Real estate finance 10

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Financing Residential Real Estate

Lesson 14:

Fair Lending and
Consumer Protection

Introduction

This lesson will cover:

federal fair lending laws
consumer protection laws
predatory lending

Fair Lending Laws

Residential mortgage loan transactions subject to:

Equal Credit Opportunity Act
Fair Housing Act
Community Reinvestment Act
Home Mortgage Disclosure Act

Fair Lending Laws

Equal Credit Opportunity Act (ECOA): passed in 1974, applies to business and consumer credit.

Consumer credit: extended to individual for personal, family, or household purposes.

Includes residential mortgage loans.

Equal Credit Opportunity Act

Prohibits discrimination based on:

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
exercised rights under federal credit laws

Protected categories

Equal Credit Opportunity Act

Lenders cannot discriminate against applicants when:

interviewing and communicating
analyzing finances
offering credit terms

Prohibited actions

Equal Credit Opportunity Act

Lenders:

cannot discourage anyone from applying for loan
must apply credit guidelines to everyone in same manner

Prohibited actions

Equal Credit Opportunity Act

Provided information isn’t used to discriminate, lenders can ask about:

age
marital status
number and ages of dependents (but not childbearing plans)
receipt of public assistance

Permissible questions

Equal Credit Opportunity Act

Lenders:

have up to 30 days to notify whether application accepted or rejected

If rejected:

specific reason for decision, or
right to inquire further within 60 days

Notifying applicants

Fair Lending Laws

Federal Fair Housing Act: 1968 law, applies to transactions involving one- to four-unit residential properties.

Fair Housing Act

Prohibits lending discrimination based on:

race
color
national origin
religion
sex
disability
familial status

Protected categories

Fair Housing Act

Illegal for lenders to do any of the following for discriminatory reasons:

refuse to provide information about mortgage loans
refuse to make mortgage loan
impose different terms or conditions on
mortgage loan

Prohibited actions

Fair Housing Act

Redlining: refusal to make loans secured by property located in certain neighborhoods based on race or ethnic background of residents.

Can refuse loan in certain neighborhood when:

property values actually declining
based on objective economic criteria
without regard to racial, ethnic composition

Redlining

Fair Lending Laws

Community Reinvestment Act (CRA): 1977 law encourages lenders to serve more low- and moderate-income people living in areas where lenders do business.

Addresses redlining.
Applies to depository institutions.
Doesn’t apply to independent mortgage companies.

Community Reinvestment Act

Institutions must submit reports on home and business loans they’ve made.

Evaluated during bank examinations.
Taken into account when lender wants to
expand operations.

CRA compliance

Community Reinvestment Act

Lenders not required to lower underwriting standards.

“Safe and sound” lending practices should still be used.
Goal: move beyond negative assumptions that lead to redlining and other discrimination.

CRA and underwriting standards

Fair Lending Laws

Home Mortgage Disclosure Act (HMDA): 1975 law that helps government monitor if lenders are fulfilling obligation to serve housing needs of community.

Facilitates enforcement of Fair Housing Act prohibitions (example: redlining).
Applies to large institutional lenders doing business in metropolitan areas.

Home Mortgage Disclosure Act

Lenders must submit annual reports to government on residential mortgage loans originated or purchased during fiscal year.

Includes purchase loans, home improvement loans, refinancing.
Doesn’t include home equity loans for other purposes (credit consolidation).
If report reveals areas with few or no home loans, may indicate redlining.

Requires annual reports

Summary
Fair Lending Laws

Equal Credit Opportunity Act
Redlining
Fair Housing Act
Community Reinvestment Act
Home Mortgage Disclosure Act

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 Regulation Z; enforced by Consumer Financial Protection Bureau.
Regulates advertising of credit terms, and allows right of rescission in some cases.
Requires disclosure of financing terms to all mortgage loan applicants.

Truth in Lending Act

Applies only to consumer loans.

Consumer loan: loan used for personal, family, or household purposes.

Consumer loan is covered by TILA if it will be repaid in more than four installments (or is subject to finance charges) and is either:

for $55,800 or less, or
secured by real property.

Loans covered by TILA

Truth in Lending Act

Only applies to loans made to natural persons.

Doesn’t apply to:

loans made to corporations or organizations
loans made for business, commercial, or agricultural purposes
loans over $55,800 not secured by real property
most seller financing

Loans exempt from TILA

Truth in Lending Act

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

Rules prohibit:

bait and switch tactics
misleading ads

Advertising under TILA

Truth in Lending Act

Always legal to state cash price or APR in ad.

