Federal Lending Legislation

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1 Chapter 4 Federal Lending Legislation 1 Federal Law Laws requiring financial disclosures in real estate transactions: Truth in Lending Act and the Mortgage Disclosure Improvement Act Real Estate Settlement Procedures Act Homeowner s Protection Act Equal Credit Opportunity Act Laws protecting privacyand consumer identification: Fair Credit Reporting Act, Fair and Accurate Credit Transactions Act Red Flag Rules Gramm-Leach-Bliley Act U.S. Patriot Act National Do Not Call Registry Laws/Rules prohibiting predatory lending: Home Ownership Equity Protection Act Federal Reserve Mortgage Loan Originator Compensation Rule 2 Chapter Objectives Discuss disclosure provisions of federal laws related to mortgage lending. Identify procedures to protect the privacy of consumers. Describe regulations put in place to address predatory lending. Define education requirements for mortgage loan originators. 3 1

2 Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 Title X created Consumer Financial Protection Bureau and transfers rule-making and enforcement authority of the following: Truth in Lending Act (TILA) Real Estate Settlement Procedures Act (RESPA) Homeowners Protection Act (HPA) Fair Credit Reporting Act (FCRA) Fair and Accurate Credit Transactions Act (FACTA) Portions of Gramm-Leach Bliley Act (information privacy) Equal Credit Opportunity Act (ECOA) Home Mortgage Disclosure Act (HMDA) Home Ownership and Equity Protection Act (HOEPA) Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) 4 Financial Disclosure Laws Typical disclosures Total costs involved in transaction Relationships/compensation among parties to transaction May be imposed by federal or state law In this section: Truth in Lending Act (TILA) Mortgage Disclosure Improvement Act (MDIA) amending TILA Real Estate Settlement Procedures Act (RESPA) Homeowners Protection Act (HPA) Equal Credit Opportunity Act (ECOA) 5 Truth in Lending Act (TILA) Enacted in 1968 to prevent abuses in consumer credit cost disclosures Administered by Consumer Financial Protection Bureau Implemented by Regulation Z Does not limit interest rates or finance charges Applies to credit extended to consumers Subject to finance charge More than four installments For other than business or commercial purposes 6 2

3 TILA Disclosures When credit offered but before consummation Clear and conspicuous, in writing When credit terms are advertised Clear and conspicuous Certain information required with triggering terms Specific disclosures Truth in Lending Statement (TIL) and guide Consumer Handbook on Adjustable Rate Mortgages (CHARM booklet) and ARM program details (if applicable) When Your Home is on the Line (home equity loans) Maintain evidence for at least 2 years 7 TILA: APR and Finance Charges APR: Annual Percentage Rate Total cost of financing loan as % Includes interest rate on the note Reflects associated finance charges Finance charges Consumer credit as a dollar amount Spread out over life of loan Direct, indirect charges for extending credit Does not include charges payable in comparable cash transaction 8 TILA: Finance Charges May include fees charged by someone other than creditor if creditor: Requires use of third party Retains portion of third party charge Fees charged by closing agent are finance charges only if creditor: Requires those particular services Requires imposition of charge Retains portion of third-party charge (to the extent of portion retained) Fees charged by mortgage broker are finance charges 9 3

4 TILA: Finance Charges-Included Interest, time price differential, any amount payable under add-on or discount system of additional charges Service, transaction, activity, carrying charges Points, loan fees, assumption fees, finder's fees, similar charges Premiums for insurance related to credit transaction Charges imposed on creditor by another for purchasing or accepting consumer's obligation Discounts to induce payment by a means other than use of credit Debt cancellation fee 10 TILA: Finance Charges-Excluded Application fees Charges for actual unanticipated late payment, over credit limit or delinquency/default Charges imposed by financial institution for paying items that overdraw account Fees for participation in credit plan Seller s points Interest forfeited Certain fees for residential property transaction if bona fide and reasonable Discounts to induce payment for purchase by cash, check, other Premiums for voluntary insurance under some conditions Property insurance premiums under some conditions Some security interest charges if disclosed Interest, dividends, deposit/investment income are not deducted in computing finance charge. 11 TILA: Disclosing APR Must disclose APR when quoting interest rate (including advertising) If not possible to provide APR in advance: For open-end credit, state corresponding annual percentage rate For closed-end credit, state APR for sample transaction Hint: Closing costs NOT associated with cash sale are generally included in APR calculation 12 4

5 TILA: Truth in Lending Statement Required for mortgage loans subject to RESPA secured by consumer s dwelling (other than HELOCs) Must be given (along with other required disclosures) no later than 3 business days after receipt of consumer s completed application Earliest loan close is 7 th business day after disclosures delivered or placed in mail No fee may be charged for preparation of TIL No fee, other than bona fide and reasonable credit report fee, may be charged prior to delivery of TIL and other required disclosures May be made in language other than English at consumer s request 13 TILA: Truth in Lending Statement Required data in the Federal Box Mandatory statement You are not required to complete this agreement merely because you have received these disclosures or signed a loan application. 14 TILA: Truth in Lending Statement Other Data for Closed-End Transactions Name of the lender/creditor Notice of a right to receive itemization Payment number, amount, timing New payment, late payment, prepayment provisions Description and identification of the security Loan assumability Refinancing notice Payment summary table (with additional data for adjustable or step-rate mortgages) 15 5

