Continuing Education For Licensed Loan Officers and Brokers

Transcription

1 Continuing Education For Licensed Loan Officers and Brokers By Paul St.Amand Champions School of Real Estate, Inc. All rights reserved. No part of this publication may be produced in any form or by any means, without permission in writing from the author. This guide is presented for informational purposes only. Information contained in this manual has been obtained from sources believed to be reliable.

2 CE for Loan Officers & Brokers Do You Know the Quality School You Are Attending? Awards 1998 Invited to Join the National Consortium of Real Estate Schools, RealtyU, as the Texas Real Estate School 2000 Chairman's Leadership Award, RealtyU 2001 Pinnacle Award, RealtyU 2002 PaceSetter Award, RealtyU 2001 Rita Santamaria REBAC, RealtyU, Instructor of the Year 2002 WCR Texas Chapter Champions School of Real Estate Affiliate of the Year 2002 Sue Ikeler REBAC, RealtyU, Instructor of the Year 2003 Chairman's Award, RealtyU 2003 Pinnacle Award, RealtyU 2003 Hall of Fame Inductee Rita Santamaria NAR, REBAC 2005 Pinnacle Award, RealtyU 2004 June Real Estate Educator's Association Champions School of Real Estate Nationwide Representative of topic "How to Operate a Large Real Estate School" Champions School of Real Estate page - 2

3 CE for Loan Officers & Brokers Continuing Education For Licensed Loan Officers and Brokers Table of Contents PREFACE CHAPTER 1 - FEDERAL LAW AND REGULATION Page 7 Equal Credit Opportunity Act Fair Credit Reporting Act Fair and Accurate Credit Transaction Act Real Estate Settlement Procedures Act Truth in Lending Act USA Patriot Act Flood Disaster Protection Act of 1973 Right to Financial Privacy Act Federal Fair Housing Act CHAPTER 2 - RESIDENTIAL LENDING Page 23 Mortgage Market Today Mortgage Companies Mortgage Bankers Mortgage Brokers Secondary Mortgage Market Federal National Mortgage Association Federal Home Loan Corporation CHAPTER 3 - AUTOMATED UNDERWRITING Page 32 Desktop Underwriter Fannie Mae Underwriting Findings Credit Bureau Score Understanding the Fair Isaac Credit Bureau Score Some Interesting Facts about Credit Scoring Tips to Improve your Credit Rating Credit Reporting Agencies CHAPTER 4 - MORTGAGE DOCUMENTS Page 40 Real Property Estate Fee Simple Estate Leasehold Estate Security Instruments Mortgage Champions School of Real Estate page - 3

4 CE for Loan Officers & Brokers Deed of Trust Advantages to the Lender Advantages to the Borrower Mortgage Theories Title Theory Lien Theory Mortgage Loan Documents Basic Components of a Mortgage and Deed of Trust Mortgagor Identity Mortgagee Identity To Secure Clause Intent of the Mortgagor Property Description Property Improvements and Fixtures Uniform Covenants Hazardous Substances Acceleration Clause Lender Rights and Responsibilities Execution Deed of Trust Promissory Note Lender Identity and Amount Due Prepayment Clause Late Charge Clause Execution Note CHAPTER 5 APPRAISAL Page 69 Principles of Residential Appraisals Principle of Substitution Market Value Appraiser and Appraisal Process Appraiser Responsibilities Valuation Process Neighborhood Analysis Site and Building Data Highest and Best Use Zoning and Deed Restrictions Easements Flood Hazard Areas Site Characteristics Building Data Energy Conservation Three approaches to Estimating Value Sales Comparison Approach Cost Approach Income Approach Reconciliation and Certification Appraisal Requirements and Federal Law Champions School of Real Estate page - 4

5 CE for Loan Officers & Brokers CHAPTER 6 ETHICS Page 85 Introduction TAMB Code of Ethics NAMB Code of Ethics Best Lending Practices Guidelines for Ethical Business Operations Predatory Lending Flipping State Predatory Lending Bills Fannie Mae Predatory Guidelines Difficult Questions SML Complaint Process Complaint Form TAMB Grievance Procedures CHAPTER 7 - SPECIAL FINANCING Page 103 Texas Home Equity Loans Reverse Mortgages Reverse Mortgage Myths Notice Concerning Extensions of Credit CHAPTER 8 - GOVERNMENT LOANS Page 112 Federal Housing Administration The History of FHA FHA 203(b) Mortgage Loan FHA Mortgage Insurance Basic Eligibility Requirements for FHA Department of Veteran Affairs (VA) Loans General Rules for Eligibility Loan Guaranty Entitlement Maximum Loan Amounts Exceptions to the No Down Payment Rule VA One-Year ARM Qualifying ratios Compensating Factors Funding Fee Allowable Fees and Charges Seller Concessions Houston Regional Loan Center Texas Veterans Land Board Program Guidelines CHAPTER 9 - NOTICES FROM THE COMMISSIONER Page 127 Mortgage Broker Advisory Committee 2005 Legislation Affecting Mortgage Brokers and Their Loan Officers Important Notice Changes to CE Program Champions School of Real Estate page - 5

