U S
MORTGAGE BROKER
WHAT YOU SHOULD KNOW
2 CALIFORNIA DEPARTMENT OF REAL ESTATE | DRE
This booklet was originally prepared by the Consumers Union of U.S., Inc.
under a research contract with the Department of Real Estate (DRE). The
information contained in the brochure is a brief overview of the basic steps and
factors involved in a mortgage transaction using the services of a mortgage
broker. Since this publication may not encompass all subsequent law changes,
it should only be used as a general source of information. You may wish
to research the subject matter further before proceeding with a mortgage
transaction. Some of the views and opinions in the brochure are those of the
authors and do not necessarily reect the position of the Administration, the
State of California, or its Department of Real Estate.
WHAT YOU SHOULD KNOW
Using the Services of a
Mortgage Broker
(Revised by the DRE, December 2015)
USING THE SERVICES OF A MORTGAGE BROKER 3
TABLE OF CONTENTS
Introduction .......................................................................... 4
Sources of Home Loans ............................................................ 4
Using the Services of a Mortgage Broker ...........................................5
The Role of the Mortgage Broker ......................................................6
Mortgage Broker Commissions and Lender Fees .............................. 6
Denitions ............................................................................ 7
What Other Fees Should I Ask About? ..........................................10
Do My Costs Increase if I Borrow More Money? ...............................10
An Overview of the Loan Process ................................................ 11
Debt Consolidation:
Borrowing Money on My Home to Pay My Bills ...............................13
Paying O a Balloon Payment Loan .............................................14
Renancing My Existing Fixed Rate or
Fully Amortizing Mortgage .......................................................17
Loans with Negative Amortization ..............................................18
How Do I Decide About the Length of Loan Term? ...........................19
How Do I Choose a Lender or Mortgage Broker
and a Loan? ..........................................................................20
What Do I Need to Know About the Loan Application? .....................21
Using the Mortgage Loan Disclosure Statement .............................22
Get it In Writing .....................................................................23
Real Estate Settlement Procedures Act (RESPA) ...............................23
Your Rights Under the Federal Truth in Lending Act .........................24
Protect Yourself in the Loan Process—Do Not Fall Prey
to Predatory Lending! .............................................................25
Know What You Can Aord .......................................................27
California Law Prohibits Discriminatory Lending Practices .................28
Loan Documents: What Do These Papers Mean? .............................29
Signing the Papers: What to Expect .............................................30
Mortgage Insurance: Notice to Borrower ......................................32
Can I Find Out Why Credit Was Denied? ........................................32
Information and Complaints .....................................................33
4 CALIFORNIA DEPARTMENT OF REAL ESTATE | DRE
INTRODUCTION
A home loan is a transaction in which you promise to repay money you
have borrowed and also give the lender a mortgage on your home to
secure repayment. In California, your promise to repay is ordinarily in
the form of a promissory note and the mortgage is ordinarily in the form
of a deed of trust. You need to make certain that you understand the
terms of the loan before you sign o and become obligated. Whether
you obtain a loan through a mortgage broker, a nancial institution, or
some other lender, you should ask questions about the loan process
and paperwork so that you understand the form of the transaction and
the terms of the loan before you agree to them.
The purpose of this booklet is to provide basic information about using
the services of a mortgage broker, which may assist you in making an
informed decision when seeking a home loan.
SOURCES OF HOME LOANS
Home loans are available through many dierent sources, including
mortgage brokers, mortgage banking companies, commercial banks,
community banks, credit unions, and other nancial institutions. There
are also many federal, state, county, and city government programs that
oer home loans and/or down payment assistance. If you are using
the services of a mortgage broker, he or she may be able to provide
information about various programs available to you.
USING THE SERVICES OF A MORTGAGE BROKER 5
USING THE SERVICES OF A MORTGAGE BROKER
A mortgage broker helps you obtain a home loan. A mortgage broker
may be licensed by either the California Department of Business
Oversight or the California Department of Real Estate (DRE).
Mortgage brokers make or arrange rst mortgages and junior (second)
mortgages. A junior mortgage secures a loan that is secondary or junior
to one or more other loans on the property. Some home loans arranged
through brokers are very similar to a home loan you might obtain
independently from a bank, savings and loan association (S&L), credit
union, nance company, or other type of lender. Some brokers oer
shorter loan terms and/or dierent repayment plans.
Prior to using the services of a mortgage broker, ensure that he or
she is properly licensed by checking with the California Department
of Business Oversight at www.dbo.ca.gov or (866) 275-2677
and/or the DRE at www.dre.ca.gov or (877) 373-4542, in addition
to the National Mortgage Licensing System and Registry (NMLS) at
www.nmlsconsumeraccess.org. There is also a one-stop resource for
California real estate and nancial services license information, laws,
and regulations at www.dre.ca.gov. It is important that you work with a
properly licensed broker, as licensed brokers are generally covered by
bonds or recovery accounts.
You may wish to check with the Better Business Bureau at
www.bbb.org to nd out if the company is a member and if any
complaints have been led against the company.
It may also be worthwhile to do an Internet search to determine if the
community at large has had a positive experience with the company.
6 CALIFORNIA DEPARTMENT OF REAL ESTATE | DRE
THE ROLE OF THE MORTGAGE BROKER
The mortgage broker is usually an agent for the purpose of arranging
the home loan transaction and generally is the duciary of the borrower.
This relationship imposes a legal duty on the broker to disclose to you
the important facts you need to know about the loan and it means the
broker must act in your best nancial interest. The broker has a duty of
fairness and honesty to both you and the lender. These legal duties can
be important in resolving disputes that may arise after the loan is made,
but the best way to avoid problems and disputes is to ask questions
and be sure you understand the terms of the loan and each of the loan
documents before you sign.
