Chapter 14 Federal Regulation of Mortgage Lending

Learning Objectives Describe how the federal government regulates the practice of residential mortgage lending Identify the various laws regulating residential mortgage lending Explain the purpose of laws and what motivated them Describe the consequences that may apply for failure to follow the various regulations 14-1

Anti-Discrimination Legislation Equal Credit Opportunity Act (ECOA)Equal Credit Opportunity Act (ECOA) –Prohibits lenders from discrimination on the basis of race, national origin, gender, age, or marital status Home Mortgage Disclosure ActHome Mortgage Disclosure Act –Requires lenders to report on areas where they make loans Community Reinvestment ActCommunity Reinvestment Act –Requires lenders to take an assertive role in lending to all citizens in their market areas 14-2

Equal Credit Opportunity Act (ECOA) Passed in 1974 Effects measure is whether minority groups are under-represented within credit recipients Intent measure is whether the lender intends to treat minority groups less favorably Practices measure is when a lender fails to adhere to guidelines 14-3

Home Mortgage Disclosure Act (HMDA) & Community Reinvestment Act (CRA) HMDA passed in 1975 and CRA passed in 1978 Act to insure that all citizens have access to credit markets HMDA requires lenders to compile reports on loan distributions CRA requires lenders to publicize their lending activities Designed to prevent redlining 14-4

Real Estate Settlement Procedures Act (RESPA) Enacted in 1974 Requires disclosure of settlement costs prior to settlement Disclosure Requirements –Borrower receives booklet on RESPA at loan application –Good faith estimate before closing –Uniform Settlement Statement contains all charges and disbursement of funds Lender must disclose intentions to sell the mortgage 14-5

RESPA Con’t Abusive practices (e.g. kickbacks) are monitored closely Limits amount of funds required in escrow accounts Does not affect enforceability of sale or loan agreements Computer Loan Organization Systems (CLOS) –loan information network –integrated origination and processing system 14-6

Consumer Credit Protection Enacted in 1968 Contains Truth-in-Lending and Fair Credit Billing Acts Regulation Z requires disclosure of total finance charges and the annual percentage rate (APR) Total finance charges include interest, origination fees, discount points, appraisal and credit report fees, credit life premiums, and mortgage insurance premiums 14-7

Credit Protection Con’t APR is the effective cost of the loan assuming that it is held for its full term APR is affected by finance charges 14-8

Regulation Z and Alternative Mortgage Instruments Lender must advise the borrower that any negative amortization in a graduated payment mortgage is a finance charge Lenders must disclose index, margin, caps, frequency of rate change, and negative amortization on adjustable rate loans Because appreciation is not known in a shared appreciation mortgage, all disclosures are based on the original, fixed interest rate 14-8

Instruments Con’t The effect of all buy-downs must be disclosed Disclosures required in home equity loans 14-9