Chapter 11
Georgia Real Estate
An Introduction to the Profession
Eighth Edition
Chapter 11
The Loan and the Consumer
Key Terms
• APR
• credit report
• Fair Credit Reporting
Act
• finance charge
•
•
•
•
liquid asset
redlining
Regulation Z
Truth in Lending Act
© 2015 OnCourse Learning
Truth in Lending Act
The Federal Consumer Credit Protection act,
known as the Truth in Lending Act was
implemented by the Federal Reserve Board
Regulation Z.
© 2015 OnCourse Learning
Truth in Lending Act
It requires that a borrower be clearly shown,
before committing to a loan, how much is
being paid for credit in both dollar terms and
percentage terms.
© 2015 OnCourse Learning
Advertising
Truth in Lending rules affect both real estate
professionals and property owners when
advertising just about anything, including real
estate, and include financing terms in the ad.
© 2015 OnCourse Learning
Trigger Terms
Five disclosures must be included in any ad
that contains even one of the following trigger
terms:
• amount of down payment
• amount of any payments
• number of payments
• period of repayment
• dollar amount of any finance charge
© 2015 OnCourse Learning
Trigger Terms
A good rule of thumb is, if
the ad includes a number
referring to the credit, Truth
in Lending has been
triggered.
© 2015 OnCourse Learning
Trigger Terms
If any of the trigger terms are used, the
following disclosures MUST appear in the ad:
• cash price or amount of the loan
• amount of down payment
• number, amount and frequency of
repayments
• annual percentage rate
• deferred payment price or total payments
© 2015 OnCourse Learning
Annual Percentage Rate
The annual percentage rate (APR) combines
the interest rate with the other costs of the
loan into a single figure that shows the true
annual cost of borrowing.
© 2015 OnCourse Learning
Annual Percentage Rate
If you wish to say something about financing
and avoid triggering full disclosure, use
general statements:
“Assumable loan”
“Financing available”
“Easy monthly payments”
“FHA and VA financing available”
© 2015 OnCourse Learning
Lending Disclosures
If you are in the business of making loans, the
Truth in Lending Act requires you to make
disclosures to your borrower. The four that
must be most prominently displayed are:
• amount financed
• finance charge
• annual percentage rate
• total payments
© 2015 OnCourse Learning
Lending Disclosures
The finance charge is the total dollar amount
the credit will cost the borrower over the life of
the loan.
These disclosures must be delivered to the
credit applicant within three business days
after the creditor receives the applicant’s
written request for credit.
© 2015 OnCourse Learning
Exempt Transactions
Certain transactions are exempt from the
lending disclosure requirement:
• business loans
• commercial loans
• agricultural loans
• credit over $50,000 secured by personal
property
© 2015 OnCourse Learning
Failure to Disclose
The Federal Trade Commission (FTC) can order
the advertiser to cease from further violations.
Each violation can result in a $10,000 civil
penalty each day the violation continues.
© 2015 OnCourse Learning
Failure to Disclose
If the required disclosures are not made or the
borrower is not given the required three days
to cancel, the borrower can cancel the
transaction at any time within three years
following the date of the transaction.
© 2015 OnCourse Learning
Right to Rescind
The borrower has three business days to back
out after signing the loan papers.
© 2015 OnCourse Learning
Loan Application and Approval
All loans intended for
underwriting by Fannie Mae,
Freddie Mac, HUD/FHA, or
the VA must comply with the
new standards regarding
loan applications.
© 2015 OnCourse Learning
Loan Application and Approval
The borrower is requested to specify the type
of mortgage and terms of the loan being
sought.
An appraiser is assigned to appraise the
property.
A title search is ordered.
© 2015 OnCourse Learning
Loan Application and Approval
These steps are taken to determine the fair
market value of the property and condition of
title.
Loans are made based on the appraised value
or the purchase price, whichever is lower.
© 2015 OnCourse Learning
Loan Application and Approval
If the appraised value is lower than the
purchase price, the buyer usually required to
make a larger cash down payment.
© 2015 OnCourse Learning
Settlement Funds
The lender wants to know if the borrower has
adequate funds for settlement.
The less money a borrower personally puts into
a purchase, the higher the probability of
default and foreclosure.
© 2015 OnCourse Learning
Purpose of Loan
Lenders feel most comfortable when a loan is
for the purchase or improvement of a property
that the loan applicant will actually occupy.
© 2015 OnCourse Learning
Borrower Analysis
The federal Equal Credit Opportunity Act
prohibits discrimination based on age, sex,
race, and marital status.
The emphasis in borrower analysis is now
focused on job stability, income adequacy, net
worth and credit rating.
© 2015 OnCourse Learning
Borrower Analysis
An applicant who possesses marketable job
skills and has been regularly employed with a
stable employer is considered the ideal risk.
