Introduction
Federal law governs nearly every step of a residential mortgage, from the first disclosure a borrower receives to the money that changes hands at the closing table. It is the second-heaviest area on the SAFE MLO test — roughly 24% of your score — and it overlaps so heavily with Origination (Chapter 3) and Ethics (Chapter 4) that 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 document 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 is written precisely to separate the two disclosures everyone confuses — the Loan Estimate and the Closing Disclosure — and to separate the finance charge and APR world of the Truth in Lending Act from the settlement-cost world of the Real Estate Settlement Procedures Act.
There is a second reason this chapter repays close reading. Almost every number in it falls into one of two categories, and the exam punishes candidates who cannot tell them apart. The timing rules are fixed: the three-business-day Loan Estimate, the seven-business-day waiting period, the three-business-day Closing Disclosure receipt rule, the three-day right of rescission, the thirty-day adverse-action notice. Those have not moved in years and you should memorize them cold. The dollar thresholds are not fixed: the HOEPA points-and-fees cutoffs, the Qualified Mortgage points-and-fees caps, the HMDA asset threshold, the conforming and FHA loan limits. The regulations themselves say those figures are "adjusted annually on January 1." A study aid that prints one of them as gospel is telling you something that will be false next January, and this book will not do that. Where a figure moves, you will see subject to change and a pointer to the agency that publishes it.
A note on who runs all of this. Since the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, rulemaking authority for almost every consumer mortgage statute in this chapter — TILA, RESPA, ECOA, HMDA, FCRA's mortgage-relevant provisions, GLBA privacy — was consolidated in the Consumer Financial Protection Bureau. That is why the regulations you will cite live in Title 12, Chapter X of the Code of Federal Regulations: Regulation X at 12 CFR part 1024, Regulation Z at 12 CFR part 1026, Regulation B at 12 CFR part 1002, Regulation C at 12 CFR part 1003, Regulation V at 12 CFR part 1022, Regulation P at 12 CFR part 1016, Regulation N at 12 CFR part 1014, and Regulation H at 12 CFR part 1008. When you see "Regulation Z," think "the CFPB's rule implementing the Truth in Lending Act." The statute is the authority; the regulation is the operating manual; and the exam quotes the operating manual.
This chapter walks the statutes in the order the exam frames them. Part A and Part B cover RESPA and Regulation X — the settlement-service world, the anti-kickback rule, escrow accounts, and servicing. Parts C, D and E cover ECOA and Regulation B — the nine prohibited bases, the thirty-day adverse-action clock, and the government-monitoring questions you must ask. Parts F and G cover TILA and Regulation Z at its foundations — the finance charge, the APR, and the right of rescission. Parts H, I and J cover the three Regulation Z rules that most often decide a borrower's price: HOEPA high-cost mortgages, higher-priced mortgage loans, and the loan originator compensation rule. Parts K, L, M and N cover TRID — the Loan Estimate, the Closing Disclosure, the tolerance buckets, and the record-retention rules that trip up almost everyone. Parts O through W cover the remaining federal laws the outline names: HMDA, FCRA and FACTA, the Red Flags Rule, BSA/AML and the USA PATRIOT Act, GLBA privacy and the Safeguards Rule, Regulation N advertising, the E-Sign Act, the Homeowners Protection Act, and finally Dodd-Frank itself and the two agencies the outline asks you to know — the CFPB and HUD.
Learning objectives
After working through this chapter you should be able to:
- Distinguish RESPA/Regulation X (settlement-service abuses, kickbacks, escrow, servicing — 12 CFR part 1024) from TILA/Regulation Z (the true cost of credit — 12 CFR part 1026), and explain how TRID integrates their disclosures.
- State the RESPA Section 8 prohibition precisely: no fee, kickback or thing of value for a referral of settlement-service business (12 CFR §1024.14(b)), and no split of a charge except for services actually performed (§1024.14(c)).
