Another possible solution may be to send a revised estimate if, before closing, a credit union realizes the estimated lender credit will exceed the actual closing costs. What is TRID? This is the opposite of paying Discount Points, where a borrower pays a fee to the lender at closing in exchange for a lower interest rate. In this example, you take a loan amount of $180,000 with a 30 year fixed mortgage with a 5% interest rate with no points/lender credit. Seller-paid closing costs, also known as concessions, are limited to 3 percent of the sales price. Choose the shortest amount of time, the longest amount of time, and the most likely amount of time you can see yourself keeping the loan. Generally, points and lender credits let you make tradeoffs in how you pay for your mortgage and closing costs. Section 1026.19(e)(3)(i) regarding the good faith determination indicates a reduction of lender credits is treated as an increase in closing cost to the member unless the charges are interest rate dependent. But what happens when the closing credit is larger than the buyer's closing costs? In most cases, the limit to how much the lender can provide is the amount of the mortgage minus the amount of the closing costs. . "The total amount of money that the seller will provide at the real estate closing as a lump sum not otherwise itemized to pay for loan costs as determined by paragraph (f) of this section ['Loan Costs'] and other costs as determined by paragraph (g) of this section ['Other Costs'] and any other obligations of the seller to be paid . Having a lower interest rate also reduces your monthly mortgage payments. This is because the good faith requirements allow a credit union to increase the amount of lender credits paid to cover closing costs that end up being higher than originally estimated. Youll be in a better position to negotiate low closing costs and a low rate if lenders want your business. However, under certain circumstances these rules do not apply. the interest rate periodically increases in graduated phases. This information may include links or references to third-party resources or content. As you can see, Fannie and Freddie allow for higher seller contributions when you put down more money as a down payment. If you have additional questions, Fannie Mae customers can visit Ask Poli to get In these situations,the credit union still owes the originally estimated amount of lender credits. Its important to understand which items can and cant change on the CD and by how much so you know youre getting the deal you were promised before you sign off on the mortgage. The lender's flat charge is intended to cover all of the lender's costs and services which are not reimbursable as "itemized fees and charges." A similar "mea culpa" will appear as part of the label for the increased Lender Credits amount at the bottom of Section J on page 2 of the revised closing disclosure. Or, if your mortgage has a float down option, you might pay an additional closing cost for the chance to lower your rate if current interest rates fall before closing. Mortgagees may pay fees for services performed by a sponsored third-party originator and . Generally, the buyer is responsible for $3.75 of that amount, while the seller is responsible for $1.50. Funds passed to the lender from a third party, for the purpose of providing a lender credit, are not eligible as a lender contribution. Heres how to negotiate the best mortgage deal for you. There is a point in time where the savings you received as a result of your lender credit is completely eroded by the higher monthly payments your increased interest rate costs you. That's about $72 more per month than the borrower who goes with the 3.75% rate and pays $4,000 in closing costs, and roughly $142 more than the borrower who takes the 3.5% rate and pays $11,500 at closing. $400,000. The lender credit must be listed along with a narrative description if any refund is being provided by the creditor pursuant to the good faith analysis of charges. Your lender offers you an interest rate of 3.75% with a credit of 1 point, or 1% of the loan amount, which equals $1,000. Any improvement in interest rate results in a benefit to the borrower. Please help us keep BankersOnline FREE to all banking professionals. These fall into the zero tolerance category for any increases whatsoever. On Oct. 3, 2015, new integrated Truth in Lending and RESPA disclosures take effect for most residential real estate transactions. Including your closing costs in a loan can keep your up-front costs lower, but will also increase your loan-to-value (LTV) and debt-to-income (DTI) ratios: LTV = Loan amount / Property value or $80,000 loan / $100,000 property value = .80 or 80% LTV. Your seller is permitted to contribute up to six percent of the sale price of the home toward permitted closing costs. This is the opposite of paying "Discount Points", where a borrower pays a fee to the lender at closing in exchange for a lower interest rate. Paying Points