Topic: Loan Documentation
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Our bank made a closed-end construction loan to a borrower. The loan was not intended to convert to permanent financing after construction was complete. However, now that construction is complete, the loan has a remaining balance of $100,000. The loan is up for renewal, and we would like to change the terms from a variable rate to fixed rate and from interest only payments to principal and interest payments. Can we issue a change in terms without issuing a new loan?
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Whether a subsequent transaction related to the same loan should be treated as a new loan depends on the specific facts, including consideration of the original and any subsequent loan documents. In this situation, for the reasons discussed below, we believe that the continuation of the extension of credit should be treated as a new…
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Under the TRID rules, if an appraised value comes in less than we anticipated and the applicant already has received the Loan Estimate, do we have a valid changed circumstance permitting us to issue a revised Loan Estimate? The lower appraisal value means that the loan amount will change, but none of the charges disclosed on the Loan Estimate will change.
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No, we do not believe the TILA-RESPA Integrated Disclosure (TRID) rules permit you to issue a revised Loan Estimate simply due to a lower appraised value of the property (subject to the discussion below). While you state that the charges will not change, the loan amount, estimated payments, cash-to-close and possibly other loan terms set…
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A small number of our auto and installment loan customers signed a note that stated a post-maturity rate of 18%. However, our system actually calculates the post-maturity rate for these loans by adding 5% to the loan’s interest rate. All of the loans had fixed rates, the highest of which was just under 10% (so the system would never apply a post-maturity rate higher than 18%). Do we need to have the customers sign new notes to fix this discrepancy?
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We are not aware of any laws or regulations that would require you to ask your customers to sign new notes in this situation. In our view, the fact that your bank will be declining to exercise its right to charge an 18% post-maturity rate does not necessitate the issuance of new notes or disclosures.…
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Our loan department recently discovered that we misspelled the customer’s name on the promissory note for a consumer vehicle installment loan. The customer already has signed the note, and we have disbursed the funds. How should we correct this?
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We recommend modifying the promissory note with the borrower’s consent, although it may be sufficient to simply notate the change on the note with the borrower’s initials. Even if you do not modify the promissory note, we believe that it likely would be enforceable. Several Illinois courts have held that a contract is enforceable even…
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If we pay property taxes on behalf of a delinquent borrower, can we add those amounts to the loan principal and charge interest? Our loan agreement requires borrowers to pay the taxes. It does not expressly permit us to add the taxes to the loan principal, but it does generally permit us to add amounts advanced on behalf of a borrower to the loan principal and charge interest on those amounts.
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It may be possible to add the property taxes to the loan principal, but it would depend on the specific language in your loan agreement. Our advice is to ask your bank counsel to review the note and mortgage document for an answer to this question. Going forward, we recommend establishing a uniform policy for…
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We include a Confession of Judgment clause in our commercial promissory notes. Our forms vendor recently started producing an advisory warning about this clause. Should we remove the confession of judgment clauses from our notes?
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No, you do not need to remove the confession of judgment language from your commercial promissory notes, provided that it is possible to ascertain the amount of the potential judgments from the face of the notes (without reference to other documents). Confession of judgment clauses are common in commercial loan agreements, but it is important…
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Because some of our MLOs are not renewing their NMLS registrations, some of our branches will not have any MLOs available to originate residential loans. In those branches, can non-MLOs take loan applications to forward for processing, provide their names on loan documents (such as the promissory note), or act as the closing agent for loans or modifications?
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In our view, if an employee’s name appears on loan documents or if the employee is actively participating in a loan or modification closing, those actions likely would trigger the SAFE Act mortgage loan originator (MLO) registration requirements. However, if the employee’s actions are limited to taking completed loan applications from customers and forwarding them…
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Do we need to provide the bank’s NMLS number to our customers on any written communications? Our current procedures cover only the use of a loan originator’s NMLS number.
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Regulation Z requires the disclosure of NMLS identifiers for both financial institutions and loan originators on credit applications, Loan Estimate and Closing Disclosures, notes and loan contracts, and security instruments. Notably, the SAFE Act’s provisions regarding NMLS identifiers apply only to mortgage loan originators, not to financial institutions. For resources related to our guidance, please…
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Are we required to complete a “net tangible benefit/anti-flipping” worksheet, on top of our other tests for compliance with HPML, HOEPA, HRHLA, QM, etc.?
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While there are no Illinois laws that expressly require you to use a net tangible benefit worksheet, we still would advise that you complete some sort of tangible net benefit analysis when refinancing mortgage loans secured by a borrower’s principal residence, in order to avoid a violation of the Illinois Fairness in Lending Act or…
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Where is a third-party fee that is charged by a realtor to the borrower as part of the sales contract recorded on the Loan Estimate?
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A third party fee charged by a realtor should be recorded as “other costs” in Section H on the Loan Estimate if the creditor is aware of the fee when the Loan Estimate is issued. For citations related to our guidance, please see: Regulation Z, 12 CFR 1026.37(g)(4) (“Under the subheading ‘Other,’ an itemization of…