Federal Lending Legislation

Chapter 4

Federal Lending Legislation

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Overview • Federal and state laws regulate real estate financing and include laws that: – Require financial disclosures – Protect privacy – Prohibit discrimination – Prohibit predatory lending

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Key Terms • 3/7/3 Rule • Affiliated Business Arrangement • Annual Percentage Rate (APR) • Community Reinvestment Act • Disclosure Statement • Equal Credit Opportunity Act (ECOA)

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

• Fair and Accurate Credit Transactions Act (FACT Act) • Fair Credit Reporting Act (FCRA) • Good Faith Estimate • Gramm-Leach-Bliley Act • Home Mortgage Disclosure Act (HMDA) • Home Ownership and Equity Protection Act (HOEPA) 3

Chapter 4: Federal Lending Legislation

Key Terms • Homeowners Protection Act (HPA) • Housing and Economic Recovery Act of 2008 (HERA) • HUD Uniform Settlement Statement (HUD-1) • Mortgage Disclosure Improvement Act (MDIA) • Red Flag Rules • Regulation Z

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

• Rescind • RESPA • Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) • Settlement Statement • Truth in Lending Act (TILA) • Truth in Lending Disclosure Statement (TIL) 4

Chapter 4: Federal Lending Legislation

Laws Requiring Financial Disclosures

Related to real estate finance and mortgage loans, specifically those required under federal law include: • Regulation Z of the Truth in Lending Act (TILA) • Mortgage Disclosure Improvement Act (MDIA) • Real Estate Settlement Procedures Act (RESPA) • Homeowners Protection Act (HPA)

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Truth in Lending Act (TILA) • Enacted in 1968 to prevent abuses in consumer credit cost disclosures • Amended most recently by the Mortgage Disclosure Improvement Act. • Requires lenders to disclose consumer credit costs to promote informed use of consumer credit • Enables consumers to compare credit costs and shop around for the best credit terms • Administered by the Board of Governors of the Federal Reserve System (specific provisions implemented by Regulation Z) Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Truth in Lending Act (TILA) • Provisions apply to primarily to lenders extending credit for personal, family, or household purposes • Credit offered must be subject to a finance charge or payable by written agreement in more than four installments • Includes all real estate loans made to consumers if loan is for other than business or commercial purposes Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

TILA Disclosures TILA disclosures required in two general areas: – When lenders offer credit but before the transaction in consummated – When credit terms are advertised to potential customers

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Required TILA Disclosures • Truth in Lending Disclosure Statement (TIL) and guide on how to read the TIL • When Your Home is on the Line booklet (for home equity loans and HELOCs) • Consumer Handbook on ARMs (CHARM booklet) • ARM Disclosure (if applicable) • Balloon Disclosure (if applicable) • Prepayment Disclosure • Notice of Right to Rescind Lenders must retain evidence of compliance for 2 years

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Annual Percentage Rate (APR) • The total cost of financing a loan in percentage terms, as a relationship of the total finance charges to the total amount financed (not the note rate) • APR must be disclosed to consumer whenever the interest rate is quoted • If you cannot determine the APR in advance, other cost information for the consumer's specific transaction may be given, as well as: – Open-end credit: Corresponding annual percentage rate – Closed-end credit: APR for a sample transaction

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Finance Charges • Cost of consumer credit as a dollar amount • Includes: – Any charge payable directly or indirectly by the borrower – Any charge that the lender imposes directly or indirectly as a condition of extending credit – Fees charged by a mortgage broker—including fees that the borrower pays directly to the broker or to the lender for the broker

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Truth in Lending Statement (TIL)

• 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 consumer’s application • Once delivered, imposes a waiting period of 7 business days before loan can close • No fee, other than credit report, may be charged prior to delivery of TIL and other required disclosures Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Truth in Lending Statement (TIL)

Data in the “Federal Box” − Finance charge expressed as an APR − Total finance charges − Amount financed − Total of payments paid at the end of loan term Mandatory statement: You are not required to complete this agreement merely because you have received these disclosures or signed a loan application. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Truth in Lending Statement (TIL)

• Name of lender/creditor • Notice of a right to receive itemization of amount financed • Number, amount, and due dates of payments • Variable rates, if applicable • New payment, late payment, and prepayment provisions • Acceleration clauses, default procedures • Description and identification of the security • Whether the loan may be assumed by a subsequent buyer Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

TIL – Additional Waiting Period • New disclosures required if changes to initial APR exceeds: • 1/8% (.125) for fixed rate transaction • 1/4% (.25) for adjustable rate transaction

• New disclosure trigger a waiting period of three business days before loan can close • 3/7/3 Rule: • Initial disclosure within 3 business days of applying • Earliest close on the 7th business day after disclosures are delivered/mailed • An additional waiting period of 3 business days after borrower receives the redisclosure before closing Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Right of Rescission • Borrower may rescind the credit transaction of principal residence until midnight of the third business day after loan closes • Applies to home equity loan and lines of credit, home improvement loans, and refinances from different lenders • Lenders must inform consumers of this right and terms in a separate document • Borrowers with bona fide reason may be able to waive right to rescind • If rescinded, the loan is void, lender must return any money collected, borrower is relieved of liability Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Extended Right of Rescission Extended right of rescission period of three years if: • Lenders fail to properly inform borrowers of their right to rescind • Truth in Lending Statement not given to borrower • Disclosures made on the Truth in Lending Statement are understated by: – The greater of 0.5% of the amount financed or $100 – The greater of 1% of the amount financed or $100 for some refinances

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Advertising and Triggering Terms • • • •

Clear and conspicuous disclosure of terms Accurate use of the term “fixed” Advertised terms must be actually available Annual percentage rate required if triggering terms used: – – – – –

The amount of the down payment The amount of any payment The number of payments The period of repayment The amount of any finance charge

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Required Advertising Disclosures • Use of any triggering term requires these disclosures: – Amount or percentage of down payment – Terms of repayment – APR (or annual percentage rate); if the rate may increase (e.g., ARMs), that fact must also be disclosed