6 CE for Loan Officers & Brokers License Expiration and Renewal Criminal Offenses related to Licensure Dual Holders Mortgage Broker Compliance Examination Rating System Frequently Asked Questions Mortgage Broker/Loan Officer Disclosure Disclosure of Multiple Roles in a Consumer Real Estate Transaction CHAPTER 10 WEBSITES Page 146 BIBLIOGRAPHY Page 149 Champions School of Real Estate page - 6

7 Preface PREFACE In 1999, the Texas legislature passed Senate Bill 1074, The Mortgage Broker License Act (MBLA). The Act amended the Finance Code to require the licensing of mortgage brokers and loan officers. The Texas Department of Savings and Mortgage Lending is an agency of the Finance Commission of Texas and regulate the Mortgage Brokers and Loan Officers doing business within the state. The 79 th Legislative Session passed two bills that modify the Mortgage Broker License Act s continuing education program: House Bill 955 and Senate Bill 988. The Texas MBLA now distinguishes courses as Pre-licensing (new loan officer applicants) and CE (renewal mortgage brokers and loan officers). The following text will fulfill the current requirement of needing 15 hours of continuing education as established by the Texas Department of Savings and Mortgage Lending. This text covers many of the essential topics needed for an individual to qualify as an effective mortgage broker/loan officer under the Texas licensing requirement. A better understanding of the real estate mortgage market is the ultimate goal of this text. Education for professionals is never ending. The mortgage industry is constantly changing. The mortgage professional who strives to maintain the highest level of competency shall safeguard the prime purpose of any professional licensing requirement: to protect the public. Paul St.Amand Champions School of Real Estate page - 7

8 Federal Law & Regulation CHAPTER 1 - FEDERAL LAW AND REGULATION EQUAL CREDIT OPPORTUNITY ACT (REGULATION B) The Equal Credit Opportunity Act (ECOA), originally passed in 1974, ensures that all consumers are given an equal chance to obtain credit. The ECOA covers all creditors who regularly extend credit and impacts professionals, such as mortgage brokers and loan officers, who are involved in granting credit. The Equal Credit Opportunity Act, and the Federal Reserve Board s implementing Regulation B, prohibits discrimination in any aspect of a credit transaction on the basis of: Race Color Religion National Origin Sex Marital Status Age (provided that the applicant has the capacity to enter into a binding contract) Receipt of income from a public assistance program The good faith exercise of any right under the Consumer Credit Protection Act These factors are referred to throughout the regulation as prohibited bases. Regulation B deals with taking, evaluating, and acting on applications for credit and the furnishing and maintenance of credit information. It does not prevent a creditor from obtaining information necessary to evaluate the creditworthiness of an applicant. Public assistance programs include but are not limited to, Aid to Families with Dependent Children (AFDC), food stamps, rent and mortgage supplement or assistance programs, Social Security and Supplemental Security Income (SSI), and unemployment compensation. Only physicians, hospitals and others to whom the benefits are payable need consider Medicare and Medicaid as public assistance. A creditor may however, take into account the applicant s immigration status and any applicable law, regulation or executive order restricting dealings with citizens or the government of a particular country. Activities not Constituting Discrimination It shall not constitute discrimination for purposes of this subchapter for a creditor 1. to make an inquiry of marital status if such inquiry is for the purpose of ascertaining the creditor s rights and remedies applicable to the particular extension of credit and not to discriminate in a determination of credit-worthiness; 2. to make an inquiry of the applicant s age or of whether the applicant s income derives from any public assistance program if such inquiry is for the purpose of determining the amount and probably continuance of income levels, credit history, or other pertinent element of creditworthiness as provided in regulations of the Board; 3. to use any empirically derived credit system which considers age if such system is demonstrably and statistically sound in accordance with regulations of the Board, except that in the operation of such system the age of an elderly applicant may not be assigned a negative factor or value; or 4. To make an inquiry or to consider the age of an elderly applicant when the age of such applicant is to be used by the creditor in the extension of credit in favor of such applicant. Champions School of Real Estate page - 8

9 Federal Law & Regulation Additional Activities not Constituting Discrimination It is not a violation of this section for a creditor to refuse to extend credit offered pursuant to 1. any credit assistance program expressly authorized by law for an economically disadvantaged class of persons; 2. any credit assistance program administered by a nonprofit organization for its members or an economically disadvantaged class of persons; or 3. Any special purpose credit program offered by a profit-making organization to meet special social needs which meets standards prescribed in regulations by the Board. Statement of Credit Denial Adverse Action The term adverse action means a denial or revocation of credit, a change in the terms of an existing credit arrangement, or a refusal to grant credit in substantially the amount or on substantially the terms requested. Such term does not include a refusal to extend additional credit under an existing credit arrangement where the applicant is delinquent or otherwise in default, or where such additional credit would exceed a previously established credit limit. Within thirty days (or such longer reasonable time as specified in regulations of the Board for any class of credit transaction) after receipt of a completed application for credit, a creditor shall notify the applicant of its action on the application. Each applicant against who adverse action is taken shall be entitled to a statement of reasons for such action from the creditor. A creditor satisfies this obligation by: Providing statements of reasons in writing as a matter of course to applicants against whom adverse action is taken or giving written notification of adverse action which discloses: The applicant s right to a statement of reasons within thirty days after receipt by the creditor of a request made within sixty days after such notification, and The identity of the person or office from which such statement may be obtained. Such statement may be given orally if the written notification advises the applicant of his right to have the statement of reasons confirmed in writing on written request. A statement of reasons meets the requirements only if it contains the specific reasons for the adverse action taken. Appraisals, Copies of Reports to Applicants; Costs Each creditor shall promptly furnish an applicant, upon written request by the applicant made within a reasonable period of time of the application, a copy of the appraisal report used in connection with the applicant s application for a loan that is or would have been secured by a lien on residential real property. The creditor may require the applicant to reimburse the creditor for the cost of the appraisal. A creditor may routinely provide a copy of the appraisal report to an applicant (whether credit is granted or denied or the application is withdrawn). A creditor that does not routinely provide appraisal reports shall provide a copy upon an applicant s written request. A creditor provides appraisal reports only upon request shall notify an applicant in writing of the right to receive a copy of an appraisal report. The notice may be given at any time during the application process but no later than when the creditor provides notice of action taken. The notice shall specify that the applicant s request must be in writing, give the creditor s mailing address, and sate the time for making the request. A creditor shall mail or deliver a copy of the appraisal report promptly (generally within 30 days) after the Champions School of Real Estate page - 9

