Mortgage Lending Regulatory and Legislative Issues
In light of the spotlight that has been placed upon the real estate financial industry and the dire consequences it has had upon consumers, government--both Federal and state, have a consortium of regulations and legislations giving them the authority to monitor activities of financial lending institutions among others involved in real estate finance transactions.

A. Overview

Regulated by 10 federal laws, 5 federal enforcement agencies, and over 49 state laws and licensing boards, the mortgage finance industry is governed by a host of legislative rhetoric that is important for bankers-brokers to understand.

To establish levels of acceptable practices and standards to which mortgage officers are required to comply and to, generally speaking, provide oversight to the lending process (as a collective whole) and its myriad of interrelated institutions, the Federal government put forth a series of laws and regulations to govern the mortgage financial industry and ensure that offerings and provisions to clients remain above board.

B. Truth in Lending

In this e-book, we spoke earlier of the Truth in Lending regulation, which as a part of the Consumer Credit Protection Act, is a federal law mandating that very specific written disclosure requirements be made known to the consumer.

Such disclosures requirements include:

Finance Charge. The finance charge is the amount charged to the borrower for a loan.

Annual Percentage Rate (APR). This cost of borrowing is computed by tabulating more than just the simple interest rate but also adding on the pre-paid interest; points--both discount and origination; and interest from closing date to the end of the month.

Amount Financed. This amount reflects the true amount the consumer is actually borrowing.

Total Payments. This number refers to the total number of payments that will need to be made over the life of the loan.

Total Sales Price. The total price is the cumulative amount for a specific real estate purchase inclusive of the down payment, mortgage principal, and ancillary interest fees.

The Truth in Lending Act also is responsible for placing requirements upon advertising for lenders, disclosures pertaining to APR and to other features, in addition to, rescission rights, where the borrower has three business days to cancel a mortgage loan transaction.

C. Fair Housing Act

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Similar to the Truth in Lending Act, the Fair Housing Act was adopted in 1968. Yet, rather than making requirements on disclosures, the Fair Housing Act's purpose is to prohibit discriminatory practices within housing related business activities. Specifically, the discriminatory practices of which we speak include: race, gender, religion, national origin, familial status, and/or disability or handicap.

In mortgage lending, solely based upon an individual's on race, color, national origin, religion, sex, familial status, or handicap (disability), the following actions are considered non-permissible:

  • Discrimination in property appraisal.
  • Imposition of different terms or conditions on a loan, for example, varying interest rates, points, or fees.
  • Refusal to make a mortgage loan.
  • Refusal to provide information regarding loans.
  • Refusal to purchase a loan.
  • Setting of different terms or conditions for purchasing a loan.

While the Fair Housing Act covers the majority of housing types, under some circumstances, the Act exempts owner occupied buildings with fewer than four units; single family homes sold or rented without the aid of a broker; and housing operated by organizations and private clubs that restricts its member occupancy.

By and large, though, all mortgage bankers-brokers should always be in compliance with the Fair Housing Act, and as a demonstration of such, prominently display the Fair Housing logo along with the Equal Housing Lender slogan on all of their collateral and affiliated materials.

D. Real Estate Settlement Procedures Act (RESPA)

A second consumer protection law, The Real Estate Settlement Procedures Act (RESPA) covers the purchase of loans, assumptions made in conjunction with loans, loans intended for refinance and property improvements, and equity lines of credit for one to four unit residential properties.

Generally speaking, RESPA serves two primary functions:

  • Requires certain disclosures be made to borrowers.
  • Prohibits practices that have a tendency to drive up closing costs of a loan.

Under RESPA, the required disclosures include:

~ Required at the Time of the Loan Application

  • Good Faith Estimate (GFE) of settlement costs.
  • Customized consumer information booklet (for purchase transactions only).

~ Disclosures before Closing

  • Affiliated Business Arrangement (AfBA).
  • Disclosures of any relationships between lender and other parties providing services linked with the loan.
  • A HUD-1 Settlement Statement.

~ Disclosures at Closing

  • HUD-1 Settlement Statement.
  • Initial escrow statement.
  • Disclosures after closing.
  • Annual escrow statement.
  • Servicing Transfer Statement in the event of transferring servicing for the mortgage.

Note: A brief word on closing costs (incurred at the time of lending the money to the borrower), the majority of these costs are typically passed on to the borrower in the following forms: title search and title insurance fees, escrow fees, appraisal and credit report expenses, lenders' and agents' fees, recording and notary fees, as well as, any other expenses that may not incur again over the loan maturity period.

Further, RESPA provides protection to the consumer in the form of the following: prohibitions on kickbacks, fee-splitting and unearned fees in return for referrals for settlement services, non-requirements placed upon the seller requiring them to use a specified title insurance company, and limits placed upon escrow accounts.

E. Equal Credit Opportunity Act (ECOA)

It was not until 1975 that the Equal Credit Opportunity Act (ECOA) came into being, essentially prohibiting credit discrimination on the basis of sex, race, marital status, religion, national origin, age, and/or receipt of public assistance. The ECOA regulates the contents of a credit application, discerns whether questions are fair and, thus acceptable or unacceptable, and reviews the verbal or written rejection of an application.

Differing from the Fair Housing Act, under the ECOA individuals cannot be discriminated against due to their age or reliance upon public funding assistance.

F. Home Mortgage Disclosure Act

Enacted in 1975, the Home Mortgage Disclosure Act (HMDA) places requirements upon the reporting of lenders where they need to disclose loan data regardless of whether the loan has been approved or denied.

G. Community Reinvestment Act

Introduced in 1977, the mission of the Community Reinvestment Act (CRA) is to support financial institutions' (insured depository institutions) as they strive to meet the credit needs of the communities in which they serve, including both low- and moderate-income community members.

H. Fair Credit Reporting Act

Newly incepted in 1978, the Fair Credit Reporting Act (FCRA) promotes the accuracy of consumer credit information derived from consumer reporting agencies, for instance, credit bureaus, while ensuring the privacy of the information in its dissemination. Due to online transactions and additional security issues, since its establishment, the act has undergone several amendments.

I. New Homeowner's Protection Act (HPA)

Coming into being in 1998, the Homeowner's Protection Act (HPA), also known as the PMI Act, establishes rights for homeowners and rules for lenders regarding the cancellation of private mortgage insurance. The act applies to mortgages obtained on or after July 29, 1999.

J. Fair Debt Collection Practices Act

Instituted in 1977, the Fair Debt Collection Practices Act by prohibiting certain methods of debt collection seeks to minimize the harassment from debt collectors while ensuring fair treatment. Specifically it bans unfair, deceptive, and abusive practices (such as overcharging and harassment for lack of or insufficient payment). Further, it also bans the disclosure of consumers' debt information to third parties.

K. Gramm-Leach-Bliley Act

Enacted in 1999, the Gramm-Leach-Bliley Act, encompassing the following three components, helps safeguard consumers' personal financial information:

  1. The Financial Privacy Rule. This is a requirement placed upon financial institutions whereby they need to provide their customers with privacy notices explaining their information collection and sharing practices.
  2. The Safeguards Rule. This rule is a requirement placed upon financial institutions where they need to have a security plan to protect both the confidentiality and integrity of consumer's personal information.
  3. Pretexting. Pretexting is the prohibition placed upon the use of false pretenses, including fraudulent statements and impersonation, to obtain a consumer's personal financial information.