Adjustable-rate mortgage, Closed End Credit, Finance, Finance charge, Loan, Security interest, Statute of Limitations, Truth in Lending Act
There are eight (8) major federal laws pertinent to mortgage origination and servicing.
Truth-in-Lending Act (TILA); 15 U.S.C. § 1638.
Purpose. TILA is largely a disclosure statute that requires that lenders make certain disclosures to borrowers and potential borrowers. The Act is meant to insure that borrowers are informed of all of the terms of the loan before they take out the loan and can make an informed decision.
Scope. TILA applies to consumer credit – both closed end credit (like mortgages) and open ended credit (like credit cards) – extended by a creditor.
To constitute as “consumer credit” under the statute:
• The consumer must be a natural person.
• Credit is the right to defer payment of debt or to
incur debt and defer payment.
• The credit must be payable, by written agreement, by more than four
installments or subject to finance charges.
Under TILA, a “creditor” is:
• An entity that regularly extends consumer credit. Regularly means six or
more real estate secured loans, two or more high cost loans (or one or
more if made through a broker), or 26 or more in other cases per year.
• The creditor is the entity to which the obligation is payable to on its face.
Arrangers, like brokers, are not covered by TILA.
• Business, agricultural, organizational and commercial credit.
• Credit over $25,000 unless secured by real estate or a dwelling.
• Public utility credit in some instances.
• Securities or commodities accounts.
• Certain student loans.
• Home fuel budget plans if no finance charge is imposed.
Fundamentals. Lenders must disclose the following terms and conditions:
1. Amount Financed The amount financed is the amount of money that the borrower receives for his own benefit. Generally, this would include the proceeds of the loan, the purchase price of the goods/services being purchased, and the amount of pre-existing debts being paid off by consolidation or refinancing. Amount financed is roughly the same as the concept of “principle” but it is distinct from how principle is construed under state usury laws.
2. Finance Charge. Any charge that a consumer pays, directly or indirectly,
that is charged by the creditor, directly or indirectly, as incident to or a condition of the extension of credit. Examples include interest, service charges, points, origination fees, and many other costs associated with credit.
3. Annual Percentage Rate (APR). The cost of credit as a yearly rate.
Required Disclosures for Closed End Credit – Failure to disclose the following terms and conditions gives rise to Statutory Claims.
1. Total Finance Charge. Consists of all finance charges as defined above.
a. Under certain conditions, charges by third parties, closing agent fees,
debt cancellation coverage, and overdraft fees.
b.Application fees so long as they are charged to all applicants, whether or
not credit is extended.
c. Late fees.
d.Certain closing costs, so long as they are bona fide and reasonable.
e. Voluntary credit life, health, accident and loss of income insurance so
long as the voluntary nature, cost and term are disclosed and the consumer
separately agrees to the insurance in writing.
f. Credit property insurance premiums so long as the consumer is aware
that he can purchase insurance elsewhere.
g. Certain security interest related charges.
h.Annual fees or fees periodically charged as a condition to credit.
i. Seller’s points.
j. Interest reductions in time deposits.
2. Amount Financed. The principle part of the loan minus all charges
deemed to be finance charges.
3. Annual Percentage Rate.
4. Payment Schedule.
5. Total Number of Payments.
6. Security Interests.
7. Special Formatting Rules.
The disclosures must be clear, obvious, separate from other information and in a form that the borrower can keep. Disclosures must be provided in a timely manner, in a way that the borrower can keep before the consummation of the loan.
Lenders must also give the borrower a Notice of Right to Cancel, which informs the borrower of his right to rescind and contains the forms that the borrower needs to exercise that right.
Relief and Statute of Limitations. Under TILA, the borrower has an absolute right to rescind for three business days after the consummationof the loan. After three business days, a borrower may have the right to rescind up to three years if the disclosures were not made to the client. Damages and attorney’s fees are recoverable under the statute.
Home Ownership and Equity Protection Act (HOEPA); 15 U.S.C. § 1639
Purpose. HOEPA is designed to protect all borrowers, but especially
borrowers that apply for and take out high cost loans. HOPEA is
associated with TILA and is often considered a part of TILA.
Scope. Same as TILA.