10 Federal Law & Regulation creditor receives an applicant s request, receives the report, or receives reimbursement from the applicant for the report, whichever is last to occur. A creditor need not provide a copy when the applicant s request is received more than 90 days after the creditor has provided notice of action taken on the application. Penalties And Liabilities The Act provides that any creditor that fails to comply with a requirement imposed by the Act or this regulation is subject to civil liability for actual and punitive damages in individual or class actions. Pursuant to Sections 704 (b), (c), and (d) and 702 (g) of the Act, violations of the Act or regulations also constitute violation of other Federal laws. Liability for punitive damages is restricted to nongovernmental entities and is limited to $10,000 in individual actions and the lesser of $500,000 or 1 percent of the creditor s net worth in class actions. Section 706(c) provides for equitable and declaratory relief and section 706 (d) authorizes the awarding of costs and reasonable attorney s fees to an aggrieved applicant in a successful action. FAIR CREDIT REPORTING ACT (FCRA) This act governs the consumer reporting agencies and those who access consumer credit reports. The general purpose of the Fair Credit Reporting Act is to ensure the consumer that these agencies are fair, accurate and exhibit confidentiality in their credit reporting methods. In addition, this act specifically defines the obligations of users under FCRA. Obligations of Users under the FCRA The Federal Fair Credit Reporting Act (FCRA) requires that this notice be provided to inform users of consumer reports of their legal obligations. State law may impose additional requirements. This first section of this summary sets forth the responsibilities imposed by the FCRA on all users of consumer reports. The subsequent sections discuss the duties of users of reports that contain specific types of information, or that are used for certain purposes, and the legal consequences of violations. The FCRA, 15 U.S.C u, is set forth in full at the Federal Trade Commission s Internet website at Congress has limited the use of consumer reports to protect consumers privacy. All users must have permissible purposes under the FCRA to obtain a consumer report. Section 604 of the FCRA contains a list of the permissible purposes under the law. These are: As ordered by a court or a federal grand jury subpoena. Section 604(a)(1) As instructed by the consumer in writing. Section 604(a)(2) For the extension of credit as a result of an application from a consumer, or the review or collection of a consumer s account. Section 604(a)(3)(A) For employment purposes, including hiring and promotion decisions, where the consumer has given written permission. Sections 604(a)(3)(B) and 604(b) For the underwriting of insurance as a result of an application from a consumer. Section 604(a)(3)(C) When there is a legitimate business need, in connection with a business transaction that is initiated by the consumer. Section 604(a)(3)(F)(i) To review a consumer s account to determine whether the consumer continues to meet the terms of the account. Section 604(a)(3)(F)(ii) To determine a consumer s eligibility for a license or other benefit granted by a governmental instrumentality required by law to consider an applicant s financial responsibility or status. Section 604(a)(3)(D) Champions School of Real Estate page - 10

11 Federal Law & Regulation For use by a potential investor or servicer, or current insurer, in a valuation or assessment of the credit or prepayment risks associated with an existing credit obligation. Section 604(a)(3)(E) For use by state and local officials in connection with the determination of child support payments, or modifications and enforcement thereof. Sections 604(a)(4) and 604(a)(5) FAIR AND ACCURATE CREDIT TRANSACTION ACT (FACTA) On December 4, 2003, President Bush signed into law the Fair and Accurate Credit Transactions Act (FACTA) of 2003, ensuring that all citizens are treated fairly when they apply for a mortgage or other form of credit. The legislation will provide consumers, companies, consumer reporting agencies, and regulators with important new tools that expand access to credit and other financial services for all Americans enhance the accuracy of consumers financial information, and help fight identity theft. These reforms make permanent the uniform national standards of our credit markets, and institute new, strong consumer protections. Background The Fair and Accurate Credit Transactions Act of 2003 will accomplish the following key Administration priorities to help ensure that all Americans, of every income level and background, are able to build good credit and confront the problem of identity theft: Ensuring that lenders make decisions on loans based on full and fair credit histories, and not on discriminatory stereotypes. In 1996, uniform national standards were established to set clear rules on what credit agencies were entitled to include in individual credit reports, and now more than a million Americans have credit as a result. This legislation makes these national standards permanent. Improving the quality of credit information, and protecting consumers against identity theft. Giving every consumer the right to their credit report free of charge every year. Consumers will be able to review a free report every year for unauthorized activity, including activity that might be the result of identity theft. Helping prevent identity theft before it occurs by requiring merchants to leave all but the last five digits of a credit card number off store receipts. This law will make sure that slips of paper that most people throw away do not contain their credit card number, a key to their financial identities. Creating a national system of fraud detection to make identity thieves more likely to be caught. Previously, victims would have to make phone calls to all of their credit card companies and three major credit rating agencies to alert them to the crime. Now, consumers will only need to make one call to receive advice, set off a nationwide fraud alert, and protect their credit standing. Establishing a nationwide system of fraud alerts for consumers to place on their credit files. Credit reporting agencies that receive such alerts from customers will now be obliged to follow procedures to ensure that any future requests are by Champions School of Real Estate page - 11