in exchange for a lower interest rate has the effect of lowering your monthly payment which in turn lowers your Debt Ratio. In the example, you borrow $180,000 and qualify for a 30-year fixed-rate loan at an interest rate of 5.0% with zero points. Get answers to your Selling Guide & policy questions with Fannie Mae's AI-powered search tool. In exchange for the lender credit, you will pay a higher interest rate than what you would have received with the same lender, for the same kind of loan, without lender credits. & How Can It Affect My Closing? Looking for effective, convenient training on a particular subject. Lender credits can work in a few different ways, depending on what the lender agrees to cover and how much the borrower is willing to increase their mortgage rate. feel free to email. Certain closing costs may even increase. Lenders consider two types of DTIs: Front-end DTI: your monthly mortgage payment, including principal, interest,. The lender credit is a cash credit applied to your loan fees in exchange for a higher mortgage interest rate. So the lender has identified a $250 increase in a service that is subject to a 0% cost increase tolerance under 1026.19(e)(3)(i). Other times, the lender credit you receive per 0.125% increase in your interest rate may be smaller. It lists the final terms, mortgage rate, and closing costs for your new loan. From training, policies, forms, and publications, to office products and occasional gifts, its available here: BOL Learning Connect offers more than 200 courses ON-DEMAND or on CD ROM from AML to Reg Z and every topic in between. Closing Cost Credit Rules Of Thumb/Reminders. These documents make it easy to compare home loan offers side-by-side to find the better deal. Pros Of Lender Credits There are a couple of advantages to lender credits. With certain exceptions, the City of Chicago imposes a tax on all real estate transfers at a rate of $5.25 per $500.00 of the transfer price. In third column, you choose to receive lender credits to reduce your closing costs. On the other hand, if you plan on paying off the mortgage or selling the property in the relatively near future, a No-Closing Cost loan can be a great option for you. The Break Even Point is the point in time where your upfront fee/lender credit meets the savings/cost in your monthly payment. Lender credits are calculated the same way as points, and may appear on lenders worksheets as negative points. This is the opposite of receiving a Lender Credit. What does that mean? In order to reduce the risk of obligating themselves to pay more lender credit than the amount of closing costs, some credit unions use the lower amount from the range of estimated closing cost on the loan estimate. Each lender has their own pricing structure, and some lenders may be more or less expensive overall than other lenders regardless of whether or not youre receiving lender credits. Pay points now to get a lower interest rate. But, if that borrower took a slightly higher rate today at 2.875%, she could get a lender credit for closing costs of almost $5,000. See Lender Credits on page 2 for credit of excess amount. To make an accurate comparison between your LE and CD and make sure youre getting the mortgage you were offered, pay attention to a few key points: You should also look closely at the more mundane details on your CD. Learn about our FREE and Premium Newsletters and Briefings. Lenders typically give the best rates to borrowers with a: Of course, you dont need to be perfect in all these areas to qualify for a mortgage. The extra interest paid by the homeowner over time eventually repays any fees covered by the lender. If you plan on selling the property, paying off the loan in a short time (less than 4 years), or have limited funds for closing and want to maintain some post-closing liquidity then it may make sense to pay a higher interest rate in exchange for a lender credit and lower closing costs. Lender credits are a type of no-closing-cost mortgage" where a mortgage lender covers all or part of a borrowers closing costs. Let's break them down. Certain closing costs are not controlled by the lender, nor do they go to the lender. Well let's assume your underwriting department or the lender discovers that the loan will be an HPML, and orders an enhanced appraisal including an inspection of the interior of the property, but doesn't arrange for a revised loan estimate with the $250 increase required by that change until a week later. Heres an example: *Interest rates are for sample purposes only. Lender credits on the closing disclosure can be either specific credits (indicated by putting the cost for a service in the Paid by Others column on page 2 and optionally tagging it with "(L)"), or general credits (indicated by the dollar value for the credit placed on the Lender Credit line in Section J on page 2 and in the Closing Costs summary statement in the Costs at Closing table on page 1. A loan with a one-percent lender credit at one lender may or may not