When acting as an agent, the broker speaks for you in submitting your
loan application to a lender. Make sure that you give the broker full and
accurate information and that any loan application or other document
the broker prepares for your signature is accurate and complete before
you sign it. Never sign blank applications or forms. Make sure you
understand the terms of the loan before you agree to it.
MORTGAGE BROKER COMMISSIONS AND LENDER FEES
Mortgage broker commissions and lender fees are not usually set by
law. Mortgage brokers are paid either directly by you or by the lender
who funds the loan. Generally, a mortgage broker cannot get paid by
both the lender and you on your home loan. You may choose to pay the
mortgage broker’s commission with:
• Cash (out of pocket); or
• Proceeds from the loan (this will increase your loan balance); or
• A lender’s rebate or service release premium. (See the denition
of lender’s rebate and service release premium in the “Denitions”
section, starting on page 7.)
Compare fees charged by several lenders and mortgage brokers. You
may be able to do this with a few phone calls. Ask about the amount of
the fees and costs to be paid by you in cash before the loan is funded,
the amount of the fees and costs to be paid from the loan proceeds or
lender rebates, and the amount of fees and costs to be nanced.
USING THE SERVICES OF A MORTGAGE BROKER 7
DEFINITIONS
Points
The term “points” customarily refers to the commission, or origination
fee, charged by the mortgage broker or the loan fee charged by the
lender when the loan is made. Each point is 1 percent of the loan
amount. On a $100,000 loan, one point is $1,000 and 10 points is a
charge of $10,000. The amount of points charged is not usually set
by law. You may wish to shop for a mortgage broker or lender who
charges fewer points. You may also be able to negotiate for lower
points. Asking about points before you choose a mortgage broker or
lender may save you money. You should be aware, however, that a
loan portrayed as a “no point” or “zero point” loan may have a higher
interest rate than a loan for which points must be paid; therefore, it
is important to compare the points, costs, and interest rates in order
to decide which loan is best for you. And remember, there is no such
thing as a “no cost” loan. Points can also be paid by the borrower to
obtain a lower interest rate. These are referred to as “discount points”
and are dierent than the points charged by the broker or lender as
origination fees.
Rate Sheet
A term used to describe how lenders communicate (electronically or
by fax) the interest rates, terms, and costs of loan products available
to mortgage brokers. Interest rates can change several times a day.
Each lender provides its approved mortgage brokers with the current
rate sheet for its loan products.
Par Loan
The interest rate at which the borrower pays no discount points and
the lender pays no rebate to the broker for delivering the loan to the
lender.
8 CALIFORNIA DEPARTMENT OF REAL ESTATE | DRE
Yield Spread Premium (Also Known as a Lender Rebate)
The rate at which a mortgage broker is compensated for the
dierence between the interest rate on a par loan and the interest
rate on an above-par loan that a broker can deliver to the lender.
This is expressed in the number of points paid to a broker. A broker
receives payment of the premium, the lender obtains a higher than
par interest rate, and the borrower pays for the premium over the
entire life of the loan through that higher interest rate and payments.
For example, if the interest rate on a par loan is 7 percent and the
mortgage broker can deliver a 7.5 percent loan to the lender, the
lender may be oering to pay the mortgage broker a rebate of two
points or 2 percent of the loan value. For a $100,000 loan, the broker
would be paid a $2,000 yield spread premium by the lender and the
borrower would have to pay a higher interest rate over the life of the
loan. On the adjustable rate mortgage (ARM) loans, a higher “margin”
can result in a rebate from the lender to the broker. The “margin” is
a component of the interest rate calculation on ARM loans. A higher
margin results in a higher interest rate to the lender and therefore
can generate a rebate to the broker. Always ask your broker if rebate
pricing is involved on your loan, as a broker must disclose any rebate
he or she is to receive in connection with your loan to you. Note that
for federally related mortgage loans, the yield spread premium must
be credited back to the borrower and cannot be retained by the
broker. Ask if any portion of the rebate will be used by the broker to
oset your closing costs.
Service Release Premium
This is another form of compensation that a lender may pay to a
broker for delivering a loan. Each loan comes with “servicing rights,”
which are the rights to collect the mortgage payments. Servicing
rights can be sold independently of the actual mortgage. Some
lenders pay mortgage brokers a “service release premium,” expressed
as points, when the mortgage broker delivers the lender a loan.
Always ask your broker if a service release premium is involved on
your loan; a broker must disclose any service release premium they
are to receive in connection with your loan to you.
USING THE SERVICES OF A MORTGAGE BROKER 9
Loan Pre-Approval
Mortgage brokers will obtain pre-approval for a loan based on
preliminary information supplied by the borrowers. THIS IS NOT
A LOAN APPROVAL. Loan approval only takes place after all
required information has been reviewed and approved by the lender’s
underwriter. Loan approvals may also contain conditions that the
borrower must meet prior to the loan funding.
Loan Lock
The interest rate on your loan can either be locked or oating. If
you choose to obtain a loan lock, the mortgage broker will “lock in”
an interest rate at the time you request the lock. This lock is for a
given period of time. Always ask your broker for the length of time
the interest rate will be locked and if there is any lender charge for
locking the interest rate. Always ask for a written lock-in agreement,
signed by the mortgage broker, detailing the exact terms of the
lock-in.
You may choose to oat the interest rate on your loan. This means
that the loan’s interest rate will be set at the prevailing interest rate
for your loan program on the day of closing.
Remember interest rates can change daily and sometimes more than
once in a day. You need to talk with your broker to determine the best
course of action for you.
Annual Percentage Rate (APR)
The annual percentage rate (APR) of interest includes both the
simple interest rate and certain fees, commissions, costs, and
expenses. By contrast, the simple interest rate, or note rate, does not
include these costs and fees. If a broker or lender quotes an interest
rate to you, be sure to ask if that rate is the simple rate or the APR.