12 Federal Law & Regulation the true consumer, not an identity thief posing as the consumer. The law also will enable active duty military personnel to place special alerts on their files when they are deployed overseas. Requiring regulators to devise a list of red flag indicators of identity theft, drawn from the patterns and practices of identity thieves. Regulators will be required to evaluate the use of these red flag indicators in their compliance examinations of financial institutions, and impose fines where disregard of red flags has resulted in losses to customers. Requiring lenders and credit agencies to take action before a victim even knows a crime has occurred. With oversight by bank regulators, the credit agencies will draw up a set of guidelines to identify patterns common to identity theft, and develop methods to stop identity theft before it can cause major damage. This legislation gives consumers unprecedented tools to fight identity theft and continued access to the most dynamic credit markets in the word. With a free credit report and powerful new tools to fight fraud, consumers have the ability to better protect themselves and their families. REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA) The Real Estate Settlement Procedures Act of 1974 (RESPA) (12 USC ) became effective on June 20, The act requires lenders, mortgage brokers, or servicers of home loans to provide borrowers with pertinent and timely disclosures of the nature and costs of the real estate settlement process. The act also protects borrowers against certain abusive practices, such as kickbacks, and places limitations upon the use of escrow accounts. HUD promulgated Regulation X On October 26, 1994, HUD issued its final rule changing the accounting method for escrow accounts. The rule also establishes formats and procedures for initial and annual escrow accounting statements. The rule became effective on May 24, On December 19, 1994, HUD also published a final rule for the transfer of servicing of mortgage loans. The rule replaces the interim one dated April 26, 1991, and implements the provisions of section 6 of RESPA. The rule became effective on June 19, RESPA is applicable to all federally related mortgage loans. They are: Loans (other than temporary loans), including refinancings, secured by a first or subordinate lien on residential real property that is improved with either: A one-to-four family structure (including individual units of condominiums and cooperatives), either existing or to be constructed on the real property, using loan proceeds. A manufactured home, either existing or to be placed on the real property, using loan proceeds. Champions School of Real Estate page - 12

13 Federal Law & Regulation And to which any one of the following applies: Loans made by a lender, creditor, or dealer. Loans made or insured by an agency of the federal government Loans made in connection with a housing or urban development program administered by an agency of the federal government. Loans made and intended to be sold by the originating lender or creditor to Federal National Mortgage Association (FNMA), Government National Mortgage Association (GNMA), or Federal Home Loan Mortgage Corporation (FHLMC), or its successor. Loans that are the subject of a home equity conversion mortgage or reverse mortgage issued by a lender or creditor subject to the regulation. Installment sales contracts, land contracts, or contracts for deed on otherwise qualifying residential property, if the contract is funded in whole or in part by proceeds of a loan made by a lender or creditor subject to the regulation. Transactions exempt from RESPA include loans: Secured by parcels of 25 acres or more, whether or not the property is improved. For which the primary purpose is business, commercial, or agricultural. However, a business purpose loan made to one or more persons, acting in an individual capacity (natural persons) to acquire, refinance, improve, or maintain a one-to-four family residential property used or to be used to rent or lease to other persons is a covered transaction. That is temporary, such as construction loans. (The exemption does not apply, and the transaction becomes covered by RESPA, if the loan is used as, or may be converted to permanent financing by the same bank. A lender s commitment for permanent financing is covered by the regulation. Any construction loan with a term of two years or more is covered by the regulation, unless it s made to a bona fide contractor. Bridge or swing loans are not covered by the regulation). Secured by vacant or unimproved property when none of the loan proceeds will be used to construct a one-to-four family residential structure. (If the proceeds will be used to locate a manufactured home or construct a structure within two years from the date of settlement, the loan is covered). That are assumptions of existing mortgages in which the lender has no right to approve subsequent persons as borrowers. Bona fide transfers of loan obligations in the secondary market. (However, the mortgage servicing transfer disclosure requirements of 24 CFR still applies.) (Mortgage broker transactions that are table funded (the loan is funded by a contemporaneous advance of loan funds and an assignment of the loan to the person advancing the funds) are not secondary market transactions and are covered by RESPA.) Special Information Booklet A bank must provide the borrower with a copy of the Special Information Booklet either at the time a written application is submitted or no later than three business days after the application is received. If the application is denied before the end of the three-business-day period, the bank need not provide the booklet. If the borrower uses a mortgage broker, the broker, rather than the bank, must provide the booklet. Champions School of Real Estate page - 13

