Chapter 11

Georgia Real Estate An Introduction to the Profession Eighth Edition Chapter 11 The Loan and the Consumer

Key Terms APR credit report Fair Credit Reporting Act finance charge liquid asset redlining Regulation Z Truth in Lending Act © 2015 OnCourse Learning

Truth in Lending Act The Federal Consumer Credit Protection act, known as the Truth in Lending Act was implemented by the Federal Reserve Board Regulation Z. © 2015 OnCourse Learning

Truth in Lending Act It requires that a borrower be clearly shown, before committing to a loan, how much is being paid for credit in both dollar terms and percentage terms. © 2015 OnCourse Learning

Advertising Truth in Lending rules affect both real estate professionals and property owners when advertising just about anything, including real estate, and include financing terms in the ad. © 2015 OnCourse Learning

Trigger Terms Five disclosures must be included in any ad that contains even one of the following trigger terms: amount of down payment amount of any payments number of payments period of repayment dollar amount of any finance charge © 2015 OnCourse Learning

Trigger Terms A good rule of thumb is, if the ad includes a number referring to the credit, Truth in Lending has been triggered. © 2015 OnCourse Learning

Trigger Terms If any of the trigger terms are used, the following disclosures MUST appear in the ad: cash price or amount of the loan amount of down payment number, amount and frequency of repayments annual percentage rate deferred payment price or total payments © 2015 OnCourse Learning

Annual Percentage Rate The annual percentage rate (APR) combines the interest rate with the other costs of the loan into a single figure that shows the true annual cost of borrowing. © 2015 OnCourse Learning

Annual Percentage Rate If you wish to say something about financing and avoid triggering full disclosure, use general statements: “Assumable loan” “Financing available” “Easy monthly payments” “FHA and VA financing available” © 2015 OnCourse Learning

Lending Disclosures If you are in the business of making loans, the Truth in Lending Act requires you to make disclosures to your borrower. The four that must be most prominently displayed are: amount financed finance charge annual percentage rate total payments © 2015 OnCourse Learning

Lending Disclosures The finance charge is the total dollar amount the credit will cost the borrower over the life of the loan. These disclosures must be delivered to the credit applicant within three business days after the creditor receives the applicant’s written request for credit. © 2015 OnCourse Learning

Exempt Transactions Certain transactions are exempt from the lending disclosure requirement: business loans commercial loans agricultural loans credit over $50,000 secured by personal property © 2015 OnCourse Learning

Failure to Disclose The Federal Trade Commission (FTC) can order the advertiser to cease from further violations. Each violation can result in a $10,000 civil penalty each day the violation continues. © 2015 OnCourse Learning

Failure to Disclose If the required disclosures are not made or the borrower is not given the required three days to cancel, the borrower can cancel the transaction at any time within three years following the date of the transaction. © 2015 OnCourse Learning

Right to Rescind The borrower has three business days to back out after signing the loan papers. © 2015 OnCourse Learning

Loan Application and Approval All loans intended for underwriting by Fannie Mae, Freddie Mac, HUD/FHA, or the VA must comply with the new standards regarding loan applications. © 2015 OnCourse Learning

Loan Application and Approval The borrower is requested to specify the type of mortgage and terms of the loan being sought. An appraiser is assigned to appraise the property. A title search is ordered. © 2015 OnCourse Learning

Loan Application and Approval These steps are taken to determine the fair market value of the property and condition of title. Loans are made based on the appraised value or the purchase price, whichever is lower. © 2015 OnCourse Learning

Loan Application and Approval If the appraised value is lower than the purchase price, the buyer usually required to make a larger cash down payment. © 2015 OnCourse Learning

Settlement Funds The lender wants to know if the borrower has adequate funds for settlement. The less money a borrower personally puts into a purchase, the higher the probability of default and foreclosure. © 2015 OnCourse Learning

Purpose of Loan Lenders feel most comfortable when a loan is for the purchase or improvement of a property that the loan applicant will actually occupy. © 2015 OnCourse Learning

Borrower Analysis The federal Equal Credit Opportunity Act prohibits discrimination based on age, sex, race, and marital status. The emphasis in borrower analysis is now focused on job stability, income adequacy, net worth and credit rating. © 2015 OnCourse Learning

Borrower Analysis An applicant who possesses marketable job skills and has been regularly employed with a stable employer is considered the ideal risk. © 2015 OnCourse Learning

