By the end of this chapter, you should be able to:
4.Identify the purpose, scope, and key provisions of the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. 2601 et seq., and its implementing Regulation X (12 CFR 1024).
5.Identify the purpose, scope, and key provisions of the Truth in Lending Act (TILA), 15 U.S.C. 1601 et seq., and its implementing Regulation Z (12 CFR 1026).
6.Explain the integration of RESPA and TILA disclosures under the TILA-RESPA Integrated Disclosure (TRID) rule, including the Loan Estimate (LE) and Closing Disclosure (CD).
7.Distinguish between the timing, delivery, and tolerance rules for the LE and CD.
8.Apply the right of rescission rules under TILA, including exemptions and calculation of the rescission period.
9.Recognize prohibited practices under RESPA, including kickbacks, unearned fees, and affiliated business arrangements (AfBAs).
10.Identify common exam traps related to disclosure timing, tolerance categories, and statutory vs. regulatory names.
1.1 RESPA: Purpose and Scope
RESPA was enacted in 1974 to ensure that consumers receive meaningful and timely disclosures about the cost of real estate settlement services, and to eliminate kickbacks and referral fees that inflate costs. RESPA applies to federally related mortgage loans, which are loans secured by a first or subordinate lien on a residential property (1-to-4 family dwelling) made by a lender whose deposits are insured by the federal government, a lender regulated by a federal agency, a lender that makes loans in the secondary mortgage market, or a creditor that makes more than a certain volume of loans per year.
RESPA is implemented by Regulation X (12 CFR 1024) . The statute itself is cited as 12 U.S.C. 2601 et seq. RESPA covers loans for purchase, refinance, home equity, and reverse mortgages, but does not cover loans for business or commercial purposes, or loans on vacant land (unless a dwelling will be constructed).
Key RESPA provisions include:
Section 8 (12 U.S.C. 2607): Prohibits kickbacks, unearned fees, and splitting charges for settlement services. It also regulates affiliated business arrangements (AfBAs), requiring a disclosure to the consumer and no requirement to use the affiliate.
Section 9 (12 U.S.C. 2608): Prohibits a seller from requiring the buyer to use a particular title insurance company as a condition of the sale.
Section 10 (12 U.S.C. 2609): Requires escrow accounts to be calculated and maintained within certain limits, and requires an initial escrow statement and annual statements.
Section 4 and 5: Originally required the Good Faith Estimate (GFE) and HUD-1 Settlement Statement. Under TRID, these have been replaced by the Loan Estimate and Closing Disclosure for most transactions.
1.2 TILA: Purpose and Scope
TILA was enacted in 1968 to promote the informed use of consumer credit by requiring clear disclosure of credit terms and costs. TILA is implemented by Regulation Z (12 CFR 1026) . The statute is cited as 15 U.S.C. 1601 et seq.
TILA applies to consumer credit transactions — credit offered or extended to a natural person for personal, family, or household purposes, with a finance charge or payable in more than four installments. For mortgage loans, TILA applies to loans secured by a dwelling, including purchase, refinance, home equity, and reverse mortgages.
Key TILA provisions include:
Right of Rescission (15 U.S.C. 1635): For loans secured by the consumer’s principal dwelling (other than a purchase-money first lien), the consumer has three business days to rescind.
Finance Charge and APR: Creditors must disclose the finance charge and annual percentage rate (APR) accurately.
Advertising Rules: TILA regulates trigger terms and misleading advertising.
High-Cost Mortgage Rules (HOEPA): Under Section 32 of Regulation Z, additional disclosures and restrictions apply to loans with high rates or fees.
Ability to Repay (ATR) and Qualified Mortgages (QM): Under Section 129C of TILA, creditors must make a reasonable, good-faith determination of the consumer’s ability to repay.
1.3 TRID: The Integrated Disclosure Rule
The TILA-RESPA Integrated Disclosure (TRID) rule, effective October 3, 2015, replaced the GFE and HUD-1 with two new forms: the Loan Estimate (LE) and the Closing Disclosure (CD) . TRID applies to most closed-end consumer mortgage loans secured by real property. It does not apply to home equity lines of credit (HELOCs), reverse mortgages, or loans secured by mobile homes not attached to land (these still use TILA and RESPA disclosures separately).
The LE must be provided within three business days of receiving the consumer’s application and must be delivered or placed in the mail no later than that deadline. The LE contains key loan terms, projected payments, closing costs, and the total interest percentage (TIP) .