• If only the APR is advertised, additional disclosures are not required Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Advertising Closed-End Credit • If more than one interest rate will apply, disclose: – Each rate; if variable, a reasonably current index and margin – The period of time each will apply – The APR for the loan

• Payment amount must include amount of each (balloon if applicable) and period payment will apply • Restrictions on comparing actual or hypothetical payments/rates with “teaser” payments/rates • Guidelines on the use of the terms “variable” and “fixed” Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Advertising Open-End Credit • Additional disclosures if triggering terms are used: – Loan fees – Any periodic rate used to compute the finance charge expressed as an annual percentage rate – Maximum annual percentage rate that may be imposed in a variable-rate plan

• Balloon payment (if applicable) • If promotional rates and payments used, disclose: – Period during which promotional rate/payment applies – If rate, any APR that will apply (if a variable rate, APR within established accuracy standards) – If payment, the amounts and time periods of any payments that will apply (if variable index and margin, based on a reasonable current index and margin) Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Other Advertising Provisions • Any ad stating tax implications—such as whether or not interest is tax-deductible—cannot be misleading; consumer must be advised to consult tax adviser • TV and radio ads may provide toll free number for more information • Misrepresentations prohibited, for example: – – – –

Loan product being government endorsed Misleading use of the current lender’s name Misleading claims of debt elimination Prohibits use of “counselor” to reference for-profit mortgage broker or lender – In foreign language ads, prohibits making some required disclosures only in English

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Appraisal Practices Addressed by TILA • Lenders, mortgage brokers, and their affiliates are prohibited from coercing, influencing, or encouraging appraiser to misstate the value of the dwelling • Lender cannot extend credit if improper coercion has occurred unless it can show appraisal did not materially misrepresent value • Lender may ask appraiser to consider additional information or correct errors Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Servicing Practices That Violate TILA • 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 Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Real Estate Settlement Procedures Act (RESPA)

• Promulgated in 1975 by the U.S. Department of Housing and Urban Development (HUD) as Regulation X • Enforced by HUD's Office of Consumer and Regulatory Affairs and Interstate Land Sales • Intended to: – Help consumers become better shoppers for settlement services – Eliminate increases in the costs of certain settlement services due to kickbacks and referral fees

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Settlement Services • Loan origination • Mortgage broker services • Processing or funding • Title services • Attorney services • Document preparation/recording • Inspections

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

• Settlement services • Insurance • Property taxes/assessments • Real estate brokerage services • Any other service required by borrower or seller

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Chapter 4: Federal Lending Legislation

RESPA Transactions • Covers loans on property secured designed for occupancy of from one to four families: – Most purchase loans, assumptions, refinances, property improvement loans, home equity lines of credit, some construction loans

• Does not cover: – – – – – – –

An all-cash sale A sale where the individual 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 a dwelling will be constructed or moved onto the property within two years

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Kickbacks and Unearned Fees •

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Section 8 prohibits: − Giving/accepting a fee, kickback, or anything of value in exchange for referrals − Fee splitting and receiving unearned fees for services not actually performed Fees, salaries, compensation, or other payments for services actually rendered and that are not based on a referral do not violate RESPA Violators may be fined up to $10,000 and/or be imprisoned up to one year; in civil lawsuit, violators may be liable for damages equal to three times the amount of the charge paid for the service.

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Affiliated Business Arrangement Situation where an individual or entity or associate in a position to refer settlement services: – Has affiliate relationship with or direct/beneficial ownership interest of more than 1% in provider of settlement services AND WHO THEN – Refers business to that provider or in some way influences the selection of that provider • Someone with ownership interest may accept legitimate fees/wages for actual services rendered/hours worked, bona fide compensation unless for referral or unearned •

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Other RESPA Provisions • Section 9: Seller Required Title Insurance • Prohibits seller from requiring home buyer to use a particular title insurance company, directly or indirectly, as a condition of sale

• Section 10: Limits on Escrow Accounts • • • •

Sets limits on escrow accounts Allows a cushion not to exceed 2 months Requires annual analysis Any excess over $50 be returned

• Prohibits lenders/servicers from charging for preparation of any disclosures required by RESPA or TILA Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Loan Application • Submission of a borrower‘s financial information in anticipation of a credit decision, which includes: – Borrower‘s name – Borrower‘s monthly income – Borrower‘s SSN (to obtain a credit report) – Property address – Estimate of value of the property – Loan amount – Any other information deemed necessary • RESPA requires lender (or mortgage broker) to provide certain disclosures at application or within three business days, unless – Applicant withdraws application – Lender turns down the loan within three business days Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Disclosures At Application • Special Information Booklet • Good Faith Estimate (GFE) of Settlement Costs – Not a loan commitment – No fee other than credit report may be charged until GFE and TIL are provided

• Mortgage Servicing Disclosure Statement

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Disclosures Before Settlement • Affiliated Business Arrangement (AfBA) Disclosure – Required if settlement service provider refers to another provider with whom there’s an affiliated business arrangement – Must be given at or prior to the time of referral

• HUD-1 Settlement Statement – Details all closing costs – Borrower may request 1 day prior to settlement Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Disclosures At Settlement • HUD-1 Settlement Statement – Details all closing costs – Separate forms may be used for borrower and seller

• Initial Escrow Statement – Itemizes estimated taxes, insurance premiums, and other charges to be paid from escrow account for first 12 months of loan – Lender has 45 days from settlement to deliver Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Disclosures After Settlement • Annual Escrow Statement – Summarizes all escrow deposits and payments – Must be delivered to borrower once a year – Notifies borrower of any shortages

• Servicing Transfer Statement – Required if servicer sells or assigns servicing rights – Generally must notify borrower 15 days before effective date – Borrower making timely payment to old servicer within 60 days can’t be penalized – Bona fide transfer in the secondary market not covered Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Good Faith Estimate (GFE) • States the amount of, or range of, settlement charges the borrower is likely to pay • May be provided by the lender or the mortgage broker, if applicable • Ultimately lender’s responsibility to determine applicant received GFE • Must be provided no later than 3 business days after receipt of written application • Must be provided at no cost to borrower

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

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 10 business days • Loan summary • Escrow account information • Summary of settlement services Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