Use the APR to compare loans that have dierent simple interest
rates, points, and other loan charges. The loan with the higher APR
may cost you more over the term of the loan.
10 CALIFORNIA DEPARTMENT OF REAL ESTATE | DRE
WHAT OTHER FEES SHOULD I ASK ABOUT?
(See the section on page 22 on the mortgage loan disclosure statement
for a detailed discussion on how these costs and fees are disclosed to
you in writing.)
The mortgage broker may charge you loan application processing fees.
You may incur appraisal and credit inquiry expenses. However, if the
mortgage broker asks for payment in advance for any service other than
an appraisal or credit inquiry, call DRE to see if the broker has approval
to do so. Closing costs may include charges for document preparation,
escrow services, title insurance, notary services, and recording fees.
You may also be charged for re or homeowner’s insurance coverage,
optional credit life, or disability insurance, or beneciary statements.
You do not have to buy credit life or disability insurance. Credit life and
disability insurance benets make your mortgage payments if you die or
become disabled. Many credit life and disability policies have limitations,
called exclusions, that excuse the insurer from paying under a variety of
circumstances. Make certain you understand the terms of the policy and
what it excludes. You can also secure nancial protection from disability
or death through standard term life insurance or disability insurance.
Before you buy credit life or disability insurance, compare the cost with
the cost of a term life or disability policy.
DO MY COSTS INCREASE IF I BORROW MORE MONEY?
Many loan costs and fees are based on the amount of the loan. Usually,
the more you borrow, the higher the costs and fees. If arranged through
a broker licensed by DRE, your costs and fees are also limited by law on
rst mortgages under $30,000 and junior mortgages under $20,000.
USING THE SERVICES OF A MORTGAGE BROKER 11
AN OVERVIEW OF THE LOAN PROCESS
Selecting a Mortgage Broker or Lender
Brokers usually act as your agent with the lender. You can also deal
directly with some lenders without using a mortgage broker. Whichever
you choose, ensure that you have checked out the company. Try to use
companies that people you know have used and can tell you the level
of service provided. Rates should be competitive with other companies.
Remember that if the deal sounds too good to be true, it probably is.
Be aware of your credit status. Before you contact a broker or lender,
obtain a copy of your credit report. This can be done free on the Internet
at www.annualcreditreport.com or by calling (877) 322-8228. For
a fee, you can also obtain your credit score, which lenders will use to
determine if you qualify for a prime loan or sub-prime loan. Sub-prime
loans have interest rates and fees that are generally higher than prime
loans. Knowing your credit score before you apply will allow you to shop
for the best loan for you.
12 CALIFORNIA DEPARTMENT OF REAL ESTATE | DRE
The Loan Application
You will have to provide a completed loan application. Some brokers
will come out to your home to take the application. You can ll one out
yourself or use websites that will allow you to submit the application
online. Remember, never sign blank applications or forms. You will
probably be asked to pay for a credit report and appraisal fee up front.
If a broker tells you the credit report and appraisal costs are not being
charged to you, make sure to get it in writing. Also, verify that you
will not pay for these items at the close of escrow out of your loan
proceeds or that the broker will not demand payment for the fees if
you do not close the loan. The broker will also request that you submit
the documents that the lender requires for the loan program you
are trying to obtain. Both the broker and lender will provide you with
required disclosures regarding the terms of the loan. It is important
that you review these disclosures and ensure that the terms meet
with your approval.
Processing the Loan
The broker obtains the required information and submits it to the
lender’s underwriter for loan approval. This is a critical stage in
obtaining your loan. Ensure that you respond to all requests for
information from the broker in a timely manner. This will increase your
chances of getting the loan or learning why you don’t qualify. This
is also the time you may want to lock in an interest rate. Remember
to keep in contact with the broker and to monitor the loan process,
ensuring that the broker is meeting the agreed upon time frames.
Closing the Loan
This is the nal stage of the loan process. The closing can take place
at a title company, escrow company, or the broker’s oce. The broker
may use a signing service that will bring the documents to you for
signing. No matter where the signing takes place, this is the time to
ensure the loan terms and costs are the same as agreed. Read all
documents. Do not let yourself be rushed. If you have questions, ask
them at this point and make sure you understand the answers. If the
terms and conditions are not what were agreed upon, do not sign the
loan documents. Request that the documents be redrawn stating the
correct terms.
USING THE SERVICES OF A MORTGAGE BROKER 13
DEBT CONSOLIDATION: BORROWING MONEY ON MY
HOME TO PAY MY BILLS
Be careful about using a home loan to consolidate debts into a single
monthly payment. A home loan is dierent from other consumer debts.
If you cannot pay most consumer debts, you might receive a bad credit
rating, be sued, or even be forced into bankruptcy. But if you cannot pay
your home loan, you could lose your home.
Many consumer debts such as bills for credit cards or medical services
are unsecured. Other consumer debts like car payments or furniture
payments may be secured by an interest in the goods but not by an
interest in your home. If you cannot repay consumer debts, the creditor
may be able to take back the goods and sue you for the amount of the
debt not repaid by the resale of the goods. But on a consumer debt, the
creditor cannot simply foreclose on your home.
If you pay o consumer debts like car, medical, or credit card bills with a
home loan, the new debt is secured by your home. This creates the risk
that you could lose your home if you cannot make the payments.
14 CALIFORNIA DEPARTMENT OF REAL ESTATE | DRE
Questions to Ask About Debt Consolidation
• Are your debts unsecured (such as medical bills and credit
card bills) or secured only by an interest in personal property
(such as a car or furniture payments)?
