Financing Residential Real Estate Lesson 14: Fair Lending and Consumer Protection
Financing Residential Real Estate
Lesson 14:
Fair Lending and Consumer Protection
Introduction
In this lesson we will cover:
federal fair lending laws,
consumer protection laws that apply to mortgage lending, and
the problem of predatory lending.
Fair Lending Laws
Residential mortgage loan transactions are subject to federal antidiscrimination laws, including:
Equal Credit Opportunity Act,
Fair Housing Act,
Community Reinvestment Act, and
Home Mortgage Disclosure Act.
Fair Lending Laws
Equal Credit Opportunity Act (ECOA) was passed in 1974 and applies to business and consumer credit.
Consumer credit = credit extended to an individual for personal, family, or household purposes,
including residential mortgage loans.
Equal Credit Opportunity Act
Equal Credit Opportunity Act
ECOA prohibits discrimination against applicant based on applicant’s:
race/color
religion
national origin
sex
marital status
age
Protected categories
Equal Credit Opportunity Act
Also prohibits discrimination against applicant who:
receives income from public assistance program
has exercised rights under federal credit laws
Protected categories
Equal Credit Opportunity Act
Lenders must not discriminate when:
interviewing and communicating with credit applicants,
analyzing applicants’ finances, or
offering credit terms to applicants.
Prohibited actions
Equal Credit Opportunity Act
Lenders may not discourage anyone from applying for loan.
Credit guidelines must be applied to everyone in same manner.
Illegal to make lending decisions based on stereotypes and assumptions about creditworthiness.
Prohibited actions
Equal Credit Opportunity Act
As long as information isn’t used to discriminate, ECOA does permit lenders to ask about:
age
marital status
number and ages of dependents
Can’t ask about or make assumptions about childbearing plans, however.
Permissible questions
Equal Credit Opportunity Act
Under ECOA, lenders have up to 30 days to inform applicants whether their completed application was accepted or rejected.
And if the application is rejected, the lender must give a specific reason for the decision, and notify the consumer of their right to inquire further, within 60 days.
Notifying applicants
Fair Lending Laws
Federal Fair Housing Act – 1968
Applies to transactions concerning one- to four-unit residential property, including mortgage lending transactions.
Fair Housing Act
Fair Housing Act
Prohibits lending discrimination based on:
race
color
national origin
religion
sex
disability
familial status
Protected categories
Fair Housing Act
Under Fair Housing Act, lenders may not do any of the following for discriminatory reasons:
refuse to provide information about mortgage loans,
refuse to make a mortgage loan, or
impose different terms or conditions on a mortgage loan.
Prohibited actions
Fair Housing Act
Fair Housing Act also prohibits redlining:
Refusal to make loans secured by property located in certain neighborhoods based on race or ethnic background of residents.
Redlining
Fair Housing Act
Lender may legally refuse to make loan because property values in neighborhood are declining.
Must be based on objective economic criteria, without regard to neighborhood’s racial or ethnic composition.
Redlining
Summary
Fair Lending Laws
Equal Credit Opportunity Act Fair Housing Act Community Reinvestment Act Home Mortgage Disclosure Act Redlining Predatory lending
Consumer Protection Laws
Federal consumer protection laws that apply to mortgage loan transactions:
Truth in Lending Act
Real Estate Settlement Procedures Act
Consumer Protection Laws
Truth in Lending Act (TILA) – 1968
Implemented by Federal Reserve Board’s Regulation Z.
Requires disclosure of finance charges.
Regulates advertising of consumer credit.
Truth in Lending Act
Truth in Lending Act
TILA applies only to consumer loans.
Consumer loan = a loan used for personal, family, or household purposes.
Consumer loan is covered by TILA if it is to be repaid in more than four installments (or is subject to finance charges) and is either:
for $25,000 or less, or
secured by real property.
Loans covered by TILA
Truth in Lending Act
Thus, TILA applies to any mortgage loan used for personal, family, or household purposes, such as:
buying or remodeling a home,
consolidating personal debt, or
sending kids to college.
Loans covered by TILA
Truth in Lending Act
TILA only applies to loans made to natural persons.
Loans exempt from TILA
Truth in Lending Act
TILA only applies to loans made to natural persons.
Doesn’t apply to:
1) loans made to corporations or organizations;
2) loans made for business, commercial, or
agricultural purposes; or
3) loans > $25,000 not secured by real property.
