RF_14 Instructor Materials PDF - Fair Lending & Consumer Protection

Fair Lending and 14 Consumer Protection Learning Objectives After completing this lesson, students should be able to… Describe the purpose of the Equal Credit Opportunity Act List discriminatory acts and protected classes under the Fai...

Fair Lending and 14 Consumer Protection Learning Objectives After completing this lesson, students should be able to… Describe the purpose of the Equal Credit Opportunity Act List discriminatory acts and protected classes under the Fair Housing Act Explain the goals of the Community Reinvestment Act Discuss the role of the Home Mortgage Disclosure Act in preventing redlining Summarize the purpose of the Truth in Lending Act (TILA) Describe TILA’s advertising requirements, and state how the right of rescission works Explain the prohibited practices provisions in the Real Estate Settlement Procedures Act Understand the forms required under the TILA-RESPA Integrated Disclosure rules, and the deadlines associated with them Define predatory lending and give examples of predatory practices Summarize the laws regulating predatory lending Suggested Lesson Plan 1. Give students Exercise 14.1 to review the previous chapter, “Seller Financing.” 2. Provide a brief overview of Chapter 14, “Fair Lending and Consumer Protection,” and review the learning objectives for the chapter. © 2018 Rockwell Publishing  Financing Residential Real Estate Instructor Materials 3. Present lesson content: Fair Lending Laws – Equal Credit Opportunity Act – Fair Housing Act – Community Reinvestment Act – Home Mortgage Disclosure Act EXERCISE 14.2 Fair lending laws Consumer Protection Laws – Truth in Lending Act – Real Estate Settlement Procedures Act – Integrated disclosures under TILA/RESPA EXERCISE 14.3 TILA’s advertising rules Predatory Lending – Predatory lending practices – Targeted victims – Federal predatory lending law – State predatory lending laws EXERCISE 14.4 Predatory lending 4. End lesson with Chapter 14 Quiz. Chapter 14 Outline: Fair Lending and Consumer Protection I. Fair Lending Laws A. Equal Credit Opportunity Act (ECOA) 1. ECOA applies to all consumer credit, including residential mortgages 2. ECOA prohibits discrimination against loan applicants based on race, color, re- ligion, national origin, sex, marital status, age, or whether income comes from public assistance 3. Lenders may not base lending decisions on assumptions about creditworthiness of racial, ethnic, or religious groups B. Fair Housing Act 1. The Fair Housing Act applies to transactions involving residential properties and prohibits discrimination based on race, color, national origin, religion, sex, dis- ability, or familial status 2  Chapter 14: Fair Lending and Consumer Protection 2. Under the act, a lender may not refuse to provide information about loans, refuse to make a loan, or impose different terms or conditions on a loan for discrimina- tory reasons 3. The act also prohibits redlining: refusing to make loans secured by property in particular neighborhoods because they are largely comprised of a particular racial or ethnic group 4. A lender may refuse to make a loan in a neighborhood where property values are declining, but the decision must be based on objective economic criteria C. Community Reinvestment Act 1. The Community Reinvestment Act (CRA) requires depository institutions to col- lect information on loans made to low- and moderate-income borrowers living in the communities where these lenders do business 2. The lenders submit CRA data to the government during annual bank examina- tions D. Home Mortgage Disclosure Act 1. The Home Mortgage Disclosure Act (HMDA) requires large lenders in metropol- itan areas to make disclosures to the federal government regarding all loans they originate or purchase; certain smaller lenders are excluded 2. The intent is for the government to monitor whether lenders are engaging in redlining or other discriminatory lending practices EXERCISE 14.2 Fair lending laws II. Consumer Protection Laws A. Truth in Lending Act 1. The Truth in Lending Act (TILA) requires disclosures to mortgage loan appli- cants, limits advertising of financing terms, and gives rescission rights to certain borrowers; it’s enforced by the CFPB and implemented through Regulation Z 2. TILA covers many consumer loans, including those secured by real property 3. TILA applies only to loans made to natural persons (not corporations), and ex- cludes loans made for business or agricultural purposes; seller financing is also exempt, since