• Can you work out a payment schedule with your creditors to
repay existing debts?
• How will you pay o a new home loan if you cannot pay your
current bills?
There are many types of loans from which to choose: xed rate,
adjustable rate, balloon payment, and negative amortization.
Loans may contain one or more of these features (e.g., an
adjustable rate loan may or may not have potential negative
amortization or a xed rate loan may or may not contain a
balloon payment provision). Discuss with your lender or broker
which loan is right for you.
PAYING OFF A BALLOON PAYMENT LOAN
A balloon payment loan is not fully paid o through monthly payments.
A loan without a balloon payment is repaid a little bit each month; each
month’s payment applies to both interest and principal. They are called
fully amortized loans because you pay o (amortize) the loan with
your monthly payments. By contrast, an interest-only loan or a partially
amortizing loan will include one or more balloon payments; i.e., payments
that are twice or more the size of the regular payment.
Partially amortizing and interest-only loans have lower monthly
payments than fully amortizing loans for the same amount. In an
interest-only loan, the monthly payments do not pay any of the loan
principal. The payments cover only interest. The unpaid principal must
be paid by one or more balloon payments.
USING THE SERVICES OF A MORTGAGE BROKER 15
For example, if you obtain a $15,000 interest-only loan at 10 percent
interest for ve years, you must make monthly interest payments of
$125. At the end of the ve-year term, however, you would still owe the
entire $15,000 principal and it would be due in one balloon payment. (If
you had made payments of $318.71 instead, the loan would have been
amortized/paid o by the end of the ve-year loan term. If your loan
was for 10 years, monthly payments of $198.23 per month would fully
amortize it.) A balloon payment results when your monthly payments pay
only interest (a non-amortizing loan) or when they pay only part of your
loan principal (a partially amortizing loan).
An example of each could look like this:
$15,000 Loan
10 % - 5 years
Monthly Payment Balloon
(Due after ve years)
Fully Amortized $318.71 —0—
Par tially Amortized $222.65 $7,500
Interest Only $125 $15,000
With interest-only and partially amortizing loans, if you do not have the
nancial means to repay the balance of the loan principal as a balloon
payment at the end of the loan term, your choices could include:
• Selling your home to completely or partially make the balloon
payment;
• Taking out another loan—typically incurring more fees and costs—
to pay o the balloon payment; or
• Losing your home to foreclosure if you fail to make the balloon
payment.
16 CALIFORNIA DEPARTMENT OF REAL ESTATE | DRE
CONSUMER CHECKLIST
Interest-Only, Partially Amortizing, and Negative
Amortization Loans
q
How much can the loan balance increase if you make the
lowest payment?
q How soon will you be required to make fully amortizing
payments and how can the payments go up?
q How much will you owe (balloon payment) after you make
all the monthly payments?
q How much would the monthly payments be to fully amortize
the loan and avoid any balloon payment?
q Could you aord the monthly payments on a fully amortizing
loan if you borrowed less money or obtained a longer term loan?
q Where will you obtain the money to make the balloon payment?
q Do you fully understand that you risk losing your home if you
cannot pay the balloon payment?
If you renance the loan to pay the balloon payment, you typically must
pay new loan fees and closing costs. This could increase your debt. If
the debt becomes too large in comparison with the amount of equity in
your home, you may not be able to further renance. Then, if you are not
able to satisfy the debt, you could lose your home in foreclosure or be
forced to sell it to pay o the loan.
USING THE SERVICES OF A MORTGAGE BROKER 17
REFINANCING MY EXISTING FIXED RATE OR
FULLY AMORTIZING MORTGAGE
Sometimes borrowers replace an existing mortgage with a new,
larger rst mortgage. Some things to consider in deciding whether
to renance an existing mortgage are:
• Renancing may replace a xed rate loan with an adjustable rate loan.
• Renancing may replace a fully amortizing loan with a loan requiring a
balloon payment or containing negative amortization.
• Renancing may shorten the amount of time you have to repay by
replacing a long-term loan with a short-term loan.
• A new junior mortgage in a smaller amount may cost less, in points
and fees, than renancing the existing rst mortgage.
With an ARM, the interest rate—and your monthly payment—may
increase with an increase in the index used in your mortgage. In an ARM,
the current interest rate is calculated by adding a xed margin (such as
2 percent) to an index such as the Cost of Funds Index published by the
Federal Home Loan Bank Board: Index Rate + Margin = Mortgage Rate
or Note Rate.
For adjustable rate loans, ask the lender or broker:
• How long is the initial interest rate in eect?
• How often can the interest rate change?
• What is the largest monthly payment you could face?
• How often can the payments change?
• Can the amount you owe increase through negative amortization?
This can happen if your monthly payment is less than monthly
interest costs.
• What is the formula that will be used to set the rate?
• What would the rate be today if it were set by that formula?
• What are the caps on how high or low the interest rate can go?
• Is there a cap on how high or low a payment can be adjusted when
the interest rate adjusts?
18 CALIFORNIA DEPARTMENT OF REAL ESTATE | DRE
LOANS WITH NEGATIVE AMORTIZATION
Although negative amortization loans are only available in limited
circumstances, and in some cases are illegal, there could be an instance
where such a product is appropriate. But great care should be exercised
before agreeing to a negative amortization loan.
“Negative amortization” or “deferred interest” is a term used when the
principal balance of your loan (the amount you owe) goes up instead
of down. A fully amortizing loan has payments that include interest
and principal each month until the loan is paid o (fully amortizing). A
negative amortizing loan contains payment options that may not pay the
full amount of interest due each month and pay nothing toward lowering
the principal balance. If a mortgage payment does not satisfy the total
amount of the interest due, the dierence between the payment made
and the interest due is added to the loan balance, hence the term
“negative amortization” or “deferred interest.” The interest will eventually
have to be paid, usually by much higher payments depending on the
terms of your loan contract.