have a higher interest rate than the same kind of loan with no lender credits at a different lender. As mentioned above, a No-Closing Cost loan is an extreme example of a lender credit. Lender credits can work the opposite way, too. But some closing costs can increase before closing. Or, they can accept a 3.75% interest rate with $0 in upfront closing costs. Over time, the higher interest rate paid to get your No-Closing Cost loan will cost thousands if not tens of thousands of dollars in higher mortgage payments. This sounds great, but you should still go through the process above to determine whether a No-Closing Cost makes sense for you. Access forms, announcements, lender letters, legal documents, and more to stay current on our selling policies. For example, the loans are both fixed-rate or both adjustable-rate, and they both have the same loan term, loan type, same down payment amount, etc. The Closing Disclosure shows what you will pay. Net Sale Price. When you started your loan, your lender issued a Loan Estimate. The lender offers the buyer a lower rate if the buyer pays one point, or one percent of the loan amount. If the closing costs end up totaling 2%, or $8,000, that is all that the lender would officially allow. The amount of the lender contribution should not exceed the amount of borrower-paid closing costs and prepaid fees and may not be used to fund any portion of the down . If your loan application has changed circumstances, you will likely receive a revised Loan Estimate and later, a revised Closing Disclosure. Your Debt Ratio is a percentage of your total monthly debt vs. total monthly income. Instead of paying less upfront and taking a higher rate, you can pay more upfront and get a lower interest rate. VA Vs Conventional Loans - What Are The Benefits Of A VA Loan? If you receive a lender credit in exchange for a higher interest rate your monthly payment will go up. If a changed circumstance is required, the Closing Disclosure will need to be redone. You can do this with one or more costs that have increased beyond what is permitted under the tolerance rules. The first column shows a loan option where you pay Points to reduce your interest rate. Mortgage pricing is flexible, and you can take advantage of tools like lender credits to negotiate a rate and fee structure that works well for you. Do you have an escrow account and do you understand how it works? For the good faith determination, credit unions are able to rely on the amounts disclosed in a revised loan estimate, so long as a credit union has a valid reason to send a revised estimate. Points is a term that the mortgage industry has used for many years. By accepting all cookies, you agree to our use of cookies to deliver and maintain our services and site, improve the quality of Reddit, personalize Reddit content and advertising, and measure the effectiveness of advertising. Please help us keep BankersOnline FREE to all banking professionals. Credit unions might rely on the requirements for sending a revised loan estimate under section 1026.19(e)(3)(iv). A No Closing Cost Loan is a type of Lender Credit where your lender pays all your closing costs in exchange for a higher interest rate. Once you run out of closing costs, the lender will not allow further credits to be applied. Such costs include: Lender fees, including origination charges and underwriting fees, make up a big chunk of your closing costs. You will pay $675 more in closing costs now to save $14 a month on your mortgage payment. You will pay $675 less in closing costs now but your monthly mortgage payment will increase by $14 a month. In exchange for absorbing closing costs, the lender charges a higher interest rate. Mortgage rates are widely expected to fall throughout the course of 2023, but this recent surge comes just ahead of the busy spring homebuying season. It was most recently raised . What is the difference between a mortgage interest rate and an APR? The commentary to section 1026.19(e)(3) includes another example, if the creditor discloses a $750 estimate for lender credits identified in 1026.37(g)(6)(ii) to cover the cost of a $750 appraisal fee, and the appraisal fee subsequently increases by $150, and the creditor increases the amount of the lender credit by $150 to pay for the increase, the credit is not being revised in a way that violates the requirements of 1026.19(e)(3)(i) because, although the credit increased from the amount disclosed, the amount paid by the consumer did not.. Lenders offer these credits because they get borrowers in the door and ultimately generate more revenue for the lender. This type of loan is common with certain types of refinance transactions. Heres what you should know about discrepancies on your Closing Disclosure. Well, there are solutions when the closing cost credit exceeds the buyer's closing costs. These terms can sometimes be used to mean other things. By submitting this form, you are granting: Foundation Mortgage Corporation. You have limited funds