Consumer Protection and Equal Opportunity in Real Estate Lending - Module 3 of 5
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Consumer Protection and Equal Opportunity in Real Estate Lending
The first part of this
course focused on the various types of mortgages commonly available and the
process of formalizing the loans. Next, we turn to the rights of the consumer
or, in this case, the borrower. Congress and the states have passed several
laws to ensure consumer protection and fairness in real estate lending. We will
provide an overview of some of the major consumer protection laws that impact
mortgages. The analysis begins with the Truth in Lending Act and the Real
Estate Settlement Procedures Act, two important national laws regulating
mortgage loans. Next, the discussion turns to state usury statutes and other
laws that protect mortgage consumers. Finally, we’ll conclude with a brief
overview of equal opportunity and anti-discrimination laws that ensure fair
treatment of mortgage applicants.
The
Truth in Lending Act
The first major mortgage
consumer protection law, the Truth in Lending Act (or, “TILA”), was passed in
1968 as part of the Consumer Credit Protection Act.[1] Now, TILA is implemented by the Consumer Financial
Protection Bureau through an administrative law commonly known as Regulation Z.[2] TILA and Regulation Z, together, have established a national
framework for consumer protection in mortgage transactions that subsequent laws
and amendments have continued to build upon.
TILA and Regulation Z
offer several consumer protection guarantees to mortgage borrowers by ensuring
lenders engage in responsible business practices. For example, Regulation Z
prohibits mortgage lenders and brokers from engaging in certain unfair
practices regarding the compensation they receive for arranging the loan. The
rule prohibits a lender from paying a mortgage broker based on the agreement’s
terms and conditions beyond the amount of credit extended.[3] In other words, the mortgage broker cannot accept higher
compensation if he negotiates a mortgage with higher interest rates or fees.
This is meant to prevent brokers from “steering” customers to mortgages
offering less favorable terms.[4] The rule also requires all lenders to
document and verify a potential borrower’s ability to repay the loan, thus
minimizing the foreclosure risk.[5]
TILA and Regulation Z
also provide important substantive rights to mortgage borrowers. The law
prohibits certain contractual terms, like mandatory arbitration and waivers of
consumer protection rights, in any lending agreement where a dwelling is used
as security.[6] Also, the Act requires lenders give home
loan borrowers at least three days after closing to rescind the transaction.[7] This extra time helps ensure that the borrower has had an
opportunity to fully understand the details of the transaction and all the
legal and financial liabilities it raises.
Beyond these general
requirements, TILA and Regulation Z impose different obligations on lenders
depending upon whether the mortgage is open-ended, as in the case of a home
equity line of credit or closed ended. The disclosures and statements lenders
must issue for open-ended mortgages are more extensive than for closed-end
mortgages, such as 30-year fixed mortgages. Lenders who offer open-ended
mortgages must disclose all relevant financial information at the opening of
the account and provide periodic statements and additional disclosures as
needed to keep the borrower up-to-date.[8] Disclosure rules
for closed-ended mortgages require lenders to provide clear information on the
obligations between the parties at or before closing, but do not contain the
continuing notification obligations.[9]
In 1994, Congress passed
the Home Ownership and Equity Protection Act, which amended TILA to add even
more disclosure requirements to the existing law.[10] It addressed some
consumer protection issues pertaining to closed-end mortgages that charged high
interest rates or fees.[11] Now, certain higher-priced mortgages may
be rescindable for up to three years after closing.[12]
The
Real Estate Settlement Procedures Act
Congress passed the Real
Estate Settlement Procedures Act in 1974 as a follow-up to the initial TILA
legislation.[13] RESPA was passed to strengthen and standardize
the disclosures required for the real estate closure and settlement process.
Specifically, the law requires mortgage lenders, brokers, and servicers to
provide information about the extent and cost of the real estate settlement
processes. Like TILA, RESPA is also administered by the Consumer Financial
Protection Bureau through an implementing regulation known as Regulation X.