USING THE SERVICES OF A MORTGAGE BROKER 19
These loans, usually adjustable rate loans, may contain several options
for payments. For example, a loan may provide options for a payment
that is lower than the interest due, a payment to pay only the actual
interest due, a payment based on a 15-year fully amortizing loan, or a
payment based on a 30-year fully amortized loan. By paying the lowest
payment, you will increase your loan balance for each month that you
choose that option. Negative amortization loans may also be based on
a very low “payment rate”—the rate at which the lowest payment option
is calculated. This may be dierent than the actual interest rate charged
on the loan and contribute to the negative amortization. After a certain
number of years, as set forth in the loan contract, these low payments
are no longer available as an option and the payments will increase to
fully amortize the loan over the remaining time left at an interest rate
that may change each month. This can result in much higher payments
than those with which you started. If you cannot make the higher
payments, you may not be able to renance if the loan balance is higher
than what your home is worth and you may have to sell the home for
less than the balance owed. This can result in your having to pay the
dierence to the lender from other assets. If you are unable to sell the
home or renance, you could lose the home in foreclosure.
If a broker oers you a loan with an extremely low interest rate and/
or payments, ask if the loan contains negative amortization. These
loans should be discussed in detail with a broker or lender before you
make a decision to enter into a transaction. Again, a broker owes you
a full and honest description of the loan terms and the advantages and
disadvantages of this type of loan for your situation.
HOW DO I DECIDE ABOUT THE LENGTH OF LOAN TERM?
The term of the loan is the number of years you have to repay it. First
mortgages usually have terms of 15, 30, or even 40 years. Junior
mortgages typically have terms of one, three, ve, or perhaps 10
or more years. With a fully amortized loan, the longer the loan term,
the lower your monthly payments. With an interest-only or partially
amortizing loan, a longer loan term means you have more time before
you have to pay the balloon payment. In any event, the longer the loan
term the more total interest you will pay, assuming you do not prepay
the principal of the loan.
20 CALIFORNIA DEPARTMENT OF REAL ESTATE | DRE
HOW DO I CHOOSE A LENDER OR MORTGAGE BROKER
AND A LOAN?
Call lenders and mortgage brokers and ask about interest rates and
fees for the size loan you need. Be sure to ask:
• What types of loans are available?
• What is the approximate amount you will have to borrow to receive
the amount of cash you want? (That is, what amount of fees will
be nanced and deducted from your loan proceeds?)
• Does the lender or mortgage broker oer loans in the dollar
amount you need?
• How much is the lender’s fee or broker’s commission on this
size loan?
• What other fees or costs will you be charged and what is the
estimated amount of each?
• Will you have to pay any fees if the loan is denied?
• Will you have to pay any fees if you apply, but then change
your mind?
• What is the amount of the monthly payments and the amount
of any balloon payment?
• Will the loan be fully amortized/paid o by the regular monthly
payments?
• What is the length of the repayment period/term of the loan?
(The more time you have to repay, the lower your payments will
be on a fully amortizing loan.)
• What is the simple interest rate?
• Is the interest rate xed or does it vary over the term of the loan
(adjustable rate)?
• What is the annual percentage rate?
• Is there a penalty for paying the loan o early (prepayment
penalty)? If so, how much?
A good way to determine how much the fees and costs will be on a loan
is to ask each lender or broker two questions: 1) Approximately how
USING THE SERVICES OF A MORTGAGE BROKER 21
much do I have to pay in cash before the loan is funded? and 2) What is
the approximate amount of money I will have to borrow to end up with
a certain amount of cash? By comparing the answers, you can nd out
how much you would have to borrow from each source to end up with
the same amount of cash paid to you.
WHAT DO I NEED TO KNOW ABOUT THE LOAN
APPLICATION?
You will usually be asked to ll out a loan application describing your
income, assets, debts, and expenses, and the real property to secure
the loan. Before you sign the application, make sure that it truthfully
states your income, assets, debts, and expenses. Never sign a blank
application. Do not stretch the truth on your loan application. Do not
exaggerate your income or understate your debts. Some loans may not
require the lender to fully verify the information. Generally, loans with
limited verication on documentation require large down payments
or require higher amounts of equity in the property. Be wary of any
loan representative who tells you it is OK to stretch the truth in order
to qualify. It is against the law to provide false information on a loan
application to a nancial institution. The lender is entitled to know your
true nancial condition. Never sign a blank loan application or one
where information is left out. You may be asked to provide documents
to the broker to verify your employment and bank accounts, etc. The
sooner you comply with these requests, the sooner your loan application
can be processed.
CONSUMER CHECKLIST
The Loan Application
q
Accurately report your income, assets, and debts.
q Never sign a blank application.
q Ask for a copy of your signed application.
q To avoid delays, promptly provide the information requested by
the mortgage broker.
q Ask approximately how long it will take to process the application
and obtain the loan you are requesting.
22 CALIFORNIA DEPARTMENT OF REAL ESTATE | DRE
USING THE MORTGAGE LOAN DISCLOSURE STATEMENT
In most cases, a mortgage broker must deliver to you a Mortgage Loan
Disclosure Statement (MLDS) within three business days after you
complete and present to the mortgage broker a written loan application
or before you become obligated to take the loan, whichever is earlier.
Ask to receive the statement as soon as possible and read it carefully. It
will provide you with the following information about the loan:
• The amount you are borrowing (the loan amount or principal);
• The estimated amount of any costs that are to be nanced as part
of the principal;
• The estimated amount you will pay in fees to get the loan, including
commissions to the mortgage broker; and
• The estimated amount of money that you will receive from the loan
after costs, fees, and commissions have been deducted.
