US Loan Estimate and Closing Disclosure: deadlines and cost limits

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Kooky

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Two documents frame almost every home loan in the United States. The Loan Estimate arrives at the start, when the borrower has only just applied. The Closing Disclosure arrives at the end, a few days before the papers are signed. Between them sits a set of federal deadlines and limits that decide how much the final bill may differ from the first one.

Those rules are written in one place: section 1026.19 of Regulation Z, the federal regulation that implements the Truth in Lending Act, in its paragraphs (e) and (f). The Consumer Financial Protection Bureau, the agency that administers the regulation, explains the same rules in plain language for borrowers. This guide follows both: which loans are covered, when each document is due, what a lender may not do before the estimate, which costs are frozen and which may move, when an estimate may be revised, what restarts the waiting period before closing, and what happens when a borrower is charged too much. It describes the general federal rule; how it applies to a particular loan depends on the facts of that loan.

Regulation Z, section 1026.19(e) and (f), current text of the Electronic Code of Federal Regulations, read in October 2026.

Which loans the rules cover

According to Regulation Z, paragraphs (e) and (f) of section 1026.19 apply to closed-end consumer credit secured by real property or by a cooperative unit. Closed-end means a loan of a fixed amount repaid over a set term, which is what an ordinary purchase mortgage or refinance is. Reverse mortgages that fall under section 1026.33 of the same regulation are excluded.

The Consumer Financial Protection Bureau lists the loans for which a borrower does not receive the two forms: reverse mortgages, home equity lines of credit, manufactured-housing loans that are not secured by real estate, and certain subordinate loans made through homebuyer-assistance programmes. The Bureau says a reverse mortgage borrower receives two older forms instead, the Good Faith Estimate and the HUD-1.

Loans secured by an interest in a timeshare plan are covered, but on a lighter timetable. Regulation Z says the seven-business-day wait described below does not apply to them, and their final disclosure is due no later than consummation rather than three business days before it.

One word runs through all of these rules: consummation. Regulation Z defines it as the time the consumer becomes contractually obligated on the credit transaction. Every waiting period in this guide is counted back from that moment, the point at which the borrower is bound to the loan.

What counts as an application and as a business day

The first deadline starts when the lender receives an application, so the definition matters. For these mortgage rules, section 1026.2 of Regulation Z says an application consists of six pieces of information:

1. the consumer's name;
2. the consumer's income;
3. the consumer's Social Security number, so that a credit report can be obtained;
4. the property address;
5. an estimate of the value of the property;
6. the mortgage loan amount sought.

Once a lender holds those six items, it has an application and the clock is running. In practice this means a borrower who has not yet chosen a property has not yet applied in the sense of the rule, since the property address is one of the six.

The second definition is less obvious, because Regulation Z uses "business day" in two ways. The general meaning is a day on which the creditor's offices are open to the public for carrying on substantially all of its business functions. Under that meaning, a lender that closes on Saturdays does not count Saturdays.

For a list of specific provisions, the same section gives a stricter meaning: all calendar days except Sundays and the federal legal public holidays, such as New Year's Day, Independence Day, Thanksgiving Day and Christmas Day. Under that meaning Saturday always counts, whether the lender is open or not.

The provisions that use the stricter count include the seven-business-day wait after the Loan Estimate, the rule on when a mailed disclosure is considered received, the rule on fees before the estimate, the deadline for receiving a revised estimate, and the three-business-day wait after the Closing Disclosure.

The Loan Estimate: three business days after applying

The Consumer Financial Protection Bureau describes the Loan Estimate as a three-page form, and says all lenders are required to use the same standard form. That uniformity is the point: two estimates from two lenders can be laid side by side and compared line by line.

Regulation Z sets two timing rules for it. First, the creditor must deliver the Loan Estimate, or place it in the mail, no later than the third business day after it receives the application. This is the deadline that uses the lender's own business days. Second, the estimate must be delivered or mailed no later than the seventh business day before consummation. This is the deadline counted on every day except Sundays and federal public holidays.

