CA RE Broker·Mortgage Brokerage·Disclosures

Mortgage Loan Disclosures

Overview

Mortgage disclosures are among the most regulated aspects of real estate finance. Federal and state laws require lenders and brokers to provide borrowers with timely, accurate disclosures at multiple stages of the loan process. The purpose is to ensure borrowers understand the true cost of their loan before committing. California brokers who originate or arrange loans must be fluent in these requirements.

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Mortgage Loan Disclosure Statement (MLDS)

The Mortgage Loan Disclosure Statement (MLDS) is a California-specific disclosure required under the Real Property Loan Law (RPLL) for loans arranged by California real estate brokers:

When required:

First mortgages where the loan amount is under $30,000
Second mortgages where the loan amount is under $20,000

Timing:

Must be delivered within 3 business days of receiving a completed loan application

Contents of the MLDS:

Estimated maximum costs and expenses to be paid by the borrower
Total broker commission and all fees
The estimated total dollar amount of the loan
Any balloon payment terms
Estimated proceeds to the borrower after all costs are deducted (net to borrower)
Whether the loan will be sold or assigned after funding

The MLDS must be signed and dated by both the broker and the borrower. The broker must retain a copy for the required record-keeping period.

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Truth in Lending Act (TILA) and APR Disclosure

The Truth in Lending Act (TILA) is a federal law that requires lenders to disclose the true cost of credit to borrowers in standardized terms. The key TILA disclosure is the Annual Percentage Rate (APR):

APR (Annual Percentage Rate):

Represents the total yearly cost of borrowing, expressed as a percentage
Includes not just the interest rate but also points, fees, and other finance charges
Allows borrowers to compare loan offers apples-to-apples
Example: A loan with a 6.5% interest rate and 2 points might have a 6.85% APR — the APR reflects the true total cost
TILA requires APR disclosure in all loan advertising that mentions specific rate terms

Regulation Z implements TILA. TILA applies to all consumer credit transactions, including purchase mortgages, refinances, and home equity loans.

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TRID: Loan Estimate and Closing Disclosure

The TILA-RESPA Integrated Disclosure Rule (TRID), effective October 2015, replaced several older forms with two integrated disclosures:

Loan Estimate (LE)

Provided to borrower within 3 business days of receiving a completed application
Three-page standardized form showing:

Closing Disclosure (CD)

Provided to borrower at least 3 business days before closing
Shows final loan terms and actual closing costs
Borrower must acknowledge receipt; closing cannot proceed until the 3-day waiting period elapses (unless the borrower waives it in a bona fide personal financial emergency)

Changed Circumstances: If the loan terms change after the Loan Estimate, the lender may need to issue a revised Loan Estimate and restart the 3-business-day clock for certain changes.

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Balloon Payment Disclosure

A balloon payment is a large lump-sum payment due at the end of a loan term that is significantly larger than the regular monthly payments. For loans with balloon payments:

The balloon payment amount and due date must be prominently disclosed
TILA requires the balloon payment to be disclosed in both the Loan Estimate and Closing Disclosure
California RPLL also requires balloon payment disclosure in the MLDS for covered loans
Qualified Mortgages generally cannot have balloon payments (with limited exceptions for rural/underserved areas and small creditors)
Balloon payments create risk for borrowers who may not be able to refinance when the payment is due

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Prepayment Penalty Disclosure

A prepayment penalty is a fee charged when a borrower pays off a loan early. Under California law and TILA:

Any prepayment penalty must be disclosed in the loan documents and in TRID disclosures
Under Dodd-Frank, Qualified Mortgages generally cannot have prepayment penalties
If a prepayment penalty exists, TILA requires disclosure of the maximum prepayment penalty amount and when it applies
California additional rules: Hard money loans may include prepayment penalties; these must be clearly disclosed and not buried in fine print
California Rosenthal Act: Provides additional consumer protections for residential mortgage borrowers

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ARM Disclosure (Adjustable Rate Mortgage)

Adjustable rate mortgages (ARMs) carry interest rate risk. TILA and Regulation Z require specific ARM disclosures:

An ARM disclosure booklet (Consumer Handbook on Adjustable Rate Mortgages — "CHARM booklet") must be provided within 3 business days of application
The worst-case payment scenario must be calculated and disclosed: what is the maximum possible payment if the index rises to its cap?
The ARM disclosure must include:
Example: A $500,000 ARM at 6.5% initial rate with a worst-case scenario reaching 11.5% (5% lifetime cap) might have a worst-case payment of $3,200 vs. the initial $3,160/month — this must be disclosed