The statement must also include estimates of the maximum costs of
arranging the loan. It must list the estimated amount of each of these
fees, if they apply:
• Appraisal fee
• Lender fees
• Escrow fee
• Title insurance charge
• Notary fee
• Recording fee
• Credit investigation fee
• Fire or other hazard insurance premiums
• Credit life or disability insurance premium
• Beneciary statement fees
• Reconveyance fee (when you are renancing an existing loan)
• Broker origination fees or commissions, including any rebates paid
by the lender to the broker
USING THE SERVICES OF A MORTGAGE BROKER 23
The disclosure statement should also list any existing loans or liens
against the property. If you expect the new loan to pay o a debt,
check to be sure that debt is listed. The disclosure must also state if a
prepayment penalty will apply if you pay o the loan early.
Be sure to ask for this disclosure statement before you sign the loan
papers. You do not become obligated to accept the loan until you sign
the loan agreement or promissory note. If the disclosure statement does
not describe the terms that you expect or want, do not sign the loan
papers. Any changes from the original terms, cost, or expenses must be
disclosed to you in a timely manner.
If the loan transaction is federally related, you should also receive a
Loan Estimate or a Good Faith Estimate and certain Truth In Lending
disclosures. These are federal disclosures that together generally
provide similar information to the MLDS. (See discussions on pages
23 and 24 regarding RESPA and the Truth in Lending Act.) Regardless
of how you receive the disclosures, the broker must advise you of any
compensation received or expected from the lender and whether the
loan includes a balloon payment.
GET IT IN WRITING
Do not be afraid to ask the mortgage broker or lender to show you
where the loan papers describe any particular features of the loan that
have been promised to you. If the terms you have been promised are
not there, ask the mortgage broker or lender to put them in writing.
Promises made only orally may not be enforceable.
REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA)
The RESPA is a federal law administered by the Consumer Financial
Protection Bureau (CFPB). RESPA only applies to federally related
loans and requires, among other things, that mortgage brokers provide
detailed information on settlement costs so that buyers and borrowers
can shop around for settlement services. Mortgage brokers and lenders
must provide an estimate of costs the borrower is likely to incur at close
of escrow. The broker must present this estimate not later than three
business days after receipt of a written loan application. The estimate
will contain information similar to the MLDS required by California law.
24 CALIFORNIA DEPARTMENT OF REAL ESTATE | DRE
YOUR RIGHTS UNDER THE FEDERAL
TRUTH IN LENDING ACT
The Federal Truth in Lending Act (TILA) applies if the broker makes
the loan with its own funds or arranges the loan for a lender who makes
ve or more home loans per year. If the TILA applies, the lender must
provide you a disclosure before you become obligated that tells you the
identity of the creditor; the amount nanced; that you have a right to
an itemization of the amount nanced; the dollar amount of the nance
charge; the nance charge expressed as an APR; the number, amount,
and periods of payments; the total of all payments; any late payment
charge; and whether there is a charge upon prepayment of the
loan principal.
The disclosure statement must also identify the property that will be
used to secure the loan and should tell you whether the terms of the
loan permit assumption of the loan by someone buying the property
from you.
If the TILA applies, you may have a right to rescind (cancel) the loan
within three days after certain events, including the consummation of
the loan transaction. When you do not receive proper disclosures about
the loan, the right to rescind can last as long as three years from the
time you obtain the loan. Any request to rescind the loan should be
made in writing.
USING THE SERVICES OF A MORTGAGE BROKER 25
The TILA right of rescission does not apply to all loans arranged by
mortgage brokers, so do not rely on the possibility of later rescission
as a substitute for careful study of the loan before you agree to it.
The TILA was amended in 1994 with respect to certain loans, other than
purchase money loans, construction loans, reverse mortgages or home
equity lines of credit, secured by the borrower’s principal dwelling. In these
“high-rate/high-fee” loan transactions, also known as Section 32 loans,
the TILA places some additional restrictions on creditors, requires more
disclosures, and gives borrowers cancellation rights. The amendment
denes a creditor as someone who, in any 12-month period, originates
more than one high-rate/high-fee loan. Also, any such loan arranged by
a mortgage broker is subject to the requirements. A high-rate loan is one
in which the APR exceeds by eight points or more on a rst-lien loan or
10 points or more on a second-lien loan, the yield on Treasury Securities
having a similar term. A high-fee loan is one in which the total points and
fees exceed the greater of 8 percent of the loan amount or, as of
January 1, 2006, $528 (adjusted annually on January 1 based on the
change in the Consumer Price Index). The TILA is enforced by the
CFPB, and CFPB can answer questions concerning the TILA and
high-rate/high-fee loans.
PROTECT YOURSELF IN THE LOAN PROCESS—DO NOT
FALL PREY TO PREDATORY LENDING!
The term “predatory lending” encompasses a variety of home mortgage
lending practices. Predatory lenders often try to pressure consumers into
signing agreements for loans they cannot aord or simply are not in the
consumer’s best interest. Often, through the use of false promises and
deceptive sales tactics, borrowers are convinced to sign a loan contract
before they have had a chance to review the paperwork and do the math
to determine whether they can truly aord the loan.
Predatory loans carry high up-front fees that are added to the balance,
decreasing the homeowner’s equity. Loan amounts are usually based in
the borrower’s home equity without consideration of the borrower’s ability
to make the scheduled payments. When borrowers have trouble repaying
the debt, they are often encouraged to renance the loan to another
unaordable, high-fee loan that rarely provides economic benet to the
consumer. This cycle of high-cost loan renancing can ultimately deplete
the homeowner’s equity and result in foreclosure.