it doesn’t originate with an institutional lender 4. TILA bans “bait and switch” advertising and the advertising of loan terms that provide a false picture of the lender’s product 5. If certain loan terms are stated in an advertisement, then TILA requires that all loan terms must be stated; APR and cash price can be stated without triggering the requirements; slightly different rules apply to ARM advertising 6. Home equity loan borrowers have a right of rescission within three days of: sign- ing the loan agreement, receiving a disclosure statement, or receiving notice of the right to rescind, whichever occurs latest 3  Financing Residential Real Estate Instructor Materials B. Real Estate Settlement Procedures Act 1. The Real Estate Settlement Procedures Act (RESPA) provides borrowers with information about closing costs and prohibit kickbacks that increase settlement costs; RESPA is enforced by the CFPB 2. RESPA applies to federally related loan transactions, which include almost all residential loans made by institutional lenders; all professionals involved in the settlement process are covered by the law, including real estate agents, mortgage brokers, lenders, and title companies 3. RESPA doesn’t apply to loans used to purchase 25 acres or more, loans for busi- ness or agricultural purposes, loans to purchase vacant land, temporary financing, or assumptions where the lender’s approval isn’t required 4. The lender/service provider cannot require excessive deposits 5. A lender/service provider cannot pay or receive kickbacks or referral fees, pay or receive unearned fees, or charge a document preparation fee C. TILA-RESPA Integrated Disclosures 1. TILA and RESPA used to each require a separate set of disclosure forms, but they are now combined into two user-friendly forms, the loan estimate and closing disclosure 2. A lender must give a borrower an information booklet about loan transactions published by the CFPB, within three days of receiving a loan application 3. The three main disclosure requirements are the finance charge, the annual percentage rate (the finance charge expressed as a percentage of the amount fi- nanced), and the total interest percentage (the interest the borrower will pay, as a percentage of the loan amount) 4. The finance charge may include interest, origination fee, borrower-paid points, finder’s fee, service charges, and mortgage insurance; it doesn’t include appraisal, credit report, or inspection fees, title insurance, or seller-paid points 5. The lender must give the loan estimate form to the borrower within three business days of receiving a loan application, which provides information about loan costs and closing costs 6. Some charges are subject to a zero tolerance limitation, while others are subject to a 10% cumulative tolerance limitation; in either case, if the actual charges exceed the estimated charges by more than the allowed amount, the lender must refund the excess charges 7. The lender must give the closing disclosure form to the borrower at least three business days before closing; this form summarizes the buyer’s and seller’s amounts due and payments made EXERCISE 14.3 TILA’s advertising rules 4  Chapter 14: Fair Lending and Consumer Protection III. Predatory Lending A. Predatory lending refers to practices by lenders that take advantage of uninformed and/or vulnerable buyers and homeowners for profit B. Predatory lending practices include predatory steering, fee packing, equity stripping, loan flipping, disregarding buyer’s capacity to pay, issuing loans in excess of value, waiving impound accounts, negative amortization schemes, and balloon payment abuses C. Predatory lenders tend to target people who aren’t able to understand the transaction they’re entering into and aren’t aware of better alternatives D. Federal predatory lending law: TILA amendments, which apply to “higher-priced” loans (virtually all subprime loans) 1. Higher-priced loans require in-person appraisal, including interior 2. Higher-priced loans require impound accounts for first-lien loans, and prohibit prepayment penalties after first two years of loan E. Many states also have predatory lending laws that require disclosures and prohibit predatory practices. Some states have laws specifically protecting borrowers from predatory practices that occur during the loan modification process EXERCISE 14.4 Predatory lending Exercises EXERCISE 14.1 Review exercise To review Chapter 13, “Seller Financing,” have students answer these questions. 1. When is seller financing likely to be especially helpful to sellers and buyers? 