GFE – Page 2 • Block 1-Origination charges • Block 2-Your credit or charge (points) for the specific interest rate chosen • Line A-Your adjusted origination charges • Block 3-Required services we select • Block 4-Title services and lender’s title insurance • Block 5-Owner’s title insurance • Block 6-Required services that you can shop for

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

• Block 7-Government recording charges • Block 8-Transfer taxes • Block 9-Initial deposit for your escrow account • Block 10-Daily interest charges • Block 11-Homeowner’s insurance • Line B-Your charges for all other settlement services • Line A+B-Total estimated settlement charges 38

Chapter 4: Federal Lending Legislation

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

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Other GFE Provisions: Terms Availability of terms: • Charges/terms for settlement services must be available for at least 10 business days • 10-day provision does not apply to: • Interest rate • Charges related to interest rate

• Rates may be locked for pre-determined period

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Other GFE Provisions: Tolerances • Charges that may not exceed GFE amount – Origination charge – 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

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Other GFE Provisions: Binding • Loan originator bound to terms unless new GFE provided • Updated GFE usually 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 – Borrower-requested changes affecting charges/terms – Changes if interest rate not locked/lock expires Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Changed Circumstances • Changed circumstances: – 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 that are particular to the borrower or transaction • Market fluctuations by themselves are not considered to be changed circumstances

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Other GFE Provisions • Original GFE expires in 10 days (or longer as

specified by loan originator) if borrower does not intend to continue with an application • If charges at settlement exceed the charges listed on the GFE by more than the permitted tolerances, loan originator may cure by reimbursing to the borrower the amount of the excess : • At settlement • Within 30 calendar days after settlement

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

HUD-1 Uniform Settlement Statement

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Required for RESPA compliance Completed by person conducting closing Itemizes all charges related to transaction Must be prepared for both borrower & seller HUD-1A may be used when no seller Not required for open-end home equity loans Loan owner must retain for 5 years

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Paid Outside of Closing • Charges paid outside of settlement by the borrower, seller, loan originator, real estate agent, or any other person, must be included • Marked "P.O.C." for "Paid Outside of Closing" (settlement) • Must not be included in computing totals • Indirect payments from a lender to a mortgage broker may not be disclosed as P.O.C. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

HUD-1 Page 1 • Section J Summary of Borrower's Transaction – Line 303 indicates either the cash required from the borrower at settlement or cash payable to the borrower at settlement with the appropriate box checked • Section K, Summary of Seller's Transaction – Line 603 indicates either the cash required to be paid to the seller at settlement or the cash payable by the seller at settlement, with the appropriate box checked Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

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

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

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 • Loan terms

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Homeowners Protection Act (HPA)

• Requires lenders or servicers to provide certain disclosures and notifications concerning private mortgage insurance (PMI) on residential mortgage transactions • Most provisions do not apply to home loans made before July 29, 1999 • Requires lenders that refinance or service home mortgages to comply with its terms • Does not cover loans that do not have PMI or loans secured by 2nd or multi-family homes Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Disclosure Provisions of the HPA

• Lenders must provide initial written disclosure regarding PMI cancellation and annual reminders • Borrower cancellation-request when LTV is 80% or less and borrower has good payment history • Automatic termination-when LTV is 78% when borrower current with payments • Final disclosure confirming borrower no longer required to pay PMI premiums

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Laws Related to Privacy and Consumer Identification

• Financial information gathered as part of the loan process must be kept confidential • This section discusses the following federal laws: – Fair Credit Reporting Act (FCRA) – Fair and Accurate Credit Transactions Act (FACT Act) – Gramm-Leach-Bliley Act – U.S. Patriot Act – National Do Not Call Registry

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Fair Credit Reporting Act (FCRA)

• Regulation V, enforced by FTC • Federal law dealing with: – – – –

Granting of credit Access to credit information Rights of debtors Responsibilities of creditors

• Gives consumers access to the same information about themselves that lenders use when making credit decisions Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Consumer Rights •Adverse action, provide name, address, and phone number of reporting agency •Free copy of credit report from credit agency if: – – – –

Information resulted in adverse action. Victim of identify theft; fraud alert inserted File contains inaccurate data because of fraud Public assistance or unemployed

•Request credit score (not free) •Dispute incomplete or inaccurate information •Limit prescreened offers

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Consumer Reporting Agency Obligations • May not report outdated negative information – Negative credit data more than 7 years old – Bankruptcy more than 10 years old – No time limit on criminal convictions

• Must limit access to a credit file to those with legitimate business need • May not give out consumer credit information to an employer, or potential employer, without written consent from consumer to employer

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Fair and Accurate Credit Transaction Act (FACT Act) • Amended the Fair Credit Reporting Act in 2003 • Helps consumers fight identity theft • Contains 7 major titles: – Identity Theft Prevention and Credit History Restoration – Improvements in Use of and Consumer Access to Credit Information – Enhancing the Accuracy of Consumer Report Information – Limiting the Use and Sharing of Medical Information in the Financial System – Financial Literacy and Education Improvement – Protecting Employee Misconduct Investigations – Relation to State Laws Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Fair and Accurate Credit Transaction Act (FACT Act) • Allows access of credit reports to spot possible identity theft, allow dispute of inaccurate information • Requires Home Loan Applicant Credit Score Information Disclosure notice • Allows consumer to place a fraud alert or a credit freeze • Provides for truncation of customer's card number Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Fair and Accurate Credit Transaction Act (FACT Act) • Requires measures to responsibly secure and dispose of sensitive personal information found in a consumer’s credit report: – Burning or shredding papers – Destroying or erasing electronic files or media – Placing all pending loan documents in locked desks, cabinets, or storage rooms at the end of the work day Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Red Flags Rules (Section 114) • Financial institutions and creditors must implement written identity theft prevention program • Card issuers must assess validity of address change requests • Users of consumer reports must reasonably verify identity of consumer report subject if notified of address discrepancy Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Red Flags • Alerts, notifications, or warnings from a consumer reporting agency • Suspicious documents • Suspicious personally identifying information • Unusual use of 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

