1. © 2012 Rockwell Publishing Financing Residential Real Estate Lesson 14: Fair Lending and Consumer Protection

2. © 2012 Rockwell Publishing Introduction This lesson will cover: federal fair lending laws consumer protection laws predatory lending

3. © 2012 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

4. © 2012 Rockwell Publishing 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

5. © 2012 Rockwell Publishing Equal Credit Opportunity Act Prohibits discrimination based on: race/color religion national origin sex marital status age Protected categories

6. © 2012 Rockwell Publishing Equal Credit Opportunity Act Also prohibits discrimination against applicant who: receives income from public assistance exercised rights under federal credit laws Protected categories

7. © 2012 Rockwell Publishing Equal Credit Opportunity Act Lenders cannot discriminate against applicants when: interviewing and communicating analyzing finances offering credit terms Prohibited actions

8. © 2012 Rockwell Publishing Equal Credit Opportunity Act Lenders: cannot discourage anyone from applying for loan must apply credit guidelines to everyone in same manner Prohibited actions

9. © 2012 Rockwell Publishing 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) Permissible questions

10. © 2012 Rockwell Publishing 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

11. © 2012 Rockwell Publishing Fair Lending Laws Federal Fair Housing Act: 1968 law, applies to transactions involving one- to four-unit residential properties. Fair Housing Act

12. © 2012 Rockwell Publishing Fair Housing Act Prohibits lending discrimination based on: race color national origin religion sex disability familial status Protected categories

13. © 2012 Rockwell Publishing 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

14. © 2012 Rockwell Publishing 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

15. © 2012 Rockwell Publishing 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

16. © 2012 Rockwell Publishing 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

17. © 2012 Rockwell Publishing 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

18. © 2012 Rockwell Publishing Fair Lending Laws Home Mortgage Disclosure Act (HMDA): 1975, 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

19. © 2012 Rockwell Publishing 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). Requires annual reports

20. © 2012 Rockwell Publishing Home Mortgage Disclosure Act For each loan or application, lender must provide: dollar amount and type of loan purpose of loan whether application was request for preapproval and if denied or approved borrower’s race, ethnicity, sex, and gross annual income type and location of property Loan data

21. © 2012 Rockwell Publishing Home Mortgage Disclosure Act HMDA: implemented by Federal Reserve Board’s Regulation C 2004 and 2008 amendments require lenders to include information about loan costs, terms high-cost loans may alert regulators to predatory lending practices Predatory lending

22. © 2012 Rockwell Publishing Summary Fair Lending Laws Equal Credit Opportunity Act Redlining Fair Housing Act Community Reinvestment Act Home Mortgage Disclosure Act Predatory lending

23. © 2012 Rockwell Publishing Consumer Protection Laws Federal consumer protection laws that apply to mortgage loan transactions: Truth in Lending Act Real Estate Settlement Procedures Act

24. © 2012 Rockwell Publishing Consumer Protection Laws Truth in Lending Act (TILA): 1968. Implemented by Federal Reserve Board’s Regulation Z. Regulates content and timing of disclosure of interest rates, finance charges. Truth in Lending Act

25. © 2012 Rockwell Publishing 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 $50,000 or less, or secured by real property. Loans covered by TILA

26. © 2012 Rockwell Publishing 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 $50,000 not secured by real property most seller financing Loans exempt from TILA

27. © 2012 Rockwell Publishing Truth in Lending Act Disclosure statement: estimates of loan costs within 3 days of receiving written application must use best info reasonably available revised disclosure required if estimates later prove incorrect Disclosure requirements

28. © 2012 Rockwell Publishing 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

29. © 2012 Rockwell Publishing TILA Disclosure Requirements Total finance charge: sum of fees and charges borrower will pay in connection with loan. Includes interest. May also include: origination fee, discount points finder’s fee, service charge mortgage insurance premiums guaranty fee mortgage broker’s fee Total finance charge

30. © 2012 Rockwell Publishing 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 for default Total finance charge Doesn’t include:

31. © 2012 Rockwell Publishing TILA Disclosure Requirements Disclosure statement must also show: lender’s identity amount financed payment schedule total payments any prepayment penalty late charges assumption policy Other disclosures