RESPA and Regulation X
serve two foundational consumer protection functions. First, they ensure a fair
and standardized process for real estate closing. For example, the laws create
a national standard for escrow accounting and prescribed rules for initial and
annual escrow account disclosures.[14] RESPA also
requires mandatory disclosures in the closing documents discussed in Module 2.[15] Second, RESPA and Regulation X prohibit certain practices
that tend to inflate real estate costs. This prohibition extends to kickbacks
or fees for certain referrals, as well as any charges for preparing mandatory
disclosures.[16]
Together, TILA and RESPA
create a system of consumer protection based on ensuring transparency in
mortgage transactions. While signing the extensive disclosure documents and
standardized forms at closings sometimes seems inconvenient, they also provide
mortgage borrowers with accurate and timely information regarding mortgage
loans. These laws also limit lenders from engaging in certain unethical
business practices, like offering kickbacks to brokers for negotiating
high-interest loans.
State
Usury Statutes and Other Mortgage Consumer Fairness Laws
TILA and RESPA laid the
foundation for consumer protection and fairness in private mortgage lending.
However, Congress and the states have passed other laws aimed at ensuring
fairness and transparency in the mortgage lending process.
Usury statutes are state laws setting forth
maximum interest rates that mortgage lenders may charge. Usury statutes vary
substantially by jurisdiction, and some states use a tiered approach where
different maximum rates are applied based on borrower criteria.[17] Loans insured by the Federal Housing Administration (“FHA”)
or Veteran’s Administration (“VA”) are also commonly exempted from usury
statutes.[18]
The penalties for
violating the maximum interest rate allowed on a mortgage under a state usury
law can be substantial. Violating lenders can be required to forfeit far more
than the amount of interest they charged.[19] In some
jurisdictions, willful violation of the state usury statute is a crime.[20]
A federal law passed in
1980, the Depository Institutions Deregulation and Monetary Control Act,
preempted some important aspects of state usury statutes. For example, the law
exempted most first mortgages taken out on residences from state-imposed limits
on interest rates.[21]
Other than the
Depository Institutions Act, Congress has passed other laws aimed at regulating
real estate finance transactions. For example, Congress passed the Home
Mortgage Disclosure Act in 1975 to create greater transparency in mortgage
lending agreements by requiring public disclosure of certain relevant
information.[22] This Act and its implementing regulation –
Regulation C – make mortgage information public, to help determine whether
lenders are meeting the home lending needs of their communities. The laws also
help lawmakers decide where public spending should be funneled to make up for
gaps in private lending and identify any potentially discriminatory patterns in
mortgage lending.[23]
The
Roles of Credit and Debt Collections Legislation
The Fair Credit
Reporting Act and Fair Debt Collection Practices Act are
two other major federal consumer credit protection laws that include some
provisions that specifically pertain to mortgage transactions. The FCRA
requires credit reporting agencies to follow certain procedures ensuring
accuracy and fairness in all disclosures of consumer credit information.[24] The law requires home loan providers to disclose the
borrower’s credit score, as reported to them by consumer reporting agencies, as
well as the key factors impacting the credit rating.[25] The FDCPA was passed a few years after the FCRA, and it was
meant to eliminate certain unfair practices in consumer debt collection,
including mortgage foreclosures.[26] For example, the
law prohibits debt collectors from disclosing certain information about debt to
third parties.[27] The law also prohibits debt collectors
from attempting to reach debtors during unusual times or at improper places,
such as the borrower’s place of employment.[28] The FDCPA bars
debt collectors from using abusive, harassing, unfair or deceptive practices
while attempting to collect a debt.[29]
Mortgage customer
privacy, the final federal law facet of consumer protection for mortgage
borrowers, is guaranteed by the Gramm-Leach-Bliley Act,[30] which requires lenders to disclose their practices for
information collection and sharing and give borrowers the opportunity to limit
disclosure.[31] The Gramm-Leach-Bliley Act also prohibits
fraud or use of false pretenses to obtain personal financial information and
requires lenders to maintain their records under proper security measures.[32]
In 2007, the real estate
and financial services market collapsed, largely due to inappropriate mortgage
lending processes. The causes of this economic crisis and the mortgage consumer
protection reforms that followed are the subject of the next module. However,
no discussion of consumer protections afforded to mortgage borrowers would be
complete without a mention of the Dodd-Frank Wall Street Reform and Consumer
Protection Act.[33] Dodd-Frank was a sweeping reform, and it
included two laws that guaranteed consumer protections to mortgage borrowers:
the Anti-Predatory Lending Act and the Consumer Financial Protection Act.