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Gramm-Leach-Bliley Act (GLB Act)

• Financial Modernization Act of 1999 • Includes provisions in Title V to protect and regulate the disclosure of consumers’ personal financial information • Three principal parts to the privacy requirements: 1. The Financial Privacy Rule 2. Safeguards Rule 3. Pretexting Provisions

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

GLB: Financial Privacy Rule • Governs collection and disclosure of customers’ nonpublic personal information: – What a consumer or customer puts on an application – Data from another source, such as a credit bureau – Transactions between the individual and the company – Whether someone is a consumer/customer of financial institution • Consumer Privacy Policy notice explains lender’s information gathering and sharing practices – Before disclosing nonpublic personal information to a third party – Annually during the financial relationship • Consumer may opt out of having information shared Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

GLB: Safeguards Rule • Requires all financial institutions to design, implement, and maintain safeguards to protect customer information • Written policy must: – Ensure security and confidentiality of customer records – Protect against any anticipated threats or hazards to security of such records – Protect against unauthorized access or use of such records Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

U.S. Patriot Act • Enacted in 2001 • Federal legislation designed to curb terrorist activities • Expands the definition of terrorism • Impacts real estate and mortgage transactions because of the disclosure requirements associated with it

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

National Do Not Call Registry • Managed by the Federal Trade Commission; enforced by the FTC, Federal Communications Commission, and states • Applies to sales/marketing via interstate phone calls • Requires regular maintenance of national (every 3 months) and internal (every 30 days) lists • Violators can be fined up to $11,000 per incident • Established business relationship (EBR)-call up to 18 months after last transaction • Inquiries/applications-call up to 3 months • May not call someone on internal list, even if EBR Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Laws Prohibiting Discrimination • •

Fair and equitable treatment in housing and real estate transactions is a right by law Federal anti-discrimination statutes related to housing and lending include: – – – – –

Civil Rights Act of 1866 Title VII of the Civil Rights Act of 1968 (Fair Housing Act) The Equal Credit Opportunity Act (ECOA) The Community Reinvestment Act (CRA) The Home Mortgage Disclosure Act (HMDA)

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Civil Rights Act of 1866 • Prohibits public and private discrimination based on race or ancestry in any property transaction in the United States • Applies to all property—real or personal, residential or commercial, improved or unimproved • Person unlawfully discriminated against can sue only in federal district court • Remedies include injunctions, compensatory or punitive damages

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Fair Housing Act • Federal Fair Housing Act or Title VIII of the Civil Rights Act of 1968 • Prohibits discrimination in the sale or lease of residential property, including vacant land intended for residential housing, based on:

• Race • Color • Religion • Sex

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

• National Origin • Disability • Familial Status

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Chapter 4: Federal Lending Legislation

Fair Housing Act • Prohibits discrimination in advertising, real estate brokerage, lending, and other services associated with residential transactions • Requires: • “Equal housing lender” slogan in any broadcast advertisement • Equal Housing Opportunity poster in every branch where mortgage loans are made • Equal Housing Opportunity logo on all printed promotional material Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Fair Housing Act Violations • Refusing to rent or sell residential property after receiving a good faith offer. • Refusing to negotiate for the sale or rental of residential property. • Taking any action that would otherwise make residential property unavailable or deny it to any person. • Using discriminatory advertising or any other notice that indicates a limitation or preference or intent to make any limitation, preference, or discrimination. • Making any representation that property is not available for inspection, sale, or rent when it is, in fact, available. • Coercing, intimidating, threatening, or interfering with anyone because of his enjoyment, attempt to enjoy, or encouragement and assistance to others in their enjoyment of the rights granted by the Fair Housing Act. • Discriminating in the terms or conditions of any sale or rental of residential property or in providing any services or facilities in connection with such property. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Discrimination in Mortgage Lending

• Refusing to make a mortgage loan • Refusing to provide information regarding loans • Imposing different terms or conditions on a loan • Discriminating in the appraisal of property • Refusing to purchase a loan • Setting different terms or conditions for purchasing a loan Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Discriminatory Practices • Blockbusting: Inducing owners to sell homes by suggesting the ethnic or racial composition of the neighborhood is changing, implying property values will decline (also called panic selling) • Steering: Channeling prospective buyers/tenants to neighborhoods based on race, religion, or ethnic background • Redlining: Refusing to make loans on property located in a particular neighborhood for discriminatory reasons Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Equal Credit Opportunity Act of 1974 (ECOA)

• Ensures all consumers (individuals and businesses) are given an equal chance to obtain credit • Also known as Regulation B • Prohibits discrimination in granting credit/prohibits discouraging credit application to people based on: •Sex •Age •Marital status •Race •Color Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

•Religion •National origin •Receipt of public assistance •Rights exercised rights under Consumer Credit Protection Act 73

Chapter 4: Federal Lending Legislation

Equal Credit Opportunity Act of 1974 (ECOA)

• Applies to anyone who grants credit or arranges financing, including bankers and mortgage brokers • Requires credit bureaus to maintain separate credit files on married spouses, if requested • May not ask about spouse unless: – Joint application and spouse will use account or be liable – Relying on spouse’s income, child support, alimony to qualify – In a community property state • Can use only these terms: Married, unmarried, separated • May not ask about intent related to children, but can ask about expenses related to dependents

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Chapter 4: Federal Lending Legislation

ECOA: Loan Application • Section X of Uniform Residential Loan Application: – Ethnicity (Hispanic or Latino/Not Hispanic or Latino) – Race (American Indian or Alaska Native, Native Hawaiian or Other Pacific Islander, Asian, White, Black or African American) – Sex (Male or Female)

• Applicant may refuse to supply; lender cannot discriminate • Interviewer required to note data based on visual observation and surname if application made in person Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

ECOA: Evaluating Income • A creditor may consider the amount and probability of any income continuing • A creditor may NOT: – Refuse to consider public assistance income the same way as other income. – Discount income because of sex or marital status. – Discount or refuse to consider income because it comes from part-time employment or pension, annuity, or retirement benefits programs. – Refuse to consider regular alimony, child support, or separate maintenance payments. • An applicant is not required to disclose such income. • A loan officer may not discriminate against someone for exercising the right of nondisclosure. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