2. What are two ways in which a seller second may be used? 3. What are the names of the two parties to a land contract, and what type of title does each of them have during the contract term? 4. What is it called when the property remains subject to the seller’s existing mortgage after the sale, but the seller offers the buyer financing for a larger amount? Answers: 1. When market interest rates are high. 2. To supplement a new loan, or to supplement an assumption. 3. Vendor (seller) has legal title; vendee (buyer) has equitable title. 4. Wraparound financing. 5  Financing Residential Real Estate Instructor Materials EXERCISE 14.2 Fair lending laws Match the correct federal statute to each of the following descriptions. Equal Credit Opportunity Act Community Reinvestment Act Fair Housing Act Home Mortgage Disclosure Act 1. This law prohibits discrimination by lenders, although only in transactions involving residential properties with one to four units. 2. This law requires depository institutions to serve low- and moderate-income bor- rowers who live in the communities where these lenders do business. 3. This law prohibits redlining, the practice of refusing to make loans in certain neighborhoods based on the race or ethnicity of the residents. 4. This law requires large institutional lenders to submit annual reports on all loans they issue in a year, as well as applications that didn’t result in loans. 5. This law prohibits discrimination against loan applicants who receive all or part of their income from public assistance. Answers: 1. FAIR HOUSING ACT. The Fair Housing Act prohibits discrimination in residential transactions, including discriminatory acts by lenders. 2. COMMUNITY REINVESTMENT ACT. The Community Reinvestment Act requires depository lenders to make loans to a broad range of borrowers in the communi- ties where they do business, and to report this information annually. 3. FAIR HOUSING ACT. The Fair Housing Act prohibits lenders from refusing to make loans in particular neighborhoods because of discriminatory assumptions about the residents, a practice known as redlining. 4. HOME MORTGAGE DISCLOSURE ACT. The Home Mortgage Disclosure Act requires lenders to submit information to the federal government that can be used to detect redlining. 5. EQUAL CREDIT OPPORTUNITY ACT. Persons who receive income from public assistance are a protected class under the Equal Credit Opportunity Act. 6  Chapter 14: Fair Lending and Consumer Protection EXERCISE 14.3 TILA’s advertising rules Discussion Prompt: What aspect of the advertising flyer shown in Figure 14.2 in the textbook violates the Truth in Lending Act? Assuming that the information presented is accurate, why is the ad misleading? What would be necessary in order to bring the ad into compliance with TILA? Does TILA require the APR to be included in every ad concerning mortgage financing? Analysis: An advertisement that’s subject to TILA isn’t required to include the APR or any other specific information about the terms. However, if certain information is stated in an ad, that triggers TILA’s full disclosure requirement. For example, if an ad specifies the amount or rate of any financing charge or the amount of any payment, then full disclosure is required. So the problem with the flyer shown in the book is that it gives the payment amount (“$958/MONTH”) without disclosing the rest of the financing terms. This is misleading because the payment amount makes it sound like the financing is very affordable, but there isn’t enough information provided to enable a prospective borrower to tell whether that’s true. In fact, it’s very doubtful that the terms of this loan are attractive. Let’s assume it’s a 30-year loan. (The ad doesn’t give even that basic information.) Even if no interest whatsoever were being charged, it would take a monthly payment of more than $958 to pay off the principal in 30 years: $400,000 ÷ 360 = $1,111 per month. So this clearly isn’t a fully amortized loan. If it’s not fully amortized, how soon would a balloon payment be due, and how much would the balloon payment be? Perhaps the $958 payment is an interest-only payment. In that case, the interest rate would be only about 2.9%, which is quite low. (The borrower would be paying $11,496 per year; $400,000 ÷ $11,496 = 0.0287.) But since the ad doesn’t state the interest rate, it may be higher than 2.9%, and in that case the payment won’t even cover the interest accruing, resulting in negative amortization. The ad also doesn’t say whether the payment will