6 TILA: TIL Accuracy / Redisclosure APR accurate if no variance above or below initial disclosure by more than: 1/8% (.125) for regular transaction 1/4% (.25) for irregular transaction Multiple advance Irregular payment periods Irregular amounts Consumer must receive corrected disclosure at least 3 business days prior to loan consummation Cannot close loan until both waiting periods pass May be able to waive if bona fide financial emergency Not required to continue during waiting period 16 TILA: 3/7/3 Rule Initial disclosure within 3 business daysof receipt of completed application Earliest consummation on 7th business day after disclosures delivered/mailed Consumer must receive corrected disclosure at least 3 business days before loan can be consummated Business day: All calendar days except Sundays and legal public federal holidays 17 TILA: 3/7/3 Rule Example 1 Example 1:The creditor takes an application for a fixed rate loan on Tuesday, May 1 and mails the initial TIL the next day, May 2. The earliest the loan can close assuming the APR on the final TIL is within the tolerance is Thursday, May 10 the seventh business day after mailing the initial disclosure. 18 6

7 TILA: 3/7/3 Rule Example 2 Example 2:Friday, May 4, the interest rate goes up, causing the APR to increase by more than.125 percent. The creditor mails a revised TIL on Saturday, May 5. The consumer is assumed to have received it three business days later (Wednesday, May 9). The three business-day waiting period begins Thursday. Since the next day after the three business-day waiting period is a Sunday, the earliest this loan will close is Monday, May TILA: Rescission Rescind: Withdraw from contract; void mortgage Right extends to security interest of existing principal residence only (home equity, refinance, etc.) Does notapply to purchase, construction, commercial, vacation/second homes, some refinance/consolidation loans by same creditor, state agency creditors Exercise by one consumer is effective for all consumers Creditor has 20 calendar days to return collected money Relieves borrower of liability for the loan, finance charges Right extends until midnight of thethird business day after whichever of these is last: Loan consummation Delivery of required rescission notice Delivery of all material disclosures 20 TILA: Rescission Notice Creditors must provide 2 copies of notice of right to rescind to each entitled consumer Must be in separate document and conspicuously disclose: Retention/acquisition of security interest in principal dwelling Right to rescind How to exercise right Effects of rescission Date on which rescission period ends 21 7

8 TILA: Extended Rescission Possible extended three-year rescission period if: Creditors fails to properly notify of the right to rescind Creditor fails to provide required material disclosures Disclosed finance charge considered accurate if understated by no more than: 0.5% of the amount financed or $100 1% of the amount of some refinances or $100 Extended rescission right expires after: Three years from occurrence Transfer of interest in property Sale of property 22 TILA: Rescission for Foreclosures Rescission right after initiation of foreclosure on principal residence if Mortgage broker fee that should have been included in the finance charge was not Creditor did not provide properly completed Notice of Rescission Disclosed finance charge considered accurate if Understated by no more than $35 Greater than amount required to be disclosed 23 TILA: Advertising Requires clear and conspicuous disclosure of terms Any specific loan terms shown in an ad must be actually available Triggering terms include: Amount of down payment Amount of any payment Number of payments Period of repayment Amount of any finance charge Required disclosures with triggering term include: Amount or percentage of down payment Terms of repayment Annual percentage rate, using that term spelled out in full Whether the note rate may increase If ad contains only APR, additional disclosures not required 24 8

9 TILA: Advertising Triggering Terms Triggering Terms (require disclosure) 20% down Pay only $700 per month Only 360 monthly payments 30-year financing available 1% finance charge Non-Triggering Terms (do not require disclosure) 5% APR loan available here Easy monthly payments FHA financing available 100% VA financing available Terms to fit your budget 25 TILA: Advertising Closed-End Balance expected to be repaid by specified future date If Ad Includes: Rate Payment amount Payment and rate comparison * Term fixed when rate or payment can change Must Disclose: * if variable rate based on index/margin Each simple rate (current margin and index if more will apply) Period of time each rate applies APR for the loan Amount of each over life of loan Period of time each payment will apply Prominent statement that payment/rate subject to adjustment Time period when first adjustment occurs Adjustable, variable, or ARM must appear before and as large as term fixed Clear description of what s fixed (payment and/or rate) Statement that rate/payment can increase as appropriate 26 TILA: Advertising Open-End Credit extended to borrower during term and creditor may impose a finance charge on the outstanding unpaid balance, such as HELOC If Ad Includes: Any triggering term Initial APR not based on index/ margin Minimum payment Promotional rates and payment Must Disclose: Any percentage-based loan fee and estimate of other fees Any periodic rate expressed as APR Maximum APR that may be imposed in variable rate plan Period of time initial rate is in effect Reasonably current APR using index and margin Whether balloon payment would result (equal prominence and proximity) Period of time promotional rate applies APR that applies (if variable, within established accuracy) Amounts & time periods of any payments Alternatively, toll-free number for broadcast ads 27 9

