Performing a Loan Audit
Performing a forensic loan audit simply means reviewing a homeowner’s loan documents to check for evidence of predatory lending or violations of federal and state laws meant to protect borrowers. On the surface this might sound easy, but in actuality this is complicated by the interweaving obscure laws governing home loans and the volumes of cryptic documents associated with mortgages. This is said not to dissuade you, but to prepare you for the challenge. As intended with most of the information on this site, use this section to get an understanding of the topic and then with an educated mind contact a professional to assist you.
Overview of Loan Documents Required by Federal Law
| Document | Purpose | When Provided | Required by |
|---|---|---|---|
| TILA Disclosure | Provides price, payment and term information. | Before consummation | TILA: 15 U.S.C. § 1638 |
| TILA Notice of Right to Cancel | Gives notice of the right to cancel and the effect of cancellation, and the date by which to cancel. | At consummation, 2 copies must be provided for each borrower | TILA: 15 U.S.C. § 1635 |
| Special Variable Rate Disclosures: Brochure & Separate Disclosures | Describes the variablerate program and how rate adjustments are calculated. | At time of application or within 3 days of application in some cases | TILA: Regulation Z § 226.19(b) |
| Home Equity Lines of Credit: Brochure & Separate Disclosures | List of items to be disclosed, including payment terms, APR, fees, etc. | At time of application or within 3 days of application in some cases | TILA: 15 U.S.C. §§ 1637a(a) and (b) |
| HOEPA Notice | Provides a warning about losing the home, detailing APR, monthly payment, and maximum payment if a variable rate loan. | At least 3 days before settlement | TILA: 15 U.S.C. §§ 1639(a) and (b) |
| Good Faith Estimate of Closing Costs: Booklet | Estimates every charge associated with the loan; booklet explains the costs. | Within 3 business days after application | RESPA: 12 U.S.C. §§ 2603, 2604 |
| HUD-1 Settlement Statement | Itemizes all actual charges imposed on the borrower. | At settlement | RESPA: 12 U.S.C. § 2603 |
| Property Appraisal | Should include a review and valuation of the property, including a description and valuation of comparable properties. | Upon request of borrower; must be furnished “promptly” | ECOA: 15 U.S.C. § 1691(e) |
| Transfer of Loan Servicing Statement | Notification whether servicing may be transferred. | At time of application | RESPA: 12 U.S.C. § 2605 |
| Private Mortgage Insurance Statement | Homeowner’s rights to termination of insurance and exemptions. | At settlement | Homeowner’s ProtectionAct: 12 U.S.C. § 4903 |
| Escrow Statement | Itemizes the estimatedcharges to be paid from the escrow account. | At settlement or within 45 days of the creation of the account | RESPA: 12 U.S.C. § 2609(c) |
| Affiliated Business Disclosure | Discloses relationships between the lender and service providers used in closing the loan. | At settlement | RESPA: 12 U.S.C. § 2607(c)(4) |
Overview of Loan Documents Required by California State Law
| Document | Purpose | When Provided |
|---|---|---|
| Promissory Note | Terms of repayment, including loan amount, interest rate, payment term and due dates, balloon payments, variable rate index and margin, maximum interest rate cap, prepayment penalties, late fees, etc. | At settlement |
| Deed of Trust | The deed of trust gives the lender a lien on your home. It also gives the lender the right to foreclose on your home if you don’t repay the loan. | At settlement |
| Mortgage Broker Agreement | Discloses broker responsibilities and the amount of any fee, etc. | At the time application is given or when relationship is established |
Other Important Loan Documents
Loan Application: Typically, an application is completed at the start of the home loan process and a second one is produced at the closing of the loan. It’s important to compare the two applications because differences can illuminate possible bait-and-switch tactics and fraud committed by the lender and/or broker. The items to inspect carefully are the loan terms, the reported income, when the applications where signed and completed, and who they were completed by.
Credit Report: Usually an application and credit report are obtained in tandem. If an application has a date that differs from when the credit report was pulled and there is a potential issue with notices and disclosures not being delivered in a timely manner as prescribed by law, you may have proof of fraud.
Payment History: Review the payment history on the home loan to make sure that all monies where applied correctly.
Performing the Initial Analysis
The analysis should focus on two things, where the money went and where any laws violated.
Looking to see where the money went should be easy if you have a HUD-1 settlement statement which itemizes the closing costs and should have been provided at the time the loan was closed. Checking for violations of any legal issues will probably be the harder step since most of us aren’t real estate or consumer lending law experts. The following should help you get started.
