All real estate loans have certain procedures in common. Basically, the following steps are imperative. You must:
1. Make proper credit judgments;
2. Properly perfect a prior lien position; and
3. Comply with existing state and federal laws.
The first step of every loan will be the loan inquiry and application. The application need not be a formal, written application,* however, it is recommended that a written application be taken.
This written application will allow you to make the necessary credit judgment and will serve as a source of information that you will be required to keep according to federal regulations. The formal application, if properly prepared, will insure that you will be in compliance with the Equal Credit Opportunity Act (Regulation B).
If you decide to decline the loan or grant less than asked for, or take any other adverse action,** you must then send a written notice of adverse action under Regulation B. This is mandatory in all cases of adverse action and must be delivered in person or mailed within 30 days of taking the action. If you have decided to make the loan, you should:
1. Obtain an abstract to the property extended to date;
2. Obtain an attorney’s opinion or title insurance commitment to determine the status of the title (You must be sure that title to the real estate is clear and that you obtain a priority lien which may be foreclosed if necessary to protect your interest);
3. Obtain an appraisal and see that a properly executed certificate is in the file (subject to regulation, this may be done by qualified officers of the bank);
4. Prepare the note and trust deed or mortgage and other necessary papers, including proper Regulation Z and RESPA disclosures;
5. Secure adequate insurance coverage with a standard mortgage clause in your favor;
6. Check the record if there is any cause for concern or if there is any intervening time elapsed since the first abstracter’s certificate or title insurance commitment;
7. File your mortgage or deed of trust;
8. Have the abstract extended showing the bank’s lien position.
9. Obtain a final title check by the bank’s attorney or title insurance policy which can give you an opinion in writing that FOR PURPOSES OF A LOAN you have a legal lien position.
If your loan is on a 1 to 4 family residence and will create a lien on that property, you will have the additional requirement of presenting a set of two right of rescission notices to all parties (this requires a set of two separate notices to each joint tenant applicant). The right of rescission is not required when the loan is to finance the purchase money for a home to be acquired by the borrower. These notices must allow them three business days from midnight of the date of the notice to rescind that action. Disbursement of funds may not be made until the time for recession has expired.
Also, if the proceeds of the loan are to be used to finance or involve a change in ownership of the property, RESPA comes into play and you must strictly comply with its provisions.
Different types of real estate loans require differing degrees of sophistication. We submit as an example the various procedures required for a typical one-family residential loan.
You may wish to adopt all or part of the suggestions. In any event, we recommend that your attorney review all of your real estate transactions to make sure you are adequately protected.
* In the event a written application is not taken, a memorandum of your actions should be made for the file.
** Adverse action is defined as: A refusal to grant the credit in substantially the amount and on substantially the terms requested. This will include a refusal to increase the credit limit. The law requires a notice of granting the application which becomes moot if the loan is made. Reg. B 202.2(c)(1). You are not required to mail the notice in the case of business or agriculture credit unless such is requested in writing within 30 days after being informed of the action taken.