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The federal government has enacted consumer protection laws pertaining to residential mortgage lending. We have attempted to review the most salient points of those laws and discuss areas that are important when consumers are shopping for a mortgage loan. Some of the content of the federal regulations could be open for interpretation.
We do not represent that the following sections on the regulations are 100% accurate: it should not be considered a legal opinion of the law. Readers may seek the entire text from the governing bodies or talk to counsel for a comprehensive opinion.
EQUAL CREDIT OPPORTUNITY ACT REGULATION B
Regulation B was issued by the Board of Governors of the Federal Reserve System to implement the provisions of the Equal Credit Opportunity Act (ECOA). The law was enacted in 1974 to make if unlawful for creditors to discriminate in any aspect of a credit transaction on the basis of sex or marital status. In 1976, through amendments to the Act, it became unlawful to also discriminate on the basis of race, color, religion, national origin, age, receipt of public assistance and the good faith exercise of rights under the Consumer Credit Protection Act.
The primary purpose of the ECOA is to prevent discrimination in the granting of credit by requiring banks and other creditors to make extensions of credit equally available to all credit worthy applicants with fairness, impartially and without discrimination on may prohibited basis. The regulation applies to consumer and other types of credit transactions. This discussion will be limited to those provisions of ECOA that relate specifically to the mortgage lending process, including:
- Rules Concerning Taking of Applications
- Rules Concerning the Evaluation of Applicants
- Rules Concerning Extension of Credit
- Rules Concerning Consumer Notifications
Consumer Information for Monitoring Purposes
Rules Concerning Taking of Applications:
- Oral or Written Statements:
The regulation specifically prohibits a lender from making any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a responsible person from making or pursuing an application.
- Collection of Information:
With regards to collection of information, a lender may request any information in connection with an application, with certain exceptions discussed below:
- Required collection of information:
The lender is required to request information for monitoring purposed for credit transactions secured by the applicant's dwelling.
- Information about a former spouse:
The lender is permitted under the regulation to request any information concerning an applicant's spouse that is requested about the applicant, if the applicant resides in a community property state, like California, or property on which the applicant is relying as a basis for repayment of the credit requested is located in a community property state. Information regarding a former spouse may be requested if the request can also be made to the applicant, if the applicant is relying upon alimony, child support or separate maintenance payments from a spouse (no longer residing with the applicant) or former spouse as a basis for repayment of the credit requested.
- Other accounts of the applicant:
A lender may request an applicant to list any account upon which the applicant is liable and to provide the name and address in which the account is carried. A lender may also ask the names in which an applicant has previously received credit.
- Marital Status:
In California, a lender may inquire about an applicant's marital status, due to the fact that California is a community property state. A lender may only use the terms "married," "unmarried" and "separated."
- Disclosure about income from alimony, child support or separate maintenance:
Under the regulation, a lender may inquire whether an applicant's income is derived in whole or part from alimony, child support or separate maintenance only if the lender first discloses to the applicant that the income from these sources need not be revealed unless the applicant wishes to rely on it to establish credit worthiness. This disclosure must be given to any co-applicant as well.
- Sex:
The lender is prohibited from inquiring about the sex of an applicant. An applicant may be requested to designate a title in an application form (such a Ms., Mr.,. Mrs., or Miss) if the form discloses that the title designation is optional. Otherwise, the application form must use terms that are neutral to sex.
- Childbearing, child rearing:
The lender is prohibited from requesting or considering information concerning the applicant's plan or expectations of having children, their childbearing capabilities or birth-control practices. The lender is permitted to inquire about the number and ages of an applicant's dependents or about dependent-related financial obligations or expenditures, provided such information is requested without regard to any prohibited basis.
- Race, color, religion, national origin:
A lender may not inquire about the race, color, religion or national origin or any applicant or any other person in connection with a credit transaction. A lender may inquire about an applicant's permanent residence and immigration status.
