14 Hour Mortgage Broker 2006

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14 Hour Mortgage Broker 2006

  1. 1. PRESORTED STANDARD U.S. POSTAGE PAID BERT RODGERS SCHOOLS Post Office Box 4708 Sarasota, Florida 34230-4708 www.bertrodgers.com 1 4 - H o u r M ORT G A G E B RO K E R I N G / L E N D I N G C E C OUR S E2 0 0 6 E diti o n Florida Mortgage Brokering/Lending Continuing Education Online or Correspondence Course Includes • Latest updates to Florida laws and rules for the mortgage brokering/lending industry • Modules include FNMA, fair housing, and real estate finance and mortgages • Optional end-of-module review questions provided to ensure your comprehension of the material. No final exam required. • Accredited by the Florida Department of Financial Services (Permit #MBS 2006-43) Convenience • We send the book at no obligation—study the modules in the book or online • Submit your Registration Form/Affidavit and tuition payment by mail, fax, or online • Toll-free instructor, technical, and administrative support Bert Rodgers Schools – The Smart Choice. Toll free 800-432-0320 or click: www.bertrodgers.com F lo r i d a M o r t g a g e b r o k e r i n g / l e n d i n g 1 4 - H o u R c o n t i n u i n g e d u c at i o n c o u r s e 2 0 0 6 E diti o n Online or Correspondence tuition only $ 39.95 tuition only $ 39.95
  2. 2. No traffic, no stress. Today our lives are busier than ever. Bert Rodgers Schools offers you two convenient ways to fulfill your mandatory 14-hour continuing education requirement – online or correspondence. Study on your schedule, at your pace. Correspondence This book contains the 4-hour mandatory law and rule update plus additional modules on real estate finance and mortgages, FNMA, and fair housing. Mail or fax your Registration Form/Affidavit to us and receive your official Certificate of Completion. Online Everything you need is online. Study, register, pay and print your official Certificate of Completion, all online! Any time of the day or night. Our friendly, knowledgeable staff is always ready to help. 800-432-0320 www.bertrodgers.com Toll-free instructor, technical, and administrative support are only a click or call away. Bert Rodgers Schools – Your Smart Choice! TEL (941) 378-2900 | FAX (941) 378-3883 Florida statutes and Department rules require all loan originators, principal representatives, associates, and mortgage brokers to complete 14 hours of continuing education every two years. The next deadline is August 31, 2006. Busy professionals can study on their schedule, at home or work. There is no need to travel and attend class or seminars. This book contains the 14-hour course you need to complete your education, including the 4-hour law and rule update. Optional end-of-module review questions provided to ensure your comprehension of the course material. No final exam required. Take full advantage of the benefits of distance learning! Bert Rodgers Schools offers the identical course online and by correspondence. At only $39.95 for 14 hours—online or correspondence—it is a true value. Providing high quality education to Florida licensed professionals since 1958, Bert Rodgers Schools is accredited by the Florida Department of Financial Services (Permit #MBS 2006-43). C O N V E N I E N C E • V A L U E • S E R V I C E Rely on us for fast, friendly, professional service!