14 Federal Law & Regulation The booklet need not be given for refinancing transactions, closed-end subordinate lien mortgage loans, and reverse mortgage transactions, or for any other federally related mortgage loan unintended for the purchase of a one-to-four family residential property. Part one of the booklet describes the settlement process and the nature of charges, and suggests questions to be asked of lenders, attorneys, and others to clarify their services. It also contains information on the rights and remedies available under RESPA and alerts the borrower to unfair or illegal practices. Part two of the booklet contains an itemized explanation of settlement services and costs, and sample forms and worksheets for cost comparisons. The appendix of the Special Information Booklet contains a listing of government offices from which to obtain consumer information and literature on home purchasing and other related topics. Good Faith Estimates (GFE) of Amount/Range of Settlement Costs A bank must provide, in a clear and concise form, a good faith estimate of the amount of, or range of, settlement charges the borrower is likely to pay. The GFE must include all charges that will be listed in section L of the HUD-1 Settlement Statement. It must be provided no later than three business days after receipt of the written application. If the application is denied before the end of the three-business-day period, the bank is not required to provide the GFE. The GFE may disclose either an estimate of the dollar amount or a range of dollar amounts for each settlement service. The estimate of the amount of range for each charge must: Bear a reasonable relationship to the borrower s ultimate cost for each settlement charge. Be based upon experience in the locality in which the property involved is located. For brokered loans, if the mortgage broker is the bank s exclusive agent, either it or the broker shall provide the GFE within three business days after the broker receives or prepares the application. When the broker is not the bank s exclusive agent, it is not required to provide the GFE if the broker has already done so, but the funding lender must ascertain that the GFE has been delivered. Uniform Settlement Statement (HUD-1 or HUD-1A) The HUD-1 and HUD-1A must be completed by the person conducting the closing (settlement agent) and must conspicuously and clearly itemize all charges related to the transaction. The HUD-1 is used for transaction in which there is a borrower and seller. For transactions in which there is a borrower and no seller (refinancing and subordinate lien loans), the HUD-1 may be completed by using the borrower s side of the settlement statement. Alternatively, the HUD-1A may be used. However, no settlement statement is required for open-end home equity plans subject to the Truth in Lending Act and Regulation Z. Appendix A or 24 CFR 3500 contains the instructions for completing the forms. One-Day Advance Inspection of the Settlement Statement Upon request by the borrower, the HUD-1 or HUD-1A must be completed and made available for inspection during the business day immediately proceeding the day of settlement, listing those items known at that time by the person conducting the closing. Champions School of Real Estate page - 14

15 Federal Law & Regulation The completed HUD-1 or HUD-1A must be delivered to the borrower, the seller, and the lender at or before settlement. However, the borrower may waive the right of delivery by executing a written waiver at or before settlement. The HUD-1 or HUD-1A shall be mailed or delivered as soon as practicable after settlement if the borrower or borrower s agent does not attend the settlement. Prohibition against Kickbacks and Unearned Fees Any person who, pursuant to any agreement or understanding, gives or receives a fee or a thing of value (including payments, commissions, fees, gifts, or special privileges) for the referral of settlement business violates RESPA (section 8). Payments in excess of the reasonable value of goods provided or services rendered are considered kickbacks. Appendix B and OCC bulletin 96-8 (section 8 transactions) provide guidance on the meaning and coverage of the prohibition against kickbacks and unearned fees. Controlled Business Arrangements If the bank has either an affiliate relationship or a direct or beneficial ownership interest of more than 1 percent in a provider of settlement services and the lender directly or indirectly refers business to the provider, it is a controlled business arrangement. That arrangement does not violate section 8 of RESPA and section of Regulation X, if: The bank discloses on a separate piece of paper either at the time of loan application or with the GFE s: o The nature of the relationship (explaining the ownership and financial interest) between the provider and the bank. o The estimated charge or range of charges generally made by such provider. The bank does not require the use of such a provider, with the following exceptions: the bank may require a buyer, borrower, or seller to pay for the services of an attorney, credit reporting agency, or real estate appraiser chosen by the bank to represent its interest. The bank receives only a return on ownership or franchise interest or payment otherwise permitted by RESPA in section (g). Mortgage Servicing Transfer Disclosures The disclosures related to the transfer of mortgage servicing are required for first mortgage liens of federally related mortgage loans, including all refinancing transactions of such loans. HUD has exempted from the requirements of this section any subordinate lien and has excluded all open-end lines of credit (home equity plans), whether secured by a first or subordinate lien, that are covered under the Truth in Lending Act and Regulation Z. In addition, these requirements shall not apply when the application for credit is denied within three business days after receipt of the application. A bank that receives an application for a federally related mortgage loan is required to disclose to the borrower at the time of application, or within three business days after its submission: Whether the servicing of the loan may be assigned, sold, or transferred. The percentages (rounded to the nearest quartile (25 percent)) of loans made by the bank in each of the last three calendar years for which servicing has been assigned, sold or transferred or, in the alternative, a statement that the bank has previously assigned, sold, or transferred the servicing of federally related mortgage loans. Champions School of Real Estate page - 15