Loans exempt from TILA
Truth in Lending Act
TILA only applies to loans made to natural persons.
Doesn’t apply to:
1) loans made to corporations or organizations;
2) loans made for business, commercial, or
agricultural purposes; or
3) loans > $25,000 not secured by real property.
Most seller financing is also exempt.
Loans exempt from TILA
Truth in Lending Act
Lender must give mortgage loan applicant disclosure statement with estimates of loan costs within 3 days of receiving written application.
Disclosure requirements
Truth in Lending Act
Lender expected to use best info reasonably available in preparing TILA disclosure statement.
If estimates later prove incorrect, revised disclosures required.
Disclosure requirements
Truth in Lending Act
Two most important disclosures:
Total finance charge “Dollar amount your credit will cost you”
Annual percentage rate (APR) “Cost of your credit as a yearly rate”
Disclosure requirements
TILA Disclosure Requirements
For mortgage loan, these expenses would be included in total finance charge, if applicable:
InterestOrigination feePoints paid by borrowerFinder’s feeService chargeMortgage insurance premiumsGuaranty feeMortgage broker’s fee
Total finance charge
TILA Disclosure Requirements
Application feeAppraisal feeDocument prep feeNotary feeCredit report feeSurvey feeTitle report feeTitle insurance premiums
Pest inspection feeFlood inspection feeImpoundsPoints paid by sellerLate payment feesFees charged on default
Total finance charge
Not part of total finance charge for mortgage loan:
TILA Disclosure Requirements
TILA disclosure statement must also show:
Lender’s identityAmount financedPayment scheduleTotal paymentsAny prepayment penaltyLate chargesAssumption policy
Other disclosures
TILA Disclosure Requirements
APR for ARM can’t be calculated in same way as APR for fixed-rate loan, because total amount of interest to be charged is unknown at outset.
When calculating APR for ARM, lender may use loan’s initial interest rate.
Must state that APR is subject to increase after closing.
ARMs
TILA Disclosure Requirements
Numerous special disclosures required for ARM secured by principal dwelling.
CHARM booklet: “Consumer Handbook on Adjustable-Rate Mortgages.”
ARMs
TILA Disclosure Requirements
Numerous special disclosures required for ARM secured by principal dwelling.
CHARM booklet: “Consumer Handbook on Adjustable-Rate Mortgages.”
Specific disclosures about ARM program(s) the applicant is considering, such as:
how interest rate and payment may change; index used to determine ARM’s interest rate.
ARMs
TILA Disclosure Requirements
For ARM secured by principal dwelling, lender must notify borrower each time interest rate is being adjusted.
Notice explains effect of adjustment on payment, loan balance, other aspects of loan.
If payment amount will change, adjustment notice must be sent at least 25 days, but no more than 120 days, before change.
ARM adjustment notice
Truth in Lending Act
If security property is borrower’s existing principal residence, borrower has right of rescission.
Right of rescission
Truth in Lending Act
If security property is borrower’s existing principal residence, borrower has right of rescission.
May rescind loan agreement any time within3 days after:
signing agreement,
receiving disclosure statement, or
receiving notice of right of rescission.
Right of rescission
Truth in Lending Act
If borrower doesn’t receive statement or notice, right of rescission doesn’t expire for 3 years.
Right of rescission
Truth in Lending Act
Right of rescission applies to:
home equity loans
refinancing with a new lender
Doesn’t apply to purchase loans.
Right of rescission
Truth in Lending Act
TILA advertising rules apply to anyone who advertises consumer credit, not just lenders.
Advertising under TILA
Truth in Lending Act
TILA advertising rules apply to anyone who advertises consumer credit, not just lenders.
Rules prohibit:
Bait and switch tactics.
Misleading ads that feature only most attractive terms and disguise true cost of loan.
Advertising under TILA
Truth in Lending Act
It’s legal to state cash price or APR in ad.
But if particular “trigger” terms (such as downpayment, interest rate, or monthly payment) are stated, the rest of the terms must also be stated.
Advertising under TILA
Summary
Truth in Lending Act Regulation Z Consumer loan Annual percentage rate Total finance charge ARM disclosures CHARM booklet Adjustment notice Right of rescission Advertising rules Bait and switch
Consumer Protection Laws
Real Estate Settlement Procedures Act – 1974
Affects how closing is handled in most residential mortgage transactions.