ECOA: Considering Age • The applicant is too young to sign contracts, generally under age 18. • The creditor would favor applicants age 62 and older. • It is used to determine the meaning of other factors important to creditworthiness, such as to determine if an applicant’s income might drop because of impending retirement. • It may be used in a valid credit scoring system that favors applicants depending on their age. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

ECOA: Required Disclosures • Notify applicants of lending decision within 30 days of filing a complete application – If approved, may provide a Commitment Letter – If incomplete, send a Notice of Incomplete Application – When adverse action is taken, send a Statement of Adverse Action, in writing

• Disclose customer’s rights, including right to appraisal report used in the decision process

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Chapter 4: Federal Lending Legislation

ECOA: Record Retention • After notification of action taken, creditor must maintain for 25 months (12 months for business credit): – Any application it receives – Any information required to be obtained concerning characteristics of the applicant to monitor compliance – Any other written or recorded information used in evaluating the application and not returned to the applicant at the applicant's request – The notification of action taken and the statement of specific reasons for adverse action – Any written statement submitted by the applicant alleging a violation of ECOA Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

ECOA: Enforcement • Enforced by the Federal Trade Commission; each financial institution further falls under the authority of its respective regulatory agency • Creditors subject to civil liability for actual and punitive damages in individual or class actions • Punitive liability applies only to nongovernmental entities • Damages limited to $10,000 in individual actions; lesser of $500,000 or 1% of the creditor's net worth in class actions

• Civil action must be brought within 2 years of alleged violation Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Community Reinvestment Act (CRA)

• Enacted by Congress in 1977 to encourage financial institutions to help meet the credit needs of their respective communities • Requires each insured depository institution’s record be evaluated periodically • In some states, these requirements have been extended to mortgage lenders. Make sure you know your state’s laws

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Chapter 4: Federal Lending Legislation

Home Mortgage Disclosure Act of 1975 (HMDA)

• Enforced by the Fed's Regulation C • Provides loan data from certain financial institutions to be used by the public to: − Determine if financial institutions are serving community housing needs − Aid public officials in distributing public funds in order to attract private investment where needed − Identify possible discriminatory lending patterns • Relies on public scrutiny for effectiveness • Does not establish quota system Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

HMDA: Covered Properties • Affects applications for residential loans, including: – Home purchase – Home improvement – Refinancing – Subordinate financing • Does not apply to loans on vacant land, new construction, or on loans sold as part of a pool for servicing Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

HMDA: Data Reporting • Requires financial institutions to submit a Loan/Application Register (or LAR) to their supervisory agencies every March • Data for LAR is collected on loan originations, applications, loan purchases, requests under a pre-approval program • LARs may be used to discover discriminatory practices, including redlining • LAR data must be maintained and made available upon request for 3 years Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

HMDA: Role of the FFIEC • Supervisory agencies, through the Federal Financial Institutions Examination Council (FFIEC), compile HMDA data for each institution • Produces other aggregate reports that show lending patterns by home age and property location • Data analysis helps determine compliance of with ECOA, fair lending laws • Reg C requires notice about availability of HMDA data to be posted in lobbies of lending institutions Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Laws Against Predatory Lending

• Predatory lending involves loans that take advantage of illinformed consumers through: – Excessively high fees – Misrepresented loan terms – Frequent refinancing that does not benefit the borrower – Other prohibited acts • Amendments to Truth in Lending Act: – Home Ownership and Equity Protection Act (HOEPA) – Higher-priced loans definition

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Chapter 4: Federal Lending Legislation

Home Ownership and Equity Protection Act of 1994 (HOEPA) • Amends the Truth in Lending Act • Establishes disclosure requirements for certain loans with high interest rates and/or fees • Prohibits deceptive and unfair practices in lending • Enforced by the Federal Trade Commission and each state’s attorney general • Gives broad regulatory authority to Federal Reserve Board • Allows consumers to sue violators and recover statutory and actual damages, court costs, and attorney fees • Violations may invoke a three-year rescission period

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Chapter 4: Federal Lending Legislation

HOEPA: High Cost Loan Triggers •High cost: closed-end loan secured by a borrower’s principal residence, excluding purchase loans, construction loans, and reverse mortgages •APR trigger when it exceeds the yield on comparable Treasury securities by more than: – 8% on a 1st lien mortgage – 10% on a second lien mortgage

•Total finance charge trigger when total points and fees exceed: – Larger of 8% of the loan amount or the current designated dollar amount

•HOEPA calculates total finance charges differently than standard Reg Z calculation Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

HOEPA: Prohibited Terms • Balloon payments on loans less than 5 years except for bridge loans less than 1 year used to build or purchase a home • Negative amortization • Repayment schedule that consolidates more than 2 periodic payments that are due to be paid in advance from the proceeds of the loan • Default interest rates higher than pre-default • Rebates • Prepayment penalties (generally prohibited but may be allowed under certain circumstances) • Demand clauses Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

HOEPA: Prohibited Practices • Disbursing proceeds from home improvement loans except as provided for in the contract • Selling or otherwise assigning the loan without furnishing a mandated statement to the purchaser or assignee related to liability of a high-cost loan • Refinancing a HOEPA loan into another HOEPA loan within the first 12 months, unless new loan is in borrower’s best interest

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Chapter 4: Federal Lending Legislation

HOEPA: Verifying Ability to Pay • May not grant loans on collateral value of property without regard to borrower’s ability to repay • Must consider current and reasonably expected income and assets – Cannot be materially greater than could have verified when loan was consummated

• Must use largest payment of principal and interest scheduled in first 7 years and consider either: – Debt-to-income ratio – Income after paying all debt obligations

• Does not apply to temporary or bridge loans of 12 months or less Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

HOEPA: Required Disclosures At least three business days prior to consummation of a mortgage transaction: – Written notice: You are not required to complete this agreement merely because you have received these disclosures or have 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 no meet your obligations under the loan.