26 CALIFORNIA DEPARTMENT OF REAL ESTATE | DRE
Predatory loan practices specically prohibited by law include:
• Unsuitability: Giving a borrower a loan he or she cannot aord
to repay
• Flipping: Frequent making of new loans to renance existing loans
• Steering: Giving a borrower a loan with higher rates and fees when
the borrower qualies for a loan with lower rates and fees
• Packing: Selling of additional products without the borrower’s consent
• Charging excessive fees.
Homeowners in certain communities, particularly the elderly or minorities,
are especially likely to be targets of predatory lending, but almost anyone
can fall prey to abusive lending practices. You can protect yourself by
knowing what you can aord; choosing a reputable, licensed broker/
lender; understanding the loan application and contract; and being aware
of commonly used predatory lending practices. Informed decision-making
is your best defense.
Beware of these predatory lending tactics:
• Exceedingly high interest rates and inated fees in comparison with
other lenders.
• Bait and switch tactics where a mortgage broker or lender knowingly
oers one set of terms that are more appealing but are not readily
available and then pressures the borrower into signing the contract
with more expensive terms and hidden fees.
• Door-to-door high-pressure salespersons and pitches for home
equity loans related to home improvement contracts or contracts for
installation for items such as drapes and carpets.
• Salespersons with backgrounds similar to yours who attempt to gain
your trust. This tactic is oftentimes used to lull a homeowner into a
false sense of security, causing the homeowner to make a decision
based on trust instead of knowledge and understanding.
• Mail, radio, and television ads that claim “No job! No credit! No
problem! You can still qualify for a loan based on your home equity.”
These ads encourage you to place your home at risk. If you cannot
make the payments, you will lose your home. Oers that sound too
good to be true usually are.
USING THE SERVICES OF A MORTGAGE BROKER 27
• High-pressure sales tactics requiring you to sign a loan contract
right away. If the oer is good today, it should probably be good
tomorrow after you have reviewed the contract and consulted a
knowledgeable, uninvolved advisor.
Be wary of brokers who attempt to steer you into a home-equity line of
credit (HELOC) when you are applying for a “high-rate/high-fee” real
estate loan. (See “Your Rights Under the Federal Truth in Lending Act”
section on page 24.) These loans do not oer the same protections as
a “covered loan.” If a broker is steering you into a HELOC that you did
not ask for, he or she may be attempting to evade the covered loan law.
A broker has a responsibility to you as your agent to discuss all possible
loan options and inform you of the advantages and disadvantages of
each. You should not be pressured or steered into applying for a loan
that is not suitable for your needs or ability to pay.
KNOW WHAT YOU CAN AFFORD
• Manage your money wisely, as your credit history is your
responsibility.
• Carefully review your income and expenses and always borrow
within your budget.
• If purchasing a home, you normally need to have enough savings to
cover a down payment of 5 percent to 20 percent of the purchase
price plus an additional 3 percent to 7 percent of this price for
closing costs. If you do not have the down payment, you may be
able to qualify for a loan under various government programs that
are available.
• Do not inate your earnings or provide false information to qualify
for a loan as the lender’s borrower qualications are based on what
an individual or family must earn to aord the mortgage payment.
• Do not bet on future income increases as there are no certainties
in the future, but it is a certainty that you could face the loss of your
home and all of the money you paid on the loan if you cannot make
the payments due to unforeseen events.
• The law requires mortgage brokers and lenders to notify you of
your right to review your credit score and the key factors aecting
your credit score. Obtain a copy of your credit report to verify that it
accurately reects your credit history.
28 CALIFORNIA DEPARTMENT OF REAL ESTATE | DRE
As of July 1, 2002, California also has a law covering high-rate/
high-fee loans. The law contains special rules regarding balloon
payments, prepayment penalties, the borrower’s ability to repay the loan,
and many others. It also requires that the loan have a tangible benet
to the consumer. With certain specied exceptions, a “covered loan”
is a consumer credit transaction that is secured by a one- to four-unit
dwelling that is the borrower’s principal residence and where the APR
exceeds by 8 points or more the yield on Treasury Securities having
a similar term, or, the total points and fees, as dened, payable by the
consumer at or before closing will exceed 6 percent of the total loan
amount. The maximum amount covered is the most current Fannie Mae
single-family rst mortgage conforming loan limit.
As of October 11, 2009, California also has a law covering higher-
priced mortgage loans. The law contains special rules regarding
prepayment penalty and the borrower’s ability to repay the loan. A
higher-priced mortgage is a rst lien on a principal dwelling in which the
APR exceeds the average rate by 1.5 percent or more or is a junior lien
on a principal dwelling in which the APR exceeds the average rate by
3.5 percent or more.
As of April 1, 2011, the Federal Reserve Board enacted rules to limit
a mortgage broker’s compensation to a single source. This means a
broker cannot receive compensation for originating a federally related
loan from both the borrower and the lender.
CALIFORNIA LAW PROHIBITS DISCRIMINATORY
LENDING PRACTICES
Brokers and lenders are required to give you a Fair Lending Notice
that advises you of your right to le a complaint if you feel that you
are, or have been, treated in a discriminatory manner in the lending
process based on your race, color, religion, sex, marital status, domestic
partnership, age, physical or mental disability, medical condition, sexual
orientation, familial status, source of income, national origin, or ancestry.
It is also illegal to use these factors to discriminate based on the
neighborhood surrounding the housing accommodation unless it is
required to avoid an unsafe and unsound practice. Brokers or
lenders are also required to post a notice in their oces in a
conspicuous location.
USING THE SERVICES OF A MORTGAGE BROKER 29
CONSUMER CHECKLIST
Understanding the Loan Documents
q Study the loan documents and ask questions to help you
understand their meaning BEFORE you sign.
q Ask the mortgage broker or lender to put into writing the terms
agreed to.
q Read all the loan documents carefully before you sign.
q Before you sign, make certain all the loan terms agreed on are
included.
q Obtain and keep a copy of everything you sign.
