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Lenders’ Checklist to Minimize Closing Disclosure Errors
Aritas Mortgage Solutions
October 23, 2023
Contents
The Consumer Financial Protection Bureau (CFPB) recently fined a leading Florida-based mortgage lender for violating the Housing Mortgage Disclosure Act. The CFPB found 51 errors in the lender’s files which led to a resubmission. These errors reportedly had a negative impact on over 20% of the lender’s loan applications.
The incident reminds us of the 2008 sub-prime mortgage crisis. It was a tumultuous period in the US housing market, marked by reckless lending practices, misleading terms and a lack of accountability. The fallout from this crisis had far-reaching consequences, prompting Congress to take decisive action in the form of the Dodd-Frank Act. This legislation led to the creation of the CFPB.
One of the key mandates assigned to this agency was the integration of TRID closing disclosures under the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). This integration gave birth to an 1888-page regulatory document, a labyrinthine set of rules and regulations aimed at providing greater clarity and protection to borrowers. Among the many changes introduced by this document, two stood out:
- The Loan Estimate
- The Closing Disclosure
The sheer complexity and intricacy of these documents, stemming from the extensive regulatory framework, have left room for error, especially on the part of lenders. Mistakes in the Closing Disclosure can have significant consequences, potentially leading to borrower dissatisfaction, legal disputes and even financial loss for the lender.
In this blog post, we’ll delve into some of the most common mistakes that mortgage lenders make when preparing the Closing Disclosure. We’ll explore the potential consequences of these errors, both for lenders and borrowers. Make sure you get to the valuable checklist at the end of this post compiled to ensure your Closing Disclosure process is error-free.
What is a Closing Disclosure in Mortgage?
A Closing Disclosure is your trusted co-pilot in the mortgage process, designed to give borrowers a complete rundown of the financial ins and outs of their home loan. Now, there are two main types you need to know about: the Preliminary (or Initial) Closing Disclosure and the Final Closing Disclosure.
Preliminary or Initial Closing Disclosure
This is what we call the Loan Estimate. It’s the first document borrowers get after they’ve fired off their mortgage application. Inside, you’ll find estimates of the terms and costs tied to the loan, including that all-important interest rate, monthly payments and closing costs. Think of it as a sneak peek into what their financial commitment will look like. It’s all about giving borrowers the details they need to make informed decisions on their loan.
Final Closing Disclosure
As the name implies, this one’s the big kahuna. It lands in the borrower’s lap at least three business days before the loan closing date and it’s all about the final word on terms and costs for that mortgage. This document reflects the actual loan terms and it’s their last chance to double-check and make sure they’re clear on the financial commitment they’re about to undertake.
Now, why are these two documents so essential for you? It can all be brought down to four key reasons. Check them out below:
- For Transparency and Informed Decisions: These documents ensure transparency. They lay it all out for the borrowers – mortgage terms, costs, everything. This clarity empowers borrowers to make informed decisions and avoid those disappointing moments when they find hidden fees or surprise changes in loan terms
- Regulatory Compliance: We know you’re no strangers to TILA and RESPA. Compliance with these big hitters is non-negotiable. That’s where the Closing Disclosure comes into play, thanks to the TILA-RESPA Integrated Disclosure (TRID) rule. It’s what keeps us in line with the regulations. You could end up paying hefty fines and find yourself in legal trouble if you risk not being aligned to it
- Avoiding Costly Mistakes: There’s a lot to learn from the Florida lender’s mistakes. It clearly illustrates for errors can lead to delays and unexpected costs. For borrowers, these mistakes could mean paying more for their mortgage than they originally signed up for
- CFPB’s Got its Eyes on Compliance: The CFPB isn’t taking any shortcuts. They’ve made it crystal clear that compliance-related errors will be their focus in audits. Technical mistakes are one thing, but failing to follow the regulatory procedures and deadlines spelled out in the TRID rule? That’s a big no-no
In a nutshell, Closing Disclosures are like the rulebook we need to follow, ensuring that everyone’s on the same page and that there are no surprises down the line. So, it is only wise to take that extra step to ensure accuracy and compliance to keep everything running smoothly.
Why Errors Occur in Closing Disclosures
Mistakes in the world of mortgage lending are as common as coffee breaks in your daily grind. But let’s face it, when it comes to Closing Disclosures, we can’t afford to take these blunders lightly. So, let’s talk about why these hiccups happen and how to steer clear of them.