APR Payment amount (including balloon, if allowed by law) Loan amount Maximum monthly payment (if variable) and fact that it may increase – Total amount borrowed (for refinance) – – – –

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Chapter 4: Federal Lending Legislation

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

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Chapter 4: Federal Lending Legislation

Higher-Priced Loans • Includes home purchase loans • Does NOT include: – The initial construction of a dwelling – A temporary or "bridge" loan with a term of 12 months or less, such as a loan to purchase a new dwelling where the consumer plans to sell a current dwelling within 12 months – A reverse-mortgage transaction – A home equity line of credit

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Higher-Priced Loans: Restrictions • Lenders must verify repayment ability • Prepayment penalties are generally prohibited unless limited to first 2 years of loan. Prepayment penalty is 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 must be established for required property taxes and mortgage-related insurance premiums a 1st lien securing borrower’s principal dwelling; not required for loans on coops or condo units where association maintains a master insurance policy • Not subject to the extended right of rescission that is available to borrowers with HOEPA-defined high cost loans

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Chapter 4: Federal Lending Legislation

Housing and Economic Recover Act of 2008 (HERA) • Major housing law designed to assist with the recovery and revitalization of America’s residential housing market • Multiple purposes: – Modernization of the Federal Housing Administration – Foreclosure prevention – Enhancement of consumer protections • Title V, the Secure and Fair Enforcement for Mortgage Licensing Act or SAFE Act, is a key component Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

The SAFE Mortgage Licensing Act Requirements • States must establish minimum standards for mortgage training (prelicensing and continuing education) • All MLOs must be state-licensed or federally registered • All MLOs must pass national SAFE Mortgage Loan Originator test (may be a state component) • States must implement licensing process meeting NMLS standards

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Chapter 4: Federal Lending Legislation

Objectives of the SAFE Act • Provide uniform license applications and reporting requirements for state licensed-loan originators • Provide comprehensive licensing and supervisory database • Aggregate and improve flow of information to and between regulators • Provide increased accountability and tracking of loan originators • Streamline the licensing process and reducing regulatory burden • Enhance consumer protections and support anti-fraud measures

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Chapter 4: Federal Lending Legislation

Objectives of the SAFE Act • Provide consumers with free, easy-to-access information about a loan originator’s employment history and any public disciplinary and enforcement actions • Establish a means by which residential mortgage loan originators would be required to act in the best interests of the consumer • Facilitate responsible behavior in the subprime mortgage market place • Provide comprehensive training related to nontraditional mortgage products • Facilitate collection and disbursement of consumer complaints on behalf of state mortgage regulators Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

SAFE Act Licensing Requirements • Applicants: – Must submit a background check

– Can never have had a revoked loan originator license – Can never have been convicted of a felony involving fraud, dishonesty, breach of trust, or money laundering – Cannot have been convicted of any other felony within the past 7 years

• All licensed or registered loan originators will have a unique ID number Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Prelicensing Education Requirements • New loan originators must complete at least 20 hours of approved prelicensing education • Must include these topics: – Federal law and regulation (3 hours) – Ethics, fraud, consumer protection, and fair lending (3 hours) – Nontraditional mortgage products (2 hours)

• States may require state-specific topics

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Chapter 4: Federal Lending Legislation

Mortgage Loan Originator Exam • Mortgage loan originators must pass a national licensing exam covering these topics: – Federal mortgage-related laws (35%) – General mortgage knowledge (25%) – Mortgage loan origination activities (25%) – Ethics (15%)

• States may determine how to handle statespecific portions of the exam

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Renewal Requirements • Loan originators must take at least 8 hours of CE every year including these topics: – Federal Law and Regulation (3 hours) – Ethics, fraud, consumer protection, and fair lending (2 hours) – Nontraditional mortgage products (2 hours)

• Cannot get credit for the same CE class twice in consecutive years

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Chapter 4: Federal Lending Legislation

Summary: TILA • Truth in Lending Act (Regulation Z, TILA), 1968; amended by Mortgage Disclosure Improvement Act (MDIA) 2009 • Promotes the informed use of credit by disclosing costs in a uniform manner • Applies to loans with more than four installments • Provides right of rescission for three business days after close on refinance of owner-occupied property • TIL statement discloses APR, down payment and repayment terms in advertising when triggering terms are used • Imposes a prescribed tolerance between TIL APR and final APR • 3/7/3 Rule: Initial disclosures 3 business days after application; loan cannot close until 7th business day after disclosures delivered; if redisclosure required, there’s a waiting period of three business days

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Chapter 4: Federal Lending Legislation

Summary: TILA Disclosures Within 3 Business Days of Application: • TIL disclosure statement (credit terms, including APR and total finance charges, payment amounts, and due dates) • Guide to the TIL statement • Notice of rescission rights • Prepayment disclosure • ARM disclosure (if applicable) • CHARM booklet (if applicable) • Balloon disclosure (if applicable) • When Your Home is on the Line disclosure (home equity loans such as HELOCs) Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Summary: RESPA • Real Estate Settlement Procedures Act (Regulation X, RESPA), 1974 • Helps consumers compare settlement services and eliminate unnecessary increases in the costs of certain settlement services • Covers loans secured with a mortgage placed on a one- to fourfamily residential property • Prohibits kickbacks, fee-splitting, and unearned fees • Sets limits on escrow accounts • Prohibits sellers from requiring home buyers to use a particular title insurance company • Requires Good Faith Estimate (GFE) showing amount of, or range of, settlement charges the borrower is likely to pay; includes tools for consumers to compare • Requires use of HUD-1 or HUD-1A Settlement Statement to clearly show all charges imposed on borrowers and sellers in connection with the settlement (except for open-end home equity) Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Summary: RESPA Disclosures • • • • • • • • • • • • •

Within 3 Business Days of Application: Good Faith Estimate Mortgage Servicing Disclosure HUD Booklet on Settlement Costs Before Settlement: Affiliated Business Arrangement Disclosure HUD-1 Settlement Statement (within 1 business day of settlement if requested) At Settlement: HUD-1 Settlement Statement Initial Escrow Statement After Settlement: Annual Escrow Statement Servicing Transfer Statement

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Chapter 4: Federal Lending Legislation