32. © 2012 Rockwell Publishing TILA Disclosure Requirements Additional disclosures required for ARM secured by principal dwelling. CHARM booklet: “Consumer Handbook on Adjustable-Rate Mortgages.” How interest rate and payment may change for each loan program being considered. Index used to determine ARM’s interest rate. Hypothetical examples based on $10,000 loan. ARMs

33. © 2012 Rockwell Publishing TILA Disclosure Requirements Lender must notify borrower each time interest rate is being 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

34. © 2012 Rockwell Publishing Truth in Lending Act When security property is borrower’s principal residence, borrower may rescind loan agreement within 3 days of: signing agreement, receiving disclosure statement, or receiving notice of right of rescission. Right of rescission

35. © 2012 Rockwell Publishing Truth in Lending Act Notice of right to rescind: can’t be part of other TILA disclosures or documents must be separate document doesn’t expire for 3 years if borrower never receives statement or notice Right of rescission

36. © 2012 Rockwell Publishing 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

37. © 2012 Rockwell Publishing 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

38. © 2012 Rockwell Publishing 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, interest rate, monthly payment. Ads for loans with variable rates (ARMs): rates/terms may change can’t advertise loan as “fixed” Advertising under TILA

39. © 2012 Rockwell Publishing Summary Truth in Lending Act Regulation Z Consumer loan Annual percentage rate Total finance charge ARM disclosures Adjustment notice Right of rescission Advertising rules

40. © 2012 Rockwell Publishing Consumer Protection Laws Real Estate Settlement Procedures Act (RESPA): 1974, enforced by Consumer Financial Protection Bureau (CFPB) Affects how closing is handled in most residential mortgage transactions. Applies to any professional involved in process. Includes real estate agents. RESPA

41. © 2012 Rockwell Publishing RESPA Two main goals: to provide borrowers with information about all financing fees and closing costs to eliminate kickbacks and referral fees that increase borrowers’ costs Purpose of law

42. © 2012 Rockwell Publishing RESPA RESPA applies to all federally related loan transactions. Includes most residential mortgage loans. Includes almost all institutional lenders. Covered transactions

43. © 2012 Rockwell Publishing 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 secondary market agency, or makes more than $1 million in real estate loans per year. Covered transactions

44. © 2012 Rockwell Publishing 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

45. © 2012 Rockwell Publishing RESPA Requirements, Restrictions 1. Within 3 days of written application, lender must give loan applicant: booklet about settlement procedures mortgage servicing disclosure statement good faith estimate of closing costs Disclosures to loan applicant

46. © 2012 Rockwell Publishing 2.Disclose required use of particular service provider when loan application or service agreement is signed. 3. Disclose affiliated business arrangement when borrower referred to affiliated provider. Affiliated business arrangements RESPA Requirements, Restrictions

47. © 2012 Rockwell Publishing 4. Itemize loan settlement charges on Uniform Settlement Statement form. Closing agent must provide copy to buyer, seller, lender on or before closing date. Used to itemize closing costs. Uniform Settlement Statement RESPA Requirements, Restrictions

48. © 2012 Rockwell Publishing 5. 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

49. © 2012 Rockwell Publishing 6. Lender or service provider may not: give or receive kickbacks or referral fees accept unearned fees charge a document preparation fee for required disclosures (Uniform Settlement Statement, impound account statement, TILA disclosures) Kickbacks and unearned fees RESPA Requirements, Restrictions

50. © 2012 Rockwell Publishing 7. Property seller may not require buyer to use particular title insurance company. Choice of title company RESPA Requirements, Restrictions

51. © 2012 Rockwell Publishing As of 2010, lenders are required to use new: standardized form for good faith estimate (GFE) version of Uniform Settlement Statement RESPA rule changes in 2010 RESPA Requirements, Restrictions

52. © 2012 Rockwell Publishing New rules for lenders: give applicants GFE earlier in process to facilitate comparison shopping place strict limits (“tolerances”) on cost increases between time of GFE estimates and closing explain costs/tradeoff of choices encourage “volume discounts” RESPA rule changes in 2010 RESPA Requirements, Restrictions

53. © 2012 Rockwell Publishing Summary RESPA Federally related loan transaction Settlement service provider Affiliated business arrangement Kickback or referral fee Unearned fee Good faith estimate (GFE) Uniform Settlement Statement

54. © 2012 Rockwell Publishing Predatory Lending Predatory lending: practices unscrupulous mortgage lenders and brokers use to take advantage of unsophisticated borrowers for profit. Includes: Tactics that are always abusive. Lending practices and loan terms misused for predatory purposes.

