Topic 13.10: Laws Regarding Fair Credit and Lending Procedures

Learning Objective

After successfully completing this topic, you will be able to describe the major provisions of the federal laws regarding fair credit and lending procedures.

Consumer Credit Protection Act 

The Consumer Credit Protection Act is an “umbrella” law that includes several other important credit laws, including the Equal Credit Opportunity Act and the Truth in Lending Act.

Equal Credit Opportunity Act (ECOA) 

The Equal Credit Opportunity Act (ECOA) ensures that lenders make credit available without discriminating against the buyer based on race, color, religion, national origin, sex, marital status, age or receipt of income from public assistance programs.

A lender cannot require an applicant’s spouse to join in (sign) a loan application.  

The law prohibits a lender from discriminating against income from alimony, child support, public assistance, or part-time employment. It also prohibits inquiry about, or consideration of, child bearing plans or potential for child bearing.

The Truth in Lending Act

The Truth in Lending Act (TILA) requires lenders to treat consumers fairly and to provide meaningful disclosure about the cost of credit. This allows consumers to understand the charges, compare costs, and shop around for the best credit deal. It applies to mortgage loans and auto loans (closed-end credit) and credit cards (open-end credit).

Federal Reserve Regulation Z

The law is implemented by Regulation Z, requiring a Truth in Lending Disclosure of full credit costs.  

Annual Percentage Rate (APR)

The Act requires lenders to tell the consumer the amount of the loan, the annual percentage rate, and any finance charges. The annual percentage rate includes the interest rate and other loan costs.  The law also applies to real estate licensees who advertise credit terms to be granted by an institutional lender. When a licensee advertises certain information, called triggers, the licensee must disclose all the components of the financing.

For example, any of the following information in a real estate ad is a “trigger:”

• The amount or percentage of the down payment (e.g., “5% down”; “$4,000 down”),
• The amount or percentage of any payment (“payments $896.54 monthly”),
• The number of payments or the period of repayment (“15-year or 30-year mortgages available”), or
• The amount of any finance charges (“less than $1,800 interest in year one”).

Any “trigger” requires that the licensee disclose the following information:

• the amount or percentage of the down payment, which would normally show the purchase price, the down payment, and the amount financed,
• the terms of repayment, which would normally show the payment amount and the number of payments required, and
• the annual percentage rate, using that term or the abbreviation “APR,” tak­ing into account the amount of the loan, timing of the payments, the finance charge, and the note rate.

Disclosure of Annual Percentage Rate for New Mortgages

When mortgage lenders calculate the annual percentage rate of a loan, they must include not only interest, points, and origination fees but also many other buyer fees (such as amortization schedule, application fee, assignment fee, assumption fee, commitment fee, courier fee, funding fee, construction inspection fee, mortgage broker fee, mortgage insurance premiums, loan processing fees, recording fees, tax service fee, title endorsement fee, verification fee, and wire fee).

A basic rule for advertising credit is this: if the ad shows the finance charge as a rate, that rate must be stated as an “annual percentage rate” or “APR.”

Bait and Switch Advertising

The TILA makes bait and switch advertising a federal offense. If a builder advertises “$500 down and $500 per month,” the builder must offer buyers those terms, or the builder will violate the law.

Right of Rescission

Individuals who borrow on consumer loans have a three-business-day “cooling off” period, or right of rescission. That means they can cancel the transaction without cost. The types of loans that have this feature include refinance loans, home equity lines of credit, and second mortgages. This does not apply to loans used to purchase or build a home

Real Estate Settlement Procedures Act (RESPA) 

The Real Estate Settlement Procedures Act (RESPA) requires disclosure of the amounts and types of charges buyers must pay at closing. RESPA applies to most closings with a “standard” home mortgage loan from a financial institution or mortgage banker.

The law requires the lender to give the borrower an information booklet describing closing costs. It requires advanced estimates of closing costs as well as requiring that the borrower be able to examine the RESPA-specified closing statement in advance. The Act prohibits kick-backs to a lender from vendors of closing related services.

The six principal areas of the RESPA are

1. Loan Estimate. (See next section)
2. Settlement cost booklet. The booklet was updated to reflect the new disclosure forms.
3. Selection of the closing agent. The lender must disclose the business relation¬ship and the charges of any closing agent if the lender requires that the loan be closed by that agent.
4. Purchase of title insurance. A seller may not make it a condition of the sale that the buyer purchase title insurance from a particular company.
5. No kickbacks. Service fees may not be paid unless a service was per¬formed by a person licensed to do so, and all parties are informed. Referral fees between brokers are permitted.
6. Closing Disclosure. (See next section)

TILA-RESPA Integrated Disclosure (TRID) 

This disclosure consists of two major forms, the Loan Estimate (LE) and the Closing Disclosure (CD).
The Loan Estimate and the settlement cost booklet must be given to the applicant within three days after the loan application. It
• makes the lender responsible for the exact loan charges quoted. Certain other costs must be within 10% of the estimate,
• helps buyers understand loan costs, and
• helps buyers compare loan costs from several lenders.

The borrower must receive the Closing Disclosure at least three days before closing. The lender must have proof of receipt. If the lender mails the forms, they must be in the mail at least seven days before the closing.