Question & Answer
Question: When an applicant changes their loan request while the application is being processed, must we provide a new good faith estimate or is the one we provided when the application was first taken sufficient?
Answer: There are really two regulations that you should be concerned about. Both RESPA and Truth in Lending require early disclosures for federally related mortgage loans and residential mortgage transactions. Neither regulation speaks directly to your question.
RESPA and HUD's Regulation X require that you provide the applicant for a federally related mortgage loan with a good faith estimate of closing costs within three days of receiving or preparing the application. The good faith estimate should show the amount of or range of charges for the specific settlement services the borrower is likely to incur in connection with the settlement." Section 3500.7. Because the good faith estimate discloses settlement charges rather than loan costs, it is not necessarily based on loan specific disclosures. The essential information in the disclosure relates to the charges for settlement services. Therefore, because the regulation does not specifically require redisclosure, there is a strong argument that redisclosure is not required unless a settlement charge changes. For example, if the applicant changes the request from an FHA loan to a conventional loan, there may be differences in the settlement services. In this situation, it would be appropriate to provide a new good faith estimate.
Truth in Lending contains two rules relating to changed disclosure requirements. First, the early disclosures required by Section 226.19(a) must be provided within three days of application or before consummation, whichever is earlier. These disclosures are based on a specific loan request. Because these disclosures are transaction specific, the regulation also specifies when the creditor must provide new disclosures. Section 226.19(a)(2). New disclosures are triggered by changes in the APR. Changing the loan program applied for would probably trigger new disclosures, however, Section 226.19(a)(2) specifies that these are due prior to consummation.
However, the ARM rule, Section 226.19(b) is much stricter. That section requires that ARM program disclosures must be provided for each program in which the applicant expresses an interest. Commentary paragraph Section 226.19(b)(2)-1 explains that the creditor "must provide appropriate disclosures as soon as reasonably possible" when customers become interested in an ARM program for which they have not yet received disclosures. Thus, when a customer asks about changing an application for a fixed rate loan to an adjustable rate mortgage loan, or the loan officer suggests it, the customer should be given disclosures for that ARM program.
The conclusion? Clearly, ARM disclosures must be provided when an applicant changes the application and requests consideration for an ARM. Although it is not necessary to also give a good faith estimate and new TIL disclosures (other than the ARM program) at that time, you should consider whether it is more important to include these steps in your loan procedures to ensure that loan officers recognize the redisclosure requirement, or whether the redisclosure policy for all disclosures would be unnecessarily burdensome.
Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 18 & 19, 12/96
First published on 12/01/1996