Rules Concerning Evaluation of Applicants
Evaluation Information
The regulation allows a lender to consider any information properly obtained, so long as the information is not used to discriminate against an applicant on a prohibited basis.
Specific Rules Concerning the Use of Information:
- A lender may not take a prohibited basis into account in any system of evaluating the credit worthiness of applicants.
- Age and/or receipt of public assistance may only be used for the purpose of determining a pertinent element of credit worthiness. Furthermore, age may be considered when such age is used to favor the elderly applicant in extending credit.
- Childbearing, child rearing assumptions or aggregate statistics relating to the likelihood that any group of persons will bear or rear children or will, for that reason, receive diminished or interrupted income in the future, may not be used by the lender.
- A lender may not discount or exclude from consideration the income of an applicant or the spouse of an applicant on a prohibited basis or because the income is derived from part-time employment or is an annuity, pension or other retirement benefit. A lender may consider that amount and the probable continuance of any such income in evaluating an applicant's credit worthiness.
- To the extent that a lender considers credit history in evaluating the credit worthiness of similarly qualified applicants for a similar type and amount of credit in evaluating an applicant's credit worthiness, a lender may consider:
- The credit history, when available, of accounts designated as accounts that the applicant and that applicant's spouse are permitted to use or for which both are contractually liable.
- On the applicant's request, any information the applicant may present that tends to indicate that the credit does not accurately reflect the applicant's credit worthiness; and
On the applicant's request, the credit history, when available, of any account reported in the name of the applicant's spouse or former spouse that the applicant can demonstrate accurately reflects the applicant's credit worthiness.
Rules Concerning Extension of Credit
- Extension of Credit:
A lender may not refuse to grant an individual account to a credit worthy applicant on the basis of sex, marital status or any other prohibited basis.
- Applicant's Name(s):
A lender may not refuse to allow an applicant open or maintain an account in a birth-given first name and surname that is the applicant's birth-given surname, the spouse's surname or a combined surname.
- Signature of Applicant's Spouse of Other Person:
In general, a lender may not require the signature of an applicant's spouse or other person, other than a joint applicant, on any credit instrument if the applicant qualifies under the lender's standards of credit to be secured, the lender may require the signature of the applicant's spouse or other joint owner of the collateral on any instrument necessary or reasonably believed to be necessary under state law to make the property being offered as security available to satisfy the debt in the event of a default. In California, applicable state law requires all owners of personal property to sign in order to encumber the property. Therefore, the lender may request the non-applicant spouse or other parties to sign a security agreement or other instrument to secure a lien on the property, but not the promissory note. With transactions involving community real property, both spouses must sign the deed of trust in order for the lien to be perfected for the lender. Non-applicant spouse's signature should never be requested on the application or the promissory note.
Consumer Notifications
- Appraisal Notification:
Effective December 14, 1993, the Federal Reserve Board issued amendments to Regulation B, Equal Credit Opportunity Act. These amendments require the lender to notify the applicant of their right to receive a copy of their appraisal on loans secured by one-to-four family dwellings.
- Action Taken:
A lender must notify an applicant of action taken generally within 30 days after receiving a completed application. A notification given to an applicant when adverse action is taken is required to be in writing and must contain: a statement of action taken; the name and address of the lender; a statement of the provisions known commonly as the ECON Notice; the name and address of the federal agency that administers compliance with respect to the lender; and either a statement of specific reasons for the action taken or a disclosure of the applicant's right to a statement of specific reasons within a specified period of time.
- Information for Monitoring Purposes:
A lender that receives an application for credit primarily for the purchase or refinancing of a dwelling occupied or to be occupied by the applicant as a principal residence, where the extension of credit will be secured by the dwelling, is required to request as part of the application the following information regarding the applicants race or national origin (using the categories American Indian or Alaskan Native; Asian or Pacific Islander; Black; White; Hispanic; Other [specify] ); Sex; Marital Status (using the categories Married, Unmarried, and Separated); and age. The applicant(s) are not required to supply the requested information. If the applicant(s) chooses not to provide the requested information or any part of it, that fact will be noted on the form.
