he could take care of emergency or immediate expenses. On the positive
side, it’s been almost a year since he was late on a credit card payment and over 6 years since he was late on his
mortgage or car payments.
The other day Jacob and his daughters were returning from a weekend trip to the lake and passed a house with
a For Sale sign in the front yard. It’s within walking distance of the beach at the lake and has a two car garage -
something Jacob realizes he’ll need now that the girls will be driving soon. When they get home, Jacob calls the
number on the sign and talks to the real estate agent. The house is a new listing and they make arrangements for
Jacob and the girls to swing by the next day for a tour.
Sure enough the girls love the house, and based on the price the seller wants, Jacob thinks he can afford it. He’s
making pretty good money now and has enough saved up to afford a significant down payment. He calls the 800
number of EZ Loans - a company that’s always advertising about mortgages.
At EZ Loans he reaches Allison, a mortgage loan originator who listens to Jacob’s story. She tells him she’ll take a
look at the numbers and call him back in about an hour to let him know if there’s a mortgage option that will fit his
needs.
Before Allison even hangs up she knows that there are several products that Jacob qualifies for that fit his needs.
Allison is really excited because it is the end of the month and if Jacob decides to move forward before the end of
the day, she’ll hit her bonus goal. That bonus could really help with the new car she is thinking of buying.
Allison runs the numbers and finds that there are three options for Jacob based on his qualifications:
Ethics And The MLO
As part of the EZ Loan process, Allison also reviews Jacob’s credit

report with her credit underwriter to ensure that Jacob’s history will
not impact getting his loan approved. She finds out that based on
the length of time since Jacob’s last late mortgage payment, if he Jacob’s Options:
waits three more months to apply for a mortgage, the derogatory • 5/1 ARM at 4.5%, PITI = $750
information from the late payments will be removed from his report.
• 15-year Fixed at 5%, PITI = $975
This could significantly improve his credit score. A higher score
would likely reduce his interest rate by .5% - which might result in • 30-year Fixed at 5.5%, PITI = $900
mortgage payments as much as $50 lower per month than what he
would be required to make if he decides to move forward today.
Weighing The Options

As she thinks about what she should tell Jacob when she calls him back, Allison gets an email from her boss
Juliana asking if Allison has any remaining leads for the month that might turn into loan applications. Rather than
replying online, Allison knocks on Juliana’s office door and is waved in.
“I saw you talking to credit a little while ago,” Juliana says. “Got anything cooking?”
“Yes,” Allison says. “I got a call this morning from a potential client named Jacob. He’s really interested in a house
he saw for sale and called to see if he could qualify. Based on the information he gave me, it looks like he’s got a
couple of good options.” She hands her notepad to Juliana to show her the numbers. “The reason I was talking
to credit is because Jacob’s had some credit issues in the past and I wanted to make sure we wouldn’t have any
hiccups.”
“Well, do we?” Juliana asks. “Have any hiccups I mean?”
“Only that he’s on the edge of his score going up in a few months,” Allison says. ” and if he waits a few more
months to get a loan, his qualifications would be higher - meaning a better deal for him.”
“But that means no loan today,” Juliana says.
“Exactly,” Allison says. “I’m not sure how to tell him. I mean on one hand, he qualifies now, but if he waits it could
save him a good deal of money. $50 a month adds up to $600 a year - that’s a lot. Especially for a single dad with
teenage girls.”
“Sure,” Juliana says. “But who knows what the market will be like then. Waiting could mean higher interest rates
and that house is probably going to sell long before then.”
“I know.” Allison bit down on her lip, “I’m just trying to think how I should present this to him.”
“Tell him the truth,” Juliana said with a wink.
Allison grins, “Sounds like a plan!”
“Why are you talking to me then?” Juliana asks. “Call him back and let’s get this one in the books! You only need
one more loan to make bonus.” Then she lowers her voice, “And if you hit your goal, I can finally justify to the
partners a promotion for you to Director.”
“Really?” Allison says. “So I’d have my own team to run?”
Juliana stands to walk Allison out, “You bet!” Before she opens the door to let Allison out Julianna adds, “Plus, I’m
pretty overwhelmed. You hitting goal and getting a promotion would make my life so much easier.”
As Allison walks back to her desk her head starts to spin.
Decision Time
Allison thinks to herself:

Jacob qualifies today - and it sounds like he really wants that house. Does it even make sense to tell him what
might happen in the future if he holds off?
Who knows where the market will be then? Will rates be higher?
Will that house still be on the market for him?
Ethics And The MLO
One more loan for bonus. That may give me enough to make a decent down payment on a new car.
Juliana wants to promote me. She’s counting on me to get this loan written.
She sits down at her desk and starts writing her thoughts down on her notepad.
Be prepared to discuss your thoughts on this scenario with a group of your fellow MLO candidates. Pay special
attention to the ethics and fraud formula we covered earlier in the course. How does that impact your thinking as
it relates to your own conduct?
Mariama’s Business Practices
Certain business practices, while they may help generate business, can be in violation of some fairness laws. It is
NOT against the law to pursue business and make a decent living. But MLOs need to be careful that while they are
attempting to create opportunities for themselves, they do not violate any specific laws and ensure their behavior
remains ethical and above board.
Mariama is a mortgage loan originator who has been in the industry for over 10 years and considers herself a savvy
business professional. She uses advertising to generate business, because she knows if borrowers see an enticing
low rate, they are more likely to call her up. The rates she is currently advertising are a stretch; not many people will
actually qualify for the lowest rate on her ads. In fact, the last time someone qualified for her lowest advertised rate
was over six years ago, when the market supported rates that low.
Another tactic Mariama employs is targeting first time home buyers and elderly people. She has found over the years
that these folks are very trusting and willing to agree to most terms. Before these borrowers find out what interest
rate and payment they qualify for, Mariama charges them an application fee ranging from $450-$600. She believes
that regardless of what rate and payment the borrower gets, they rarely back out of the deal once they have given
her the application fee.
Discussion Questions:
1. Are there any laws or rules that Mariama is violating with her business practices?
2. How could Mariama change her actions to ensure compliance?
Careless Patrick
Tonya walks into Patrick the Broker’s office looking to get a mortgage to purchase a new primary home. After
getting some of the basic conversation out of the way, Patrick asks Tonya for her social security number to pull up
a copy of her credit report. Tonya let’s Patrick know that there was a bit of a mix up at the Social Security office and
she has two different social security numbers. She lets Patrick know that she usually gives both numbers to try,
since sometimes one works better than the other. Patrick pulls Tonya’s credit using the first number she provided,
and Tonya’s credit is in great shape. Patrick continues to gather information from Tonya in order to complete the
application.
About halfway through the application Patrick’s phone rings; Patrick tells Tonya that he needs to take a call in the
other room. While Patrick is away, Tonya walks around Patrick’s desk, puts a flash drive into it and copies everything
from a folder labeled: Client Information. She quickly sits back in her seat before Patrick returns.
Ethics And The MLO
Upon Patrick’s return, he continues asking Tonya for the information he needs to complete the application. Patrick
asks Tonya where the property is located and where Tonya works. Patrick realizes the distance between Tonya’s
work and the home she is buying is about 200 miles. He asks Tonya if she works from home or online, and Tonya
tells him that she will be commuting to the office every day. Patrick shrugs his shoulders and continues on with the
application. As they get near the end of the application Tonya suddenly says she needs to leave and asks if they can
finish their conversation tomorrow. Patrick agrees and walks Tonya to the door. As Tonya is leaving, she asks Patrick
what his brokerage will do to protect her personal information and make sure it stays secure. Patrick reassures Tonya
that he does plenty of checks and balances in place to make sure nothing can be tampered with. Unconvinced,
Tonya pushes Patrick by asking specifically what these checks and balances are. Patrick tells Tonya that he locks his
filing cabinet and the door to his office each night and has purchased top-notch internet security software.
1. In what ways has Patrick’s brokerage violated federal law? Include the specific laws or rules that have been
violated.
2. As an MLO, what red flags did Patrick miss?
3. How would you have handled this situation?
Carl’s Loan Shop

