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Mortgage Loan Disclosure Statement

DEFINITION

Disclosure of mortgage terms including costs, fees, rates, and terms and conditions of the mortgage.

EXPLANATION

The Real Estate Settlement Procedures Act was created to protect consumers by requiring lenders, agents, brokers, and others to disclose as much information as possible regarding a mortgage, home purchase or sale.

In the context of mortgages, one such requirement was making it mandatory for lenders to provide prospective borrowers a good faith estimate (GFE) within three days of executing a loan application. This form states all the costs the borrower is due at closing. A GFE allows borrowers to easily compare various lenders’ mortgage loan costs and terms in order to select the best one.

A Mortgage Loan Disclosure Statement (MLDS) (RE 882, RE 883, or RE 885), or an alternative disclosure that fully complies with Section 10240(c), is provided to the borrowers within three days of receiving the completed, written loan application.

Purpose of Act

–             Require lenders, agents, brokers, to disclose and material facts regarding a transaction

–             Forbid kickbacks

–             Provide consumers with vital information to present them with all of their options

Mortgage Loan Disclosure Statement Include:

–             Principal loan amount

–             Interest rate

–             Mortgage terms and conditions

–             Costs associated with providing or arranging the loan (i.e. appraisal fees, settlement/escrow fees, credit report and title insurance costs, notary and recording fees)

–             Any liens on the property and the lien position of each lender

–             Commissions and/or fees entitled to an agent at the close of the loan

–             Prepayment penalty information

–             Estimated payments

–             Statement indicating that the loan’s funding is in compliance of real estate law

Lender Requirements

A lender must get the potential borrower’s signature on the disclosure statement in order to proceed with the loan.

If an agent retains a non-federally backed loan on behalf of a borrower, the agent is responsible for providing this statement to the borrower. It must be produced within three business days after receiving the loan application.

Specific Mortgage Loan Disclosure Requirements of California

California has an additional disclosure form that increases the severity for lenders and agents to disclose vital information about a potential transaction. While it contains many of the same mechanisms to deter unlawful disclosure activity, its main purpose is to help consumers understand all of their options and what they are agreeing to.

Specific Requirements of the Mortgage Loan Disclosure Statement

California requires lenders to provide borrowers with a mortgage loan disclosure statement. This disclosure indicates all of a mortgage’s terms, including costs, fees, rates, estimated payments, and conditions of the mortgage. A lender must get the potential borrower’s signature on the disclosure statement in order to proceed with the loan.

RESPA prevents lenders from charging borrowers for services that are not rendered. It also makes it illegal for a lender to charge for services that are completed in order to comply with the Act, such as printing out additional forms or spending time preparing documents.

All fees charged by a lender must be necessary to the loan approval process. Section 8 of RESPA outlaws kickbacks and referral fees that make the process of applying for a loan more expensive. Should a lender, broker, or other party violate this provision, they could be subject to damages of up to $10,000 and face up to one year in prison. They could also be held liable for up to three times the fee for which the prospective borrower was charged.

The Mortgage Loan Compliance Manual, which was created by the Department of Real Estate, states that mortgage-related expenses for qualifying and obtaining a loan cannot exceed 5% of the total mortgage amount, or $390 if the amount is less than 5%. Regardless of the mortgage amount, costs of mortgages for a regulated loan cannot exceed $700. For example a loan amount of $15,000 can have maximum costs of $700, even if the broker attempts to charge 5 percent because that amount exceeds the maximum $700 cost.

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