THE LOAN DOCUMENTS: WHAT DO THESE
PAPERS MEAN?
The mortgage broker should explain the loan to you, but you can also
help avoid misunderstanding by reading the documents and asking
questions. Do not guess at the meaning of the loan papers, and ask the
mortgage broker to explain them.
30 CALIFORNIA DEPARTMENT OF REAL ESTATE | DRE
SIGNING THE PAPERS: WHAT TO EXPECT
When the time comes to sign the papers, several documents will be
presented to you. Take your time and read each document carefully.
They will likely include:
Promissory Note – In the promissory note, you promise to repay the
money borrowed. The note should state the amount you are borrowing,
the interest rate, whether and how that interest rate may change, the
term or length of the loan, and the amount of any balloon payment. It
will also state if a prepayment penalty applies to your loan.
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 do not
repay the loan.
Escrow Instructions – The escrow instructions tell the escrow holder
how to pay the loan funds. If existing mortgages or other debts are to
be paid o by the loan, be sure that the escrow instructions tell the
escrow agent to pay o these debts.
Broker Agreement – Sometimes you will be asked to sign this
agreement. Read the broker agreement carefully. Does the agreement
require you to pay the broker’s fee even if you do not receive the loan
you requested? Make sure the agreement is consistent with what the
broker has already told you about your rights and obligations.
USING THE SERVICES OF A MORTGAGE BROKER 31
Declaration of Oral Disclosures – This is a statement that the broker
has orally explained certain terms of the loan to you. Before you sign a
paper saying that you have received explanations, make sure that you
have received the explanations and that you understand what you have
been told.
Mortgage Loan Disclosure Statement – The mortgage broker must
give you this statement, which sets forth the loan terms and estimated
costs, within three business days of receiving your completed written
loan application or before you become obligated to complete the loan
transaction, whichever is earlier. If liens or debts are to be paid o
by the loan, be sure they are listed on the disclosure statement. (In a
federally related loan transaction you may also receive a Loan Estimate
or Truth in Lending disclosures and Good Faith Estimate.)
CONSUMER CHECKLIST
Signing the Loan Papers
q Do not be rushed or intimidated.
q Read each document before you sign any part of it.
q Do not sign any documents if there are spaces or boxes
concerning the terms of the loan that are left blank.
q Check that the promissory note lists the interest rate, length
or “term” of the loan, and other terms that were promised or
represented to you.
32 CALIFORNIA DEPARTMENT OF REAL ESTATE | DRE
MORTGAGE INSURANCE: NOTICE TO BORROWER
Civil Code Section 2954.6 requires that if private mortgage insurance
(PMI) is a condition of a loan, the lender must notify the borrower
whether the borrower has the right to cancel the PMI and, if so, what
conditions must be met in order to cancel.
CAN I FIND OUT WHY CREDIT WAS DENIED?
The Federal Equal Credit Opportunity Act forbids discriminatory lending
practices. Lenders may not base a decision to deny you credit on your
race, color, religion, national origin, ancestry, sex, marital status, or the
fact that some of your income comes from a public assistance program.
The lender is required to inform you in writing of an adverse action
(denial) taken on your application. If you make a timely written request,
the lender must also tell you in writing why credit was denied.
Eective January 1, 2002, any person who makes, or arranges, loans
secured by one- to four-unit residential property, and who uses a
consumer’s credit score in connection with the application must give you
a Notice to the Home Loan Applicant disclosing your rights to receive
information regarding your credit score.
USING THE SERVICES OF A MORTGAGE BROKER 33
INFORMATION AND COMPLAINTS
Department of Real Estate – Find out whether a mortgage broker has
a current license, how long the broker has been licensed, and whether
DRE has ever taken any formal disciplinary action against the broker.
www.dre.ca.gov
Department of Business Oversight – Find out whether a mortgage
lender or banker has a current license and whether DBO has taken
formal disciplinary action against the lender/banker. www.dbo.ca.gov
Consumer Financial Protection Bureau – Get information about
loan estimate disclosures and settlement cost disclosures, RESPA and
TILA requirements, and high-rate/high-fee loans.
www.consumernance.gov
Private attorneys – The State Bar Association has a referral service
to provide a referral to lawyers who have asked to be listed with them.
www.calbar.ca.gov/Public/LawyerReferralServicesLRS.aspx
Legal Aid – If you are on a xed income or have a low income, you may
qualify for a lawyer through your county’s Legal Aid Oce.
34 CALIFORNIA DEPARTMENT OF REAL ESTATE | DRE
Principal Oce
651 Bannon Street, STE 500
Sacramento, CA 95811
(877)
373-4542
www.dre.ca.gov
District Offices
Fresno
2550 Mariposa Mall, Suite 3070
Fresno, CA 93721
(877) 373-4542
Los Angeles
320 West 4th Street, Suite 350
Los Angeles, CA 90013
(877) 373-4542
Oakland
1515 Clay Street, Suite 702
Oakland, CA 94612
(877) 373-4542
San Diego
8620 Spectrum Center Blvd.,
Suite 301
San Diego, CA 92123
(877) 373-4542
Department of Business
Oversight
1515 K Street, Suite 200
Sacramento, CA 95814-4052
(866) 275-2677
www.dbo.ca.gov
Consumer Financial
Protection Bureau
Consumer Help
P.O. Box 4503
Iowa City, Iowa 52244
(855) 411-2372
www.consumernance.gov
DEPARTMENT OF REAL ESTATE
Department of Real Estate
651 Bannon Street, STE 500
Sacramento, CA 95811
RE 35A (Rev. 1/16)
PDE_18-120