16 Federal Law & Regulation The best available estimate of the percentage of loans to be made by the bank that may be assigned, sold, or transferred during the 12-month period beginning on the date of origination. A summary of the information that will be provided to the borrower if the loan is transferred. A disclosure of the duty of the bank to: o Provide a written acknowledgment of the borrower s qualified written request for information relating to the loan within 20 business days. o Make corrections, if necessary, or provide a written explanation of why the account is correct, within 60 days of notice. o Withhold, during the 60-day period, information about any overdue payment to a credit reporting agency. A written acknowledgment that the applicant has read and understood the disclosure, evidenced by the signature of the applicant. When the servicing of a federally related mortgage loan is assigned, sold, or transferred, the transferor servicer (present servicer) must provide a disclosure not less than 15 days before the effective date of the transfer. The same notice from the transferee servicer (new servicer) must be provided not more than 15 days after the effective date of the transfer. Both notices may be combined into one notice delivered to the borrower not less than 15 days before the effective date of the transfer. The disclosure must include: The effective date of the transfer of servicing. The name, address for consumer inquiries, and toll-free or collect-call telephone number of the transferee servicer. A toll-free or collect-call telephone number for a person employed by the transferor servicer that can be contacted by the borrower to answer servicing questions. The date on which the transferor servicer will cease accepting payments relating to the loan and the date on which the transferee servicer will begin to accept such payments. These dates must either be the same or consecutive dates. Any information about the effect of the transfer on the availability of optional insurance and any action the borrower must take to maintain coverage. A statement that the transfer does not affect any other terms or conditions of the mortgage, except as related directly to servicing. During the 60-day period beginning on the date of transfer, no late fee can be imposed on a borrower who has made the payment to the wrong servicer. The following transfers are not considered an assignment, sale, or transfer of mortgage loan servicing for purposes of this requirement if there is no change in the payee, address to which payment must be delivered, account number, or amount of payment due: Transfer between affiliates. Transfers resulting from mergers or acquisitions of servicers or subservicers. Transfers between master servicers, when the subservicer remains the same. Servicers Must Respond to Borrower s Inquiries A bank servicer must respond to a borrower s qualified written inquiry and take appropriate action within established time frames after receipt of the inquiry. Generally, the bank must provide written acknowledgment within 20 business days and take certain specified actions within 60 business days of receipt of such inquiry. Champions School of Real Estate page - 16

17 Federal Law & Regulation During the 60-business-day period following receipt of a qualified written request from a borrower relating to a disputed payment, a bank may not provide information on any overdue payment, or relating to this period or the qualified written request, to any consumer reporting agency. Penalties and Liabilities Kickbacks Civil and criminal liability is provided for violating the prohibition against kickbacks and unearned fees, including: Civil liability to the parties affected, equal to three times the amount of the referral fee, kickback, or unearned fee. The possibility that the costs associated with any court proceeding and reasonable attorney s fees could be recovered. A fine of no more than $10,000 or imprisonment for no more than 1 year or both, for each violation. TRUTH IN LENDING ACT (Regulation Z) The Truth in Lending Act (TILA), Title I of the Consumer Credit Protection Act, is aimed at promoting the informed use of consumer credit by requiring disclosures about its terms and costs. In general, this regulation applies to each individual or business that offers or extends credit when the credit is offered or extended to consumers; the credit is subject to a finance charge or is payable by a written agreement in more than four installments; the credit is primarily for personal, family or household purposes; and the loan balance equals or exceeds $25, or is secured by an interest in real property or a dwelling. TILA is intended to enable the customer to compare the cost of cash versus credit transaction and the difference in the cost of credit among different lenders. The regulation also requires a maximum interest rate to be stated in variable rate contracts secured by the borrower s dwelling, imposes limitations on home equity plans that are subject to the requirements of certain sections of the Act and requires a maximum interest that may apply during the term of a mortgage loan. TILA also establishes disclosure standards for advertisements that refer to certain credit terms. In addition to financial disclosure, TILA provides consumers with substantive rights in connection with certain types of credit transactions to which it relates, including a right of rescission in certain real estate lending transactions, regulation of certain credit card practices and a means for fair and timely resolution of credit billing disputes. This discussion will be limited to those provisions of TILA that relate specifically to the mortgage lending process, including: Early and Final Regulation Z Disclosure Requirements Disclosure Requirements for ARM Loans Right of Rescission Advertising Disclosure Requirements TILA requires lenders to make certain disclosures on loans subject to the Real Estate Settlement Procedures Act (RESPA) within three business days after their receipt of a written application. This early disclosure statement is partially based on the initial information provided by the consumer. A final Champions School of Real Estate page - 17