- Recite the six items that make a mortgage application complete and start the Loan Estimate clock (12 CFR §1026.2(a)(3)(ii)), and explain why an originator may not withhold the sixth to stall the clock.
- State the two central TRID clocks cold: the Loan Estimate delivered or mailed within 3 business days of a completed application and no later than 7 business days before consummation (§1026.19(e)(1)(iii)); the Closing Disclosure received by the borrower at least 3 business days before consummation (§1026.19(f)(1)(ii)(A)).
- Apply the two different definitions of "business day" in §1026.2(a)(6), and say which TRID paragraph takes which.
- Explain the three tolerance categories under §1026.19(e)(3) — zero tolerance, the 10 percent cumulative bucket, and the charges for which variation is permitted — and what a valid changed circumstance under §1026.19(e)(3)(iv) does to them.
- List the nine prohibited bases under ECOA/Regulation B §1002.2(z) and distinguish them from the seven protected classes of the Fair Housing Act at 42 U.S.C. §3605(a).
- State the adverse-action timing rules of §1002.9(a)(1) and the content requirements of §1002.9(a)(2), and the ECOA valuations rule of §1002.14(a)(1).
- Describe HMDA/Regulation C reporting — the loan/application register, the March 1 deadline (§1003.5(a)(1)(i)), and the indexed asset threshold — and the FCRA rules on permissible purpose, adverse action, and risk-based pricing.
- Explain the GLBA privacy notice and Safeguards duty, and the BSA/AML written-program and suspicious activity report obligations for non-bank mortgage lenders (31 CFR §§1029.210, 1029.320).
- Apply the LO Compensation Rule (§1026.36(d)) — no compensation based on a term of the transaction, no proxies, no dual compensation, no steering — and the NMLSR ID requirement of §1026.36(g).
- Identify a HOEPA high-cost mortgage by its three triggers (§1026.32(a)(1)), distinguish it from a higher-priced mortgage loan under §1026.35, and say which figures in each are indexed.
- State the Homeowners Protection Act equity points — 80 percent on borrower request, 78 percent automatically, and the amortization midpoint as a final backstop (12 U.S.C. §§4901, 4902).
- Apply the right of rescission (§1026.23): which transactions carry it, the three-business-day clock, the three-year backstop, and the twenty-calendar-day mechanics.
- Reproduce the four-way record-retention split: Regulation Z generally two years, TRID records three years, the Closing Disclosure itself five years, Regulation B twenty-five months.
### Key numbers & deadlines — the federal clocks Loan Estimate, delivery: delivered or placed in the mail no later than the 3rd business day after the creditor receives the consumer's application (12 CFR §1026.19(e)(1)(iii)(A)). Fixed. Loan Estimate, waiting period: also no later than the 7th business day before consummation (§1026.19(e)(1)(iii)(B)). Fixed. Closing Disclosure: the consumer must receive it no later than 3 business days before consummation (§1026.19(f)(1)(ii)(A)). Fixed. Mailbox rule: a disclosure not handed over in person is deemed received 3 business days after it is delivered or placed in the mail (§1026.19(e)(1)(iv) for the LE; §1026.19(f)(1)(iii) for the CD). Fixed. The six items of a complete application: name, income, Social Security number to obtain a credit report, property address, estimate of the value of the property, and the mortgage loan amount sought (§1026.2(a)(3)(ii)). Fixed. Two "business day" definitions: the general one is any day the creditor is open to the public for substantially all of its business functions; the precise one is all calendar days except Sundays and the legal public holidays in 5 U.S.C. 6103(a) (§1026.2(a)(6)). Fixed. Right of rescission: until midnight of the third business day after the latest of consummation, delivery of the notice, or delivery of all material disclosures; 3 years if the notice or material disclosures were never delivered (§1026.23(a)(3)(i)). Fixed. Rescission mechanics: the creditor has 20 calendar days after receiving the notice to return money and release the security interest (§1026.23(d)(2)); the consumer may keep tendered property the creditor does not collect within 20 calendar days (§1026.23(d)(3)). Fixed. ECOA adverse action: notify within 30 days of a completed application, of adverse action on an incomplete application, or of adverse action on an existing account; 90 days after an unaccepted counteroffer (12 CFR §1002.9(a)(1)). Fixed. ECOA valuations: copies of all appraisals and written valuations on a first-lien dwelling loan, promptly upon completion or 3 business days before consummation, whichever is earlier; the right-to-receive notice within 3 business days of application (§1002.14(a)(1)–(2)). Fixed. Record retention, the four-way split: Regulation Z generally 2 years (§1026.25(a)); TRID §1026.19(e) and (f) records 3 years (§1026.25(c)(1)(i)); the Closing Disclosure itself 5 years (§1026.25(c)(1)(ii)(A)); Regulation B 25 months (§1002.12(b)(1)). Fixed. BSA/AML: file a suspicious activity report within 30 calendar days of initial detection, extendable to 60 only where no suspect has been identified (31 CFR §1029.320(a)(3)). Fixed.