RESPA
RESPA
RESPA has two main goals:
to provide borrowers with information about all financing fees and closing costs; and
to eliminate kickbacks and referral fees that increase borrowers’ costs.
Purpose of law
RESPA
RESPA applies to all federally related loan transactions.
Category includes most residential mortgage loans.
Covered transactions
RESPA
Loan is federally related if both 1 and 2 apply:
1. Loan is secured by residential property with up to four dwelling units.
Or loan will be used to finance construction of dwelling with up to four units.
2. Lender is federally regulated, has federally insured accounts, sells loans to secondary market agency, or makes more than $1 million in real estate loans per year.
Covered transactions
RESPA
RESPA doesn’t apply to:
loan to purchase 25 acres or more;
loan primarily for business, commercial, or agricultural purpose;
loan to purchase vacant land, unless it will have dwelling built on it or mobile home placed on it;
temporary financing (construction loan);
assumption where lender’s approval not required or obtained.
Exemptions
RESPA Requirements and Restrictions
1. Within 3 days of written application, lender must give loan applicant:
booklet about settlement procedures
good faith estimate of closing costs
mortgage servicing disclosure statement
Disclosures to loan applicant
RESPA Requirements and Restrictions
2. When referring a party to another provider, a settlement service provider must disclose any affiliated business arrangement.
Settlement service provider = lender, mortgage broker, title company employee, real estate agent.
Affiliated business arrangement = referring provider has more than a 1% ownership or beneficial interest in the business the party is being referred to.
Affiliated business arrangements
RESPA Requirements and Restrictions
3. Closing agent must itemize loan settlement charges on Uniform Settlement Statement form.
Completed form must be available for inspection by borrower, upon request, at least one day before closing.
Form has special sections for buyer and seller information; copies given to both parties at closing.
Uniform Settlement Statement
RESPA Requirements and Restrictions
4. If borrower required to make deposits into an impound account, lender can’t require excessive deposits.
Excessive = more than necessary to cover expenses when due.
Cushion of more than two months’ worth of payments generally considered excessive.
Impound account deposits
RESPA Requirements and Restrictions
5. Lender or settlement service provider may not:
give or receive kickbacks or referral fees;
accept unearned fees; or
charge a document preparation fee for required disclosures (Uniform Settlement Statement, impound account statement, or TILA disclosures).
Kickbacks and unearned fees
RESPA Requirements and Restrictions
6. Property seller may not require buyer to use a particular title insurance company.
Choice of title company
RESPA Requirements and Restrictions
In 2010, lenders will be required to start using new standardized form for good faith estimate (GFE) and new version of Uniform Settlement Statement.
RESPA rule changes in 2010
RESPA Requirements and Restrictions
New rules will also:
Encourage lenders to give applicants GFE earlier in process, to facilitate comparison shopping.
Place strict limits on cost increases between time of GFE estimates and closing.
Require disclosure of more information about trade-offs between interest rate and other loan costs (such as yield spread premiums for mortgage brokers).
RESPA rule changes in 2010
Summary
Real Estate Settlement Procedures Act
RESPA Federally related loan transaction Settlement service provider Affiliated business arrangement Kickback or referral fee Unearned fee Good faith estimate of closing costs (GFE) Uniform Settlement Statement
Predatory Lending
Predatory lending refers to practices that unscrupulous mortgage lenders and brokers useto take advantage of unsophisticated borrowers for profit.
Predatory Lending
Some predatory lending practices involve tactics that are always abusive.
Other involve ordinary lending practices and loan terms that can be misused for predatory purposes.
Predatory practices
Predatory Lending Practices
Predatory steering
Steering buyer towards more expensive loan when buyer could qualify for less expensive loan.
Steering
Predatory Lending Practices
Fee packing
Charging interest rates, points, or processing fees that far exceed norm and are not
justified by the cost of services provided.
Fee packing also includes charging for unnecessary products or features that increase cost of loan.
Fee packing
Predatory Lending Practices
Equity stripping
“Stripping away” home owner’s equity by charging high fees on repeated refinancing.
Equity stripping
Predatory Lending Practices
Loan flipping
Encouraging home owner to refinance repeatedly over short period, when there’s no real benefit in doing so.
Another form of equity stripping.
Loan flipping
Predatory Lending Practices
Property flipping
Purchasing property at discount and then quickly reselling it for inflated price.
Illegal if real estate agent, appraiser, and/or lender fraudulently makes unsophisticated buyer believe property is worth more than it is.