be $958 throughout the loan term, or only during a limited period. In any event, it’s very likely that the monthly payment amount will have to increase dramatically at some point, or else a very large balloon payment (possibly the full $400,000, or even more) will eventually be due. As you can see, telling prospective borrowers only the monthly payment amount doesn’t enable them to decide whether a loan is desirable. To bring the ad in the textbook into compliance with TILA, either the payment amount would have to be left out, or else the ad would have to include the APR, the amount or percentage of the downpayment, and the payment schedule, with the number, amount, and timing of the payments; it would also have to include the amount of any balloon payment that will be required. 7  Financing Residential Real Estate Instructor Materials EXERCISE 14.4 Predatory lending Read the following True/False questions aloud to students and have them jot their an- swers down on a piece of paper; discuss the answers together. 1. When a borrower is persuaded to refinance repeatedly even when there’s no benefit to doing so, it’s called fee packing. 2. Requiring borrowers to make deposits into an account to cover property taxes and insurance payments when they come due is a predatory lending practice. 3. The victims of predatory lenders are borrowers who don’t understand the transac- tion or the alternatives available, often because of cognitive impairment, lack of education, or language barriers. 4. A discretionary acceleration clause allows the lender to demand repayment in full at any time, not just because the payments are delinquent or the property is being sold. 5. Imposing a prepayment penalty was once considered an acceptable lending practice, but is now regarded as predatory. 6. It’s a standard lending practice to approve a loan based only on the appraised value of the property, since that’s what will matter in the event of default. 7. Predatory lending practices are commonly used in connection with subprime loans, especially subprime home equity loans and refinancing. Answers: 1. FALSE. The predatory lending practice described is known as loan flipping. 2. FALSE. The opposite is true: an impound waiver (not requiring deposits into an impound account) is a predatory lending practice, when it’s unlikely that the bor- rower will be able to make the tax and insurance payments when they’re due. 3. TRUE. Predatory lenders take advantage of a potential borrower’s inability to un- derstand the transaction and/or lack of awareness of the alternatives. Victims are often elderly and cognitively impaired, have a low income or limited education, or speak little English. 4. TRUE. An acceleration clause that allows the lender to accelerate the loan at any time and without reason is a discretionary acceleration clause, also known as a demand feature. 5. FALSE. A prepayment penalty isn’t necessarily predatory, although predatory lend- ers often use them. A prepayment penalty is considered predatory if it’s excessive or if it can be charged at any point during the loan term. 8  Chapter 14: Fair Lending and Consumer Protection 6. FALSE. Legitimate lenders always take into account the borrower’s capacity to make the payments, not just the property’s value, when deciding whether to make a loan. 7. TRUE. Predatory lending is common in the subprime market, and it often occurs in connection with home equity loans and refinancing. (Purchase loans are by no means exempt from predatory practices, however.) 9  Financing Residential Real Estate Instructor Materials Chapter 14 Quiz 1. Which law prohibits discrimination in all 6. Under the Truth in Lending Act, how many applications for consumer credit, including days does a borrower have to rescind a home residential mortgages? equity loan after receiving a TILA disclosure A. Equal Credit Opportunity Act statement? B. Fair Housing Act A. Two C. Home Mortgage Disclosure Act B. Three D. Truth in Lending Act C. Five D. There is no rescission right 2. Which of the following would NOT be a viola- tion of the Fair Housing Act? 7. Which of the following advertising phrases A. Failing to disclose a loan’s annual percent- does not require further disclosures under the age rate Truth in Lending Act? B. Imposing different terms or conditions on A. ‘Assume seller’s 30-year loan’ a loan B. ‘Buy for just $1,200 per month’ C. Redlining C. ‘Only $15,000 down’ D. Refusal to make a loan for discriminatory D. ‘Won’t last; 6.33% APR’ reasons 8. The purpose of the Real Estate Settlement 3. Which law requires