The two rules do different work. The first makes sure the borrower sees the estimate early. The second sets a floor under the whole process: a loan cannot be consummated within a few days of the first estimate, however fast the file moves.

When the application is taken by a mortgage broker rather than by the lender, Regulation Z allows either the creditor or the broker to provide the estimate. The creditor remains the one that must ensure the rules are met.

A document that is not handed over in person has a deemed date of receipt. Regulation Z says the consumer is considered to have received it three business days after it is delivered or placed in the mail. This matters wherever a rule turns on receipt rather than on sending, which is the case for the fee rule below and for both later waiting periods.

Alongside the estimate, section 1026.19(g) requires a special information booklet to be delivered or mailed within three business days after the application is received.

Before the estimate: fees, documents and informal quotes

Three protections apply in the days around the application. Each is a limit on the lender, and each is set out in section 1026.19(e)(2).

The first concerns fees. No fee may be imposed on the consumer until the consumer has received the Loan Estimate and has indicated an intent to proceed with the transaction. The regulation makes one exception: a bona fide and reasonable fee for obtaining a credit report may be charged earlier. Intent to proceed can be shown in any manner the consumer chooses, unless the creditor requires a particular one, and the creditor must document it. For a borrower, the effect is that an appraisal fee or an application fee comes only after the estimate has been seen and accepted as a basis for going on.

The second concerns paperwork. A creditor may not require a consumer to submit documents verifying the information in the application before providing the Loan Estimate. The six items are enough to trigger the estimate; pay slips and bank statements may be asked for afterwards.

The third concerns informal quotes. A lender may give a written estimate of terms or costs before the official form. If it does, Regulation Z requires a statement at the top of the front of the first page, in a font no smaller than 12-point, that reads: "Your actual rate, payment, and costs could be higher. Get an official Loan Estimate before choosing a loan." The informal document may not substantially resemble the official forms. A worksheet from a loan officer is therefore not a Loan Estimate, and none of the limits on cost increases attach to it.

Shopping for services and the lender's written list

Some closing services are chosen by the lender. Others may be chosen by the borrower, and the Loan Estimate must identify which ones. Regulation Z says a creditor permits shopping when it lets the consumer select the provider of a service, subject to reasonable requirements.

When shopping is permitted, the creditor must give the consumer a written list of available providers. The list must name at least one provider for each service the consumer may shop for, state that the consumer may choose a different provider, and be provided separately from the Loan Estimate, on the same timetable.

The list looks like a courtesy. It is in fact the hinge of the cost limits described next. A borrower who picks a provider from the list keeps a ceiling on how far that provider's charge may rise. A borrower who goes outside the list gives that ceiling up for the service in question. The Bureau's guide to closing places this choice in its sequence of steps before closing: submit documents, schedule a home inspection, shop for homeowner's insurance, shop for title insurance and closing services, watch for revised Loan Estimates, review the documents, close.

How much closing costs can change

Regulation Z calls the standard "good faith". The general rule in section 1026.19(e)(3)(i) is that an estimated closing cost is in good faith only if the charge the consumer finally pays does not exceed the amount originally disclosed. That is a limit of zero. Two exceptions follow, and together they sort every closing cost into one of three groups.

The first group is the default. The Bureau says these costs cannot increase at all unless there is a changed circumstance. A lender's own origination charge belongs here, and so does any charge of a company affiliated with the lender or the broker.

The second group is measured in aggregate. Under section 1026.19(e)(3)(ii), the sum of these charges paid at closing may not exceed the sum disclosed on the estimate by more than 10 per cent. Three conditions apply: the charge is for a third-party service or a recording fee, it is not paid to the creditor or an affiliate of the creditor, and the creditor permitted the consumer to shop. Because the test is on the total, one line may rise by more than 10 per cent as long as the group as a whole does not.