55. © 2012 Rockwell Publishing Predatory Lending Practices Predatory steering: steering buyer towards more expensive loan when buyer could qualify for less expensive loan. Steering

56. © 2012 Rockwell Publishing 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

57. © 2012 Rockwell Publishing 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

58. © 2012 Rockwell Publishing Predatory Lending Practices Loan flipping: encouraging home owner to refinance repeatedly over short period, when there’s no real benefit in doing so. Loan flipping

59. © 2012 Rockwell Publishing 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

60. © 2012 Rockwell Publishing 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

61. © 2012 Rockwell Publishing 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

62. © 2012 Rockwell Publishing 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

63. © 2012 Rockwell Publishing Predatory Lending Practices Negative amortization schemes: deliberately making loan with payments that don’t cover interest. Unpaid interest added to principal. Negative amortization

64. © 2012 Rockwell Publishing 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

65. © 2012 Rockwell Publishing 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

66. © 2012 Rockwell Publishing Predatory Lending Practices High-pressure sales tactics: telling prospective borrowers that they must decide immediately, no other lender will loan them money, etc. High-pressure tactics

67. © 2012 Rockwell Publishing 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

68. © 2012 Rockwell Publishing 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

69. © 2012 Rockwell Publishing Predatory Lending Practices Unfair default interest rate: increasing loan’s interest rate by excessive amount when borrower defaults. Default interest rate

70. © 2012 Rockwell Publishing 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

71. © 2012 Rockwell Publishing Predatory Lending Practices Single-premium credit life insurance: requiring borrowers to purchase policy with single large premium due at closing. Credit life insurance

72. © 2012 Rockwell Publishing Predatory Lending Practices Predatory loan servicers may: charge improper late fees fail to credit payments institute foreclosure against borrowers not in default Loan servicing

73. © 2012 Rockwell Publishing 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

74. © 2012 Rockwell Publishing Predatory Lending Laws designed to stop predatory lending practices: federal state Predatory lending laws

75. © 2012 Rockwell Publishing Predatory Lending Laws Home Ownership and Equity Protection Act (HOEPA): provisions added to TILA in 1994. 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

76. © 2012 Rockwell Publishing Federal Predatory Lending Law High cost loan: loan’s APR or total points and fees exceed certain thresholds. First lien loan: initial APR exceeds yield on certain Treasury securities by more than 8%. Total points and fees borrower will pay at or before closing exceed 8% of loan amount, or specified dollar amount, whichever is greater ($611 in 2012). High-cost loans

77. © 2012 Rockwell Publishing Federal Predatory Lending Law 2008: new provisions added to TILA and Regulation Z to provide consumers with greater protection against predatory lending. Established new category: higher-priced loans. Higher-priced loans

78. © 2012 Rockwell Publishing Federal Predatory Lending Law Higher-priced loan category: purchase loans as well as home equity and refinance loans lower cost thresholds Higher-priced loans

79. © 2012 Rockwell Publishing Federal Predatory Lending Law Recent consumer protection requirements for higher-priced and high-cost loans. Lender can’t make loan without considering borrower’s ability to repay. For high-cost (HOEPA) loans: no prepayment penalty allowed. For higher-priced loans: no prepayment penalty after first two years or if loan has variable payments during first four years. Higher-priced and high-cost loans

80. © 2012 Rockwell Publishing Federal Predatory Lending Law Since April, 2010, lenders required to: establish escrow (impound) account for first-lien loans require borrower to make deposits for property taxes and insurance Higher-priced and high-cost loans

81. © 2012 Rockwell Publishing Federal Predatory Lending Law HOEPA’s high-cost loans continue to be subject to several existing rules. Loan term less than 5 years: loan can’t be structured so that balloon payment necessary. Negative amortization isn’t allowed. Interest rate can’t be raised after default. High-cost-only rules

82. © 2012 Rockwell Publishing 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

83. © 2012 Rockwell Publishing State Predatory Lending Laws State laws address recent concern: need for consumer protection during loan modification process (after borrower defaults or is about to default on home loan). Protection for distressed borrowers

84. © 2012 Rockwell Publishing Summary Predatory Lending Steering Fee packing Equity stripping Loan flipping Property flipping HOEPA High-cost loan Higher-priced loan