institutional lenders to sub- Procedures Act is to: mit annual reports to the federal government on A. eliminate kickbacks and referral fees in the loans issued, including geographic information settlement process on the property? B. provide borrowers with information about A. Equal Credit Opportunity Act closing costs B. Fair Housing Act C. require disclosure of the true cost of the C. Home Mortgage Disclosure Act financing applied for D. Truth in Lending Act D. Both A and B 4. Which of the following types of loans is subject 9. After receiving a written loan application, how to the Truth in Lending Act? many days does a lender have to give applicants A. A loan for agricultural purposes a loan estimate form? B. A seller-financed loan to purchase a home A. Two C. A $20,000 loan secured by real property B. Three D. A $70,000 loan secured by personal prop- C. Four erty D. Five 5. Which of the following items would not be included in a total finance charge? A. Buyer-paid points B. Interest C. Origination fee D. Title insurance premium 10  Chapter 14: Fair Lending and Consumer Protection 10. Which of the following actions is NOT 15. Which of the following items would be in- prohibited by the Real Estate Settlement cluded in a loan’s finance charge? Procedures Act? A. Appraisal fee A. Charging document preparation fees for an B. Buyer-paid discount points impound account statement C. Seller-paid discount points B. Loan flipping D. Surveyor’s fee C. Referral fees D. Unearned fees 11. A lender charges a borrower an extremely high above-market interest rate and a larger origination fee than is justified by the services provided. This is known as: A. a discretionary acceleration provision B. balloon payment abuse C. equity stripping D. fee packing 12. It’s considered a predatory lending practice if a borrower is required to pay a single large premium at closing for: A. credit life insurance B. flood insurance C. mortgage insurance D. title insurance 13. Which of the following borrowers is least likely to be a target for a predatory lender? A. A buyer with past bankruptcies and a heavy debt load B. A family of recent immigrants who don’t speak much English C. An elderly homeowner with a lot of home equity D. Trade-up buyers seeking to buy a larger and more expensive house 14. Which of these federal laws includes provi- sions that restrict predatory lending practices in connection with mortgage loans that have high interest rates and fees? A. Fair Credit Reporting Act B. Equal Credit Opportunity Act C. Truth in Lending Act D. Real Estate Settlement Procedures Act 11  Financing Residential Real Estate Instructor Materials Answer Key 1. A. The Equal Credit Opportunity Act pro- 9. B. The lender has three days after receiv- hibits discrimination against applicants ing an application to give the applicant for consumer credit, which is credit the loan estimate form required by extended to an individual for family or TILA-RESPA Integrated Disclosure household purposes. rules. 2. A. Disclosure of a loan’s annual percent- 10. B. Property flipping may be prohibited un- age rate is required by the Truth in der applicable predatory lending laws, Lending Act, not the Fair Housing Act. but is not prohibited under RESPA. 3. C. The Home Mortgage Disclosure Act 11. D. Fee packing occurs when a lender requires large lenders to disclose in- charges unjustifiably high interest rates formation on the loans they have made or loan fees. (such as dollar amount, purpose of loan, race and income of borrower, and 12. A. Borrowers may choose to pay in- geographic location of property). stallment premiums for credit life insurance, but it’s considered preda- 4. C. Loans are subject to TILA if they are tory if a lender requires a borrower to $55,800 or less, or secured by real purchase it and pay for it with a single property. Business, commercial, and large premium at closing. agricultural loans are exempt, as are most seller-financed loans. 13. D. Predatory lenders tend to target bor- rowers who don’t fully understand the 5. D. Title insurance premiums are not in- transaction they’re entering into and cluded in the finance charge. Interest, who don’t know that better alternatives buyer-paid points, origination fees, are available; trade-up borrowers usu- mortgage insurance premiums, and ally have more experience. broker’s fees are included in the fi- nance charge. 