The CD must be provided at least three business days before closing. The consumer must receive it in person or by mail; if mailed, the consumer is presumed to receive it three days after mailing, so the creditor must send it earlier to ensure the consumer has the full three business days before closing.
1.3.1 Timing Rules for the CD
The CD must be delivered to the consumer no later than three business days before consummation (closing). If the CD is mailed, the creditor must mail it at least six business days before closing to account for the three-day presumed delivery period.
Changed Circumstances and Redisclosure: If certain changes occur after the CD is provided, a revised CD must be issued, and a new three-business-day waiting period applies. These changes include:
An increase in the APR by more than 1/8 of one percentage point (0.125%) for fixed-rate loans (or 1/4 of one percentage point for adjustable-rate loans).
A change in the loan product (e.g., from fixed to adjustable).
The addition of a prepayment penalty.
Other changes (e.g., a decrease in APR, changes to fees within tolerance) do not trigger a new waiting period.
1.4 Tolerance Categories on the Closing Disclosure
The CD compares estimated costs from the LE to actual costs at closing. Costs fall into three tolerance categories:
48.Zero Tolerance (0%): Charges that cannot increase at all from the LE to the CD. These include:
Charges paid to the creditor or mortgage broker (origination charges).
Charges paid to third parties if the consumer is allowed to shop for the service and the creditor did not require a specific provider (unless the consumer chooses a different provider).
Transfer taxes.
The total of all recording fees (in aggregate).
53.10% Tolerance: Charges that can increase by no more than 10% in aggregate. These include:
Charges paid to third parties where the consumer is not allowed to shop (i.e., the creditor selected the provider).
Recording fees (individually, but the aggregate is capped at 10%).
Title insurance premiums and other settlement services where the consumer did not shop.
57.No Tolerance (Unlimited): Charges that can increase by any amount. These include:
Prepaid interest (per diem interest).
Property insurance premiums (hazard insurance).
Property taxes placed in escrow.
Charges for services not required by the creditor (e.g., a home inspection the consumer orders independently).
Important: If a zero-tolerance or 10% tolerance charge increases beyond the limit, the creditor must cure the error by crediting the consumer the difference before closing. If the error is discovered after closing, the creditor must cure within 30 days of closing.
1.5 Right of Rescission Under TILA
The right of rescission applies to loans secured by the consumer’s principal dwelling , except for:
A purchase-money first lien (i.e., a loan to finance the acquisition of the dwelling).
A refinance by the same creditor of a prior loan that was already subject to rescission rights (with some exceptions).
The consumer has three business days from the latest of:
69.Consummation of the loan;
70.Delivery of the material disclosures (APR, finance charge, payment schedule, total of payments); or
71.Delivery of the notice of the right to rescind.
Rescission period ends at midnight of the third business day. If the consumer rescinds, the creditor must return all fees and charges within 20 days, and the consumer must return the loan proceeds. The security interest is voided.
Business days for rescission include Saturdays (but not Sundays or federal legal holidays). This is different from the TRID “business day” definition, which excludes Saturdays for the CD waiting period.
1.6 RESPA Section 8: Prohibited Practices
Section 8 of RESPA (12 U.S.C. 2607) prohibits:
Kickbacks and referral fees: Giving or accepting anything of value in exchange for the referral of settlement service business.
Unearned fees: Charging a fee for services that were not actually performed.
Fee splitting: Splitting a charge for settlement services without providing commensurate services.
Affiliated Business Arrangements (AfBAs): A provider may refer a consumer to an affiliate (e.g., a title company owned by the lender) if:
The consumer is given a written disclosure of the relationship.
The consumer is not required to use the affiliate.
The provider receives no fee for the referral (only a return on ownership interest).
Section 9 (12 U.S.C. 2608): A seller cannot require a buyer to purchase title insurance from a specific company as a condition of the sale. The buyer may shop for title insurance.
1.7 Escrow Accounts Under RESPA
RESPA Section 10 (12 U.S.C. 2609) requires that escrow accounts for taxes and insurance be calculated to avoid overcharging. The initial escrow payment cannot exceed one-sixth of the estimated annual charges. The cushion cannot exceed two months of escrow payments. The servicer must provide an initial escrow statement at closing and an annual statement each year.
1.8 Advertising Rules Under TILA
TILA advertising rules apply to any commercial advertisement that promotes consumer credit. If an ad includes a trigger term (e.g., “no down payment,” “monthly payment,” “APR”), it must also disclose:
The APR (and whether it is fixed or variable).
The loan term.
The total of payments.
The down payment amount or percentage.