© 2015 OnCourse Learning
Monthly Income
The lender looks at the amount and sources of
the applicants’ income. The income sources
must be stable.
Included in the proposed housing expense
total are principal, interest, taxes, insurance,
assessments, and homeowner association
dues.
© 2015 OnCourse Learning
Monthly Income
Some lenders add the monthly cost of utilities
to this list.
Proposed monthly housing expense is
compared with gross monthly income. Monthly
housing expense (PITI) should not exceed 25%
to 30% of the gross monthly income
© 2015 OnCourse Learning
Monthly Income
The total fixed monthly expenses should not
exceed 33% to 38% of income.
Lenders recognize that food, health care,
clothing, transportation, entertainment and
income taxes must also come from the
applicants’ income.
© 2015 OnCourse Learning
Assets and Liabilities
Assets in the form of cash or that are readily
convertible into cash are called liquid assets.
They are much more useful in meeting living
expenses and loan payments than assets that
may require months to sell and convert to
cash.
© 2015 OnCourse Learning
Assets and Liabilities
The lender is interested in the applicants’
existing debts and liabilities.
The applicants’ total debts are subtracted from
their total assets to obtain their net worth.
© 2015 OnCourse Learning
References
Lenders ask for credit references as an
indicator of the future.
© 2015 OnCourse Learning
Redlining
In the past, it was not uncommon for lenders
to refuse to make loans in certain
neighborhoods. This was called redlining.
© 2015 OnCourse Learning
Redlining
Today, a lender cannot refuse to make a loan
simply because of the age or location of a
property; the neighborhood income level; or
the racial, ethnic or religious composition of
the neighborhood.
© 2015 OnCourse Learning
Loan-to-Value Ratios
The lenders looks at the amount of down
payment the borrower proposes to make, the
size of the loan being requested and the
amount of other financing the borrower plans
to use.
The larger the down payment is, the safer the
loan is for the lender.
© 2015 OnCourse Learning
Loan-to-Value Ratios
Loan-to-value ratios above
80% present more risk of
default to the lender. The
lender will either increase
the interest rate charged on
these loans or require
insurance coverage such as
FHA or a private mortgage
insurer.
© 2015 OnCourse Learning
Credit Report
The lender will order a credit report on the
applicant. The applicant is asked to pay for the
report.
© 2015 OnCourse Learning
Credit Report
The Fair Credit Reporting Act gives individuals
the right to inspect their file at a credit bureau,
correct any errors and make explanatory
statements to supplement the file.
© 2015 OnCourse Learning
Credit Report
Credit scoring is being used as a method of
evaluating credit risk.
A score of 720 or higher will get the borrower
the most favorable interest rate on a
mortgage. Bad credit can result in paying
significantly higher interest rates.
© 2015 OnCourse Learning
Credit Report
Borrowers can improve their credit scores.
Factors included in evaluating credit are: type
of credit use, application for new credit, length
of credit history, payment history and amounts
owed.
© 2015 OnCourse Learning
Credit Report
The most important factors
in evaluating credit are
payment history and
amounts owed.
© 2015 OnCourse Learning
Credit Report
Other factors considered
including paying bills on
time, consistently reducing
your credit card balances
and not “moving debt
around.”
© 2015 OnCourse Learning
Subprime Loans
There continues to be a market for subprime
loans. There are lender who cater to borrowers
with limited or blemished credit.
© 2015 OnCourse Learning
Subprime Loans
Lender who work in this market have different
criteria and profile the risk a borrower presents
differently. These loans have higher interest
rates due to the higher risk of default.
© 2015 OnCourse Learning
Predatory Lending
Georgia passed the Georgia Fair Lending Act,
considered to be one of the toughest predatory
lending laws in the nation.
© 2015 OnCourse Learning
Predatory Lending
The Mortgage Banker’s Association has
identified 12 practices considered to be
predatory lending:
© 2015 OnCourse Learning
Predatory Lending
• steering borrowers to
high-rate lenders
• intentionally structuring
high-cost loans with
payments the borrower
cannot afford
© 2015 OnCourse Learning
Predatory Lending
• falsifying loan documents
• loans to mentally
incapacitated
homeowners
© 2015 OnCourse Learning
Predatory Lending
• forging signatures on loan
documents
• changing the loan terms
at closing
• requiring credit insurance
© 2015 OnCourse Learning
Predatory Lending
• falsely identifying loans as
lines of credit or open-end
mortgages
• increasing interest
charges for loan
payments with payments
are late
© 2015 OnCourse Learning
Predatory Lending
• charging excessive
prepayment penalties
• failing to report good
payments on borrower’s
credit reports
• failing to provide accurate
loan balance and payoff
amounts
© 2015 OnCourse Learning