14. C. TILA and Regulation Z have provi- sions intended to prevent predatory 6. B. TILA gives a borrower three days after lending practices. receiving a disclosure statement to re- scind a home equity loan. 15. B. Buyer-paid discount points (along with interest, origination fees, mortgage 7. D. A loan’s APR and cash price may be insurance premiums, and mortgage advertised without triggering TILA’s broker’s fees or finder’s fees) are in- full disclosure requirement. cluded in a loan’s total finance charge. 8. D. RESPA has two purposes: to require disclosure of closing costs, and to pro- hibit use of kickbacks and referral fees that inflate closing costs. 12  Chapter 14: Fair Lending and Consumer Protection PowerPoint Thumbnails Use the following thumbnails of our PowerPoint presentation to make your lecture notes. Financing Residential Real Estate Lesson 14: Fair Lending and Consumer Protection © 2018 Rockwell Publishing Introduction This lesson will cover: ⚫ federal fair lending laws ⚫ consumer protection laws ⚫ predatory lending © 2018 Rockwell Publishing Fair Lending Laws Residential mortgage loan transactions subject to: ⚫ Equal Credit Opportunity Act ⚫ Fair Housing Act ⚫ Community Reinvestment Act ⚫ Home Mortgage Disclosure Act © 2018 Rockwell Publishing 13  Financing Residential Real Estate Instructor Materials Fair Lending Laws Equal Credit Opportunity Act 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. © 2018 Rockwell Publishing Equal Credit Opportunity Act Protected categories Prohibits discrimination based on: ⚫ race/color ⚫ religion ⚫ national origin ⚫ sex ⚫ marital status ⚫ age © 2018 Rockwell Publishing Equal Credit Opportunity Act Protected categories Also prohibits discrimination against applicant who: ⚫ receives income from public assistance ⚫ exercised rights under federal credit laws © 2018 Rockwell Publishing 14  Chapter 14: Fair Lending and Consumer Protection Equal Credit Opportunity Act Prohibited actions Lenders cannot discriminate against applicants when: ⚫ interviewing and communicating ⚫ analyzing finances ⚫ offering credit terms © 2018 Rockwell Publishing Equal Credit Opportunity Act Prohibited actions Lenders: ⚫ cannot discourage anyone from applying for loan ⚫ must apply credit guidelines to everyone in same manner © 2018 Rockwell Publishing Equal Credit Opportunity Act Permissible questions 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 © 2018 Rockwell Publishing 15  Financing Residential Real Estate Instructor Materials Equal Credit Opportunity Act Notifying applicants 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 © 2018 Rockwell Publishing Fair Lending Laws Fair Housing Act Federal Fair Housing Act: 1968 law, applies to transactions involving one- to four-unit residential properties. © 2018 Rockwell Publishing Fair Housing Act Protected categories Prohibits lending discrimination based on: ⚫ race ⚫ color ⚫ national origin ⚫ religion ⚫ sex ⚫ disability ⚫ familial status © 2018 Rockwell Publishing 16  Chapter 14: Fair Lending and Consumer Protection Fair Housing Act Prohibited actions 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 © 2018 Rockwell Publishing Fair Housing Act Redlining 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 © 2018 Rockwell Publishing Fair Lending Laws Community Reinvestment Act 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. © 2018 Rockwell Publishing 17  Financing Residential Real Estate Instructor Materials Community Reinvestment Act CRA compliance 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. © 2018 Rockwell Publishing Community Reinvestment Act CRA and underwriting standards 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. © 2018 Rockwell Publishing Fair Lending Laws Home Mortgage Disclosure Act 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. © 2018 Rockwell Publishing 18  Chapter 14: Fair Lending and Consumer Protection Home Mortgage Disclosure Act Requires annual reports 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. © 2018 Rockwell Publishing Summary Fair Lending Laws Equal Credit Opportunity Act Redlining Fair Housing Act Community Reinvestment Act Home Mortgage Disclosure Act © 2018 Rockwell Publishing Consumer Protection Laws Federal consumer protection laws that apply to mortgage loan transactions: ⚫ Truth in Lending Act ⚫ Real Estate Settlement Procedures Act © 2018 Rockwell Publishing 19  Financing Residential Real Estate Instructor Materials Consumer Protection Laws Truth in Lending Act 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. © 2018 Rockwell Publishing Truth in Lending Act Loans covered by TILA 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. © 2018 Rockwell Publishing Truth in Lending Act Loans exempt from TILA 