The first Act amended
TILA to help ensure that lenders give out loans responsibly based on good
financial practices.[34] The law places mortgage originators—those
who work with borrowers to complete mortgage applications—into fiduciary
relationships with the borrowers. Mortgage originators must be
professionally licensed as required in their jurisdictions.[35] The Act also makes it illegal for originators to recommend
specific lenders to borrowers, a practice that many brokers profited from
during the events leading to the 2007-2009 financial crisis.[36]
The Consumer Financial
Protection Act consolidated and simplified many of the complex disclosures
required at mortgage closings. It also created the Loan Estimate form and the
Closing Disclosure form, which provide consumers with clear calculations of
what they will be paying over time so that they don’t face surprises after
closing.[37]
Equal
Opportunity and Anti-Discrimination Laws
When it comes to
housing, unfair financial practices are not the only things that consumers have
to worry about, as bias and discrimination have been problems in housing. To
address this issue, Congress has passed laws aimed at preventing discrimination
and ensuring equal opportunity in mortgage lending.
Congress passed
the Fair Housing Act as part of the civil rights legislation
of the 1960s.[38] It prohibits discrimination based on race,
color, religion, gender, familial status, national origin or disability in any
residential real estate transactions, including mortgage loans, construction,
improvement or maintenance of a dwelling. [39] People may
complain to the Department of Housing and Urban Development if they believe a
mortgage lender has discriminated. The Department investigates the complaint
and attempts to resolve it between the parties. If the Department determines
the law has been violated, the agency can sue the lender in federal court or
bring it before an administrative law judge.[40] The Department of
Justice can also file a Fair Housing Act enforcement action in federal court
against any lender who has engaged in a “pattern or practice” of prohibited
discrimination, which means a general policy of discriminating rather than a
specific instance of discrimination.[41]
The Equal Credit
Opportunity Act requires mortgage lenders to make credit available to
all creditworthy customers on an equal basis, without consideration of race,
color, national origin, age, sex or marital statuses. The law also prevents
lenders from denying a borrower a loan because some or all of his or her income
comes in the form of public assistance and prevents retaliation in the form of
adverse lending decisions against anyone who has exercised her rights under the
Consumer Credit Protection Act.[42] Like under the Fair Housing Act, anyone
who believes that they have been discriminated against in violation of the Act
may file a complaint with the Department of Housing and Urban Development or
may file suit independently in federal court.[43]
Both the Fair Housing
Act and the Equal Credit Opportunity Act define discrimination in one of two
ways:
- disparate treatment, or
- disparate impact.
Disparate treatment
takes the form of overt discrimination, such as when a lender offers better
mortgage terms to married couples than to single people who have the same
creditworthiness. Even when a lender does not show overt disparate treatment,
however, discrimination may exist when a lender expresses comparative
preference for some borrowers over others based on race, gender, marital
status, national origin, or disability, even when the preference is unstated.
These are generally shown through patterns of activity and decisions rather
than through stated policies.
Mortgagees are also
prohibited from applying otherwise neutral lending policies in a discriminatory
manner. Discriminatory intent is not necessary. Rather, discrimination exists
by nature of the disproportional impact a policy has on a protected class of borrowers
when there is insufficient justification for the policy.[44] For example, a facially neutral policy may restrict loans in
certain areas of town. If that policy has a disparate impact in racial
minorities, it may be considered discriminatory.
