Financing Residential Real Estate
Lesson 14:
Fair Lending and
Consumer Protection
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.
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.
Fair Lending Laws
Equal Credit Opportunity Act
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
Protected categories
ECOA prohibits discrimination against applicant
based on applicant’s:
 race/color
 religion
 national origin
 sex
 marital status
 age
Equal Credit Opportunity Act
Protected categories
Also prohibits discrimination against applicant who:
 receives income from public
assistance program
 has exercised rights under federal
credit laws
Equal Credit Opportunity Act
Prohibited actions
Lenders must not discriminate when:
interviewing and communicating with
credit applicants,
analyzing applicants’ finances, or
offering credit terms to applicants.
Equal Credit Opportunity Act
Prohibited actions
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.
Equal Credit Opportunity Act
Permissible questions
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.
Equal Credit Opportunity Act
Notifying applicants
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.
Fair Lending Laws
Fair Housing Act
Federal Fair Housing Act – 1968
Applies to transactions concerning one- to fourunit residential property, including mortgage
lending transactions.
Fair Housing Act
Protected categories
Prohibits lending discrimination based on:
 race
 color
 national origin
 religion
 sex
 disability
 familial status
Fair Housing Act
Prohibited actions
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.
Fair Housing Act
Redlining
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.
Fair Housing Act
Redlining
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.
Summary
Fair Lending Laws
Equal Credit Opportunity Act
Fair Housing Act
Community Reinvestment Act
Home Mortgage Disclosure Act
Redlining
Predatory lending
Consumer Protection Laws
Federal consumer protection laws that apply to
mortgage loan transactions:
Truth in Lending Act
Real Estate Settlement Procedures Act
Consumer Protection Laws
Truth in Lending Act
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
Loans covered by TILA
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.
Truth in Lending Act
Loans covered by TILA
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.
Truth in Lending Act
Loans exempt from TILA
TILA only applies to loans made to natural persons.
Truth in Lending Act
Loans exempt from TILA
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.
Truth in Lending Act
Loans exempt from TILA
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.
Truth in Lending Act
Disclosure requirements
Lender must give mortgage loan applicant
disclosure statement with estimates of loan costs
within 3 days of receiving written application.
Truth in Lending Act
Disclosure requirements
Lender expected to use best info reasonably
available in preparing TILA disclosure statement.
If estimates later prove incorrect, revised
disclosures required.
Truth in Lending Act
Disclosure requirements
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”
TILA Disclosure Requirements
Total finance charge
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
TILA Disclosure Requirements
Total finance charge
Not part of total finance charge for mortgage loan:
Application fee
Pest inspection fee
Appraisal fee
Flood inspection fee
Document prep fee Impounds
Notary fee
Points paid by seller
Credit report fee
Late payment fees
Survey fee
Fees charged on default
Title report fee
Title insurance premiums
TILA Disclosure Requirements
Other disclosures
TILA disclosure statement must also show:
 Lender’s identity
 Amount financed
 Payment schedule
 Total payments
 Any prepayment penalty
 Late charges
 Assumption policy
TILA Disclosure Requirements
ARMs
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.
TILA Disclosure Requirements
ARMs
Numerous special disclosures required for ARM
secured by principal dwelling.
CHARM booklet: “Consumer Handbook on
Adjustable-Rate Mortgages.”
TILA Disclosure Requirements
ARMs
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.
TILA Disclosure Requirements
ARM adjustment notice
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.
Truth in Lending Act
Right of rescission
If security property is borrower’s existing principal
residence, borrower has right of rescission.
Truth in Lending Act
Right of rescission
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.
Truth in Lending Act
Right of rescission
If borrower doesn’t receive statement or notice,
right of rescission doesn’t expire for 3 years.
Truth in Lending Act
Right of rescission
Right of rescission applies to:
home equity loans
refinancing with a new lender
Doesn’t apply to purchase loans.
Truth in Lending Act
Advertising under TILA
TILA advertising rules apply to anyone who
advertises consumer credit, not just lenders.
Truth in Lending Act
Advertising under TILA
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.
Truth in Lending Act
Advertising under TILA
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.
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
Consumer Protection Laws
RESPA
Real Estate Settlement Procedures Act – 1974
Affects how closing is handled in most
residential mortgage transactions.
RESPA
Purpose of law
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.
RESPA
Covered transactions
RESPA applies to all federally related loan
transactions.
Category includes most residential
mortgage loans.
RESPA
Covered transactions
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.
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 on it or mobile home placed on it;
temporary financing (construction loan);
assumption where lender’s approval
not required or obtained.
RESPA Requirements and Restrictions
Disclosures to loan applicant
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
RESPA Requirements and Restrictions
Affiliated business arrangements
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.
RESPA Requirements and Restrictions
Uniform Settlement Statement
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.
RESPA Requirements and Restrictions
Impound account deposits
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.
RESPA Requirements and Restrictions
Kickbacks and unearned fees
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).
RESPA Requirements and Restrictions
Choice of title company
6. Property seller may not require buyer to use a
particular title insurance company.
RESPA Requirements and Restrictions
RESPA rule changes in 2010
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 Requirements and Restrictions
RESPA rule changes in 2010
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).
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
Predatory Lending
Predatory lending refers to practices that
unscrupulous mortgage lenders and brokers use
to take advantage of unsophisticated borrowers
for profit.
Predatory Lending
Predatory practices
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 Lending Practices
Steering
Predatory steering
Steering buyer towards more expensive
loan when buyer could qualify for less
expensive loan.
Predatory Lending Practices
Fee packing
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.
Predatory Lending Practices
Equity stripping
Equity stripping
“Stripping away” home owner’s equity by
charging high fees on repeated refinancing.
Predatory Lending Practices
Loan flipping
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.
Predatory Lending Practices
Property flipping
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.
Predatory Lending Practices
Disregarding capacity to pay
Disregarding buyer’s capacity to pay
Making loan based only on property’s value,
without considering borrower’s ability to afford
payments.
Predatory Lending Practices
Impound waivers
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.
Predatory Lending Practices
Loan in excess of value
Loan in excess of value
Loaning borrower more than property’s
appraised value.
Usually involves fraudulent appraisal.
Predatory Lending Practices
Negative amortization
Negative amortization schemes
Deliberately making loan with payments that
don’t cover interest. Unpaid interest added
to principal, making loan harder to pay off.
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.
Borrowers forced to sell or refinance, or
face foreclosure.
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.
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, and so on.
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.
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.
Predatory Lending Practices
Default interest rate
Unfair default interest rate
Increasing loan’s interest rate by excessive
amount when borrower defaults.
Predatory Lending Practices
Call provision
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.
Predatory Lending Practices
Credit life insurance
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.
Predatory Lending Practices
Loan servicing
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.
Predatory Lending
Targeted victims
Targeted victims of predatory lending tend to be
uninformed and/or in vulnerable circumstances.
Predatory Lending
Targeted victims
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.
Predatory Lending
Targeted victims
Elderly people who are cognitively impaired and
have a lot of equity in their homes are often victims
of predatory lending.
Predatory Lending
Predatory lending laws
There are laws at both federal and state level
designed to stop predatory lending practices.
Predatory Lending Laws
Federal law
Home Ownership and Equity Protection Act
(HOEPA): provisions added to TILA in 1994.
Predatory Lending Laws
Federal law
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.
Predatory Lending Laws
State 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 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.
State Predatory Lending Laws
Protection for distressed borrowers
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.
State Predatory Lending Laws
License 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.
Summary
Predatory Lending
Steering
Fee packing
Equity stripping
Loan flipping
Property flipping
HOEPA
High-cost loan
Higher-priced loan