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 © 2018 Rockwell Publishing 20  Chapter 14: Fair Lending and Consumer Protection Truth in Lending Act Advertising under TILA Advertising rules apply to anyone who advertises consumer credit, not just lenders. Rules prohibit: ⚫ bait and switch tactics ⚫ misleading ads © 2018 Rockwell Publishing Truth in Lending Act Advertising under TILA 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” © 2018 Rockwell Publishing Truth in Lending Act Right of rescission 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. © 2018 Rockwell Publishing 21  Financing Residential Real Estate Instructor Materials Truth in Lending Act Right of rescission 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 © 2018 Rockwell Publishing Truth in Lending Act Right of rescission Right of rescission only applies to: ⚫ home equity loans ⚫ refinancing with new lender Doesn’t apply to: ⚫ purchase loans ⚫ construction loans © 2018 Rockwell Publishing Consumer Protection Laws RESPA 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. © 2018 Rockwell Publishing 22  Chapter 14: Fair Lending and Consumer Protection RESPA Regulates service providers Applies to any settlement service provider: a professional involved in the closing process. ⚫ Includes real estate agents. ⚫ Also lenders, title companies, etc. © 2018 Rockwell Publishing RESPA Covered transactions RESPA applies to all federally related loan transactions. ⚫ Includes most residential mortgage loans. ⚫ Includes almost all institutional lenders. © 2018 Rockwell Publishing RESPA Covered transactions 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. © 2018 Rockwell Publishing 23  Financing Residential Real Estate Instructor Materials RESPA Exemptions 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 © 2018 Rockwell Publishing RESPA Requirements, Restrictions Affiliated business arrangements 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. © 2018 Rockwell Publishing RESPA Requirements, Restrictions Impound account deposits 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). © 2018 Rockwell Publishing 24  Chapter 14: Fair Lending and Consumer Protection RESPA Requirements, Restrictions Kickbacks and unearned fees 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) © 2018 Rockwell Publishing RESPA Requirements, Restrictions Choice of title company 5. Property seller may not require buyer to use particular title insurance company. © 2018 Rockwell Publishing 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 © 2018 Rockwell Publishing 25  Financing Residential Real Estate Instructor Materials 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 © 2018 Rockwell Publishing TILA-RESPA Disclosures Coverage 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. © 2018 Rockwell Publishing TILA-RESPA Disclosures Disclosure requirements 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 © 2018 Rockwell Publishing 26  Chapter 14: Fair Lending and Consumer Protection TILA-RESPA Disclosures Finance charge 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 © 2018 Rockwell Publishing TILA-RESPA Disclosures Finance charge Doesn’t include loan application fee or charges for transaction services such as: ⚫ appraisal ⚫ credit report ⚫ inspections ⚫ survey ⚫ document prep ⚫ title insurance © 2018 Rockwell Publishing TILA-RESPA Disclosures Annual percentage rate 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. © 2018 Rockwell Publishing 27  Financing Residential Real Estate Instructor Materials TILA-RESPA Disclosures Total interest percentage 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 © 2018 Rockwell Publishing TILA-RESPA Disclosures ARMs 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. © 2018 Rockwell Publishing TILA-RESPA Disclosures ARM adjustment notice 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. © 2018 Rockwell Publishing 28  Chapter 14: Fair Lending and Consumer Protection TILA-RESPA Disclosures Loan estimate 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) © 2018 Rockwell Publishing TILA-RESPA Disclosures Loan estimate 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 © 2018 Rockwell Publishing TILA-RESPA Disclosures Loan estimate 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. © 2018 Rockwell Publishing 29  Financing Residential Real Estate Instructor Materials TILA-RESPA Disclosures Loan estimate 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. © 2018 Rockwell Publishing TILA-RESPA Disclosures Closing disclosure 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. © 