The third group has no percentage. Regulation Z says these estimates are in good faith if they are consistent with the best information reasonably available to the creditor when they are disclosed, even if the amount paid is higher. The reason is practical: prepaid interest depends on the closing date, an insurance premium on the policy the borrower buys, and an off-list provider on a price the lender never saw. "No fixed limit" is not the same as no rule. The Bureau states that it is illegal for a lender to deliberately underestimate the costs on a Loan Estimate.

A worked example of the 10 per cent limit

The figures below are invented to show the arithmetic; they are not market prices. Assume a Loan Estimate that discloses three charges in the limited group: a recording fee of US$150, lender's title insurance of US$1,100 from a provider on the written list, and a settlement agent's fee of US$750 from another listed provider. Assume no changed circumstance and no affiliate.

The disclosed total is US$2,000, so the most the borrower may be charged for the group is US$2,200. The amount paid is US$2,280, which is US$80 over the limit. That US$80 is the excess the creditor owes back. The title premium alone rose by US$250, from US$1,100 to US$1,350, which is about 23 per cent, yet the rule does not look at that line in isolation. Had the title premium come in at US$1,250 instead, the group would have totalled US$2,180, a rise of 9 per cent, and nothing would be owed.

Now add a charge from the fixed group to the same loan. Assume the estimate disclosed an origination charge of US$1,500 and the lender charged US$1,650 at closing, again with no changed circumstance. The whole difference of US$150 is over the limit, because the limit for that group is zero. On these assumptions the borrower would be owed US$80 plus US$150, or US$230 in all.

When a lender may revise the estimate

The limits above are measured against the original estimate unless Regulation Z allows a revised one to take its place. Section 1026.19(e)(3)(iv) lists the reasons. A revision is valid for the purpose of the limits only when one of them applies:

• A changed circumstance that raises settlement charges. The regulation defines a changed circumstance as an extraordinary event beyond the control of any interested party or another unexpected event specific to the consumer or the transaction; information the creditor relied on that proves inaccurate or changes; or new information the creditor did not rely on at the start. For the limited group, the change must push the total up by more than 10 per cent.
• A changed circumstance that affects eligibility, by altering the consumer's creditworthiness or the value of the property securing the loan.
• A revision the consumer asks for to the credit terms or the settlement.
• A rate that was not locked. Points and lender credits may change, and revised disclosures are due no later than three business days after the rate is locked.
• An expired estimate. The estimate may be revised if the consumer indicates an intent to proceed more than 10 business days after it was provided, or after a longer period if the creditor set one.
• A delayed settlement on new construction, where closing is expected more than 60 days after the estimate and the original estimate clearly stated that it might be revised.

The Bureau gives everyday examples of changed circumstances: the borrower chooses a different kind of loan or changes the down payment, the appraisal comes in higher or lower than expected, the borrower takes out a new loan or misses a payment, or the lender cannot document overtime, bonus or other income.

Two deadlines govern a revision. The creditor must provide the revised disclosure within three business days of receiving the information that establishes the reason for it. And a revised Loan Estimate must be received by the consumer no later than four business days before consummation; it may not be provided on or after the date the Closing Disclosure is provided. Once the Closing Disclosure is out, changes are made on that form.

For a borrower, the practical reading is that a second or third Loan Estimate is not in itself a sign of a problem. What matters is whether it follows one of the listed reasons, and whether it arrived within three business days of the lender receiving the information behind it.

The Closing Disclosure and the three-day wait

The Closing Disclosure is, in the Bureau's description, a five-page form that gives the final details of the loan: the loan terms, the projected monthly payments and the closing costs. Where the Loan Estimate estimates, the Closing Disclosure states the actual terms of the transaction.

Regulation Z requires that the consumer receive it no later than three business days before consummation. The rule turns on receipt, not on sending, and it uses the stricter count: every day except Sundays and federal public holidays. If the form is not handed over in person, the consumer is considered to have received it three business days after it is delivered or mailed.

