Chapter 23 — Exercises

Closing Day and Beyond: Funding, Recording, Escrows, the First Payment, and Post-Close Audit

Work these with a calculator and the frozen figures from the chapter. Items marked † have worked solutions in the answers appendix, along with the odd-numbered items. No answers appear in this file — that is deliberate.

Unless a problem says otherwise, assume: a full two-month escrow cushion; a single annual disbursement for each escrowed item; and that the first monthly escrow deposit arrives with the first mortgage payment.

A. Recall and definitions

1. Name the two entirely different things the word "escrow" refers to in a residential mortgage transaction, and identify who administers each.

2. State the two notice deadlines that apply to a servicing transfer — one for the transferring servicer and one for the receiving servicer — and the length of the payment-protection period.

3. † At what moment does a buyer become the owner of the property? What does recording accomplish that becoming the owner does not?

4. † State the difference between wet funding and dry funding in one sentence each, and name the practical consequence for the borrower standing in the parking lot afterward.

5. Define the escrow cushion and state the federal cap in two equivalent ways.

6. † What is an early payment default, and who defines which payments count?

B. Applied reasoning

7. † A borrower asks why the \$2,315.00 escrow deposit on their Closing Disclosure is "another fee on top of everything else." Answer them in no more than four sentences. Your answer must contain the word your at least twice and must not contain the word required.

8. † Explain, using the chapter's repurchase arithmetic as your evidence, why an underwriter asking for a twelfth document is behaving rationally rather than bureaucratically. Your answer must include a ratio.

9. † Two identical borrowers buy two identical \$385,000 houses with identical loans on the same day. One is in a county whose annual tax bill the servicer disburses in February; the other's is disbursed in August. Both first payments are December 1. Without computing anything, say which borrower brings more cash to closing and why — then compute the difference in the tax portion of the escrow deposit, using \$385.00 a month.

10. † A loan officer in your office tells a borrower on a purchase: "Don't worry, you get three days after signing to back out if you change your mind." Identify every error in that sentence and state what the loan officer was probably thinking of.

11. Your borrower closes on a Friday and calls Saturday morning because the county's online property records still show the seller as the owner. Answer them.

12. † Why does a servicing transfer feel to a borrower like something went wrong, when structurally it is closer to a change of address? Name the two beliefs the borrower holds that make it feel that way.

C. Escrow arithmetic

13. † Build the deposit. A purchase with the following facts:

• property taxes \$5,400.00 a year, one annual bill the servicer disburses in May
• homeowners insurance \$1,440.00 a year, twelve months paid at closing, renewal disbursed in February
• first payment January 1
• full two-month cushion

Compute (a) the monthly escrow payment, (b) the cushion in dollars, (c) the number of months collected for each item, and (d) the total initial escrow deposit. Show the sub-ledger for at least one item and prove that it lands exactly on the cushion.

14. † Using the same file as Exercise 13, run the aggregate trial ledger from a zero starting balance for the twelve months of the escrow computation year. Identify the low point, compute the required initial deposit under aggregate accounting, and state the aggregate adjustment that would appear on the Closing Disclosure.

15. On the Linden Street file, the tax count is five months and the insurance count is three. Both sub-ledgers land exactly on their cushions. Show both sub-ledgers and identify, for each, the month in which the balance is lowest.

16. † The analysis that isn't a shortage. Return to Linden Street. Suppose the August tax bill arrives at \$4,980.00** rather than the projected \$4,620.00, and the October insurance renewal at \$1,740.00** rather than \$1,560.00. The servicer collected \$515.00 a month all year and the account opened with \$2,315.00.

(a) Run the actual twelve-month ledger and state the balance at the November analysis. (b) Compute the new monthly escrow payment and the new cushion. (c) Run the aggregate trial for the coming year and compute the required opening balance. (d) Is there a shortage or a surplus, and how much? (e) State the borrower's new total payment, and by how much it changed.

17. A borrower's escrow analysis shows a shortage of \$1,080.00. The servicer offers to collect it in a lump sum or over twelve months. Lay out both options in dollars and describe the circumstance in which each is the better choice for this household.

18. † A different file: taxes \$9,000.00 a year, disbursed in November; insurance \$2,400.00 a year, disbursed in April; first payment October 1; full cushion. Build the initial escrow deposit item by item. Then state, in one sentence, why this borrower's escrow deposit is so much larger than Linden Street's.

19. A borrower two counties over got a Loan Estimate showing an escrow deposit almost twice what your borrower's shows, on a smaller house. Write the three questions you would ask to find out whether anything is actually wrong.

D. The first payment and prepaid interest

20. † Prepaid interest. A loan of \$298,400.00 at 6.875%, closing March 18. Compute (a) the per-diem to four decimal places, (b) the number of days of prepaid interest, (c) the prepaid interest collected at closing, and (d) the first payment date. Then state which calendar month's interest the first payment covers.

