Part 2, Module 3: Consumer Protection and Equal Opportunity in Real Estate Lending
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. Now, TILA is implemented by the Consumer Financial Protection Bureau through an administrative law commonly known as Regulation Z. 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. 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. The rule also requires all lenders to document and verify a potential borrower’s ability to repay the loan, thus minimizing the foreclosure risk.
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. Also, the Act requires lenders give home loan borrowers at least three days after closing to rescind the transaction. 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. 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.
In 1994, Congress passed the Home Ownership and Equity Protection Act, which amended TILA to add even more disclosure requirements to the existing law. It addressed some consumer protection issues pertaining to closed-end mortgages that charged high interest rates or fees. Now, certain higher-priced mortgages may be rescindable for up to three years after closing.
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. 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. RESPA also requires mandatory disclosures in the closing documents discussed in Module 2. 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.
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. Loans insured by the Federal Housing Administration (“FHA”) or Veteran’s Administration (“VA”) are also commonly exempted from usury statutes.
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. In some jurisdictions, willful violation of the state usury statute is a crime.
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.
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. 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.
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. 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. 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. For example, the law prohibits debt collectors from disclosing certain information about debt to third parties. 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. The FDCPA bars debt collectors from using abusive, harassing, unfair or deceptive practices while attempting to collect a debt.
Mortgage customer privacy, the final federal law facet of consumer protection for mortgage borrowers, is guaranteed by the Gramm-Leach-Bliley Act, which requires lenders to disclose their practices for information collection and sharing and give borrowers the opportunity to limit disclosure. 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.
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. 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. 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. 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.
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.
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. 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.  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. 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.
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. 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.
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. 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. 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.
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.
 12 C.F.R. Part 1026 (2017).
 12 C.F.R. § 226.36 (2017).
 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.
 12 C.F.R. § 1026.36
 12 C.F.R. §§ 1026.15, 1026.23 (2017).
 12 C.F.R. § 1026 Subpart B (2017)
 12 C.F.R. § 1026.17(b)-(c).
15 U.S.C. § 1639 (1994).
 12 C.F.R. §§ 1026.32, 1026.40 (2017).
 12 C.F.R. §§1026.32(c) - (d), §1026.43(g) (2017).
 12U.S.C. §§ 2601 et seq.
12 C.F.R. § 1024.17 (2017).
 12 C.F.R. § 1024.7, 1024.8 (2017).
12 C.F.R. §§ 1024.12, 1024.14
 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)
 See, e.g., N.J. Stat. Ann. § 31:1–1 (2017).
 See, e.g., Wash. Rev. Code § 19:3504(A) (2017).
 See, e.g., Or. Rev. Stat. § 2502.22 (2017); Mass. Gen. Laws Ann. Ch. 271,§ 49 (2017).
 12 U.S.C.A. §§ 1735(f)–1737(a).
 12 U.S.C. § 2801 et seq.
 12 C.F.R. 1003.1 (2017).
 15 U.S.C. § 1681 (1970).
 15 U.S.C. § 1681g(g) (1970).
 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.)
 15 U.S.C. § 1692(b)-(c).
 15 U.S.C. §§ 1692(c).
 15 U.S.C. § 1692(d)-(f)
Financial Services Modernization Act of 1999, Pub.L. 106–102, 113 Stat. 1338 (1999).
 Id. at §§ 501-510.
 Id. at §§ 521-527.
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).
 Id. at § 1400
 David D. McElroy, Recent Reforms and Developments in Mortgage Law and Finance, 25 J. Tax’n F. Inst. 43,4 (Nov.-Dec. 2011).
 Know Before You Owe: Mortgages, Consumer Financial Protection Bureau(Nov. 20, 2013)
 U.S. Department of Justice, Individual Claims of Discrimination in Housing (Aug. 6, 2015)
 15 U.S. Code § 1691
 U.S. Department of Justice, The Equal Credit Opportunity Act (Nov. 8, 2017)
 U.S. Treasury Department, Consumer Compliance Handbook, “Federal Fair Lending Regulations and Statutes Overview,”
 Office of the Comptroller of the Currency, Community Developments Factsheet, “Community Reinvestment Act,” (March 2014)