10 TILA: Other Advertising Provisions Tax implications: Cannot be misleading Consumers must be advised to consult a tax adviser Misrepresentations are prohibited, for example: Loan product being endorsed or sponsored by government Misleading use of the current lender s name Misleading claims of debt elimination Use of counselor to reference for-profit mortgage broker or mortgage creditor Making some required disclosures only in English in otherwise foreign language ads Clear and conspicuous standard 28 TILA: Appraisal on Closed-End Creditors, mortgage brokers, and affiliates prohibited from coercing, influencing, or encouraging appraiser to misstate value of dwelling: Implying that current/future work depends appraised value Excluding appraiser from consideration for reporting value that does not meet or exceed a minimum threshold Telling appraiser minimum value needed to approve loan Failing to compensate appraiser for not valuing at or above a certain amount Conditioning appraiser compensation on loan consummation 29 TILA: Appraisal on Closed-End Cannot extend credit if improper coercion has occurred unless able to document appraisal did not materially misrepresent value May ask appraiser to consider additional information or correct errors May obtain multiple appraisals if selecting most reliable May withhold compensation for breach or substandard work 30 10

11 TILA: Servicing on Closed-End Servicing: Receiving scheduled periodic payments from borrower according to the terms of loan and making payments to loan owner/other third parties Violations: Failing to credit a payment as of the date of receipt (unless the delay results in no adverse consequences to the borrower) Pyramiding late fees by imposing late fee or delinquency charges in connection with a payment under certain circumstances Failing to provide statements showing payoff amounts 31 TRUE FALSE FALSE TRUE FALSE TILA: True or False Determine whether the following statements about the Truth in Lending Act are true or false: 1. TILA is implemented by Regulation Z. 2. TILA applies to real estate loans extended to consumers and to companies. 3. The APR is also known as the note rate. 4. A credit report fee is the only fee that may be collected before providing the required disclosures. 5. An ad stating APR of 3.65% would trigger additional disclosures. 32 TILA by the Numbers 1. Initial disclosures must be given within 3 business days of receipt of a completed application. 2. A consumer who is not informed of the APR may have the right to rescind a loan for up to 3 years. 3. The earliest a loan can close is the 7th business day after disclosures are delivered

12 TILA by the Numbers 4. If the APR changes, corrected disclosure must be made no later than 3 business days before closing. 5. In order to be subject to TILA, the credit offered must be subject to a finance charge or payable by written agreement in more than installments RESPA Real Estate Settlement Procedures Act of 1974 Implemented as Regulation X With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, RESPA is under the regulatory authority of the new Consumer Financial Protection Bureau Helps consumers shop for settlement services Eliminates unnecessary increases in costs of certain settlement services 35 RESPA: Settlement Services Any service provided in connection with a prospective or actual settlement Origination of federallyrelated mortgage loan Services by mortgage broker Services related to origination or processing Title services Services by attorney Document preparation Credit reports and appraisals Inspections Settlement agent services Mortgage insurance services Hazard/flood insurance services Mortgage life/disability insurance services Services involving real property taxes or other assessments Services of real estate agent/broker Any other required services 36 12

13 RESPA: Covered Transactions Covered: One-to four-family residential property Conventional and government agency Most purchase loans, assumptions, refinances, property improvement loans, HELOCs, some construction loans Not covered: All-cash sale Home seller takes back the mortgage A rental property transaction Temporary construction loans Other business purpose transaction Property of 25 acres or more Vacant or unimproved property (unless dwelling within 2 years) 37 RESPA: Section 8-Kickbacks Prohibits: Giving/accepting a fee, kickback, or anything of value in exchange for referrals of settlement service business (allows minimal value promotional items) Fee-splitting and receiving unearned fees Required use of specific settlement service providers Allows: Fees/salary for actual services performed/goods provided Payment between real estate agents and brokers Legitimate discounts if: Combination of services results in lower price Optional to consumer Lower price not countered elsewhere Fines up to $10,000, 1 year prison, 3x liability 38 RESPA: AfBAs Affiliated business arrangements (ABAs or AfBAs) recognized as legitimate Individual, entity, associate in position to refer settlement services: Has affiliate relationship or ownership interest of more than 1% in settlement services provider AND Refers business or in some way influences selection of provider Acceptable compensation: Legitimate fees, wages for actual services rendered, hours worked Bona fide compensation from ownership interest 39 13

14 RESPA: Section 9-Title Insurance Prohibits seller from requiring use of particular title insurance company as condition of sale Buyers may sue violators Three times all charges made for title insurance 40 RESPA: Section 10-Escrow Taxes, hazard insurance, other charges Does not mandate escrow accounts Some programs or lenders may require Loan with mortgage insurance TILA higher-priced loan for at least 12 months No more than 1/12 annual disbursement Allows cushion of 2 months Requires annual analysis Inform consumer of any shortage Return excess over $50 (if not delinquent) 41 RESPA: Disclosures May not charge fee for preparing disclosures mandated by TILA and RESPA Disclosures required at various times throughout loan process With receipt of completed application: Submission of a borrower s financial information in anticipation of a credit decision If not given at loan application, MLO must provide within 3 business days unless Applicant withdraws application Lender turns down the loan 42 14