If particular “trigger” terms are used, rest of terms must also be disclosed.
Trigger terms: downpayment, amount of payment, number of payments, repayment period, or amount of finance charge.
Ads for loans with variable rates (ARMs):
rates/terms may change
can’t advertise loan as “fixed”

Advertising under TILA

Truth in Lending Act

When security property is borrower’s principal residence, borrower may rescind loan agreement within 3 business days of:

signing agreement,
receiving disclosure statement, or
receiving notice of right of rescission.

Right of rescission

Truth in Lending Act

Notice of right to rescind:

can’t be part of other TILA disclosures or documents
must be separate document

Right to rescind doesn’t expire for 3 years if borrower never receives statement or notice

Right of rescission

Truth in Lending Act

Right of rescission only applies to:

home equity loans
refinancing with new lender

Doesn’t apply to:

purchase loans
construction loans

Right of rescission

Consumer Protection Laws

Real Estate Settlement Procedures Act (RESPA): enforced by Consumer Financial Protection Bureau (CFPB).

Another law helping ensure residential borrowers get accurate info about finance charges and closing costs.
Also prohibits kickbacks and referral fees that increase borrowers’ costs.

RESPA

Applies to any settlement service provider: a professional involved in the closing process.

Includes real estate agents.
Also lenders, title companies, etc.

Regulates service providers

RESPA

RESPA applies to all federally related loan transactions.

Includes most residential mortgage loans.
Includes almost all institutional lenders.

Covered transactions

RESPA

Federally related loan:

1. secured by residential property with (or land used to build) up to four dwelling units (includes condos, mobile homes), AND

2. lender is federally regulated, has federally insured accounts, is assisted by federal government, sells loans to GSEs, 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/mobile home placed
temporary financing (construction loan)
assumption where lender’s approval
not required or obtained

Exemptions

1. Disclose required use of particular service provider when loan application or service agreement is signed.

2. Disclose affiliated business arrangement when borrower referred to affiliated provider.

Affiliated business arrangements

RESPA Requirements, Restrictions

3. Lender can’t require borrower to make excessive deposits into impound account.

Excessive: more than necessary to cover expenses when due (usually two months’ worth).

Impound account deposits

RESPA Requirements, Restrictions

4. Lender or service provider may not:

pay or receive kickbacks or referral fees
pay or receive unearned fees
charge a document preparation fee for required disclosures (such as impound account statement)

Kickbacks and unearned fees

RESPA Requirements, Restrictions

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

Choice of title company

RESPA Requirements, Restrictions

Summary
TILA and RESPA

Regulation Z
Consumer loan
Right of rescission
Advertising rules
Federally related loan transaction
Affiliated business arrangement
Kickback or referral fee
Unearned fee

TILA-RESPA Disclosures

Until recently, TILA and RESPA each had their own set of required disclosure forms.

Under TILA-RESPA Integrated Disclosure (TRID) requirements, all information has been streamlined into two forms:

• loan estimate

• closing disclosure

TRID rules apply to home mortgage loans, including home equity and refinance loans, but not to home equity lines of credit, reverse mortgages, or mortgages secured by unattached mobile homes.

Residential mortgage applicants must receive CFPB information booklet about loan transactions within three days of application.

Coverage

TILA-RESPA Disclosures

Three most important disclosures:

finance charge
“Dollar amount your credit will cost you”
annual percentage rate (APR)
“Cost of your credit as a yearly rate”
total interest percentage
Interest paid over loan term, as percentage of loan amount

Disclosure requirements

TILA-RESPA Disclosures

Finance charge: sum of fees and charges borrower will pay in connection with loan, such as:

interest
origination fee
discount points
finder’s fee
mortgage insurance premiums
mortgage broker’s fee

Finance charge

TILA-RESPA Disclosures

Doesn’t include loan application fee or charges for transaction services such as:

appraisal
credit report
inspections
survey
document prep
title insurance

Finance charge

TILA-RESPA Disclosures

Annual percentage rate (APR): expresses relationship of finance charge to amount financed, in the form of annual percentage.

Helps make it easier for borrowers to compare costs of different loans.

Annual percentage rate

TILA-RESPA Disclosures

Total interest percentage: Represents total amount of interest borrower will pay over the loan term, expressed as a percentage of the loan amount.

Includes interest only
does not include other fees and charges included in APR

Total interest percentage

TILA-RESPA Disclosures

Additional disclosures required for ARM secured by principal residence.

CHARM booklet: “Consumer Handbook on Adjustable-Rate Mortgages.”
How often interest rate and payment amount may change.

ARMs

TILA-RESPA Disclosures

Lender must notify borrower each time interest rate will be adjusted.