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Right of Rescission

The federal Truth in Lending Act (TILA) provides a 3-business-day right of rescission for certain residential mortgage transactions:

When it applies:

Refinancing of a primary residence (not a purchase)
Home equity lines of credit (HELOCs)
Second mortgage transactions on a primary residence (when the loan is not the original purchase money mortgage)

When it does NOT apply:

Purchase money mortgages (loans used to purchase the property)
Loans on investment properties or second homes (in most cases)
Commercial loans

How it works:

The lender must provide two copies of the Notice of Right to Rescind at closing
The borrower has until midnight of the 3rd business day (Saturday counts; federal holidays do not) to cancel the loan without penalty
During the rescission period, the lender cannot disburse funds
If the lender fails to provide proper rescission notice, the right to rescind may be extended up to 3 years

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Key Terms

MLDS (Mortgage Loan Disclosure Statement): California disclosure for RPLL loans — required within 3 business days of application
APR (Annual Percentage Rate): True yearly cost of borrowing including interest and fees — TILA's primary standardized disclosure metric
TRID: TILA-RESPA Integrated Disclosure Rule — requires Loan Estimate (within 3 days of application) and Closing Disclosure (3 days before closing)
Loan Estimate (LE): Three-page TRID form replacing the Good Faith Estimate — provided within 3 business days of complete application
Closing Disclosure (CD): Final TRID form replacing the HUD-1 — provided at least 3 business days before closing
Balloon payment: Large lump-sum payment due at loan maturity — must be prominently disclosed
Prepayment penalty: Fee for early loan payoff — prohibited in Qualified Mortgages; must be disclosed if present
Right of rescission: Borrower's right to cancel a refinance, HELOC, or second mortgage on primary residence within 3 business days of closing
ARM: Adjustable Rate Mortgage — interest rate changes based on an index; worst-case scenario disclosure required

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Quiz Questions:

Q1. A borrower applies for a refinance of her primary residence. At closing, the lender provides only one copy of the Notice of Right to Rescind instead of two copies. What is the consequence?

A) The loan is void because the correct number of copies was not provided B) No consequence — the right of rescission was still satisfied because the borrower received at least one copy C) The right of rescission may be extended from 3 business days to up to 3 years from the date of consummation D) The lender must provide the second copy within 24 hours or the loan is rescinded automatically

Answer: C — Under TILA, if the lender fails to provide the required 2 copies of the rescission notice, the 3-business-day rescission period may be extended to up to 3 years. This is a significant penalty for non-compliance.

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Q2. Which of the following transactions is subject to the TILA right of rescission?

A) A first mortgage to purchase a single-family home B) A refinance of the borrower's primary residence C) A mortgage on an investment property D) A commercial real estate loan

Answer: B — The right of rescission applies to refinances of primary residences, HELOCs, and second mortgages on primary residences. It does NOT apply to purchase money first mortgages.

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Q3. A buyer applies for a $350,000 purchase money mortgage on January 10. Under TRID, the lender must deliver the Loan Estimate no later than:

A) January 12 B) January 13 (3 business days later) C) January 15 D) January 17

Answer: B — The Loan Estimate must be provided within 3 business days of receiving a completed application. If January 10 is the application date (assuming weekdays), 3 business days later is January 13 (Jan 10 + 3 = Jan 13; the day of application is day 0).

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Q4. A Loan Estimate shows the borrower's monthly payment is $2,800. The loan is an ARM with a 6.5% initial rate and a 2/2/5 cap structure. The ARM disclosure worst-case scenario calculation shows the maximum payment could reach $4,100. Which of the following is required?

A) The worst-case payment is not required to be disclosed because the initial Loan Estimate already shows the payment B) The lender must disclose the worst-case maximum payment in the ARM disclosure materials provided within 3 business days of application C) Worst-case scenarios are only required for RPLL loans, not federally regulated mortgages D) The lender must get written borrower acknowledgment that they can afford the worst-case payment

Answer: B — TILA and Regulation Z require ARM disclosures including the worst-case payment scenario. The CHARM booklet and ARM-specific disclosures must be provided within 3 business days of application.

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Q5. A buyer's lender provides a Closing Disclosure on Monday. Under TRID, what is the earliest the loan can close?

A) Monday (same day) B) Tuesday (1 business day later) C) Thursday (3 business days after receipt) D) The following Monday (5 business days later)

Answer: C — The Closing Disclosure must be received by the borrower at least 3 business days before closing. If received on Monday, the earliest closing is Thursday (Monday + 3 business days = Thursday, assuming no holidays).

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