Summary: HPA • Homeowners Protection Act (HPA), 1998 • Applies to single-family residential dwellings • Allows borrowers to request PMI cancellation when LTV reaches 80% • Automatically terminates PMI when LTV reaches 78% if borrower is not delinquent • Allows borrowers to accelerate the cancellation date by making additional payments that bring the LTV to 80% • Disclosures: – Initial disclosure of HPA provisions with annual reminders – Disclosure of cancellation and automatic termination dates for fixed rate loans Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Summary: FCRA • Fair Credit Reporting Act (Regulation V, FCRA), 1968 • Gives consumers access to the same information about themselves that lenders use when making credit decisions. • Entitles consumers to free credit report upon adverse action or identity theft. • Allows consumers to dispute credit report. • Provides additional rights for identity theft victims and active duty military personnel. • Disclosures: – One-time written notice of derogatory information, separate from Truth in Lending disclosures – Access to free credit report upon adverse action Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Summary: FACTA • Fair and Accurate Credit Transaction Act of 2003 (FACT Act) • Amends the federal Fair Credit Reporting Act to help consumers fight identity theft. • Mandates limits on information sharing. • Entitles consumers to annual free credit report. • Allows consumers to place fraud alerts and credit freezes. • Requires businesses to truncate credit/debit card numbers on receipts. • Mandates businesses to secure and properly dispose of sensitive personal information in a consumer’s credit report. • Red Flag Rules require financial institutions and creditors to implement a written identity theft prevention program. • Disclosure when applying for credit: Home Loan Applicant Credit Score Information Disclosure

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Chapter 4: Federal Lending Legislation

Summary: GLB • Gramm-Leach-Bliley Act or Financial Modernization Act of 1999 (The Privacy Act) • Financial Privacy Rule: – Restricts when and under what circumstances personal financial information may be disclosed to non-affiliated third parties. – Allows consumers to opt out of allowing information to be shared. • Safeguards Rule: – Requires all financial institutions to design, implement, and maintain safeguards to protect customer information while it is in the custody and control of the institution and its agents. • Before Disclosing Information to Non-Affiliated Third Parties: – Consumer Privacy Policy (and annually as long as the relationship continues) Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Summary: Do Not Call • Allows consumers to put phone numbers on a national Do Not Call list • Applies to any plan, program, or campaign to sell goods or services through interstate phone calls • Requires companies to maintain national and internal lists of customers and prospects and keep them updated regularly • Allows business to call a consumer with whom it has an established business relationship (EBR) for up to 18 months after the consumer's last purchase, delivery, or payment; or up to 90 days after an inquiry • Imposes fines of up to $11,000 per violation Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Summary: Civil Rights/Fair Housing • Civil Rights Act of 1866 – Prohibits all racial discrimination, private or public, in the sale and rental of property – Allows someone claiming unlawful discrimination to sue only in federal district court

• Fair Housing Act of 1968 – Prohibits any discrimination in the sale, lease, or loan terms for residential property based on race, color, religion, sex, national origin, disability, or familial status – Allows someone claiming discrimination to file a written complaint to the nearest HUD office within one year of the alleged violation – Requires Fair Housing/Lending posters and logos Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Summary: ECOA • Equal Credit Opportunity Act (Regulation B, ECOA), 1974 • Prohibits discrimination in granting credit to people based on sex, age (if at least 18), marital status, race, color, religion, national origin, receipt of public assistance, or exercised rights under the Consumer Credit Protection Act • Requires credit bureaus to keep separate files on married spouses, if requested • Implemented by the Federal Trade Commission; each financial institution falls under the authority of its respective regulatory agency • Disclosures: – ECOA statement of rights, including right to receive a copy of appraisal report – Notification of credit decision within 30 days of application (statement of adverse action if declined, incomplete, or change of terms offered) Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Summary: HMDA • Home Mortgage Disclosure Act (Federal Reserve Board’s Regulation C, HMDA), 1975 • Determines if financial institutions are serving the housing needs of their communities • Identifies possible discriminatory lending patterns through the collection and disclosure of data about applicant and borrower characteristics • Loan Application Register (LAR): Report to supervisory agencies on a loan-by-loan and application-by-application basis every March

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Chapter 4: Federal Lending Legislation

Summary: HOEPA • Home Ownership and Equity Protection Act (HOEPA) 1994 • Amends the Truth in Lending Act to prohibit deceptive and unfair practices in lending • Establishes disclosure requirements for high cost loans • Defines high cost loan as: The APR exceeds the rates on Treasury securities of comparable maturity by more than eight percentage points for a first mortgage or more than ten percentage points for a second mortgage; or the total points and fees exceed 8% of the loan amount. • Uses some different criteria to define total finance charges, e.g., counts optional credit insurance premiums • Prohibits balloon payments (on loans of less than 5 years), negative amortization, demand clauses • Limits prepayment penalties • Allows three business-day right of rescission Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Summary: HOEPA Disclosures • Notice that consumer is not required to complete the transaction • Warning that the lender will have a mortgage on the home and the borrower could lose it and equity if in default • The annual percentage rate (APR) • The regular payment amount (including any balloon payment where the law permits balloon payments) • The loan amount • Credit insurance premiums, if applicable • For variable rate loans, the amount of the maximum monthly payment and the fact that the rate and monthly payment may increase

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Chapter 4: Federal Lending Legislation

Summary: Higher-Priced Loans • Truth in Lending Act as amended by Housing and Economic Recovery Act of 2008 • Closed-end mortgage loan secured by borrower’s principal dwelling where APR exceeds applicable average prime offer rate by at least 1.5% for first lien loans or 3.5% for junior lien loans • Lenders obligated to verify repayment ability • Prepayment penalties generally prohibited • Escrow account must be established for property taxes and mortgage-related insurance premiums required by lender • No extended right of rescission Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Summary: SAFE Act • The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act), Title V of Housing and Economic Recovery Act (HERA) • Establishes minimum standards for licensing, registration of state-licensed mortgage loan originators • Provides for establishment and maintenance of nationwide mortgage licensing system and registry • Requires 20 hours of prelicensing education for new loan originators including: – Federal law (3 hours) – Ethics (3 hours) – Nontraditional mortgage products (2 hours)

• Requires background checks for applicants • Requires passage of national loan originators exam • Requires 8 hours of annual continuing education Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Chapter 4: Federal Lending Legislation

Quiz 1. The Civil Rights Act of 1866 prohibits what type of discrimination in property transactions? a. b. c. d.

race religion sex all of the above

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Quiz 2. The federal Fair Housing Act prohibits discrimination based on race, color, religion, sex, and a. age, national origin, disability/handicap, or familial status. b. ancestry, national origin, disability, or familial status. c. marital status, national origin, disability/handicap, or familial status. d. national origin, disability/handicap, or familial status.

