Federal Mortgage Laws and Regulations

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Introduction

Federal law governs nearly every step of a residential mortgage, from the first disclosure the borrower receives to the money that changes hands at the closing table. It is also the second-heaviest area on the SAFE MLO test — roughly 24% of your score — and it overlaps heavily with Origination (Chapter 3) and Ethics (Chapter 4), so the points you earn here are earned three times over.

The reason this material is so testable is that it is almost entirely rules with triggers and clocks: a specific event starts a specific countdown, and a specific disclosure must reach the borrower by a specific deadline. Learn the trigger, learn the deadline, and you have the point. The catch is that the exam writes questions precisely to separate the two disclosures that everyone confuses — the Loan Estimate and the Closing Disclosure — and to separate the finance charge / APR world of the Truth in Lending Act from the settlement-cost world of RESPA. This chapter walks the major statutes in the order the exam frames them: the disclosure foundations (RESPA, TILA, TRID), the fair-lending and data-reporting laws (ECOA, Fair Housing, HMDA, FCRA), the privacy and anti-money-laundering duties (GLBA, BSA/AML), and finally the rules that govern how you are paid, how high-cost loans are flagged, and when a borrower can cancel (the LO Compensation Rule, HOEPA, the Homeowners Protection Act, and the right of rescission).

A note on which agency runs all of this: since the Dodd-Frank Act of 2010, rulemaking authority for almost every consumer mortgage statute below — TILA, RESPA, ECOA, HMDA, and more — was consolidated in the Consumer Financial Protection Bureau (CFPB). When you see "Regulation Z" or "Regulation X," think "the CFPB's rule implementing that statute."

Learning objectives

After working through this chapter you should be able to:

• Distinguish RESPA/Regulation X (settlement-service abuses, kickbacks, servicing) from TILA/Regulation Z (the true cost of credit — finance charge and APR), and explain how TRID integrates their disclosures.
• State the two central TRID clocks cold: the Loan Estimate must be delivered/mailed within 3 business days of a completed application and no later than 7 business days before consummation; the Closing Disclosure must be received by the borrower at least 3 business days before consummation.
• List the six items that make a mortgage application "complete" and start the LE clock, and explain why an originator may not withhold the sixth item to stall it.
• Explain the TRID tolerance buckets (zero tolerance, 10% cumulative, and no tolerance) and what a valid changed circumstance does to them.
• Identify the ECOA/Regulation B prohibited bases and the 30-day adverse-action notice, and distinguish them from the Fair Housing Act protected classes.
• Describe HMDA/Regulation C data reporting and FCRA accuracy, adverse-action, and risk-based-pricing rules.
• Explain the GLBA privacy notice and Safeguards duty and the BSA/AML SAR obligation for mortgage lenders and originators.
• Apply the LO Compensation Rule (no pay based on loan terms; no dual compensation; anti-steering), the HOEPA high-cost triggers [verify the indexed figures], the rescission**.

Key numbers & deadlines

Federal timing rules are fixed nationwide — memorize them. The dollar thresholds marked [verify current year] are re-indexed by the agencies every January; confirm the live number before test day.