Protections. Special Disclosures for Variable Rate Closed End Loans (like
1. The lender must disclose the maximum interest rate that could be charged over the life of the loan in the loan note.
2. The lender must give the borrower a copy of the ARM brochure that contains generic information about ARMs as well as more specific explanations of the aspects of each variable rate plan that the borrower is considering.
3. These disclosures must be given when the application is furnished
or before the payment of a nonrefundable fee, which ever is first.
4. During the life of the loan, the lender must send rate adjustment
or change notices before the loan rate will change.
HOEPA prohibits prepayment charges and balloon payments in a limited amount of cases, higher interest rates after default, negative amortization, more than two payments being made from the loan proceeds, pattern/practice of extending credit without taking into consideration the borrower’s ability to pay, and payments directly to home improvement contractors.
Relief and Statute of Limitations. A party can recover damages and rescind under HOEPA. Attorney’s fees and costs are also available. The Statutes of limitations for affirmative actions is one year. For rescission, the statutes of limitation is three years.
Equal Credit Opportunity Act (ECOA); 15 U.S.C. § 1691
Purpose. The purpose of the ECOA is to stop discrimination in the lending industry.
Protections. ECOA has three important aspects:
1. First, it prohibits discrimination in any aspect of credit based on race, color, religion, national origin, sex, marital status, age, assistance income.
2. Second, the ECOA requires creditors to take specific actions when approving or denying credit, prevents certain factors from being used to determine creditworthiness, mandates when an existing account may be closed, and restricts the ways that information is reported to credit reporting agencies concerning spouses.
3. Third, the Act imposes certain notice requirements on the credit issuer
when a loan application is approved or denied. If the creditor makes a counter offer (for more or less credit), then it must notify the borrower in writing of the new terms.
How ECOA Protection Can Be Applied to Foreclosure Fraud
Bait and switch tactics may give rise to a claim under the ECOA. If a creditor gives credit in a much larger amount than the borrower requested and never gives the borrower an opportunity to deny the additional amount, then the creditor violated the procedural terms of the ECOA by failing to provide the borrower with written notice of all action taken on the original loan application. This tactic is often used in predatory lending. A creditor will give more credit to pay borrower’s debts that the borrower expressed no interest in paying. The new amount is often disclosed too late in the process for the borrower to feel as if he can object.
Relief and Statute of Limitations. The ECOA allows home owners to pursue relief higher on the food chain than the original lender, and provides for actual and punitive damages (up to $10,000 in an individual action), equitable relief and attorney’s fees. The statute of limitations is one year.
Real Estate Settlement and Procedures Act (RESPA); 12 U.S.C. § 2601 et seq.
Purpose. The purpose of RESPA is to protect home buyers from
abusive practices in the residential real estate industry. The Act controls
the manner in which settlement services for a residential real estate loan are provided and compensated.
Scope. RESPA applies to federally related mortgages, meaning those made by federally-insured depository lenders, HUD-related loans, loans intendedto be sold on the secondary market to Fannie Mae or Freddie Mac or to creditors who make or invest more than a million dollars per year in residentially secured loans. Most home equity loans (as well as refinancings), mobile home purchase loans and construction loans are covered by RESPA. A loan for vacant land is excluded unless a structure will be constructed or a manufactured home will be placed on the property within two years of settlement of the loan. There are some exceptions to RESPA. If a lender makes a loan from its own funds, holds the loan for varying periods of time and then sells the loan on the open market, it is not covered. Also, certain lenders that originate loans through a computer system are generally exempt from RESPA’s requirements.
Protections. RESPA requires that no later than three business days after the application, the consumer must receive a “good faith estimate” of settlement costs (usually via the HUD-1 settlement statement) along with a booklet explaining the costs. At closing, all settlement agents must use the HUD-1 settlement kickbacks and unearned fees. No person shall give or accept any fee, kickback or gift for a referral of a settlement service. Additionally, RESPA requires servicers to notify consumers about the possibility that their mortgages may be transferred and when one is imminent, and to have a mechanism that allows borrowers to make inquiries about their account to a servicer and to have corrections made to
their accounts, if necessary. Servicers have a substantive duty to pay the property taxes, homeowner’s insurance and other escrowed monies to the appropriate recipients as long as the borrower is current. Further, RESPA limits the amount that a lender can require that a borrower place in escrow, and prohibits a lender or servicer from charging the borrower for the preparation of statements required by TILA, the HUD-1 settlement statement, or escrow account statement.