Part A — RESPA: origins, coverage, and the settlement-service world
Why RESPA exists, and what a "federally related mortgage loan" is
The Real Estate Settlement Procedures Act, enacted in 1974 and now implemented by the CFPB's Regulation X at 12 CFR part 1024, was written against a specific abuse. In the settlement industry of the early 1970s, the people who steered consumers toward title companies, escrow agents, appraisers, and insurers were routinely paid for the steering. The consumer never saw the payment, could not shop it, and paid for it inside a settlement charge that looked like the price of a service. RESPA's answer was two-sided: make the costs visible through mandated disclosures, and make the hidden payments illegal.
Coverage runs through a defined term. RESPA applies to a federally related mortgage loan — broadly, a loan secured by a first or subordinate lien on residential real property designed principally for the occupancy of one to four families, where the lender is federally regulated or insured, the loan is insured or guaranteed by a federal agency, the loan is intended for sale to Fannie Mae, Freddie Mac or Ginnie Mae, or the lender makes mortgage loans above a de minimis annual volume. The practical consequence is that nearly every residential mortgage an originator will ever touch is covered. What is not covered is the transaction that is not residential and not consumer-purpose: a loan on a twelve-unit apartment building, a loan primarily for a business or agricultural purpose, and — historically — certain vacant-land and construction-only loans.
The reason to learn the definition rather than the shorthand is that the exam builds items around the edges of it. A candidate who has memorized "RESPA covers mortgages" will answer a question about a loan on a 25-unit apartment complex the same way as a question about a duplex, and only one of those is a federally related mortgage loan. The one-to-four-family limit is the line that does most of the work.
Do not fall for the idea that RESPA is a pricing statute. It does not tell a lender what it may charge. It tells the lender what it must disclose, and it tells everyone in the settlement chain what they may not pay each other (12 CFR §1024.14). A question that asks whether RESPA caps a title fee is testing whether you know the difference between a disclosure statute and a rate regulation.
Example. A borrower in Toledo is buying a four-unit building, intending to live in one unit and rent the other three. The lender is a federally insured bank. This is a loan secured by a lien on residential property designed principally for the occupancy of one to four families, made by a federally insured lender — a federally related mortgage loan, and Regulation X applies in full. Change the building to five units and the same loan falls outside RESPA's residential coverage, even though nothing about the borrower changed.
"Settlement service" and "mortgage broker" — the two definitions the exam leans on
A settlement service is any service provided in connection with a real estate settlement. Regulation X's own list is long and deliberately so: title searches, title examinations, the provision of title certificates, title insurance, services rendered by an attorney, the preparation of documents, property surveys, the rendering of credit reports or appraisals, pest and fungus inspections, services rendered by a real estate agent or broker, the origination of a federally related mortgage loan, and the handling of the processing and closing. The breadth is the point. If it is a service someone is paid for in order to make a closing happen, it is almost certainly a settlement service, and the anti-kickback rule of §1024.14 reaches it.