Together, these laws
create a holistic framework for nondiscrimination and equal opportunity in
mortgage lending. However, discriminatory housing had already damaged
communities for decades by the time these laws were passed. In 1977, Congress
passed the Community Reinvestment Act to remedy some of the
impacts that unequal lending practices had on some communities. The law
encourages banks and mortgage lenders to increase access to financial services
in their communities.[45] The equal-opportunity measures included in
the Community Reinvestment Act were targeted at eliminating the practice of
“redlining,” which occurs when lenders offer more home loans in neighborhoods
that are characterized by certain income, racial, or ethnic demographics.[46]
Conclusion
Over the past fifty
years, the United States has developed a national system of mortgage consumer
protection laws aimed at preventing unfair lending practices in housing
markets. Many of these laws involve mandatory disclosures, which explains why
so much paperwork is involved in closing a mortgage. However, they also
prohibit certain unethical business practices that unfairly impact homebuyers.
State and federal laws prevent banks from charging improperly high interest
rates and discriminating against mortgage applicants based on certain
prohibited criteria. Legislative bodies and administrative agencies also
directly monitor and regulate mortgage lenders to ensure that they are
following proper business practices, particularly following the economic
recession and subsequent passage of Dodd-Frank. Mortgage borrowers in the U.S.
enjoy robust consumer protections, but it is every homebuyer’s responsibility
to make sure he or she fully understands the legal and financial responsibilities
undertaken with a mortgage loan.
[1]Consumer Credit Protection Act, Pub. L. 90-321 (1968); 15 U.S.C. § 1601 et seq.
[4] Id.
[5]
Consumer Financial Protection Bureau, Protecting
Consumers from Irresponsible Mortgage Lending (Jan. 10, 2013) available at https://files.consumerfinance.gov/f/201301_cfpb_ability-to-repay-factsheet.pdf.
[6]
12 C.F.R. § 1026.36
[7]
12 C.F.R. §§ 1026.15, 1026.23 (2017).
[8]
12 C.F.R. § 1026 Subpart B (2017)
[9]
12 C.F.R. § 1026.17(b)-(c).
[11]
12 C.F.R. §§ 1026.32, 1026.40 (2017).
[17]
See e.g. Bearden v. Tarrant Sav. Ass’n,643 S.W. 2d 247 (Tex. App. 1982);.Frenchv. Mortgage Guarantee Co., 16 Cal. 2d 26, 31 (1940); see also N.C. Gen.Stat. § 24–9(a)(3)(a) (2017); Ala. Code § 11–97–19 (2017); W. Va.Code § 47–6–10 (2017) (exempting corporate borrowers from state usury
statutes)
[25] 15 U.S.C. § 1681g(g) (1970).
[26]
15 U.S.C. §§ 1692 et seq (1977); Glazer v Chase Home Finance, LLC. 2013 WL141699 (6th Cir. Jan. 14, 2013) (holding that a mortgage foreclosure falls
within the definition of “debt collection” under the FDCPA.)
[27]
15 U.S.C. § 1692(b)-(c).
[28]
15 U.S.C. §§ 1692(c).
[29]
15 U.S.C. § 1692(d)-(f)
[31]
Id. at §§ 501-510.
[32]
Id. at §§ 521-527.
[33]Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203,§ 929-Z, 124 Stat. 1376, 1871 (2010) (codified at 15 U.S.C. § 78).
[34]
Id. at § 1400
[35]
David D. McElroy, Recent Reforms and Developments in Mortgage Law and Finance, 25 J. Tax’n F. Inst. 43,4 (Nov.-Dec. 2011).
[36]
Id.
[44]
U.S. Treasury Department, ConsumerCompliance Handbook, “Federal Fair Lending Regulations and Statutes
Overview,”
[46] Office of the Comptroller of the Currency, CommunityDevelopments Factsheet, “Community Reinvestment Act,” (March 2014)