Property flipping
Predatory Lending Practices
Disregarding buyer’s capacity to pay
Making loan based only on property’s value, without considering borrower’s ability to afford payments.
Disregarding capacity to pay
Predatory Lending Practices
Impound waivers
Not requiring borrower to make monthly deposits for property taxes and insurance into impound account.
Encourages buyers to borrow more because of lower monthly payment.
Increases risk of default on loan.
Lender planning to sell loan, won’t be affected by eventual default.
Impound waivers
Predatory Lending Practices
Loan in excess of value
Loaning borrower more than property’s appraised value.
Usually involves fraudulent appraisal.
Loan in excess of value
Predatory Lending Practices
Negative amortization schemes
Deliberately making loan with payments that don’t cover interest. Unpaid interest added
to principal, making loan harder to pay off.
Negative amortization
Predatory Lending Practices
Balloon payment abuses
Making partially amortized or interest-only loan that has low monthly payments, without disclosing that large balloon payment is required after short period.
Borrowers forced to sell or refinance, or face foreclosure.
Balloon payments
Predatory Lending Practices
Fraud
Misrepresenting or concealing unfavorable loan terms or excessive fees, falsifying documents, or using other fraudulent means to induce borrower to enter loan agreement.
Fraud
Predatory Lending Practices
High-pressure sales tactics
Telling prospective borrowers that they must decide immediately, that no other lender will
loan them money, and so on.
High-pressure tactics
Predatory Lending Practices
Advance payments from loan proceeds
Requiring some of borrower’s mortgage payments to be paid at closing, out of loan proceeds.
Advance loan payments
Predatory Lending Practices
Excessive or unfair prepayment penalties
Imposing unusually large penalty, failing to limit penalty period, and/or charging penalty even if loan is prepaid because property is being sold.
Prepayment penalties
Predatory Lending Practices
Unfair default interest rate
Increasing loan’s interest rate by excessive amount when borrower defaults.
Default interest rate
Predatory Lending Practices
Discretionary call provision
Including call provision (acceleration clause) that allows lender to accelerate loan at any time, not just because payments are delinquent or property is being sold.
Call provision
Predatory Lending Practices
Single-premium credit life insurance
Credit life insurance policy pays off mortgage if borrower dies.
Predatory lenders require borrowers to purchase policy with a single large premium due at closing.
Credit life insurance
Predatory Lending Practices
In addition to predatory lenders, predatory loan servicers may charge improper late fees, fail to credit payments, and sometimes institute foreclosure against borrowers not in default.
Loan servicing
Predatory Lending
Targeted victims of predatory lending tend to be uninformed and/or in vulnerable circumstances.
Targeted victims
Predatory Lending
Potential borrowers are especially likely to be targeted if they:
are elderly,have a limited education,speak limited English,have a low incomeare in debt,have a poor credit history, orlive in a redlined neighborhood.
Targeted victims
Predatory Lending
Elderly people who are cognitively impaired and have a lot of equity in their homes are often victims of predatory lending.
Targeted victims
Predatory Lending
There are laws at both federal and state level designed to stop predatory lending practices.
Predatory lending laws
Predatory Lending Laws
Home Ownership and Equity Protection Act (HOEPA): provisions added to TILA in 1994.
Federal law
Predatory Lending Laws
Home Ownership and Equity Protection Act (HOEPA): provisions added to TILA in 1994.
Limited scope:
Only applies to home equity and refinance loans that:
are classified as high-cost, and
are secured by principal residence.
Doesn’t apply to purchase loans.
Federal law
Predatory Lending Laws
In addition to the protections included in TILA, a majority of states now have their own predatory lending laws, and others are in the process of adopting them.
State laws
State Predatory Lending Laws
Coverage and provisions of state laws vary.
Some apply only to home equity and refinance loans.
Others also apply to purchase loans.
Coverage
State Predatory Lending Laws
One of the most recent concerns addressed by state laws is the need for consumer protection during the loan modification process, after a borrower defaults (or is about to default) on a home loan.
Protection for distressed borrowers
State Predatory Lending Laws
State license laws that regulate mortgage brokers, appraisers, and real estate agents are also applied to suspend or revoke licenses of those involved in predatory lending schemes.
License laws
Summary
Predatory Lending Steering Fee packing Equity stripping Loan flipping Property flipping HOEPA High-cost loan Higher-priced loan