A worked example shows how the count runs. Assume a fortnight with no federal public holiday. A Closing Disclosure handed to the borrower in person on a Monday is received that day; the three business days are Tuesday, Wednesday and Thursday, so the loan can be consummated on the Thursday at the earliest. The same form placed in the mail on that Monday is treated as received on the Thursday. The three business days are then Friday, Saturday and the following Monday, and that Monday is the earliest day for consummation. Posting the form rather than handing it over moves the earliest closing by four calendar days in this example.

The same arithmetic applies to the first document. A Loan Estimate delivered or mailed on a Monday, again with no holiday, reaches its seventh business day on the Tuesday of the following week: Tuesday, Wednesday, Thursday, Friday, Saturday, Monday, Tuesday. That Tuesday is the earliest day for consummation under the seven-day rule.

A settlement agent, the title or escrow company or attorney conducting the closing, may provide the Closing Disclosure in the creditor's place. Regulation Z keeps the responsibility with the creditor, which must ensure the requirements are met. No fee may be charged for preparing or delivering the form.

Both waiting periods can be waived, narrowly. Regulation Z allows a consumer with a bona fide personal financial emergency to modify or waive the seven-business-day wait and the three-business-day wait, after receiving the disclosure concerned. The consumer must give the creditor a dated written statement that describes the emergency, specifically modifies or waives the waiting period, and is signed by all the consumers primarily liable on the loan. Printed forms for this purpose are prohibited: the statement has to be the borrower's own.

What restarts the clock before closing

Details often change between the Closing Disclosure and the signing. Regulation Z separates changes that restart the three-business-day wait from changes that do not.

Only three changes require a new waiting period, under section 1026.19(f)(2)(ii):

1. the annual percentage rate disclosed becomes inaccurate, as the regulation measures accuracy;
2. the loan product changes;
3. a prepayment penalty is added.

In each case the creditor must provide a corrected Closing Disclosure and the consumer must again receive it no later than three business days before consummation.

Every other change is handled without a new wait. The creditor must provide a corrected Closing Disclosure so that the consumer receives it at or before consummation. The regulation adds a right of inspection: the consumer may ask to see the disclosure, completed with everything known at that point, during the business day immediately before consummation.

For buyers, sellers and their agents, this split explains why some late adjustments delay a closing and most do not. A change to a seller credit, a corrected fee or a new figure for prepaid interest alters the numbers on the form without touching any of the three triggers.

The seller's copy, later corrections and refunds

A sale has two sides, and the seller receives a disclosure too. Regulation Z places that duty on the settlement agent, who must provide the seller with the disclosures that relate to the seller's side of the transaction no later than the day of consummation. The seller has no three-day wait. Where the buyer's and the seller's disclosures are on separate documents, the settlement agent gives the creditor a copy of the seller's.

The rules continue after the signing, with three separate periods.

The last row is the one that gives the cost limits their force. If the amounts paid by the consumer exceed the zero limit or the 10 per cent limit, the creditor complies by refunding the excess no later than 60 days after consummation, and by delivering or mailing a corrected disclosure that reflects the refund within the same 60 days. In the worked example earlier, the US$230 would be due on that timetable. The Bureau puts the same point from the borrower's side: where costs rise beyond the permitted limits without a changed circumstance, the borrower is entitled to a refund of the excess.

Some neighbouring subjects sit outside section 1026.19 and are not covered here, among them the separate federal rules on how an escrow account is run after closing. What the section itself gives is a fixed sequence: an estimate within three business days of applying, limits on how that estimate may grow, a final statement three business days before the borrower is bound, and 60 days afterwards to put right any charge that went over.

Kooky, from Shaka

Kooky edits Agents Estate and builds Shaka, the payment router he made for real estate professionals. One payment comes in, and every agent, agency and party in the deal receives their signed share on closing date.

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