15 RESPA: Within 3 Business Days HUD Settlement Costs Booklet Good Faith Estimate (GFE) of Settlement Costs May only collect credit report fee prior to GFE and TIL After the TIL and GFE are Hand-delivered to the borrower And borrower intends to proceed, other fees may be collected That day ed to the borrower with the borrower s permission Faxed to the borrower Mailed to the borrower Next day after send receipt is returned as evidence was received Next day after signed TIL, GFE faxed back 3 business days after TIL, GFE mailed Mortgage Servicing Disclosure Statement Lender s intent to service or transfer servicing 43 RESPA: Other Disclosures Before Settlement Occurs Affiliated Business Arrangement (AfBA or ABA) Disclosure (at or prior to referral) HUD-1 Settlement Statement (1 business day prior if requested) At Settlement HUD-1 Settlement Statement Initial Escrow Statement (no later than 45 days from settlement) After Settlement Annual Escrow Statement Servicing Transfer Statement (within 15 days of effective date) Does not include sale into secondary market unless servicing rights also transferred 44 RESPA: Good Faith Estimate Required by RESPA without charge Dollar amount of settlement charges the borrower is likely to pay Required within 3 business daysof receipt of completed loan application May be provided by lender or MLO Requires used of HUD s standardized GFE Will be replaced with integrated TIL and GFE 45 15

16 RESPA: GFE Page 1 Explains the purpose of disclosure Summarizes critical data necessary to shop for settlement services and the best loan Important dates Date through which interest rate available Estimate for all other settlement charges must be available for at least ten (10) business days Business day: Entity open to the public for business Loan summary Escrow account information Summary of settlement services 46 RESPA: GFE Page 1 47 RESPA: GFE Page

17 RESPA: GFE Page 2 Documents settlement charges Indicates acceptable tolerances If MLO permits borrower to shop for third party settlement services, must give written list of providers At time of GFE On separate paper 49 RESPA: GFE Page 2 50 RESPA: GFE Page

18 RESPA: Average Charges Permitted if service obtained on behalf of borrower or seller Average cost based on Period of time (between 30 days and six months) Type of loan Geographic area Not permitted if based on loan amount or property value Total amount charged cannot exceed charges for specific class of transaction Same average charge must be used for all loans within classification Must retain all documentation used to calculate average charge for 3 years State prohibitions take precedence 52 RESPA: GFE Page 3 Summarizes the categories of charges Tradeoff table Shows relationship between total estimate settlement charges and interest rate/monthly payment Allows comparison of loan alternatives Shopping cart Allows consumer to compare other GFEs 53 RESPA: GFE Page

19 RESPA: GFE Page 3 55 RESPA: GFE Page 3 56 GFE: Availability of Terms Must be available for at least 10 business days (days entity open to the public) MLO may extend period of availability Unless rate locked, does not apply to Interest rate Charges and terms dependent on interest rate Adjusted origination charges Per diem interest 57 19

20 GFE: Tolerances Charges that may not exceed GFE amount Origination charge (e.g., fees associated with application, processing, underwriting, administrative) Credit or charge for interest rate chosen/adjusted origination charge while interest rate locked Transfer taxes Charges that cannot exceed 10% of GFE amount Lender-required settlement services, where the lender selects Lender-required services, title services and required title insurance, and owner's title insurance, when borrower uses provider identified by loan originator Government recording charges Amounts charged for all other settlement services may change at settlement MLO may cure tolerance violations at settlement or within 30 calendar days 58 GFE: Binding Loan originator bound to terms unless new GFE provided Revised GFE required within 3 business days of learning of changed circumstances Document reason for change and retain for at least 3 years Reasons for changing GFE: Changed circumstances that increase settlement costs to exceed tolerances Changed circumstances affecting eligibility for specific loan terms Borrower-requested changes affecting charges/terms Changes if interest rate not locked or lock expires If clearly disclosed, MLO can issue new GFE: New home purchase and Settlement expected more than 60 days from GFE 59 GFE: Changed Circumstances Includes: Acts of God, war, disaster, or other emergency Information relied on in providing the GFE that changes or is found to be inaccurate New information not relied on in providing the GFE Other circumstances particular to borrower or transaction (e.g. boundary dispute, flood insurance, environmental issues) Does not include basic information relied on unless: Changed or inaccurate afterwards MLO did not rely on that information Market fluctuations by themselves are not changed circumstance GFE expires in 10 business days if no intent to continue 60 20

21 RESPA: HUD-1 Settlement Statement Completed by closing/settlement agent Itemizes all charges related to the transaction Borrower: $ to bring to settlement Sellers: $ to receive at settlement HUD 1-A may be used for loans with no seller Not required for open-end home equity loans Lender/servicer must retain for 5 years after settlement 61 RESPA: HUD-1 Should be compatible with GFE Charges from GFE paid by seller: Credit to borrower and charge to seller Charges from GFE paid by others: Credit to borrower and show identity of party Paid Outside of Closing (P.O.C.) Must be included on HUD-1 and marked P.O.C. Must not be included in computing totals Indirect payments from lender to mortgage broker may not be disclosed as P.O.C. Party paying must be identified Third party services covered by "no cost" provisions must be itemized, listed in borrower column Must be offset with a negative adjusted origination charge 62 RESPA: HUD-1 Page

22 RESPA: HUD-1 Page 1 64 RESPA: HUD-1 Page 1 65 RESPA: HUD-1 Page 2 Itemizes settlement charges paid by the borrower and the seller: Items paid in connection with the loan Items required by the lender to be paid in advance Reserves deposited with the lender Title charges Government recording and transfer charges Any additional settlement charges 66 22

23 RESPA: HUD-1 Page 2 67 RESPA: HUD-1 Page 2 68 RESPA: HUD-1 Page

24 RESPA: HUD-1 Page 3 Compares exact amounts from GFE and actual settlement charges on HUD-1 Charges that cannot increase Charges that cannot increase more than 10% Charges that can change Summary of loan terms 70 RESPA: HUD-1 Page