2018 Rockwell Publishing TILA-RESPA Disclosures Closing disclosure 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. © 2018 Rockwell Publishing 30  Chapter 14: Fair Lending and Consumer Protection Summary RESPA Finance charge Annual percentage rate Total interest percentage Loan estimate Tolerance limitations Closing disclosure © 2018 Rockwell Publishing 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. © 2018 Rockwell Publishing Predatory Lending Practices Steering Predatory steering: steering buyer toward more expensive loan when buyer could qualify for less expensive loan. © 2018 Rockwell Publishing 31  Financing Residential Real Estate Instructor Materials Predatory Lending Practices Fee packing 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. © 2018 Rockwell Publishing Predatory Lending Practices Equity stripping 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. © 2018 Rockwell Publishing Predatory Lending Practices Loan flipping 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). © 2018 Rockwell Publishing 32  Chapter 14: Fair Lending and Consumer Protection Predatory Lending Practices Property flipping 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. © 2018 Rockwell Publishing Predatory Lending Practices Disregarding capacity to repay Disregarding buyer’s capacity to repay: making loan based only on property’s value without considering borrower’s ability to afford payments. © 2018 Rockwell Publishing Predatory Lending Practices Impound waivers 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. © 2018 Rockwell Publishing 33  Financing Residential Real Estate Instructor Materials Predatory Lending Practices Loan in excess of value Loan in excess of value: loaning borrower more than property’s actual value. ⚫ Usually involves fraudulent appraisal. © 2018 Rockwell Publishing Predatory Lending Practices Negative amortization Negative amortization schemes: deliberately making loan with payments that don’t cover interest. ⚫ Unpaid interest added to principal. © 2018 Rockwell Publishing Predatory Lending Practices Balloon payments 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. © 2018 Rockwell Publishing 34  Chapter 14: Fair Lending and Consumer Protection Predatory Lending Practices Fraud Fraud: misrepresenting or concealing unfavorable loan terms or excessive fees, falsifying documents, or using other fraudulent means to induce borrower to enter loan agreement. © 2018 Rockwell Publishing Predatory Lending Practices High-pressure tactics High-pressure sales tactics: telling prospective borrowers that they must decide immediately, that no other lender will loan them money, etc. © 2018 Rockwell Publishing Predatory Lending Practices Advance loan payments Advance payments from loan proceeds: requiring some of borrower’s mortgage payments to be paid at closing, out of loan proceeds. © 2018 Rockwell Publishing 35  Financing Residential Real Estate Instructor Materials Predatory Lending Practices Prepayment penalties 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. © 2018 Rockwell Publishing Predatory Lending Practices Default interest rate Unfair default interest rate: increasing loan’s interest rate by excessive amount when borrower defaults. © 2018 Rockwell Publishing Predatory Lending Practices Acceleration clause 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. © 2018 Rockwell Publishing 36  Chapter 14: Fair Lending and Consumer Protection Predatory Lending Practices Credit life insurance Single-premium credit life insurance: requiring borrowers to purchase policy with single large premium due at closing. © 2018 Rockwell Publishing Predatory Lending Practices Loan servicing Predatory loan servicing: charging improper late fees, failing to credit borrower with payments made, etc. © 2018 Rockwell Publishing Predatory Lending Targeted victims 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 © 2018 Rockwell Publishing 37  Financing Residential Real Estate Instructor Materials Predatory Lending Predatory lending laws Laws designed to stop predatory lending practices: ⚫ federal law ⚫ ability to repay rule ⚫ state laws © 2018 Rockwell Publishing Predatory Lending Laws Federal law 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. © 2018 Rockwell Publishing State Predatory Lending Laws Coverage 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. © 2018 Rockwell Publishing 38  Chapter 14: Fair Lending and Consumer Protection Summary Predatory Lending Steering Fee packing Equity stripping Loan flipping Property flipping © 2018 Rockwell Publishing 39