Where Did the Money Go
What did the borrower (homeowner) get?
- Cash received
- If it was a purchase loan (sale), what was the cost of the home and how much was applied to services rendered? Are all numbers reasonable?
- If it was a refinance, was the loan made in the benefit of the homeowner, i.e. are rates lower or were other unsecured debts consolidated into the refinanced home loan making them secured debt?
What did the mortgage company/bank get?
- What costs appear to be third party but really end up going to the creditor (bank)? The affiliated business disclosure can help you identify unscrupulous third-party relationships.
- Unusually high prepaid finance charges, such as points, loan discounts, loan origination fees, or service charges.
- Is the borrower paying for the creditor’s costs of doing business, such as in charging for a document preparation fee?
- Was the loan padded to increase the size of the principal in order to increase the amount of interest the creditor will earn?
What did third parties get?
- Pay close attention to what mortgage brokers earned, as they are often found to push the legal and ethical limits.
Looking at the Legal Issues
Discussing all the legal issues involved with home loans is beyond the scope of this guide. What you will find below is what can be easily analyzed according to what various statutes require.
Truth in Lending
- Check the TILA disclosures for accuracy in what was allocated as a finance charge or included as part of the amount financed. TILA only requires that a total be provided. Using a HUD-1 settlement statement can help you see the itemized charges and various components of the total loan amount. The HUD-1 will not identify any fee as a prepaid finance charge, but this can be determined by the fee’s purpose and the payee. If the principal that appears in the loan note is more than the amount financed then there are some prepaid finance charges included.
Finance Charge
- Interest is usually the largest component of the finance charge. It can be determined by subtracting the loan principal amount from the total of payments to be made.
- Prepaid finance charge or loan origination fee can be labeled as points, loan discount fee, or prepaid finance charge. These are additional charges that a lender may count as part of the finance charge.
Amount Financed
- If any part of the debt should have been considered a part of the finance charge then there will be three required disclosures that are inaccurate. This includes the overstating of the amount financed, the understatement of the finance charge, and the understatement of the APR. Check to see if the lender included something in the amount financed that should have been treated as part of the finance charge? Some of the items that should be treated as a finance charge are broker fees, mortgage guarantee insurance (PMI or MGI), and points.
Other Fees and Important Numbers
- Cash to Homeowner: Review the amount that is disclosed as being provided as cash out and confirm that with the bank accounts statements or cancelled check(s).
- Payoffs to Creditors: Check account statements of the loans and debts that were paid off to confirm that proper payoff amounts were calculated.
- Appraisal and Credit Report: Confirm that appraisal and credit report fees are reasonable according to market rates.
- Settlement Fee and Document Preparation Fee: According to RESPA, there can be no charge for preparing TIL and RESPA statements.
- Title Exam: Compare with market rates.
- Title Insurance: Compare with market rates.
- Broker Referral Fee: Broker fees are considered finance charges.
HOEPA Analysis
To determine whether a loan falls under HOEPA protection, examine the following:
- A loan may fall under HOEPA protection if the APR exceeds the yield on treasury securities having comparable maturities at the time that the loan was made by more than 8 percentage points for first mortgages, made after October 1, 2002, and by more than 10 percentage points for all others. To select a relevant date for comparing treasury bond rates you must look at the 15th day of the month before the month in which the loan application was made.
- If a loan’s points and fees exceeds 8% of the total loan amount (total points and fees must be at least $400) it may also fall under HOEPA protection. The total loan amount is considered as the principal loan amount minus all fees that are finance charges under TILA rules. You must also subtract any closing costs listed in Regulation Z § 226.4(c)(7) that do not meet all of the following criteria: they are financed as part of the loan; they are reasonable; and neither the creditor nor an affiliate received any part of the charge. Points and fees include all finance charges (except interest), broker fees, and closing costs listed in Regulation Z § 226.(4)(7) that do not meet all of the following criteria: 1) they are reasonable, 2) neither the creditor nor an affiliate received any part of the charge, and 3) premiums for credit insurance written in connection with the loan.
Servicing Analysis
It is not uncommon for mortgage payments made by homeowners to be misapplied or lost, possibly helping to aggravate a situation or even push a homeowner into default. Some issues to look out for:
- Unjustified late fees due to delayed posting of payments.
- Lenders sometimes force unnecessarily expensive insurance supplied by an affiliate.
- Miscalculation of payments or interest after a variable rate adjusts.
- Foreclosure-related fees charged that are not authorized by contract or that are for services not performed.