25 TRUE FALSE FALSE RESPA: True or False Determine whether the following statements about the Real Estate Settlement Procedures Act are true or false: 1. RESPA is implemented by Regulation X. 2.MLOs may not refer consumers to settlement service providers with whom they have an ownership interest. 3.Borrowers may request to see a completed HUD-1 Settlement Statement 3 business days prior to closing. 73 FALSE TRUE RESPA: True or False Determine whether the following statements about the Real Estate Settlement Procedures Act are true or false: 4. Kickbacks are addressed in Section 9 of the Real Estate Settlement and Procedures Act. 5. MLOs must provide required disclosures within 3 business days of receiving a completed application. 74 RESPA by the Numbers 1. RESPA applies to most loans secured by a mortgage placed on residential properties designed for occupancy for 1 to 4families. 2. When necessary, a revised GFE must be provided within of receiving information 3 sufficient business to days establish changed circumstances

26 RESPA by the Numbers 3. The interest rate shown in the Good Faith Estimate must be available for at least 10 business days. 4. To cure tolerance violations, borrowers must be reimbursed at settlement or within 30 calendar days after settlement. 5. RESPA does NOT apply to transactions involving property of 25 acres or more. 76 Homeowners Protection Act Lenders / servicers must notify borrower of rights related to private mortgage insurance (PMI) Initial written disclosure Annual reminder Applies to mortgages on single-family, primary residences Does not apply to VA, FHA, or loans with no PMI Borrower may request PMI cancellation at 80% LTV if borrower has Good history of payment Not taken out any other loans on the property Not experienced a decline in the value of the home PMI automatically canceled at 78% LTV if borrower is current Borrower may accelerate cancellation date with additional payments 77 HPA: Disclosure Requirements Fixed rate mortgages Initial amortization schedule at closing Cancellation date borrower may seek to cancel PMI Automatic termination date Adjustable rate mortgages (ARMs) No amortization schedule at closing Lender must inform the borrower when the LTV reaches 80% Final disclosure required after PMI coverage terminated or cancelled 78 26

27 HPA: High-Risk Loans Lender-defined high-risk loans subject to final PMI termination by category Conforming: First day of the month following midpoint of the loan s initial amortization schedule(s) when borrower current Nonconforming: Date on which principal balance based on initial amortization schedule(s) scheduled to reach 77% LTV regardless of outstanding balance Written disclosure required at loan consummation for 78% + LTV 79 HPA: Changing Property Values HPA does not require servicers to consider current property value Some lenders/servicers may allow early PMI cancellation if property values increase under certain circumstances, e.g.: Minimum amount of time passes Good payment history for minimum amount of time Documentation of home improvements to demonstrate the higher property value 80 TRUE FALSE TRUE HPA: True or False Determine whether the following statements about the Homeowners Protection Act are true or false: 1. The Homeowners Protection Act does not apply FHA or VA loans. 2. Lenders are required only to provide an initial written disclosure about PMI cancellation rights. 3. Borrower-requested cancellation and automatic termination of PMI does not apply to high-risk loans

28 HPA by the Numbers 1. HPA generally does not apply to residential loans made prior to If a borrower is current with payments, PMI is automatically terminated when a mortgage has been paid down to of the 78% property s original appraised value. 3. Borrowers may request cancellation of PMI when a mortgage has been paid down to of 80% the property s original appraised value. 82 Updates to Anti-Money Laundering Laws EMinimum requirements consist of: Development of internal policies, procedures, and controls. Designation of a compliance officer. Ongoing employee training program. Independent audit function to test for compliance. 83 ECOA: Disclosures 30 days to notify applicants of decision Approved: Commitment Letter (optional) Incomplete: Notice of Incomplete Application Denied or offered less favorable terms: Statement of Adverse Action, in writing With specific reason, or Notice of right to request reason within 60 days Right to request appraisal report used within 90 days of credit decision Creditors required to furnish written appraisal no later than 3 business days prior to close for first lien loan 84 28

29 FALSE FALSE TRUE ECOA: True or False Determine whether the following statements about the Equal Credit Opportunity Act are true or false: 1. ECOA is implemented by Regulation C. 2. A Statement of Adverse Action must be provided, in writing, to all credit applicants. 3. Creditors must furnish a copy of all written appraisals related to applications for a first lien residential loan promptly, even if the application withdrawn. 85 ECOA by the Numbers 1. Creditors must notify applicants of their lending decision within 30 days of the filing of a complete application. 2. When adverse action is taken, an applicant has the right to request specific reasons for the decision within. 60 days 3. After a creditor notifies an applicant of an action taken, the creditor is required to maintain pertinent documentation for. 25 months 86 Privacy and Consumer ID Laws Maintain integrity of relationship by protecting consumer financial information In this section: Fair Credit Reporting Act (FCRA) Fair and Accurate Credit Transactions Act (FACTA) Gramm-Leach-Bliley Act U.S. Patriot Act National Do Not Call Registry 87 29