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Quiz 3. While law requires lenders to provide borrowers with a Good Faith Estimate of closing costs? a. b. c. d.

FCRA HMDA RESPA TILA

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Quiz 4. The most important disclosure requirement under the Truth in Lending Act is the a. b. c. d.

amount of index. amount of the loan origination fee. APR. name of the secondary market purchaser.

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Quiz 5. How many business days after closing does the consumer have the right to rescind a refinance of his personal residence? a. b. c. d.

2 3 5 There is no right of rescission.

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Quiz 6. Which will trigger the required disclosures of the Truth in Lending Act if included in an advertisement for credit? a. b. c. d.

“Affordable Financing” “Easy Monthly Payments” “No Down Payment” “Only 360 Monthly Payments”

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Quiz 7. If an advertisement discloses only the APR, what additional disclosures are required? a. b. c. d.

amount of any finance charges no additional disclosures are required percentage of down payment terms of repayment

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Quiz 8. Which act required mortgage lenders to give consumers a reason and information about obtaining their credit report when they are turned down for a loan? a. b. c. d.

ECOA FCRA RESPA TILA

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Quiz 9. Under what circumstances does RESPA allow a sale to be conditioned on the use of a particular escrow company chosen by the seller? a. if full disclosure is made b. if no kickbacks are involved c. if no unearned fees are involved d. under no circumstances Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Quiz 10. Which law mandates the use of the HUD-1 Settlement Statement? a. Regulation B b. Regulation C c. Regulation X d. Regulation Z

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Quiz 11. Which law requires lenders to document how they are serving the lending needs within the communities in which they do business? a. b. c. d.

Equal Credit Opportunity Act Fair Credit Reporting Act Fair Housing Act Home Mortgage Disclosure Act

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Quiz 12. For how many months after a loan closes may a mortgage broker call a customer whose phone number is on the National Do Not Call Registry? a. b. c. d.

3 months 6 months 18 months No calls can be made to a number on the registry.

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Quiz 13. Which law includes Red Flag Rules that require financial institutions and creditors to implement procedures to protect customer identity? a. b. c. d.

Fair and Accurate Credit Transaction Act Fair Credit Reporting Act Gramm-Leach-Bliley Act (The Privacy Act) Homeowners Protection Act

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Quiz 14. The SAFE Act requires new loan originators to have how many hours of approved prelicensing education? a. 8 b. 12 c. 20 d. 24

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Quiz 15. The Home Ownership and Equity Protection Act a. amends the Homeowners Protection Act. b. does not consider optional credit insurance as a finance charge. c. gives borrowers with high-cost loans a threeday right of rescission. d. permits negative amortization only for the first five years of a loan.

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Quiz 16. According to the Homeowners Protection Act, borrowers may request cancellation of their mortgage insurance premiums when the LTV reaches a. b. c. d.

75%. 78%. 80%. 82%.

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Quiz 17. As a result of the Mortgage Disclosure Improvement Act, how soon can a residential loan close? a. the next business day b. after three business days for a refinance or home equity loan c. within three business days of applying d. on the seventh business day after delivery of required disclosures

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Quiz 18. Which fee can be collected prior to delivery of a Truth in Lending Statement and a Good Faith Estimate? a. appraisal fee b. credit report fee c. origination fee d. No fees can be collected prior to delivery of these disclosures.

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Quiz 19. A mortgage broker rents office space from a title company at a discount in exchange for referring customers for settlement services. Which federal law does this arrangement violate? a. b. c. d.

RESPA SAFE Act TILA It does not violate any federal law.

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Quiz 20. The APR on an initial TIL for a 30-year fixed rate loan is 6.25%, and the APR on the final TIL is 6.5%. After redisclosure, how long must the borrower wait to close the loan ? a. b. c. d.

24 hours three business days after redisclosure seven business days after redisclosure There is no waiting required since the difference is within the acceptable tolerance.

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Quiz 21. A “higher-priced loan” is one that has a. an APR that exceeds the applicable average prime offer rate by at least 1.5%. b. an APR that exceeds the rates on Treasury securities of comparable maturity by more than 8%. c. total points and fees greater than 8% of the loan amount. d. total points and fees greater than 10% of the loan amount for junior liens. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Quiz 22. Which statement about loan origination fees on a GFE is FALSE? a. The fee cannot change unless there is a changed circumstance. b. The fee includes services performed by or on behalf of the loan originator. c. Lender and mortgage broker fees for the same transaction must be itemized. d. Origination fees must be expressed as lump sum. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Quiz 23. According to the SAFE Act, which incident from 10 years ago would NOT automatically disqualify an applicant for a loan originator license? a. conviction for felony assault b. conviction for fraud c. conviction for money laundering d. revocation by the state of a mortgage broker’s license Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Quiz 24. Which of these circumstances would NOT be an acceptable reason to provide a revised GFE to a borrower? a. The borrower lost the income from a part-time job and so was no longer eligible for the specific loan terms identified in the GFE. b. The borrower requested to change the loan term from 15 to 30 years. c. The loan originator regretted overlooking certain liabilities in order to qualify the borrower for a better interest rate. d. The title company discovered a junior lien on the property that was not considered when preparing the GFE. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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Quiz 25. Of these settlement charges, which is allowed to show a 10% tolerance between the GFE and the actual charge at closing? a. charge for the interest rate chosen when locked b. government recording charges c. origination fee d. transfer taxes Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009

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