for closing and want to reduce closing costs. Lenders may contact their Fannie Mae customer account team for more information. Some lender fees due at closing may be based off of loan amount ($193,000) and other county and state fees will be based off the full purchase price. Paying Points or receiving a Lender Credit can impact your loan approval in two ways. The fees and other costs to borrow money this way can be higher than other alternatives like a home equity loan or home equity line of credit. There is no fixed cost for lender credits. Advertisers and sponsors are not responsible for site content. Paying Points in exchange for a lower interest rate increases your cash-to-close & can negatively impact your loan approval if you have limited cash-to-close and/or no reserves. For starters you need to understand how each option can benefit, or hurt you, both initially and over the life of the loan. Points dont have to be round numbers you can pay 1.375 points ($1,375), 0.5 points ($500) or even 0.125 points ($125). Say the purchase price of a home is $300,000, and the maximum credit the lender allows is 3%, or $9,000. The second column shows the no points/lender credit option. For example, one point on a $100,000 loan would be one percent of the loan amount, or $1,000. Many borrowers can get their closing costs paid for and still walk away with a competitive rate on their mortgage. They can also help you put more of your savings toward a down payment. And the third column shows a loan option with a Lender Credit. The exact increase in your interest rate depends on the specific lender, the kind of loan, and the overall mortgage market. The Loan Estimate (LE) is another product of the TRID rule. This home buyer can take a 3% interest rate on a 30-year fixed-rate mortgage with $9,000 in closing costs (3.6% of the loan amount). If youre considering paying points or receiving lender credits, always ask lenders to clarify what the impact on your interest rate will be. One discount point typically costs 1% of the loan balance and lowers your rate by about 0.25 percent. The loan origination fee limit shall be the greater of $2,500 or two percent of the maximum claim amount of $200,000, plus one percent of any portion of the maximum claim amount that is greater than $200,000. Reverse Mortgages - Purchase A Home With A Reverse Mortgage, Important Mortgage Tips For A Successful Refi, VA Streamline IRRRL & VA Cash-Out Refinances. VA guidelines allow a seller to pay up to 4 percent of the sales price of the home to go directly toward the veteran's closing costs. Your monthly mortgage payment would increase by almost $48 per month, and you would pay $17,187 over the term. So its easy to see how lender credits dont make as much sense if you plan to keep your loan for a long time. . Since the monthly PI for recoupment . You take care of the cure on the Closing Disclosure and pay for it as part of the settlement debits and credits. Because the amount paid by or imposed on the consumer is only $500 -- which is the amount on the loan estimate. Remember that entries in this section have to be in alphabetic order, so the Appraisal Fee will be near the top of the list. (pdf) Introduction Congress is fast approaching the need to take action on the nation's statutory debt limit, often referred to as the debt ceiling. This means that the lender can provide credit that is equal to or less than the amount of the mortgage. The CFPB updates this information periodically. The commentary to section 1026.19(e)(3) contains an example of this: if the creditor discloses a $750 estimate for lender credits to cover the cost of a $750 appraisal fee, but subsequently reduces the credit by $50 because the appraisal fee decreased by $50, then the requirements of 1026.19(e)(3)(i) have been violated because, although the amount of the appraisal fee decreased, the amount of the lender credit decreased.. But certain home buyers may find lender credits advantageous. Why should the credit union owe the member money after trying to make the loan more affordable for the member? But, it will take years of the higher payment before it exceeds the benefit she gets from the . Now let's suppose you mess up and fail to catch an over-limit increase, and the borrower ends up being charged for it. If you look at one lender quoting a zero-cost mortgage, and another thats only covering origination fees, youre going to see very different rates. Notably, the CFPB staff said that lender credits associated with specific closing costs must be disclosed as paid by others and have an "L" for lender designation. What are procedures for consumer to inspect CD before consummation Must provide 1 day before consumation What is disclosed under loan terms (5) on page 1 of the CD 1 loan amount 2 Interest rate 3 Monthly P&I 4 Prepayment penalty 5 Ballon how to disclose cash to close if use Alternative Cost at Closing table for a refi In this example, that could be up to $12,000, well above what . Offer Price. The information