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


ECOA prohibits discrimination against applicant based on applicant’s:

race/color

religion

national origin

sex

marital status

age

Protected categories


Also prohibits discrimination against applicant who:

receives income from public assistance program

has exercised rights under federal credit laws



Lenders must not discriminate when:

interviewing and communicating with credit applicants,

analyzing applicants’ finances, or

offering credit terms to applicants.

Prohibited actions


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


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


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


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


Truth in Lending Act (TILA) – 1968

Implemented by Federal Reserve Board’s Regulation Z.

Requires disclosure of finance charges.

Regulates advertising of consumer credit.



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


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


TILA only applies to loans made to natural persons.

Loans exempt from TILA



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.




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.



Lender must give mortgage loan applicant disclosure statement with estimates of loan costs within 3 days of receiving written application.

Disclosure requirements


Lender expected to use best info reasonably available in preparing TILA disclosure statement.

If estimates later prove incorrect, revised disclosures required.



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”


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


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 statement must also show:

Lender’s identityAmount financedPayment scheduleTotal paymentsAny prepayment penaltyLate chargesAssumption policy

Other disclosures


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


Numerous special disclosures required for ARM secured by principal dwelling.

CHARM booklet: “Consumer Handbook on Adjustable-Rate Mortgages.”

ARMs


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


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


If security property is borrower’s existing principal residence, borrower has right of rescission.

Right of rescission


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


If borrower doesn’t receive statement or notice, right of rescission doesn’t expire for 3 years.

Right of rescission


Right of rescission applies to:

home equity loans

refinancing with a new lender

Doesn’t apply to purchase loans.

Right of rescission


TILA advertising rules apply to anyone who advertises consumer credit, not just lenders.

Advertising under TILA


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.



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.


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


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


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


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


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


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


6. Property seller may not require buyer to use a particular title insurance company.

Choice of title company


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


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


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


Equity stripping

“Stripping away” home owner’s equity by charging high fees on repeated refinancing.

Equity stripping


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


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


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


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


Loan in excess of value

Loaning borrower more than property’s appraised value.

Usually involves fraudulent appraisal.

Loan in excess of value


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


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


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


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


Advance payments from loan proceeds

Requiring some of borrower’s mortgage payments to be paid at closing, out of loan proceeds.

Advance loan payments


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


Unfair default interest rate

Increasing loan’s interest rate by excessive amount when borrower defaults.

Default interest rate


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


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


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


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


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


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 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

financing residential real estate lesson 14: fair lending and consumer protection

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