21. A borrower closing on June 30 and a borrower closing on July 1, on identical loans. State each one's days of prepaid interest and first payment date, and explain in two sentences why one of them brings dramatically more cash to the table.

22. † Your Linden Street borrowers call on November 20. They have not received a bill and want to know whether they should send something in. Write out exactly what you say — thirty seconds, spoken, no jargon — and include at least three specific numbers from the file.

23. Prepaid interest at closing is computed on a 365-day per-diem, while the note's monthly interest is the rate divided by twelve. Show, using the Linden Street figures, that these two conventions do not reconcile to the penny, and state why that is not an error.

E. Rescission

24. † For each of the following, state whether a right of rescission attaches and give the reason in one clause:

(a) purchase of a primary residence (b) rate-and-term refinance of a primary residence with a new lender (c) rate-and-term refinance of a primary residence with the existing lender, no new money (d) cash-out refinance of a primary residence with the existing lender (e) purchase of a vacation home the borrower will occupy two months a year (f) home equity line of credit on a primary residence (g) refinance of a four-unit rental the borrower does not live in (h) construction loan for the borrower's primary residence

25. Build a two-column comparison of the Closing Disclosure waiting period and the right of rescission, covering: the regulation each comes from, whether it applies to a purchase, whether it runs before or after consummation, and what each one blocks.

26. A refinance borrower expects their cash-out proceeds on signing day and has a contractor scheduled. Write the email you send five days before signing.

F. Read the document and find the problem

27. † At the closing table you read the note out loud and it says: loan amount \$365,750.00, rate 6.625%, 360 payments of \$2,372.25, first payment December 1. The Closing Disclosure the borrowers received on day 48 shows a principal and interest payment of \$2,341.94. Identify what almost certainly happened, state what you do in the next sixty seconds, and say what you do not do.

28. † A servicing transfer notice arrives at the borrower's house. It gives an effective date, a new payment address, a phone number, and a statement that "your interest rate and payment may be adjusted by the new servicer." Identify the item that is flatly wrong and the item that should make you suspect the letter is fraudulent.

G. Write the document

29. † The servicing-transfer reassurance. Your Linden Street borrowers call in February, frightened, holding a letter from a company they have never heard of. Write what you say — spoken, not a memo — in no more than 200 words. It must (a) name at least three specific terms of their loan that did not change, (b) tell them how to verify the letter without relying on the letter, and (c) explain the payment-protection period in words a non-specialist can act on.

30. † The mortgage insurance letter. Ten years from closing, write the two-line email you send the Linden Street borrowers, and then draft the written request they will send their servicer. Include the balance threshold, the payment number, and what the letter is worth to them in dollars.

31. † The closing-day warning. Write the thirty-second speech you give at the closing table about the escrow account and next year's analysis. It must include the current payment, the two estimated components, and the sentence that keeps them from thinking a shortage letter is a scam.

32. † Write a one-page handout titled What Happens After Closing for first-time buyers. Cover the first payment date, the first statement, the possibility of a servicing transfer, the annual escrow analysis, and the mortgage insurance cancellation date. No more than 400 words, no jargon, and every number specific to the file.

H. Judgment and ethics

33. † Your borrower's closing is at 3:00 p.m. on the last business day of the month, and the lock expires that day. At 2:40 the settlement agent tells you the borrowers' wire has not arrived and the borrowers are in the parking lot. Your branch manager suggests you "sign them now and worry about the funds after." Lay out what is actually at stake for each party, what you do, and what you say to the borrowers.

34. † A borrower calls you in March, five months after closing, and says they have missed their February and March payments after a job loss. Describe your obligations and your limits: what you can do, what you must not do, who they actually need to be talking to, and what this file now triggers on your employer's side.

I. NMLS-style exam questions

35. A consumer is purchasing a primary residence. Under Regulation Z, how long does the consumer have to rescind the transaction after consummation?

36. † Under RESPA, the maximum escrow cushion a servicer may require is generally: (a) one month of escrow payments; (b) one-sixth of the estimated annual disbursements; (c) two months of the total mortgage payment; (d) whatever the investor requires. Choose and justify — then explain why one of the wrong answers is wrong in a way that is easy to miss.

37. A servicing transfer is effective on June 1. The borrower mails their June payment, on time, to the prior servicer. What may the new servicer do about it, and until when?

38. † A loan closes on October 24 with a first payment due December 1. A candidate answers an exam question by saying the borrower "receives one month with no payment due." Explain precisely why that answer is wrong, using the phrase in arrears.

J. The Loan File extension

39. † Complete the Chapter 23 page of the Linden Street workbook: the funding sequence with dollars, the escrow build with both month counts justified from a disbursement calendar, the first payment date with the prepaid-interest arithmetic, and both mortgage insurance dates with the value of the borrower's letter.

40. † Then extend it. Assume this loan is sold and the servicing transfers effective the following March 1. Write the entry the loan officer makes in their client database that day, and the three calendar reminders they set — with dates — for the next ten years.