• Loan Estimate (LE) — delivery: delivered or placed in the mail no later than 3 business days after the creditor receives a completed application, and no later than 7 business days before consummation. (Federal — fixed.)
• Closing Disclosure (CD) — waiting period: the borrower must receive the CD at least 3 business days before consummation (closing/signing). Three changes restart the 3-day clock: (1) the APR becomes inaccurate (increase beyond tolerance, or any decrease outside tolerance), (2) the loan product changes, or (3) a prepayment penalty is added. (Federal — fixed.)
• Two "business day" definitions (a classic trap): for LE delivery, a business day is any day the creditor is open for substantially all business. For the CD 3-day wait and the right of rescission, a business day is the precise definition — all calendar days except Sundays and federal legal public holidays. (Federal — fixed.)
• Mailbox rule: if the LE or CD is mailed, the borrower is deemed to receive it 3 business days after it is placed in the mail, unless the creditor documents earlier receipt. (Federal — fixed.)
• The six items of a completed application: (1) name, (2) income, (3) Social Security number (to pull credit), (4) property address, (5) estimated property value, (6) loan amount sought. When all six are in, the LE clock starts. (Federal — TRID; fixed. The old "7th catch-all item" was removed by TRID.)
• Right of rescission: on a refinance or home-equity loan secured by the borrower's principal dwelling, the borrower has 3 business days (precise definition — Sundays and federal holidays excluded, Saturdays counted) to rescind. Does not apply to a purchase-money loan or a loan on a second home/investment property. (Federal — TILA § 1026.23; fixed.)
• ECOA/Regulation B adverse-action notice: generally within 30 days of receiving a completed application, if credit is denied or countered. (Federal — fixed.)
• ECOA appraisal-copy rule: on a first-lien loan secured by a dwelling, the creditor must provide copies of appraisals/valuations promptly upon completion or at least 3 business days before consummation, whichever is earlier. (Federal — fixed.)
• PMI (Homeowners Protection Act): borrower-paid PMI auto-terminates at 78% of the original value (on the amortization schedule), the borrower may request cancellation at 80%, and PMI ends at the midpoint of the amortization period if not already cancelled. (Federal — fixed; conventional loans only.)
• LO Compensation Rule (Reg Z § 1026.36): an originator's pay may not be based on a loan's interest rate or terms (other than loan amount); dual compensation (paid by both borrower and lender on the same loan) is prohibited; anti-steering applies. (Federal — fixed.)
• HOEPA high-cost triggers (Reg Z): a loan is high-cost if it exceeds any of: an APR trigger (first lien: APOR + 6.5 percentage points; most subordinate liens: APOR + 8.5 points), a points-and-fees trigger (about 5% of the loan amount for larger loans; a higher percentage or a set dollar figure for small loans — [verify current year]), or a prepayment-penalty trigger. (APR spreads fixed; the loan-amount cutoff and dollar figures are [verify current year].)
• Qualified Mortgage (QM) points-and-fees cap: generally 3% of the total loan amount for loans at or above a set threshold, with higher percentages/dollar caps for smaller loans — all dollar cutoffs [verify current year]. The old 43% DTI hard cap for a General QM was replaced (effective 2021) by a price-based test (APR vs. APOR spread); learn this so you don't repeat the stale rule. (Structure fixed; dollars [verify current year].)
• HMDA/Regulation C: covered institutions collect and report application-level data (including outcomes and applicant demographics); coverage/reporting-volume thresholds are [verify current year]. (Federal — fixed framework, indexed thresholds.)
• BSA/AML SAR: non-bank residential mortgage lenders and originators must maintain an AML program and file a Suspicious Activity Report (SAR) generally within 30 days of detecting suspicious activity. (Federal — FinCEN; fixed.)

Part A — RESPA and TILA: the disclosure foundations

Two statutes sit under almost every mortgage disclosure, and the exam expects you to keep them straight.

RESPA — the Real Estate Settlement Procedures Act (Regulation X) — targets abuses in settlement services (the third-party services that make a closing happen: title, escrow, appraisal, and so on). Its most tested rule is the Section 8 anti-kickback prohibition: it is illegal to give or accept a fee, kickback, or thing of value for referring settlement-service business. You may pay for a service actually performed; you may not pay for the referral itself. RESPA also governs mortgage servicing — escrow-account handling, error-resolution, and the timing of servicing transfer notices.

TILA — the Truth in Lending Act (Regulation Z) — forces lenders to disclose the true cost of credit so a borrower can compare offers. Its two signature figures are the finance charge (the total dollar cost of credit — interest plus most other charges the borrower pays to get the loan) and the annual percentage rate (APR) (that cost expressed as a yearly rate). TILA is also the home of the LO Compensation Rule, the Ability-to-Repay/QM rule, HOEPA, and the right of rescission — all covered below.

TRID — the TILA-RESPA Integrated Disclosure rule — merged the old TILA and RESPA disclosures into two consumer forms and set their timing:

• the Loan Estimate (LE), given early so the borrower can shop; and
• the Closing Disclosure (CD), given before closing so the borrower can compare the final terms to the estimate.

Understanding when each form is triggered and what it must contain is the center of gravity of the whole exam.

The Loan Estimate clock. The LE must be delivered or placed in the mail no later than the third business day after the creditor receives a completed application (the six items above), and it must reach the borrower no later than the seventh business day before consummation. Read those as two separate guardrails: the 3-day rule caps how long the lender may sit on a new application; the 7-day rule guarantees the borrower a minimum window with the estimate before closing.

The Closing Disclosure clock. The CD must be received by the borrower at least three business days before consummation. "Consummation" is the moment the borrower becomes contractually obligated on the loan — usually signing at closing — which is not necessarily the same day the loan funds or records. Only three changes force the lender to issue a corrected CD and restart the 3-day wait: (1) the disclosed APR becomes inaccurate, (2) the loan product changes (e.g., fixed to adjustable), or (3) a prepayment penalty is added. Ordinary last-minute changes — a seller credit adjustment, a typo fix, most fee changes within tolerance — require a corrected CD but do not restart the three days.