Statute of Limitations. The statute of limitations is one year except for servicer violations which has a 3 year limitation.
Fair Housing Act (FHA); 42 U.S.C. § 3605
Purpose. The FHA prohibits discrimination on the basis of race, color,
religion, sex, handicap, familial status, or national origin in the making of
or purchasing of residential real estate loans and any other related financial assistance.
Scope. The FHA applies to loan brokers, financing consultants and anyone else providing financial assistance related to the making of the loan as well as the secondary market in the purchasing of loans, debts or securities, thepooling or packaging of these instruments, and the marketing or the sale of securities issued on the basis of loans or debts.
Protection. To prove discrimination, the consumer must show that the defendants intentionally targeted on the basis of a protected class when trying to obtain credit or that there was a credit-grant policy that had a disparate impact on that basis.
Relief and Statute of Limitations. Under the FHA, the court can award actual and punitive damages, attorney’s fees and costs. The statute of limitations is two years from the occurrence or from the termination of the discriminatory practice for affirmative claims.
Federal Trade Commission “Holder” Rule
The FTC’s “Holder” rule, or the FTC Rule on Preservation of Consumers’ Claims and Defenses, allows a consumer to make a claim against a subsequent holder of a loan for the acts of the original lender. The original lender may be judgment proof, and it is unlikely that a consumer would effectively be able to defend against a collection action and bring an affirmative suit against the original lender. The rule creates an incentive for the lending industry to police itself and subsequent holders of a debt are in a better position to sue the original lender than the borrower.
Fair Debt Collection Practices Act (FDCPA); 15 U.S.C. § 1692 et seq.
Purpose. FDCPA restricts debt collector’s efforts to obtain payment and
to choose venue. The Act protects debtors from abusive or harassing
debt collection practices.
Scope. The Act is generally used in the non-mortgage context because mortgage servicers are exempt because they usually acquire servicing rights before the mortgage goes into default. A debt collector generally includes collection agencies, creditors using false names or collecting for other creditors, collection attorneys, purchasers of delinquent debts, repossession companies, and suppliers or designers of deceptive forms, but generally excludes companies collecting their own debts.
Protections. The Act protects the consumer from an invasion of privacy, harassment, abuse, false or deceptive representations, and unfair or unconscionable collection methods. Specific acts that are prohibited include late night or repetitive phone calls, false threats of legal action or criminal prosecution and communications with most third parties regarding the debt.
FDCPA provides the consumer the ability to stop all debt collection action with a letter, makes the collector deal with the consumer’s attorney if the consumer has one, and gives the consumer the right to dispute the existence, legality or amount of the disputed debt.
Relief and Statute of Limitations. The plaintiff can recover actual damages, statutory damages (up to $1000), attorney’s fees and costs and perhaps punitive damages and injunctive relief. Class actions are also authorized and the statute of limitations for all actions is one year for affirmative claims.
Racketeer Influence and Corrupt Organizations Act (RICO); 18 U.S.C. §§ 1961-1968
Purpose. RICO can be used to provide a civil remedy to abusive
consumer credit practices.
Scope. Any cause of action under RICO must have the following elements: the existence of an enterprise, the enterprise is engaged in interstate or foreign commerce, the defendant has engaged in one or more of four prohibited activities in section 1962, and the prohibited conduct cased injury to the plaintiff’s business or property.
Protections. Every RICO violation involves a collection of an unlawful debt (gambling debts or usury under state or federal law, at a rate at least twice the enforceable usury rate) or a pattern of racketeering activity. RICO can provide a remedy when a lender misrepresents that its rates are better than other lenders’ rates or that its loan will pay off other debts when it will
not. A well-plead allegation may state a claim for mail fraud in a loan flipping case under RICO. A borrower may also successfully plead a claim under RICO when there is a spread premium case where the payment of the premium is not revealed and the cost of the premium is passed onto the borrower in the form of a higher interest rate and where the broker represented that it would provide the lowest available rate, money was exchanged between the broker, the assignee, the funding lender and the title company and mail was used in furtherance of the scheme.
Remedy and Statute of Limitations. A person injured in his business or property can sue for treble damages but no physical or emotional damage claim can be made. The statute of limitations is four years in affirmative cases.
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