18 Federal Law & Regulation disclosure statement is provided at the time of loan closing. The disclosure is required to be in a specific format and include the following information: 1. Name and address of creditor 2. Amount financed 3. Itemization of amount financed (optional, if Good Faith Estimate is provided) 4. Finance charge 5. Annual percentage rate (APR) 6. Variable rate information 7. Payment schedule 8. Total of payments 9. Demand feature 10. Total sales price 11. Prepayment policy 12. Late payment policy 13. Security interest 14. Insurance requirements 15. Certain security interest charges 16. Contract reference 17. Assumption policy 18. Required deposit information Under regulation Z, disclosure must be made of the following important credit terms: Finance Charge This is perhaps the most important disclosure made. This is the amount charged to the consumer for the credit. Annual Percentage Rate This is the measure of the cost of the credit which must be disclosed on a yearly basis. The method for calculating this rate is determined the underlying transaction. Amount Financed This is the amount that is being borrowed in a consumer loan transaction, or the amount of the sale price in a credit sale. Total of Payments This includes the total amount of the periodic payments by the borrower/buyer. Total Sales Price This is the total cost of the purchase on credit, including the down payment and periodic payments. Evidence of compliance with the Truth in Lending requirements must be retained for at least two years after the date of disclosure. Disclosures must be clear and conspicuous and must appear on a document that the consumer may keep. Disclosure Requirements for ARM Loans If the annual percentage rate on a loan secured by the consumer s principal dwelling may increase after consummation and the term of the loan exceeds one year, TILA requires additional adjustable rate mortgage disclosures to be provided, including: Champions School of Real Estate page - 18

19 Federal Law & Regulation The booklet titled Consumer Handbook on Adjustable Rate Mortgages, published by the Board and the Federal Home Loan Bank Board or a suitable substitute. A loan program disclosure for each variable-rate program in which the consumer expresses an interest. The loan program disclosure shall contain the necessary information as prescribed by Regulation Z. Right of Rescission In a credit transaction in which a security interest is or will be retained or acquired in a consumer s principal dwelling, each consumer whose ownership is or will be subject to the security interest has the right to rescind the transaction. Lenders are required to deliver two copies of the notice of the right to rescind and one copy of the disclosure statement to each consumer entitled to rescind. The notice must be on a separate document that identifies the rescission period on the transaction and must clearly and conspicuously disclose the retention or acquisition of a security interest in the consumer s principal dwelling; the consumer s right to rescind the transaction; and how the consumer may exercise the right to rescind with a form for that purpose, designating the address of the lender s place of business. In order to exercise the right to rescind, the consumer must notify the creditor of the rescission by mail, telegram or other means of communication. Notice is considered given when mailed, filed for telegraphic transmission or sent by other means, when delivered to the lender s designated place of business. The consumer may exercise the right to rescind until midnight of the third business day following consummation of the transaction; delivery of the notice of right to rescind; or delivery of all material disclosures, whichever occurs last. When more than one consumer in a transaction has the right to rescind, the exercise of the right by one consumer shall be effective for all consumers. When a consumer rescinds a transaction, the security interest giving rise to the right of rescission becomes void and the consumer will no longer be liable for any amount, including any finance charge. Within 20 calendar days after receipt of a notice of rescission, the lender is required to return any money or property that was given to anyone in connection with the transaction and must take any action necessary to reflect the termination of the security interest. If the lender has delivered any money or property, the consumer may retain possession until the lender has compiled with the above. The consumer may modify or waive the right to rescind if the consumer determines that the extension of credit is needed to meet a bona fide personal financial emergency. To modify or waive the right, the consumer must give the lender a dated written statement that describes the emergency, specifically modifies or waives the right to rescind and bears the signature of all the consumers entitled to rescind. Printed forms for this purpose are prohibited. Advertising Disclosure Requirements If a lender advertises directly to a consumer, TILA requires the advertisement to disclose the credit terms and rate in a certain manner. If an advertisement for credit states specific credit terms, it may state only those terms that actually are or will be arranged or offered by the lender. If an advertisement states a rate of finance charge, it may state the rate as an annual percentage rate (APR) using that term. If the annual percentage rate may be increased after consummation the advertisement must state that fact. The advertisement may not state any other rate, except that a simple annual rate or periodic rate that is applied to an unpaid balance may be stated in conjunction with, but not more conspicuously than, the annual percentage rate. Champions School of Real Estate page - 19

20 Federal Law & Regulation Some possible violations of Regulation Z (TILA) include the following: 1. Incorrect or incomplete disclosures to customers, particularly the amount financed or the finance charges resulting in incorrect APR s 2. Using an incorrect first payment period resulting in incorrect APR s 3. Not adequately disclosing the method of determining the balance to which the finance charge is actually applied 4. Failure to follow rescission requirements 5. Failure to update initial disclosure booklets annually (i.e., 15 year index history) 6. Failure to place rate cap on variable rate loans Consequences of Noncompliance Civic Liability If a creditor fails to comply with any requirements of the TILA, other than with the advertising provisions of chapter 3, it may be held liable to the consumer for: Actual damage, and The cost of any legal action together with reasonable attorney s fees in a successful action. If it violates certain requirements of the TILA, the creditor also may be held liable for either of the following: In an individual action, twice the amount of the finance charge involved, but not less than $100 or more than $1,000 (effective September 1995, not less than $200 or more than $2,000 for closed-end credit secured by real property or a dwelling); In a class action, such amount as the court may allow. The total amount of recovery, however, cannot be more than $500,000 or 1 percent of the creditor s net worth, whichever is less. Civil actions that may be brought against a creditor also may be maintained against any assignee of the creditor if the violation is apparent on the face of the disclosure statement or other documents assigned, except where the assignment was involuntary. Criminal Liability Anyone who willingly and knowingly fails to comply with any requirement of the TILA will be fined not more than $5,000 or imprisoned not more than one year, or both. USA PATRIOT ACT Under Section 326 of the Act, financial institutions must institute a Customer Identification Program (CIP) that contains reasonable risk-based procedures to: Collect identifying information about customers opening an account Verify that customers are who they say they are to the extent reasonable and practicable Maintain records of customer information and methods used to verify their identity Determine whether the customer appears on any list of suspected terrorists or terrorist organizations Champions School of Real Estate page - 20