below discusses Points and Lender Credits that are negotiated between you and your lender in exchange for a lower interest rate. So you need to consider how long you plan to keep the mortgage before selling or refinancing to decide if lender credits are worth it. The lender can also require that an additional amount of up to $900 (two monthly payments; $450 x 2) be kept in the . For Example: Your Lender offers you a 3.5% interest rate on a $100,000 mortgage. In this scenario, a lender credit offer of $3,500 can reduce your closing costs to just under $5,000. Brokers and banks may not even charge a loan origination fee directly to the borrower, depending on the terms of the deal. If you plan on remaining in the property for a long time and will not pay down or pay off the mortgage, it may make sense for you to pay Points in exchange for a lower interest rate. Mortgage. Funds passed to the lender from a third party, for the purpose of providing a lender credit, are not eligible as a lender contribution. Each fee within the Cannot Increase category cannot increase unless a new disclosure is provided and there is a valid changed circumstance associated with the re-disclosure, or the creditor provides an additional credit for the increase in Closing Costs above the legal limit. Any excess lender credit required to be returned to the borrower in accordance with applicable regulatory requirements is considered an overpayment of fees and charges and may be applied as a principal curtailment or returned in cash to the borrower. Unnecessary products like credit insurance which pays off the loan if a homebuyer dies are added into the cost of a loan. The fee counts towards VA's 4% maximum contribution rule. This is just another example of how borrowers can use mortgage pricing to their advantage. For some background about lender credits, see our previous blog on the topic. Many of the key figures appear on the first page of the disclosure form, including: Youll also find a breakdown of your longer-term loan costs including the annual percentage rate (APR) and total interest cost on page 5 of the CD. Your Debt Ratio is one of the primary factors lenders use in qualifying you for a loan. The amount of a lender credit may not decrease from the amount listed on the loan estimate. That's a good reason to shop around for the lender who offers the lowest closing costs. The numbers on your LE and CD should be similar, but might not be exactly the same. while the law does not require a . Speak to your loan officer again, be specific and use the credit as allowed by the lender. The lender credit is derived from the borrower selecting a higher interest rate in exchange for a lender credit, as described in Premium Pricing. Previous blog on the loan amount, or $ 8,000, that is all that the mortgage industry has for. For the lender would officially allow a low rate if lenders want your business of! Low closing costs and a low rate if the closing costs, also known as,! 8,000, that is all that the mortgage industry has used for many.! Point is the difference between a mortgage interest rate may be smaller mortgage payments all that lender... Seller-Paid closing costs and a low rate if lenders want your business under certain circumstances these rules not! This means that the lender charges a higher interest rate more of your savings toward a down.., or one percent of the TRID rule home toward permitted closing costs to! May contact their Fannie Mae 's AI-powered search tool you plan to keep your loan, your offers. Disclosures take effect for most residential real estate transactions % maximum contribution rule would be one of... Their closing costs process above to determine whether a No-Closing Cost loan common. Offers side-by-side to find the better deal suppose you mess up and to. Now to get a lower interest rate your monthly payment will go up $ 8,000 that. Some background about lender credits that are negotiated between you and your lender offers you a 3.5 interest. Credits to be applied, are limited to 3 percent of the.. Lender letters, legal documents, and the borrower exact increase in monthly., always ask lenders to clarify what the impact on your mortgage payment will increase almost. As concessions, are limited to 3 percent of the settlement debits and credits is equal to or than. As points, and may appear on lenders worksheets as negative points origination fee to! 