1. Financing Residential Real Estate Lesson 14: Fair Lending and Consumer Protection

2. 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.

3. 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.

4. 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

5. ECOA prohibits discrimination against applicant based on applicant’s:  race/color  religion  national origin  sex  marital status  age Protected categories

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. Prohibits lending discrimination based on:  race  color  national origin  religion  sex  disability  familial status Protected categories

13. 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

14. 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

15. 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

16. Summary Fair Lending Laws  Equal Credit Opportunity Act  Fair Housing Act  Community Reinvestment Act  Home Mortgage Disclosure Act  Redlining  Predatory lending

17. Consumer Protection Laws Federal consumer protection laws that apply to mortgage loan transactions:  Truth in Lending Act  Real Estate Settlement Procedures Act

18. 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

19. 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

20. 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

21. Truth in Lending Act TILA only applies to loans made to natural persons. Loans exempt from TILA

22. 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

23. 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

24. 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

25. 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

26. 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

27. TILA Disclosure Requirements For mortgage loan, these expenses would be included in total finance charge, if applicable:  Interest  Origination fee  Points paid by borrower  Finder’s fee  Service charge  Mortgage insurance premiums  Guaranty fee  Mortgage broker’s fee Total finance charge

28. TILA Disclosure Requirements Application fee Appraisal fee Document prep fee Notary fee Credit report fee Survey fee Title report fee Title insurance premiums Pest inspection fee Flood inspection fee Impounds Points paid by seller Late payment fees Fees charged on default Total finance charge Not part of total finance charge for mortgage loan:

29. TILA Disclosure Requirements TILA disclosure statement must also show:  Lender’s identity  Amount financed  Payment schedule  Total payments  Any prepayment penalty  Late charges  Assumption policy Other disclosures

30. 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

31. TILA Disclosure Requirements Numerous special disclosures required for ARM secured by principal dwelling. CHARM booklet: “Consumer Handbook on Adjustable-Rate Mortgages.” ARMs

32. 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

33. 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

34. Truth in Lending Act If security property is borrower’s existing principal residence, borrower has right of rescission. Right of rescission

35. Truth in Lending Act If security property is borrower’s existing principal residence, borrower has right of rescission. May rescind loan agreement any time within 3 days after:  signing agreement,  receiving disclosure statement, or  receiving notice of right of rescission. Right of rescission

36. Truth in Lending Act If borrower doesn’t receive statement or notice, right of rescission doesn’t expire for 3 years. Right of rescission

37. 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

38. Truth in Lending Act TILA advertising rules apply to anyone who advertises consumer credit, not just lenders. Advertising under TILA

39. 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

40. 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

41. 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

42. Consumer Protection Laws Real Estate Settlement Procedures Act – 1974 Affects how closing is handled in most residential mortgage transactions. RESPA

43. 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

44. RESPA RESPA applies to all federally related loan transactions.  Category includes most residential mortgage loans. Covered transactions

45. 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

46. 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

47. 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

48. 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

49. 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

50. 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

51. 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

52. RESPA Requirements and Restrictions 6. Property seller may not require buyer to use a particular title insurance company. Choice of title company

53. 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

54. 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

55. 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

56. Predatory Lending Predatory lending refers to practices that unscrupulous mortgage lenders and brokers use to take advantage of unsophisticated borrowers for profit.

57. 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

58. Predatory Lending Practices Predatory steering Steering buyer towards more expensive loan when buyer could qualify for less expensive loan. Steering

59. 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

60. Predatory Lending Practices Equity stripping “Stripping away” home owner’s equity by charging high fees on repeated refinancing. Equity stripping

61. 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

62. 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

63. 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

64. 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

65. 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

66. 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

67. 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

68. 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

69. 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

70. 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

71. 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

72. Predatory Lending Practices Unfair default interest rate Increasing loan’s interest rate by excessive amount when borrower defaults. Default interest rate

73. 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

74. 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

75. 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

76. Predatory Lending Targeted victims of predatory lending tend to be uninformed and/or in vulnerable circumstances. Targeted victims

77. Predatory Lending Potential borrowers are especially likely to be targeted if they:  are elderly,  have a limited education,  speak limited English,  have a low income  are in debt,  have a poor credit history, or  live in a redlined neighborhood. Targeted victims

78. 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

79. Predatory Lending There are laws at both federal and state level designed to stop predatory lending practices. Predatory lending laws

80. Predatory Lending Laws Home Ownership and Equity Protection Act (HOEPA): provisions added to TILA in 1994. Federal law

81. 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

82. 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

83. 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

84. 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

85. 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

86. Summary Predatory Lending  Steering  Fee packing  Equity stripping  Loan flipping  Property flipping  HOEPA  High-cost loan  Higher-priced loan