Chapter 5 Federal Regulation and Consumer Protection

The federal government has a long history of legislation that protects property ownership and prohibits discrimination. The U.S. Constitution severely limits the government’s ability to take the private property of citizens, except for public use. In addition to laws prohibiting discrimination, there are laws that prohibit abusive sales and loan practices, as well as legislation that addresses disclosure. DISCLOSURE requires that all pertinent information about a property or a loan be provided to enable a consumer to make informed choices in the lending process. It is important that professional real estate and finance practitioners should be aware of, understand, and comply with all these federal laws.

I. Anti-Discrimination Legislation

A. CIVIL RIGHTS ACT OF 1866 The Civil Rights Act of 1866 was the first piece of legislation passed by Congress after the Civil War that dealt with real estate in particular. The act specifically prohibits any discrimination based on race or ancestry. In 1968 in the historic Jones v. Mayer case, the U.S. Supreme Court ruled that the 1866 federal law “prohibits all racial discrimination, private or public, in the sale or rental of property.” The court upheld the constitutionality of the law based on the 13th Amendment to the U.S. Constitution, which prohibits slavery.

B. FEDERAL FAIR HOUSING ACT The Federal Fair Housing Act is contained in Title VIII of the Civil Rights Act of With this law, congress broadened the protections of the Civil Rights Act of The FEDERAL FAIR HOUSING ACT makes it illegal to discriminate on the basis of race, color, religion, sex, national origin, or handicap, or against families with children, in the sale or lease of residential property or in the sale or lease of vacant land for the construction of residential buildings. BLOCKBUSTING STEERING REDLINING

C. EQUAL CREDIT OPPORTUNITY ACT The EQUAL CREDIT OPPORTUNITY ACT is a federal law prohibiting those who lend money from discriminating against borrowers based on their race, sex, color, religion, handicap, national origin, age, or marital status. Enacted in 1974, this Act was a result of hearings by the National Commission on Consumer Finance in 1972 that focused on the denial of credit to women. Married women were often denied credit in their own name, even when they were the principal breadwinner in the family. Congress revisited the bill and expanded it to include additional protections based on age, race, color, religion, and those on welfare. This revised legislation became law in 1976.

D. HOME MORTGAGE DISCLOSURE ACT The HOME MORTGAGE DISCLOSURE ACT (1975) was specifically passed by Congress to deal with the problem of redlining. The HOME MORTGAGE DISCLOSURE ACT (1975) was specifically passed by Congress to deal with the problem of redlining. The law requires any lender with assets of $10 million or more to make a report of all of its loans both within and outside of the Standard Metropolitan Statistical Area in which it has either a main office or a branch office. A STANDARD METROPOLITAN STATISTICAL AREA (SMSA) is a city and its suburbs having a population of 50,000 persons or more. A STANDARD METROPOLITAN STATISTICAL AREA (SMSA) is a city and its suburbs having a population of 50,000 persons or more. The distribution of loans must be indicated by the census tracts in which they were made. A CENSUS TRACT is the smallest demographic area used by the Bureau of the Census.

E. COMMUNITY REINVESTMENT ACT The COMMUNITY REINVESTMENT ACT (1978) was passed to make all federally regulated institutions responsive to the needs of their communities by requiring them to publicize how well they were serving their local communities. A COMMUNITY SUPPORT STATEMENT is a report to institutions regulators that details exactly how well the federally regulated institution serves its community. Based on the community support statement, as well as input from the community itself, the regulators may or may not permit the further expansion of a particular lending institution.

F. FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT (FIRREA) The FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT (FIRREA) of 1989 was a response to the failure of the savings and loan industry in the 1980s. The Act includes all mortgage lenders, including the primary and secondary market, that are not affiliated with depository institutions, as well as mortgage brokers and appraisers. The purpose of the FIRREA regulations is to insure that redlining and other discriminatory acts do not occur at any level in the lending process. The purpose of the FIRREA regulations is to insure that redlining and other discriminatory acts do not occur at any level in the lending process. FIRREA requires the licensing of appraisers by all fifty states and sets up the APPRAISAL SUBCOMMITTEE as a federal agency to monitor the actions of lenders, state regulators, the Appraisal Foundation, and other federal regulatory agencies.

G. REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA) The REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA) of 1974 was passed to protect consumers from abusive practices by lenders. Consumers had long complained about the various fees and commissions paid in the loan process. RESPA dealt with these problems by requiring all lenders to provide three disclosure statements to the borrower: 1. A HUD booklet that explains the loan settlement process and outlines standard procedures. 2. A Good Faith Estimate of all settlement charges. 3. A Uniform Settlement Statement prior to close of escrow. RESPA forbids kickbacks or the use of required title companies, and limits the amount of funds required to be deposited to escrow accounts.

H. CONSUMER CREDIT PROTECTION ACT 1968 (Truth in Lending Act) The Federal Reserve Board of Governors issued Regulation Z to implement the Act. REGULATION Z requires that the lender provide the consumer with the total of all finance charges and the Annual Percentage Rate (APR) of the loan. This disclosure must be in writing and be more prominent than other items in the disclosure. This disclosure must be made to the borrower, in writing, within three business days from the time the lender receives the application. This disclosure must be in writing and be more prominent than other items in the disclosure. This disclosure must be made to the borrower, in writing, within three business days from the time the lender receives the application. Regulation Z also contains provisions that apply to advertising. RIGHT OF RESCISSION (RIGHT TO CANCEL) TRIGGERS

Figure 5-5 Wrong Example

Figure 5-6 – Correct Example

II. CHAPTER SUMMARY The federal government has long taken an active role in assuring that all citizens will be able to enjoy the benefits of property ownership. In addition to support of the capital markets that make real estate loans possible, particular care has been taken to assure that no citizen will be discriminated against on the basis of race, religion, sex, disability, or ethnicity. In addition, the government has sought to curb both abusive and predatory sales and lending practices. The government has required full disclosure throughout the lending process, both to protect consumers and to allow them to be well informed. The government has required full disclosure throughout the lending process, both to protect consumers and to allow them to be well informed. This legislation has also benefited lenders, as it has rooted out anti- competitive lending practices.