Effect of adjustment on payment, loan balance, and other aspects of loan.
If payment amount will change: notice sent at least 25 days, but no more than 120 days, before new payment due.
If payment amount won’t change: notice sent at least once a year.

ARM adjustment notice

TILA-RESPA Disclosures

Disclosure statement that:

estimates loan costs
must be given within 3 business days of receiving loan application
no fees can be imposed until borrower gets disclosure and indicates intent to proceed (usually by signing)

Loan estimate

TILA-RESPA Disclosures

Loan estimate includes:

loan terms such as interest rate, payment amount, balloon payment
interest rate and payment increases
loan costs, closing costs, total cash needed
annual percentage rate
total interest percentage
prepayment penalties, late payment fees

Loan estimate

TILA-RESPA Disclosures

Estimates of costs must be made in good faith; if inaccurate, lender may need to refund difference between estimated cost and actual cost within 60 days after closing.

Some charges have zero tolerance limitation.
Some charges have 10% cumulative tolerance limitation.
Some charges have no limitation.

Loan estimate

TILA-RESPA Disclosures

Lender is generally bound by first loan estimate, but may make revisions in some situations:

change of circumstances in borrower’s eligibility for loan, or
borrower requests change in credit terms.
Revised estimate must be given at least three business days after receiving new information, and four days before closing.

Loan estimate

Lender must provide closing disclosure at least three business days before closing.

Replaces estimates from loan estimate with actual charges, plus additional disclosures.
Also provides summaries of amounts due from and payments made by both borrower and seller, in separate columns.

Closing disclosure

TILA-RESPA Disclosures

If amounts change, lender must provide revised form at or before closing.

If revisions are result of increased APR, addition of prepayment penalty, or change in loan product, form must be provided at least three days before closing.
If errors are found within 30 days after closing, corrected disclosure must be provided within 30 days after learning of error.

Closing disclosure

TILA-RESPA Disclosures

Summary
RESPA

Finance charge
Annual percentage rate
Total interest percentage
Loan estimate
Tolerance limitations
Closing disclosure

Predatory Lending

Predatory lending: practices unscrupulous mortgage lenders and brokers use to take advantage of unsophisticated buyers and homeowners for profit. Includes:

tactics that are always abusive.
lending practices and loan terms misused for predatory purposes.

Predatory Lending Practices

Predatory steering: steering buyer toward 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 aren’t justified by cost of services provided.

Includes charging for unnecessary products or features that increase cost of loan.

Fee packing

Predatory Lending Practices

Equity stripping: foreclosure rescue scam; results in “stripping away” of homeowner’s equity by buying home and selling back to owner with less favorable pricing and/or terms.

Equity stripping

Predatory Lending Practices

Loan flipping: encouraging home owner to refinance repeatedly over short period, when there’s no real benefit to the borrower (lender benefits from loan fees).

Loan flipping

Predatory Lending Practices

Property flipping: purchasing property at discount, then quickly reselling 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 repay: making loan based only on property’s value without considering borrower’s ability to afford payments.

Disregarding capacity to repay

Predatory Lending Practices

Impound waivers: not requiring borrower to make monthly impound account deposits for property taxes and insurance.

Encourages buyers to borrow more.
Increases risk of default on loan.

Impound waivers

Predatory Lending Practices

Loan in excess of value: loaning borrower more than property’s actual 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.

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.

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, etc.

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 acceleration clause: 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.

Acceleration clause

Predatory Lending Practices

Single-premium credit life insurance: requiring borrowers to purchase policy with single large premium due at closing.

Credit life insurance

Predatory Lending Practices

Predatory loan servicing: charging improper late fees, failing to credit borrower with payments made, etc.

Loan servicing

Predatory Lending

Targeted victims of predatory lending tend to be uninformed and/or in vulnerable circumstances:

elderly
limited education
limited English
low income
in debt
poor credit history
live in redlined neighborhood

Targeted victims

Predatory Lending

Laws designed to stop predatory lending practices:

federal law
ability to repay rule
state laws

Predatory lending laws

Predatory Lending Laws

For higher-priced loans, federal rules require:

lenders to reasonably and in good faith evaluate borrower’s ability to repay,
a full written appraisal (including interior),
limits on prepayment penalties,
additional appraisals for flipped properties, and
borrower deposits into impound accounts for taxes and insurance.

Federal law

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.

Distressed property laws regulate activities during loan modification to prevent predatory practices.

Coverage

Summary
Predatory Lending

Steering
Fee packing
Equity stripping
Loan flipping
Property flipping