21 Federal Law & Regulation FLOOD DISASTER PROTECTION ACT OF 1973 When the secured property for a loan is or will be located in Special Flood Hazard Areas (SFHA), regardless of whether the security property is located in a participating or non-participating community, the lender must provide a written notice to the borrower and the servicer. The written notice must contain the following information: A warning that the building or mobile home is or will be located in an SFHA. A description of the flood insurance purchase requirements. A statement, where applicable, that flood insurance coverage is available under the NFIP and may also be available from private insurers. A statement noting whether federal disaster relief assistance may be available in the event of damage to the building or mobile home, caused by flooding in a federally declared disaster. Delivery of the notice must take place within a reasonable time before the transaction is completed. The agencies generally regard ten days prior to closing as a reasonable time interval. However, what constitutes a reasonable time will vary according to the circumstances of particular transactions. optional. A lender may personalize and change the format of the sample form, but must provide the borrower with the minimum information required by the regulation. RIGHT TO FINANCIAL PRIVACY ACT This law prohibits a financial organization from providing access to a customer s financial records until written certification is received. Therefore, do not release a borrower s financial records to anyone before you have the Privacy Act certification. Although we may originate and process a government insured loan, in order to release information regarding the borrower to the government, we still must receive the Privacy Act certification. The Privacy Act does not preclude you from providing financial records: 1. Under subpoena in a criminal or civil case in which the government is a party 2. To prove a claim in bankruptcy or otherwise collecting a debt 3. Disclosing records in accordance with the Internal Revenue code 4. Subpoena of Grand Jury FEDERAL FAIR HOUSING ACT Also known as the Civil Rights Act of 1866, Civil Rights Act of 1968, forbids discrimination on the basis of race, color, national origin, religion, and sex. The act was amended in 1988 to include family composition and the handicapped. Age and sexual preference are not a protected category under Federal Fair Housing. Age is a protected category under ECOA. Champions School of Real Estate page - 21

22 Federal Law & Regulation A complaint would be made to HUD (Housing and Urban Development) by an individual. The first violation of the Act results in a fine of not more than $50,000 and for subsequent violations a fine of not more than $100,000. The fines are in addition to other civil damages, potential injunctions, attorney s fees and costs. Champions School of Real Estate page - 22

23 Residential Lending CHAPTER 2 - RESIDENTIAL LENDING MORTGAGE MARKET TODAY The nature of residential lending has changed significantly in the United States during the past forty years. A major shift of the mortgage money sources, from regulated depository institutions to mortgagebacked securities sold in financial markets, has taken place. Regulated lenders dominated the residential mortgage market until the late 1970s. Prior to 1980, savings institutions accounted for over 75 percent of residential lending in America. Rising interest rates, beginning in the late 1970s, forced depositors to withdraw their funds from lower interest bearing savings association accounts to higher yielding investments such as money market and certificates of deposit accounts. The 1980s saw the collapse of many savings and loan primary market lenders. As a result, savings associations began withdrawing from the mortgage loan market. Table 2-1 illustrates the shift of mortgage money sources. TABLE 2-1 Mortgage Debt Outstanding (In Millions of Dollars) 2000 Percent 2005 Percent Percent Change Total mortgage Debt 6, % 10, % 58% Commercial Banks 1,660 24% 2,689 25% 62% Savings Institutions % 1,070 10% 48% Life Insurance Companies 236 4% 274 3% 16% Federal & related agencies 341 5% 539 5% 58% Mortgage pools or trusts 3,161 46% 5,183 48% 64% Individuals and other % 1,019 9% 46% SOURCE: Federal Reserve Bulletin A review of Table 2-1 shows the migration of mortgage lending away from savings associations too mortgage pools and major financial institutions. The category of major financial institutions includes life insurance companies, which are nonblank, all state-chartered, and not subject to federal banking regulations. Premium reserves are not classed as deposits. In 2003, life insurance companies held about 9 percent of the 3,096 million listed by major financial institutions. MORTGAGE COMPANIES The failure of the savings associations in the late 1970s represented a window of opportunity for mortgage companies. Unlike regulated depository institutions, mortgage companies without depositors, have historically not been a major concern of the government. For the most part, mortgage companies are not licensed or regulated as the banks and saving associations are by the federal and state agencies. The money that mortgage companies use to make their loans come from the sale of bonds, which is considered a business transaction, not a savings account deposit procedure. A major difference between mortgage companies and regulated lenders is that mortgage companies do not hold depositors cash that can be used to fund their loans. Nor do they normally have investment cash with which to hold loans. To fund loans at closing, most mortgage companies rely on commercial banks that grant warehouse lines of credit to them. The loans are short term, collateralized by the mortgage notes they fund, and are normally repaid through the sale of these notes to the secondary market. Champions School of Real Estate page - 23