Closing, Settlement, and Loan Documentation
Domain 5: Closing, Settlement, and Loan Documentation
This domain tests the closing process and the documents that transfer and secure the loan: the Closing Disclosure, settlement charges, right of rescission, note, security instrument, title, escrow, disbursement, and post-closing corrections.
Closing documents
- The promissory note contains the promise to pay, rate, payment terms, and prepayment language; the security instrument (mortgage or deed of trust) gives the lender a lien.
- The CD itemizes loan terms, projected payments, closing costs, cash to close, and the escrow account; it must be received 3 business days before consummation.
- The settlement agent follows written closing instructions and verifies identity, authority, and title requirements.
- Recording perfects the lien; MERS may be named as nominee for the lender and successors.
Rescission and disbursement
- For a refinance or HELOC secured by a principal residence, the borrower has 3 business days after consummation to rescind; the lender cannot disburse until the period expires.
- Rescission can be extended to 3 years if required disclosures are missing or inaccurate.
- Prepaid interest runs from the disbursement date to the first payment date; per-diem interest is calculated on the loan balance.
Post-closing
- Corrected CDs are issued for errors; certain changes require a new 3-day review.
- Post-consummation CDs and escrow statements are delivered under TILA/RESPA rules.
- Missing documents are cured in post-closing; errors in the note require a correction agreement, never an alteration.
Worked example
A refinance is scheduled to close Friday. The CD was delivered Tuesday, but on Wednesday the lender discovers the APR changed beyond tolerance. A corrected CD must be delivered and a new 3-business-day wait applies, so Friday cannot stand. Separately, the borrower's 3-day rescission period begins after consummation, so funds cannot disburse until it expires.
Traps
- Confusing consummation with disbursement.
- Closing a rescindable loan before the rescission period ends.
- Altering a note instead of using a correction document.
- Forgetting that certain CD changes restart the 3-day review.