Misleading terms such as “fixed rate” for an adjustable-rate loan are prohibited. The word “fixed” can only be used if the rate is truly fixed for the full term.
1.9 UDAAP and Other Overlapping Laws
While RESPA and TILA are the core federal mortgage laws, the SAFE exam expects you to know how they interact with other statutes:
UDAAP (Unfair, Deceptive, or Abusive Acts or Practices): Under the Dodd-Frank Act, the CFPB has authority to prohibit UDAAPs. This is a broad standard that applies to all consumer financial products.
ECOA/Regulation B (12 CFR 1002): Prohibits discrimination based on race, color, religion, national origin, sex, marital status, age, or receipt of public assistance.
FCRA (Fair Credit Reporting Act): Governs the use of credit reports and requires adverse action notices.
HMDA/Regulation C (12 CFR 1003): Requires data collection and reporting on mortgage lending activity.
GLBA (Gramm-Leach-Bliley Act): Requires privacy notices and safeguards for consumer information.
FDCPA (Fair Debt Collection Practices Act): Applies to third-party debt collectors, not original creditors.
SAFE Act (12 U.S.C. 5101): Requires state licensing and federal registration of mortgage loan originators.
1.10 FHA, VA, and USDA Program Rules
These are federal loan programs, not laws, but the exam tests key distinctions:
FHA (Federal Housing Administration): Requires an upfront mortgage insurance premium (UFMIP) and annual MIP. Loans are for low-to-moderate income borrowers.
VA (Department of Veterans Affairs): For eligible veterans and service members. No down payment required, and no monthly mortgage insurance, but a funding fee applies.
USDA (U.S. Department of Agriculture): For rural and suburban borrowers with low-to-moderate income. No down payment required, but an upfront guarantee fee and annual fee apply.
Common Exam Traps
114.Mixing the 3-day rescission window with the 3-business-day TRID CD waiting period. The rescission window applies to refinances and home equity loans on the principal dwelling, and it includes Saturdays. The TRID CD waiting period applies to all closed-end loans (including purchases) and excludes Saturdays. Candidates often confuse which loans trigger rescission (purchase-money first liens are exempt) and which trigger the CD waiting period (all TRID loans).
115.Confusing the LE timing with the CD timing. The LE is due within 3 business days of application. The CD is due 3 business days before closing. A common wrong answer is that the LE is due 3 business days before closing, or that the CD is due at application.
116.Assuming all closing costs have zero tolerance. Only certain charges are zero tolerance. Prepaid interest, taxes, and insurance are unlimited. Candidates often pick “all third-party fees” as zero tolerance when in fact only non-shoppable third-party fees are 10% tolerance.
117.Thinking the creditor can cure a tolerance violation after closing without penalty. For zero and 10% tolerance violations, the cure must occur before closing. After closing, the creditor must reimburse the consumer within 30 days, but this is a violation, not a cure.
118.Believing that a change in the APR always triggers a new CD waiting period. Only an increase of more than 1/8 percentage point (fixed) or 1/4 percentage point (ARM) triggers a new waiting period. A decrease does not.
119.Confusing RESPA Section 8 with Section 9. Section 8 prohibits kickbacks and unearned fees. Section 9 prohibits a seller from requiring a specific title insurer. Candidates often swap these.
120.Thinking that the right of rescission applies to purchase-money loans. It does not. It applies to refinances and home equity loans on the principal dwelling. A common trap is applying rescission to a purchase transaction.
121.Misidentifying the “business day” for rescission vs. TRID. For rescission, Saturday counts. For TRID CD delivery, Saturday does not count. Candidates must read the question carefully to see which rule applies.
122.Believing that the LE and CD are required for HELOCs and reverse mortgages. They are not. HELOCs and reverse mortgages are exempt from TRID and use separate TILA disclosures.
123.Assuming that a broker is always the creditor for TRID purposes. The creditor is the entity to which the obligation is initially payable. The broker is not the creditor unless the broker extends credit on its own behalf.
Summary
RESPA and TILA form the backbone of federal mortgage regulation. RESPA focuses on settlement transparency and prohibits kickbacks, while TILA focuses on credit cost disclosure and the right of rescission. The TRID rule integrates these into the Loan Estimate and Closing Disclosure with strict timing and tolerance rules. The SAFE exam tests your ability to apply these rules to real-world scenarios, especially the distinctions between the LE and CD, the tolerance categories, and the rescission window. Master the definitions, the deadlines, and the exemptions, and you will be well-prepared for this content area.