10 common reasons that lead to errors
- Complexity of Regulations: Navigating the rules and timelines, especially the TILA-RESPA Integrated Disclosure (TRID) rule, can feel like moving through a maze
- High Workload: We know you’ve got stacks of loan applications to process and it’s no walk in the park. The sheer volume of work can make it easy to miss the fine print
- Human Error: We’ve all heard the saying, “to err is human.” In a world of manual data entries and calculations, errors are bound to sneak in, even for the best of us
- Inadequate Training: It’s like getting behind the wheel without a map. Insufficient training and limited knowledge of the regulations can lead to misunderstandings and inevitably, errors in your Closing Disclosures
- Lack of Quality Control: Quality checks and reviews help uncover and fix mistakes before they snowball
- Last-Minute Changes: Ever tried solving a jigsaw puzzle in the dark? Changes in loan terms at the eleventh hour can throw you off balance and if not updated correctly, result in errors
- Software and Technology Issues: While tech is a lifesaver, it can also be a culprit. Over-reliance on systems can lead to slip-ups when software malfunctions or team members aren’t tech-savvy enough
- Communication Breakdowns: Miscommunication between departments within a lending institution can lead to discrepancies in the information presented on the Closing Disclosure
- Pressure to Close Loans Quickly: We all want to meet borrower expectations and boost our numbers, but rushing the loan closing process can lead to unintended errors
- Volume of Third-Party Services: When you’re juggling third-party services, coordinating and verifying their info can be like herding cats and discrepancies can easily creep in
Here are the Most Common Mortgage Closing Disclosure Errors
Now, let’s dive into the world of Closing Disclosure slip-ups. These errors can be quite diverse, but each one has the potential to throw a wrench into the works.
- Errors in General Information Page: These can range from mix-ups in names and addresses to property details that are a tad off. Not only do these errors lead to delays, but they can also leave borrowers scratching their heads
- Errors in the Origination Charges Page: Missteps in detailing lender fees, points and other charges can spell trouble. They impact the overall loan cost, which isn’t something borrowers take lightly
- Errors in the Calculating Cash to Close Tables: Get these calculations wrong and you’ve got yourself a recipe for last-minute financial panic. Accurate figures are vital to ensure borrowers know what they’re signing up for
- Errors in the Loan Disclosure Page: Mistakes here can affect the loan amount, interest rate and monthly payment details. Financial implications and misunderstandings with borrowers are sure to follow
Here’s the kicker: errors can pop up at both the preliminary and final Closing Disclosure stages. Below is a table of some common mistake areas in both stages. Bookmark this blog to save the table!
| Mistake Areas | Pre-Closing Disclosure | Final Closing Disclosure |
|---|---|---|
| Data Entry | Mistakes may include entering incorrect borrower information, loan terms, or estimated closing costs | Similar errors can occur during the data entry process, leading to inaccuracies in the final figures |
| Timeliness | Lenders might fail to provide the Loan Estimate within three business days of receiving the loan application | The Final Closing Disclosure must be delivered at least three business days before the loan closing but could be delivered late |
| Information Update | Lenders may not provide updated Loan Estimates when significant changes in loan terms or costs occur | Failing to update the Closing Disclosure with changes in circumstances, resulting in discrepancies |
| Cost Estimation | The Loan Estimate might not accurately estimate various costs, such as origination fees, third-party fees, taxes and insurance | Errors in estimating closing costs, taxes, and other fees that result in discrepancies between the estimated and actual costs |
| Credit Reconciliation | Errors in reconciling credits and adjustments, like credit offered by the seller, could lead to discrepancies in the loan estimates and the final costs | Similar errors like not reconciling a change in the down payment amount can lead to confusion for borrowers |
| Incorrectness | Common mistakes include missing key estimated costs or inaccurately disclosing important details | The Closing Disclosure may omit or inaccurately report critical information, such as the total loan costs, cash to close, and other essential details |
| Last Minute Changes | Making significant changes to the loan estimate shortly before closing can create confusion and potential disruptions | Last-minute changes to the closing disclosure can cause issues and delays during the closing process |
| Borrower Education | Lenders might fail to provide adequate explanations and guidance to ensure borrowers understand the loan estimate | Similarly, a lack of education regarding the contents of the closing disclosure can lead to borrower confusion |
Generate Error-Free Closing Disclosures with Aritas
Error-free documents can help you reduce turnaround time for a seamless application process. When you work with an experienced player like Aritas, you can leverage the expertise of a dedicated team of professionals who ensure timely delivery of accurate and compliant initial as well as closing disclosures. What’s more? Our impactful pre- and post-closing audits optimize operations by identifying discrepancies and adhering to regulations respectively.
Contact us to minimize documentation errors and streamline your operations.
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