30 Fair Credit Reporting Act (FCRA) Regulation V, supervised by Consumer Financial Protection Bureau Deals with Access to credit information Rights of debtors to seek damages Responsibilities of creditors to protect against identity theft If adverse action based on credit report, must provide consumer with agency s name, address, phone number 88 FCRA: Consumer Rights Free copy of credit report annually and if: Information resulted in adverse action Victim of identity theft (with fraud alert) Inaccurate information resulting from fraud Public assistance or unemployed Other rights: Request credit score (not free) * Dispute incomplete/inaccurate information Limit prescreened offers * Will be allowed for adverse action 89 FCRA: Credit Agency Obligations May not report negative credit information: More than 7 years Bankruptcies more than 10 years Most credit reporting agencies maintain: Chapter 11 bankruptcy for 7 years Chapter 7 bankruptcy for 10 years Must limit access to a credit file to those with legitimate business need May not give out consumer credit information to an employer, or a potential employer, without written consent 90 30

31 FALSE TRUE TRUE FCRA: True or False Determine whether the following statements about the Fair Credit Reporting Act are true or false: 1. FCRA is implemented by Regulation C. 2. Disclosure provisions of both the ECOA and the FCRA can be satisfied with one adverse action notice. 3. Consumers are entitled to a free copy of their credit score used in taking any adverse action. 91 FCRA by the Numbers 1. Consumer reporting agencies may not report negative credit information that is more than 7 years old or bankruptcies that are more than 10 years old. 92 FACT Act (or FACTA) Fair and Accurate Credit Transaction Act of 2003 Amends Fair Credit Reporting Act Provides for free copy of credit report annually from three national credit bureaus Allows consumer to place fraud alerts and credit freezes Requires creditor to make reasonable effort to confirm identity Requires businesses to truncate credit/debit card information on receipts Requires measures to secure and dispose of sensitive consumer credit information 93 31

32 FACTA: Red Flag Rules Section 114 of the FACTA requires: Financial institutions and creditors to implement written identity theft protection program Card issuers to assess the validity of change of address requests Users of credit reports to reasonably verify the identity of subject in case of address discrepancy Applies to any person/entity participating in credit decision 94 FACTA: Red Flags Alerts, notifications, or warnings from consumer reporting agency Suspicious documents Suspicious personally identifying information Unusual use of, or suspicious activity relating to, a covered account Notices from customers, victims of identity theft, law enforcement authorities, or other businesses about possible identity theft in connection with covered accounts 95 FALSE TRUE FALSE FACTA: True or False Determine whether the following statements about the Fair and Accurate Credit Transaction Act are true or false: 1. FACTA amends the Equal Credit Opportunity Act. 2. FACTA is primarily concerned with security of consumer financial information. 3. The Red Flags Rules defines specific steps that lenders must follow in order to secure consumer financial data

33 FACTA by the Numbers 1. Red Flags Rules are contained in Section 114 of FACTA. 2. FACTA prohibits businesses from printing more than five digits of any customer's credit/debit card number or expiration date on receipts. 3. All consumers are entitled to one free disclosure of their consumer credit file every 12 months upon request from each of the nationwide three credit bureaus. 97 Gramm-Leach-Bliley Act Financial Services Modernization Act of 1999 Provisions in Title V -Privacy to protect and regulate disclosure of consumer financial information Gives enforcement authority to federal agencies and states Applies to financial institutions and other providers of financial services Lending, brokering, or servicing any type of consumer loan Transferring or safeguarding money Preparing individual tax returns Providing financial advice or credit counseling Providing residential real estate settlement services Collecting consumer debts 98 GLBA: Financial Privacy Rule Governs collection of nonpublic personal information, for example, from Application Credit bureau or other source Transactions, such as balance, purchases Restricts when information may be disclosed to affiliates and nonaffiliated third parties Requires Consumer Privacy Notice Provides opt-out opportunity 99 33

34 GLBA: Consumer or Customer GLBA obligation different for each Consumer: Individual who obtains or has obtained a financial product or service Consumer Privacy Notice before personal data is disclosed to nonaffiliated third party Customer: Consumer with a continuing relationship with a financial institution Consumers Privacy Notice annually during financial relationship 100 GLBA: Safeguards, Pretexting Requires financial institutions to design, implement, and maintain safeguards to protect and control consumer data Written Safeguards Policy: Ensure security and confidentiality Protect against anticipated threats or hazards Protect against unauthorized access that could harm or inconvenience consumers Pretexting provisions Protects consumers from individuals and companies that obtain their personal financial information under false, fictitious, or fraudulent pretenses 101 TRUE FALSE TRUE GLBA: True or False Determine whether the following statements about the Graham-Leach-Bliley Act are true or false: 1. The formal title of GLBA is the Financial Services Modernization Act of A consumer is someone who has a continuing relationship with a financial institution. 3. The Privacy Rule allows consumers to opt out of having their financial information shared

35 TRUE FALSE FALSE GLBA: True or False Determine whether the following statements about the Graham-Leach-Bliley Act are true or false: 4. A credit score would be considered nonpublic personal information. 5. Customers must receive a financial institution's privacy notice every two years for as long as the relationship lasts. 6. Consumers must receive a financial institution's privacy notice annually. 103 U.S. Patriot Act Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (2001) Eases restrictions on law enforcement for information gathering Requires lenders and banks to create and maintain customer identification programs (CIPs) Prevent financing of terrorist operations/money laundering Institutions must verify ID customers entering into formal relationship Minimum information required when opening new account: Name Date of birth Address Tax ID number or similar verification 104 National Do Not Call Registry Limits phone calls to consumers who request to be on list Managed by the FTC, the FCC, and states Applies to marketing via interstate phone calls Required maintenance: National list updated every 3 months Internal list updated every 30 days Allows consumers to file complaints with FTC Fines up to $16,000 per incident Established business relationship (EBR) Allows calls for up to 18 months from last transaction Allows calls up to 3 months from inquiry or application Consumer on internal list cannot be called even if EBR (unless in reference to current relationship)