The lender then is required to note on the form, to the extent possible, the race and national origin and sex of the applicant(s) on the basis of visual observation or surname. The lender is required to inform the applicant(s) that the government information is being requested by the federal government for the purpose of monitoring compliance with the federal statutes that prohibit lender from discriminating against applicants on the basis of race or national origin, sex, martial status and age. The lender should also inform the applicant(s) that if the applicant chooses not to provide the information, the lender is required to note the race or national origin and sex on the basis of visual observation.
HOME MORTGAGE DISCLOSURE ACT REGULATION C
The Home Mortgage Disclosure Act (HMDA) was enacted by Congress in 1974 and implemented by the Federal Reserve Board as Regulation C. This regulation provides the public with information regarding financial institutions' record of assisting in the credit need of the neighborhoods and communities in which they are located.
Another purpose to HMDA is to aid public officials in targeting public investments to attract investments from the private sector. The regulation through the various amendments requires lending institutions to collect and disclose data regarding the applicants and their characteristics. The HMDA regulation thereby allows for the public to determine possible discriminatory lending patterns and assists in enforcing anti-discriminatory statues.
Through this regulation the regulatory agencies have the authority to review a lender's mortgage loan record to determine any discriminatory practices against classes of individuals and/or within particular area within the communities served by the lender. The following types of mortgage loans are subject to coverage under HMDA:
- home purchase loans for any residential dwelling, including a condominium unit, mobile home, manufactured home, or multi-family dwelling,
- home improvement loans made for the purpose of repairing, rehabilitating or remodeling a dwelling and,
- the refinancing of a home previously covered by HMDA.
In order to evaluate lending practices, financial depository institutions are required to collect certain data from applicants. All required HMDA data is found on the Real Estate Loan Application Form 1003 in the government monitoring information section, which specifically request the applicant to provide information regarding national origin, race and sex.
The regulation allows the option to the loan applicant to furnish the data concerning national origin, race and sex. However, the regulation does require the applicant to document his/her choice when information will not be voluntarily provided.
TRUTH IN LENDING ACT REGULATION Z
The truth in Lending Act (TILA) is intended to enable the customer to compare the cost of a cash versus credit transaction and the difference in the cost of credit among different lenders.
TILA also establishes disclosure standards for advertisements that refer to certain credit terms.
In addition to financial disclosure, TILA provide consumers with substantive rights in connection with certain types of credit transactions to which it relates. These include 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.
We will limit our synopsis to the provisions of TILA which relate specifically to mortgage lending.
- Early and Final Regulation Z Disclosure Requirements
- Disclosure Requirements for ARM Loans
- Right of Rescission
- Advertising Disclosure Requirements
Early and Final Regulation Z Disclosure Requirements:
TILA requires lender to make specific disclosures on loans subject to the Real Estate Settlement Procedures Act (RESPA) within three business days after their receipt of a written application. This disclosure statement is partially based on the initial information provided by the consumer. A final disclosure statement is provided at the time of loan closing. The disclosure is required to be in a specific format with the following information:
- Name and address of creditor
- Amount financed
- Itemization of amount financed (optional, if Good Faith Estimate is provided)
- Finance charge
- Annual percentage rate (APR)
- Payment schedule
- Prepayment policy
- Total sales price
- Demand feature
- Variable rate information
- Total of payments
- Security Interest
- Insurance requirement
- Late payment policy
- Security interest charges
- Contract references
- Assumption policy
- Required deposit information
Disclosure Requirements for Adjustable Rate Mortgage 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 disclosure to be provided, including:
- 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 and 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. The lender is 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 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 the finance charge.
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:
Advertising directed to consumers; 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 an "annual percentage rate" (APR) using that term. If the annual percentage rate may be increased after consummation the advertisement must state that fact.
