Topic: Loan Documentation
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When we originate a residential construction loan, the loan is structured as an open-end line of credit, typically for a term of six to twelve months, with a fixed interest rate. The borrower makes monthly interest-only payments based on the drawn balance, with a balloon payment due at maturity. When the construction phase is complete, the borrower applies separately for permanent financing. Our loan origination system (LOS) generates our construction loan documents. On the closing disclosure for a construction loan, the field for “Monthly Principal & Interest” automatically fills “NO” in response to the question, “Can this amount increase after closing?” We are concerned this is inaccurate given that the monthly interest payment may vary based on the amount drawn on the loan, even though the interest rate is fixed. We are unable to change the answer to “YES.” Can you provide any insight or guidance on this matter?
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As a preliminary matter, you should confirm that your construction loans are “open-end” transactions under Regulation Z, as the TRID Closing Disclosure is not required for open-end transactions. The requirement to provide a borrower with a Closing Disclosure applies only to loans that are “closed-end consumer credit transaction[s] secured by real property or a cooperative…
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Our mortgage document provider is going to start including a document called the “Illinois Waiver of Participation in Mortgage Awareness Program.” The document indicates that the customer was provided written notice of their legal right to participate in a counseling and education program through the IDFPR called the “Mortgage Awareness Program,” and that they are waiving their right to participate in the program. I found a few references to the document on the IDFPR website, but one indicated that the form has been repealed. Do we need to use this form and notify a customer of their right to participate in the program?
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We believe the waiver of participation for the Mortgage Awareness Program is necessary only for “high risk home loans” as defined in the Illinois High Risk Home Loan Act (HRHLA). Under the HRHLA, the Illinois Department of Financial and Professional Regulation (IDFPR) is required to provide the Mortgage Awareness Program — a counseling and education…
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When is it permissible to backdate loan documentation? Are you aware of any potential repercussions when backdating loan documentation of a renewal that occurs after the original loan has matured? Alternatively, are there any repercussions for not backdating loan documentation, resulting in a gap between the maturity date and the renewal date? Are there contract considerations for either?
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Under Illinois law, it is permissible to backdate an agreement — in other words, to use an effective date for an agreement that predates (or postdates) its signing date — provided that the parties’ intention to do this is “clear from the face of the contract.” When renewing a matured loan, you may select an…
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Can a customer put up their property as collateral on a loan for another customer, but not be on the loan itself?
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Yes, one person’s property may be used to secure another person’s loan. Moreover, we are not aware of any law requiring a non-borrower owner of the loan’s collateral to sign the loan agreement or promissory note. However, in the case of a loan secured by someone’s residence, you likely will want the non-borrowing homeowners to…
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An LLC customer recently changed its ownership structure. We are reevaluating a loan made to the LLC and discovered the change when reviewing a recent tax filing: one of eight original members died, with four new members replacing that member (the deceased member’s ownership interest was divvied up among the four new members). The deceased member was not the LLC’s manager and was not an authorized signer or guarantor for the loan account. Do we need to obtain an updated operating agreement from the LLC showing the new members?
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In our view, you do not need to obtain an updated operating agreement under these circumstances, but you may wish to do so. Since the deceased member was not the LLC’s manager and was not an authorized signer or guarantor for the loan, the event of this member’s death probably is not material to your…
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A man obtained a residential mortgage with our bank. His wife is not on the title to the home, and she is not obligated on the note. From what we understand, the couple is now separated but not yet divorced, and the wife occupies the residence alone. The husband has stopped making the mortgage payments. Can our bank treat the wife as a successor-in-interest on the mortgage and send her information about the loan so that she might take over the payments? We are a small servicer.
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No, we do not believe that your bank should treat the wife as a successor-in-interest to the note or mortgage. Generally, a person becomes a successor-in-interest when an ownership interest in mortgaged property is transferred in one of the ways enumerated in Regulation X, such as a transfer of ownership through a divorce decree or…
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When a consumer loan applicant is unable to locate their most recent tax return, we require the applicant to request a tax transcript from the IRS, using Form 4506-T. Our bank fills out the form, the applicant signs it, and our bank uses a third-party vendor to submit the form to the IRS. The IRS sends the transcript to the vendor, who then sends the transcript to our bank. Typically, we do not identify which type of tax transcript that we are requesting, as required in items 6 through 9 of the form. However, an applicant recently pointed out that Form 4506-T states, “Do not sign this form unless all applicable lines have been completed.” Should we fill in lines 6 through 9 before the applicant signs it?
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Yes, in our view, lines 6 through 9 — where the applicant identifies the type of tax transcript requested — should be filled out, both to ensure that your bank receives the correct information and to reassure the loan applicant that only limited information is being requested. In fact, the form itself urges the signer…
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Is there a new law or regulation in Illinois that requires homes to be certified as energy efficient? We are trying to determine whether a new construction home will need to be inspected and certified.
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Yes, construction of a new residence generally must be certified to be in compliance with the Illinois Energy Conservation Code, unless an exemption applies. The Illinois Energy Efficient Building Act and its administrative rules require residential construction projects that require building permits to adhere to a comprehensive statewide energy conservation code. The local unit of…
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Can we review the criminal history and prior liens or judgments of an individual who signs loan documents on behalf of a small business applying for a Small Business Administration loan? Do we need the individual’s written authorization?
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Yes. We are not aware of any law or regulation that would prohibit lenders from reviewing judgments, liens, or the criminal history of persons who sign loan documents on behalf of a business entity. However, you would need written authorization from the individual before obtaining a consumer credit report as a source for your inquiry…
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On a residential mortgage loan application, does the loan officer have to sign the application? We are not a HMDA reporting institution.
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No, we do not believe that loan originators are required to sign loan applications. Regulation Z requires the disclosure of a loan originator’s name and NMLS identifier on credit applications and other documents related to residential mortgage loans, but it does not require the loan originator’s signature. However, secondary market investors may impose their own…