Monthly Income The lender looks at the amount and sources of the applicants’ income. The income sources must be stable. Included in the proposed housing expense total are principal, interest, taxes, insurance, assessments, and homeowner association dues. © 2015 OnCourse Learning

Monthly Income Some lenders add the monthly cost of utilities to this list. Proposed monthly housing expense is compared with gross monthly income. Monthly housing expense (PITI) should not exceed 25% to 30% of the gross monthly income © 2015 OnCourse Learning

Monthly Income The total fixed monthly expenses should not exceed 33% to 38% of income. Lenders recognize that food, health care, clothing, transportation, entertainment and income taxes must also come from the applicants’ income. © 2015 OnCourse Learning

Assets and Liabilities Assets in the form of cash or that are readily convertible into cash are called liquid assets. They are much more useful in meeting living expenses and loan payments than assets that may require months to sell and convert to cash. © 2015 OnCourse Learning

Assets and Liabilities The lender is interested in the applicants’ existing debts and liabilities. The applicants’ total debts are subtracted from their total assets to obtain their net worth. © 2015 OnCourse Learning

References Lenders ask for credit references as an indicator of the future. © 2015 OnCourse Learning

Redlining In the past, it was not uncommon for lenders to refuse to make loans in certain neighborhoods. This was called redlining. © 2015 OnCourse Learning

Redlining Today, a lender cannot refuse to make a loan simply because of the age or location of a property; the neighborhood income level; or the racial, ethnic or religious composition of the neighborhood. © 2015 OnCourse Learning

Loan-to-Value Ratios The lenders looks at the amount of down payment the borrower proposes to make, the size of the loan being requested and the amount of other financing the borrower plans to use. The larger the down payment is, the safer the loan is for the lender. © 2015 OnCourse Learning

Loan-to-Value Ratios Loan-to-value ratios above 80% present more risk of default to the lender. The lender will either increase the interest rate charged on these loans or require insurance coverage such as FHA or a private mortgage insurer. © 2015 OnCourse Learning

Credit Report The lender will order a credit report on the applicant. The applicant is asked to pay for the report. © 2015 OnCourse Learning

Credit Report The Fair Credit Reporting Act gives individuals the right to inspect their file at a credit bureau, correct any errors and make explanatory statements to supplement the file. © 2015 OnCourse Learning

Credit Report Credit scoring is being used as a method of evaluating credit risk. A score of 720 or higher will get the borrower the most favorable interest rate on a mortgage. Bad credit can result in paying significantly higher interest rates. © 2015 OnCourse Learning

Credit Report Borrowers can improve their credit scores. Factors included in evaluating credit are: type of credit use, application for new credit, length of credit history, payment history and amounts owed. © 2015 OnCourse Learning

Credit Report The most important factors in evaluating credit are payment history and amounts owed. © 2015 OnCourse Learning

Credit Report Other factors considered including paying bills on time, consistently reducing your credit card balances and not “moving debt around.” © 2015 OnCourse Learning

Subprime Loans There continues to be a market for subprime loans. There are lender who cater to borrowers with limited or blemished credit. © 2015 OnCourse Learning

Subprime Loans Lender who work in this market have different criteria and profile the risk a borrower presents differently. These loans have higher interest rates due to the higher risk of default. © 2015 OnCourse Learning

Predatory Lending Georgia passed the Georgia Fair Lending Act, considered to be one of the toughest predatory lending laws in the nation. © 2015 OnCourse Learning

Predatory Lending The Mortgage Banker’s Association has identified 12 practices considered to be predatory lending: © 2015 OnCourse Learning

Predatory Lending steering borrowers to high-rate lenders intentionally structuring high-cost loans with payments the borrower cannot afford © 2015 OnCourse Learning

Predatory Lending falsifying loan documents loans to mentally incapacitated homeowners © 2015 OnCourse Learning

Predatory Lending forging signatures on loan documents changing the loan terms at closing requiring credit insurance © 2015 OnCourse Learning

Predatory Lending falsely identifying loans as lines of credit or open-end mortgages increasing interest charges for loan payments with payments are late © 2015 OnCourse Learning

Predatory Lending charging excessive prepayment penalties failing to report good payments on borrower’s credit reports failing to provide accurate loan balance and payoff amounts © 2015 OnCourse Learning