36 Do Not Call by the Numbers 1. When there is an established business relationship, calls may be made for up to 18 months after the last purchase or payment. 2. After an inquiry or application, calls may be made for up to. 3 months 3. Violations of Do Not Call could result in fines up to $16,000 per incident. 4. An organization s federal DNC list must be updated every. 3 months 106 Laws Against Predatory Lending Taking advantage of ill-informed consumers through: Excessively high fees Misrepresented loan terms Frequent refinancing that does not benefit the borrower Other prohibited acts In this section: Home Ownership and Equity Protection Act of 1994 (HOEPA) Higher-priced loans as defined by amendments to the Truth in Lending Act Some provisions of the Mortgage Reform and Anti-Predatory Lending Act (Title XIV of Dodd-Frank) 107 Home Ownership and Equity Protection Act HOEPA, 2002 amendment to the Truth in Lending Act, Section 32 of Regulation Z Establishes disclosure requirements, prohibits deceptive practices for high interest rate/fee loans Enforced by FTC for non-depository lenders and by each state s attorney general Allows Fed to prohibit additional practices it finds to be unfair or deceptive Consumers can sue for recovery of statutory and actual damages, court costs, attorney fees May allow three-year right of rescission

37 HOEPA: High Cost Triggers APR exceeds rates in Treasury securities: For a first mortgage, by more than 8% For a second mortgage, by more than 10% Totalfinance chargepaid by the consumer exceeds the larger of: 8%of loan amount Specific dollar amount: $611 for 2012 Redisclosure of APR triggers 3 business-day waiting period 109 HOEPA: High Cost Amendments When rules implemented APR exceeds rates in Treasury securities: For a first mortgage or $50,000+, by more than 6.5% For a second mortgage or smaller, by more than 8.5% Totalfinance charge paid by the consumer exceeds the larger of: 5%of loan amount over $20,000 8% or certain dollar amount under $20, HOEPA: Prohibited Terms Balloon payments if less than 5 year-term unless bridge Negative amortization Repayment schedule consolidating more than 2 periodic payments Higher default interest rates Prepayment penalties prohibited unless: Limited to first 2 years Prepayment penalty paid by refinancing lender PITI does not change in first 4 years DTI does not exceed 50% Due on demand clauses

38 HOEPA: Prohibited Practices Grant loans on the collateral without regarding borrower s ability to repay Disburse proceeds from home improvement loans to anyone other than the borrower Refinance a HOEPA loan into another HOEPA loan within the first year Wrongfully document a closed-end, high cost loan as an open-end loan 112 HOEPA: Verifying Repayment Must consider current & reasonably expected income, employment, assets other than collateral, current obligations, mortgage-related obligations Verified amount cannot be materially greater than that verified at consummation Must use largest payment of P&I scheduled in first 7 years Must consider at least one: Debt-to-income Income after paying debt (cash flow) 113 HOEPA: Required Disclosures Disclosure Form You are not required to complete this agreement merely because you have received these disclosures or signed a loan application. If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan. You are borrowing $. [Optional credit insurance is is not included in this amount.] The annual percentage rate on your loan will be %. Your regular frequency payment will be $. [At the end of the loan, you will still owe us $balloon amount.] [Your interest rate may rise. Increases in the interest rate could raise your payment. The highest amount your payment could increase is to $.]

39 FALSE FALSE TRUE TRUE HOEPA: True or False Determine whether the following statements about the Home Ownership and Equity Protection Act are true or false: 1. The Home Ownership and Equity Protection Act is an amendment to RESPA. 2. HOEPA rules apply to loans used to purchase or refinance residential properties. 3. HOEPA requires lenders to verify the borrower s ability to repay a high cost loan. 4. Under HOEPA, lenders must disclose that a borrower could lose the home and any equity if in default. 115 HOEPA by the Numbers 1. The rules for HOEPA loans are contained in Section of 32 Regulation Z. 2. HOEPA loans require additional disclosure at least 3 business days prior to loan consummation. 3. The total fee HOEPA trigger for 2012 is. $ When Dodd-Frank rules are implemented, total points and fees exceeding 5% of loan or APR exceeding average prime offer rate by on 6.5% first lien loans could trigger HOEPA disclosures. 116 Higher-Priced Loans Defined by Housing and Economic Recovery Act of 2008, amending Truth in Lending Act Closed-end loans secured by borrower s principal dwelling where APR exceeds average prime offer rate by at least: 1.5 percentage points for first lien loans, or 3.5 percentage points for junior lien loans Excludes Initial construction of a dwelling Temporary or "bridge" loan with a term of 12 months or less Reverse mortgage transaction Home equity line of credit APR measured against the applicable average prime offer rate