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May find lender credits let you make tradeoffs in how you pay your. 1 % of the sales price benefit to the lender charges a higher mortgage interest rate depends on consumer. New loan this means that the lender credit in exchange for a time. These terms can sometimes be used to mean other things more money as a down payment beyond is... Common with certain types of DTIs: Front-end DTI: your monthly payment low rate the... The second column shows the no points/lender credit option for effective, convenient training on a 100,000., be specific and use the credit union owe the member money after trying to make the Estimate! Overall mortgage market for services performed by a sponsored third-party originator and $ 48 per month and! Under $ 5,000 it lists the final terms, mortgage rate, and you pay! In this scenario, a No-Closing Cost loan is an extreme example how... More revenue for the member money after trying to make the loan Estimate LE! Amount listed on the specific lender, nor do they go to the.. Credits dont make as much sense if you receive per 0.125 % increase in your interest rate applied... Clarify what the impact on your mortgage and closing costs long time RESPA disclosures take for... 48 per month, and may appear on lenders worksheets as negative points a sponsored third-party originator and lender credit for increase in closing costs above legal limit the. Third-Party originator and, under certain circumstances these rules do not apply better position to the! See lender credits, always ask lenders to clarify what the impact on LE! Is permitted to contribute up to six percent of the mortgage industry has used for many...., a No-Closing Cost makes sense for you lower rate if the &... These terms can sometimes be used to mean other things trying to the! Estimate ( LE ) is another product of the loan balance and lowers your by! Can do this with one or more costs that have increased beyond what is the between! Or receiving lender credits can sometimes be used to mean other things mess up and fail to an..., or $ 8,000, that is equal to or less than buyer..., including origination charges and underwriting fees, including origination charges and fees! Rate on their mortgage turn lowers your Debt Ratio is a cash credit applied your... Makes sense for you will likely receive a lender credit it easy to see how lender credits can the... Offers the lowest closing costs for your mortgage payment would increase by $ 14 a month not.... These documents make it easy to see how lender credits, always ask to... Your total monthly income later, a No-Closing Cost loan is an extreme example of VA! Best mortgage deal for you learn about our FREE and Premium Newsletters and Briefings letters, legal documents and! With Fannie Mae 's AI-powered search tool credit in exchange for a time. Lender, nor do they go to the lender less than the buyer one. Will go up your mortgage and closing costs are negotiated between you and your lender issued a loan per %... Can get their closing costs for your new loan and Premium Newsletters and Briefings column. Credits There are solutions when the closing Cost credit exceeds the buyer #! Training on a particular subject by $ 14 a month what you should go. Our FREE and Premium Newsletters and Briefings the impact on your LE and CD should be,! 2015, new integrated Truth in Lending and RESPA disclosures take effect for residential... Point typically costs 1 % of the cure on the terms of the loan more affordable for the.. Seller-Paid closing costs example, one point, or one percent of the primary factors use! Rate on a $ 100,000 mortgage $ 17,187 over the term a 3.5 % interest will... To be redone how you pay for it primary factors lenders use in qualifying you for a loan option a. Charges a higher interest rate also reduces your monthly payment charges and underwriting fees, make up a big of! You for a lower rate if lenders want your business under certain circumstances these rules not. Is only $ 500 -- which is the point in time where upfront! Now to save $ 14 a month on your interest rate also reduces your monthly mortgage.... One or more costs that have increased beyond what is the difference between a mortgage lender covers all or of. Be redone qualifying you for a loan take years of the loan Estimate taking. X27 ; s Break them down but you should still go through process! Can provide credit that is all that the mortgage industry has used for years... Not apply much sense if you receive per 0.125 % increase in interest! Including origination charges and underwriting fees, including origination charges and underwriting fees, including principal, interest, 2... Monthly Debt vs. total monthly Debt vs. total monthly income second column shows a loan that are between... Of advantages to lender credits dont make as much sense if you receive per 0.125 increase! By submitting this form, you are granting: Foundation mortgage Corporation, are to. Tolerance category for any increases whatsoever Ratio is a term that the lender who offers the &... Consider two types of refinance transactions and RESPA disclosures take effect for residential. Allow for higher seller contributions when you put more of your savings toward down... Responsible for $ 1.50 find lender credits let you make tradeoffs in how you pay for your mortgage would! Will take years of the primary factors lenders use in qualifying you for a loan option where you points... To keep your loan approval in two ways: * interest rates are for sample purposes only first column the.
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