Derek and Danny are a young couple looking to purchase their first home. They walk into Carl’s Loan Shop and let
the woman behind the desk know they would like to inquire about a mortgage to help them purchase their first
home. Carl comes out to greet the couple and takes them over to his office to start the process. Carl pulls up their
credit reports and assists the couple with completing the URLA. Even though the couple expresses their desire to
have a stable payment, Carl tells them an ARM is the best option for them. What Carl doesn’t disclose to the couple
is that he gets paid more for adjustable rate mortgages, so he makes sure to convince Derek and Danny to go with
that option. The couple trusts Carl’s recommendation since after all, he is the expert.
After the application is completed, Carl hands the couple the MSDS and the LE. Derek asks if there are any other
documents or disclosures that they should get right now, and Carl assures them those are the only two for now. Carl
proceeds to ask them if they already have a realtor and when they answer no, he suggests they work for his friend,
Rachel the Realtor. Derek and Danny thank Carl for the suggestion and call Rachel right away and lets her know that
Carl referred them over. As a thank you, Rachel sends Carl a gift card, as she always does when she gets a referral
from Carl.
1. 1. What laws have been violated in this scenario and how?
2. What actions could have been taken to make sure all parties stayed compliant with federal law?

SAFE Workbook

Uploaded by

Copyright:

Available Formats

You might also like

SAFE Workbook

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

SAFE Workbook

Uploaded by

Copyright:

Available Formats

SAFE

20 Hour Comprehensive | Fundamentals Of Mortgage Education

20 Hour SAFE Comprehensive: Fundamentals of Mortgage Education (NMLS 10527) - Version 4

16 The Mortgage Meltdown, A Financial Crisis & New Rules

18 Other Common Roles In The Mortgage Industry

20 Hour SAFE Comprehensive: Fundamentals of Mortgage Education (NMLS 10527) - Version 4

77 Unique Loan Types

20 Hour SAFE Comprehensive: Fundamentals of Mortgage Education (NMLS 10527) - Version 4

100 Conventional Non-Conforming Loans

100 Non- Conventional Mortgage Loans (Government Loans)

117 Uniform Residential Loan Application

134 Consumer Contact Laws

20 Hour SAFE Comprehensive: Fundamentals of Mortgage Education (NMLS 10527) - Version 4

136 Gramm-Leach-Bliley Act - GLBA

139 Do Not Call Laws

140 E-Sign Act

141 Mortgage Acts And Practices - Advertising

144 Borrower Ethics And Fraud

148 Borrower Fraud

151 Fraud Methods

153 Examples Of Borrower Fraud

157 Industry Fraud

172 Hazard Insurance

175 Title Insurance

178 Third Party Services

20 Hour SAFE Comprehensive: Fundamentals of Mortgage Education (NMLS 10527) - Version 4

188 Mortgage Math 2

193 Loan Payoff

200 Important Sections Of TILA

208 Disclosures Required Under TILA

210 TILA Penalties

218 BSA & AML

222 Disclosures And Documents

224 The Loan Estimate

228 The Closing Disclosure

240 Settlement Types

241 Funding Methods

20 Hour SAFE Comprehensive: Fundamentals of Mortgage Education (NMLS 10527) - Version 4

250 Ethics And The MLO

1. How did deregulation and regulation of the industry

2. Define and explain UDAAPs.

3. What is an MLO? Please provide full definition.

4. Other than MLOs, what are at least 5 key roles

5. What are the 3 different types of mortgage loan

A Message About Vocabulary

Before the 1990’s

After the 1990’s

20 Hour SAFE Comprehensive: Fundamentals of Mortgage Education (NMLS 10527) - Version 4 15

The Mortgage Meltdown, A Financial Crisis & New Rules

Dodd-Frank Wall Street Reform Act

Unfair, Deceptive or Abusive Acts or Practices (UDAAP)2

1 “Public Law 111-203-July 21, 2010.” 11th Congress, 7/21/2010. http://uscode.house.gov/statutes/pl/111/203.pdf

Loan Origination Companies

Individual Loan Originators

20 Hour SAFE Comprehensive: Fundamentals of Mortgage Education (NMLS 10527) - Version 4 17

1. What is amortization and how does it work?

2. What do each of the 4C’s represent?

3. How are the 4C’s used in a mortgage transaction?

Shopping For A New Home (Pre-Application)

• Documents signed by , , and (purchase only)