A mortgage broker, for RESPA purposes, is a person or entity that, for compensation or in expectation of compensation, brings a borrower and a lender together — a person who renders origination services and serves as an intermediary between a borrower and a lender, without using its own funds to close the loan. The contrast the exam wants is with a lender, which funds the loan, and with a table-funded transaction, in which a broker closes a loan in its own name with funds advanced at settlement by an assignee. Regulation X treats table funding as a secondary-market transaction only in form; in substance the funding party is the lender, and RESPA looks through the paperwork.
Why does that matter to an originator? Because the answer to "who owes the disclosure" and "who may be paid" depends on which role a person occupies. A broker's compensation is a settlement charge disclosed on the consumer's forms. A lender's yield on the loan is not. Blurring the two is exactly how the pre-2010 yield-spread-premium abuses worked, and it is why the Regulation Z compensation rule (Part J of this chapter) now supplements RESPA rather than duplicating it.
Two misconceptions to bury. First, a real estate agent is providing a settlement service, even though the agent is not in the lending business: the agent's commission is a settlement charge, and the agent is squarely inside the anti-referral rule. Second, an attorney is not exempt from Section 8; §1024.14(g)(1)(i) permits payment "to an attorney at law for services actually rendered," which is a permission to pay for work, not a permission to pay for referrals.
Example. A mortgage broker takes an application, orders the appraisal and title work, and arranges the loan, which closes in the broker's name using funds wired by the eventual investor at settlement. The broker never risks its own money. This is table funding; the broker is rendering origination services as an intermediary, and its compensation is a settlement charge to be disclosed, not an invisible spread.
RESPA's prohibitions, limitations, and exemptions
Regulation X's prohibitions cluster into four groups, and the exam draws from all four.
Section 8(a) — referral fees. "No person shall give and no person shall accept any fee, kickback or other thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a settlement service involving a federally related mortgage loan shall be referred to any person" (12 CFR §1024.14(b)). The regulation then closes the obvious escape route: "Any referral of a settlement service is not a compensable service." You cannot characterize a referral as work and pay for it.
Section 8(b) — unearned fees and fee splits. "No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a settlement service … other than for services actually performed" (§1024.14(c)). A charge for no or nominal services, or a duplicative fee, is an unearned fee and violates the section. Note the sentence the exam likes: "The source of the payment does not determine whether or not a service is compensable." It does not matter whether the money comes from the borrower, the lender, or a third party.
Section 9 — required use of a title company. A seller may not require, as a condition of selling the property, that the buyer purchase title insurance from any particular company.
Section 10 — escrow limits. A lender may not require escrow deposits beyond the amounts Regulation X permits, including the cushion limit discussed in Part B.
The limitations and exemptions matter as much as the prohibitions. Section 8 does not prohibit a payment to an attorney for services actually rendered, a payment by a title company to its duly appointed agent for services actually performed in the issuance of a title policy, a payment by a lender to its duly appointed agent for services actually performed in the making of a loan, a payment to any person of a bona fide salary or compensation for goods or facilities actually furnished or services actually performed, or an employer's payment to its own employees for generating business for the employer (§1024.14(g)(1)). It also does not prohibit normal promotional and educational activities that are not conditioned on referrals and do not defray expenses the recipient would otherwise incur.
The unifying idea, and the one that answers most exam items: you may pay for a thing of value received; you may not pay for a stream of business. Ask what the payer got. If the honest answer is "customers," it is a referral fee.
Example. A lender hosts a continuing-education class for local real estate agents, provides coffee and materials, and does not condition attendance on any agent sending it loans. That is normal promotional and educational activity. The same lender then offers each agent a $300 payment for every buyer who closes a loan with it. That is a referral fee under §1024.14(b), and the fact that the agent also performed genuine real estate work for the buyer does not save it — the $300 is not payment for that work.