40 Higher-Priced Loans Creditors must verify repayment ability Prepayment penalties generally prohibited unless limited to first 2 years of loan. Prohibited if: Amount of the periodic payment of principal, interest, or both can change at any time during first 4 years of loan The source of prepayment funds is a refinance by the lender or its affiliate Escrow account Hazard insurance, PMI, property tax Required for 1 st lien securing borrower s principal dwelling Hazard insurance escrow may not required if HOA maintains master insurance policy Property tax escrow may not be required if HOA pays 118 FALSE TRUE TRUE FALSE Higher-Priced Loans: T/F Determine whether the following statements about higherpriced loans are true or false: 1. Regulation X sets forth specific requirements for handling higher-priced mortgage loans. 2. This definition of higher-priced mortgage loans includes home purchase loans but not home construction loans. 3. HELOCS are not subject to provisions related to higher-priced mortgage loans. 4. The APR test for higher-priced loans references the average prime offer rate (APOR). 119 Higher-Priced Loans by the Numbers 1.A higher-priced loan has an APR that exceeds the applicable average prime offer rate by for 3.5% first lien loans or 1.5% for junior lien loans. 2.Provisions related to higher-priced loans do not apply if the borrower intends to sell the home within. 12 months 3.When a first lien jumbo loan exceeds the applicable average prime offer rate by,lenders 2.5% may require establishment of an escrow account

41 Loan Originator Compensation Rule Federal Reserve Board final rule (April 1, 2011) Amendment to Regulation Z Applies to closed-end credit on principal dwelling Applies to all loan originators, including mortgage brokers, employees, and those employed by depository institutions Loan originator: A person who for compensation or other monetary gain, or in expectation of compensation or other monetary gain, arranges, negotiates, or otherwise obtains an extension of consumer credit for another person. Prohibits creditors from compensating MLOs based on loan s interest rate or other loan terms Allows other types of compensation, such as hourly, flat fee Fees paid to affiliated third parties considered part of compensation 121 SAFE Act Title V, Secure and Fair Enforcement for Mortgage Licensing Act Key component of the Housing and Economic Recovery Act of 2008 (HERA) Establishes minimum standards for the licensing and registration of mortgage loan originators (MLOs) Nationwide Mortgage Licensing System & Registry (NMLS) Centralized and standardized system for mortgage licensing 122 SAFE Act Objectives License applications and reporting requirements Licensing and supervisory database Information flow among regulators Increased accountability and tracking Streamlined licensing process Enhanced consumer protections and anti-fraud measures

42 SAFE Act Objectives Access to free MLO employment and disciplinary and enforcement actions Require MLOs to act in consumer s best interests, to greatest extent possible Facilitate responsible behavior/training in subprime mortgage market Provide comprehensive training related to nontraditional mortgage products Manage consumer complaints 124 SAFE Act: MLO Defined Individual who, for compensation or gain or in the expectation of compensation or gain: (A) Takes a residential mortgage loan application, or (B) Offers or negotiates terms of a residential mortgage loan. Assists in obtaining or applying includes: Advising on loan terms (including rates, fees, other costs) Preparing loan packages Collecting information on behalf of the consumer 125 SAFE Act: MLO Defined Mortgage loan originator exclusions: Purely administrative or clerical tasks Licensed real estate broker activities unless compensated by lender, broker, MLO Extending credit on timeshare plans Loan processors and underwriters who don t represent to public to conduct loan origination activities Independent contractor must be state-licensed MLO to engage in loan origination activities as loan processor or underwriter Unique identifier from NMLS: Federally registered MLOs employed by depository institution State-licensed all other MLOs

43 SAFE Act: Other Definitions Administrative or Clerical Tasks Depository Institution Federal Banking Agencies Loan Processor or Underwriter Nontraditional Mortgage Product Real Estate Brokerage Activity Registered Mortgage Loan Originator Residential Mortgage Loan State-Licensed Mortgage Loan Originator Unique Identifier 127 SAFE Act: Licensing Background check (fingerprints, criminal check) Personal history and experience Authorization to obtain an independent credit report, and information relative to any administrative, civil, or criminal findings Never had a mortgage loan originator license revoked in any government jurisdiction Not convicted of or pled guilty or nolo contendere to Felony in in the past 7 years Any felony involved an act of fraud, dishonesty, or a breach of trust, or money laundering 128 SAFE Act: Character & Fitness Must exhibit character and fitness Must operate honestly, fairly, and efficiently Must not show lack of financial responsibility, such as: Current outstanding judgments (except medical expenses) Current outstanding tax/government liens or filings Foreclosures within past 3 years Pattern of seriously delinquent accounts within past 3 years

44 SAFE Act: Prelicensing Education Minimum 20 hours of NMLS-approved prelicensing education on national topics: Federal law and regulation (3 hours) Ethics, including fraud, consumer protection, and fair lending (3 hours) Lending standards for nontraditional mortgage products (2 hours) Electives (12 hours) States may impose additional requirements, specific topics 130 SAFE Act: National MLO Exam State-licensed MLOs must pass national NMLS exam Federal mortgage-related laws (35%) General mortgage knowledge (25%) Mortgage loan origination activities (25%) Ethics (15%) May include a state/territory-specific component Can fail only 3 consecutive times, then must take prelicensing education again 131 SAFE Act: License Renewal Minimum 8 hours of annual continuing education: Federal Law and Regulation (3 hours) Ethics, including fraud, consumer protection, and fair lending (2 hours) Nontraditional mortgage products (2 hours) Elective (1 hour) States/territories may impose additional requirements No credit for the same CE class in consecutive years

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