Why the two "business day" definitions matter. TILA uses the word "business day" two different ways, and the exam tests the difference:

• For LE delivery (the 3-day rule), a business day is a day the creditor is open for substantially all of its business functions — so a Saturday may or may not count depending on the lender.
• For the CD waiting period and the right of rescission, a business day uses the precise definition: every calendar day except Sundays and federal legal public holidays. Under this definition Saturday counts.

The mailbox rule. If a disclosure is mailed (rather than handed over or e-delivered with proof of receipt), the borrower is presumed to receive it three business days after mailing. So a CD mailed on Monday is deemed received Thursday, and the earliest possible consummation is the following Monday — the mailing delay stacks on top of the 3-day wait.

Source: RESPA/Reg X, 12 CFR 1024 (§ 8); TILA/Reg Z, 12 CFR 1026; TRID (§§ 1026.19, 1026.37, 1026.38).

Worked example. A borrower submits all six application items on Monday. What is the latest the lender may place the Loan Estimate in the mail, and when — at the earliest — could this loan consummate on the disclosure timing alone? The LE must be mailed no later than Thursday (3 business days after Monday). Separately, the borrower must receive the LE at least 7 business days before consummation, and must receive the CD at least 3 business days before consummation. So even a fast file cannot legally close the day after the estimate — the 7-day LE floor and the 3-day CD wait set a hard minimum runway.

Part B — Fair lending and data reporting: ECOA, Fair Housing, HMDA, FCRA

Anti-discrimination and reporting laws promote equal access to credit and let regulators watch lending patterns. An originator must treat every applicant consistently and hand off required notices on time. These duties attach the moment an inquiry becomes an application.

ECOA — Equal Credit Opportunity Act (Regulation B). ECOA governs all credit, not just mortgages, and forbids discrimination against an applicant on any prohibited basis:

race, color, religion, national origin, sex, marital status, age, receipt of income from a public-assistance program, or the good-faith exercise of a right under the Consumer Credit Protection Act.

Its most tested mechanical rule is the adverse-action notice: when an application is denied, or approved only on different terms the applicant does not accept, the creditor must give a written adverse-action notice — generally within 30 days of receiving a completed application — stating the specific reasons for the decision (or how to get them) and the ECOA anti-discrimination notice. ECOA/Reg B also carries the appraisal-copy rule: on a first-lien dwelling loan, the borrower must receive copies of appraisals and valuations promptly upon completion or at least 3 business days before consummation, whichever is earlier.

Fair Housing Act (FHA — the civil-rights statute, not the loan program). The Fair Housing Act governs housing-related transactions specifically and prohibits discrimination based on:

race, color, religion, sex, national origin, familial status, and disability.

Note the exam's favorite comparison: the Fair Housing Act adds familial status and disability, but omits ECOA's age, marital status, and public-assistance income. A mortgage originator is subject to both laws, so in practice you may not discriminate on the union of the two lists.

HMDA — Home Mortgage Disclosure Act (Regulation C). Covered lenders must collect and report loan-application data — the type of loan, the action taken (originated, denied, withdrawn), and applicant demographic information — so regulators and the public can detect discriminatory patterns such as redlining. The institutional and transactional coverage thresholds (how many loans make you a reporter) are [verify current year], as the CFPB adjusts them.

FCRA — Fair Credit Reporting Act. FCRA governs consumer (credit) reports. It requires that report data be accurate, gives borrowers the right to see the information used and dispute errors, and requires two notices the exam likes:

• an adverse-action notice when information in a consumer report causes a denial or less-favorable terms (identifying the credit-reporting agency and the right to a free report); and
• a risk-based-pricing notice (or a credit-score-disclosure exception notice) when a borrower gets materially worse terms than other borrowers based on the credit report.

Source: ECOA/Reg B, 12 CFR 1002; Fair Housing Act, 42 U.S.C. §§ 3601–3619; HMDA/Reg C, 12 CFR 1003; FCRA, 15 U.S.C. § 1681.

Worked example. An originator collects a full application on the 3rd of the month and, after underwriting, the file is declined for a high debt-to-income ratio. When and what must the borrower receive? An adverse-action notice, generally within 30 days of the completed application, stating the principal reasons for the denial (or how to request them) plus the ECOA notice; because a credit report figured into the decision, the FCRA portion of the notice must identify the reporting agency and the right to a free copy and to dispute errors. The denial itself is lawful — it rests on ability to repay, not on a prohibited basis — but the notice is mandatory.