  3. 3. Continuing Education Course 2006 Edition P.O. Box 4708, Sarasota, Florida 34230-4708 14hour_MortBroker.indb 1 5/5/05 5:02:26 PM Mortgage Brokering/Lending 14-Hour Florida
  4. 4. Bert Rodgers Schools of Real Estate, Inc. © 2005 All rights reserved, including the right to reproduce this manual or any portion of this manual in any form, or to use it for teaching purposes without the express written consent of the copy- right holder. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Bert Rodgers Schools of Real Estate, Inc. shall not be liable in any way for failure to receive and/or process your Registration Form/Affidavit within any specific time period. It is your responsibility to ensure that you have complied with your license renewal requirements in a timely manner. Bert Rodgers Schools of Real Estate, Inc. recognizes and respects its students’ privacy. Course records are confidential, and the School does not sell or rent students’ names or other infor- mation to any company or organization. Cover design and photographs: Digital Ink Design Group ISBN: 1-891753-32-2 Printed in the United States of America 14hour_MortBroker.indb 2 5/5/05 5:02:26 PM Second Printing
  5. 5. Bert Rodgers Schools of Real Estate, Inc. iii 14-Hour Brokering/Lending Continuing Education Course Bert Rodgers Schools of Real Estate, Inc. Founder Bert Rodgers President Lori J. Rodgers Administrative Vice President William E. Giffard Executive Administrative Assistant Kelli Finnigan Website Coordinator Alison Harner Production Coordinator Lisa Lacey Production Support Laraine Jansen Instructor Janine Spiegelman Accountant Aaron Pulone Typesetting Wild Dezign Printing Action Printing Cover Design Digital Ink Design Group Table of Contents Module One Florida Mortgage Brokerage and Lending Act Rules and Regulations 1 Recent Changes in Florida Statutes Regulating Mortgage Brokerage and Mortgage Lending 2 Mortgage Brokerage License Law 3 Part I: General Provisions 4 Part II and III: Mortgage Brokers and Mortgage Lenders 6 Part IV: Florida Fair Lending Act 6 Review Questions 11 Module Two Real Estate Finance and Mortgages 13 Review Questions 30 Module Three The Federal National Mortgage Association (Fannie Mae) 33 Review Questions 46 Module Four Fair Housing 49 Review Questions 57 Registration Form/Affidavit 59 14hour_MortBroker.indb 3 5/5/05 5:02:27 PM Florida Mortgage 17 : t 23Part II Real Estate Part I: Real Estate Finance Mor gages
  6. 6. iv Bert Rodgers Schools of Real Estate, Inc. P.O. Box 4708, Sarasota, Florida 34230-4708 Tel. (941) 378-2900 Toll Free (800) 432-0320 Fax (941) 378-3883 Email: MBinfo@bertrodgers.com Website: www.bertrodgers.com 200 East Gaines Street Tallahassee, Florida 32399-0372 Tel. (850) 410-9805 (Initial license or license renewal questions) Telephone Hours: 8:00 a.m. - 5:00 p.m. Monday through Friday Fax (850) 410-9748 For additional information, visit the Department website: D I R E C T O R Y 14hour_MortBroker.indb 4 5/5/05 5:02:28 PM Florida Office of Financial Regulation Division of Securities and Finance www.flofr.com/licensing/MBlist.htm
  7. 7. Bert Rodgers Schools of Real Estate, Inc. v Welcome to Bert Rodgers Schools! Online or Inside this Book … Everything You Need to Complete Your Continuing Education Requirement. CONTINUING EDUCATION originators, and associates are required to complete fourteen (14) hours of continuing education every two years. Four hours of the total 14 must cover the laws in Chapter 494, F.S., and the rules in Chapter 69V-40, F.A.C. Module 1 of the Bert Rodgers Schools course meets this requirement. IT’S EASY TO MEET YOUR REQUIREMENT WITH BERT RODGERS SCHOOLS! Study the course in this book, sent at no obligation, or study online. No test is required! Complete the optional review questions to measure your compre- hension of the course material. Correspondence. Simply complete the Registration Form/Affidavit and submit it with your payment by mail, or fax. Online. Register and pay by credit card at www.bertrodgers.com. Then complete and submit the online Affidavit and print your official Certificate of Completion. NEED HELP? Call our toll-free number and talk to a real person! We will answer your administrative, technical, and instructional questions quickly and professionally. If you prefer, email us 24/7. Administrative Support: Weekdays 8:30-5:15 Technical Support: Weekdays 7-9, Weekends 9-5 Toll Free: (800) 432-0320 Local: (941) 378-2900 Fax: (941) 378-3883 Website: www.bertrodgers.com Email administrative inquiries: MBinfo@bertrodgers.com Email instructor inquiries: MBinstructor@bertrodgers.com HOW DO I RECEIVE MY CERTIFICATE OF COMPLETION? Mail: Use the enclosed envelope and send your Registration Form/Affadavit and payment to us. We will mail your certificate of completion the following business day. Fax: For even faster results, choose one of our con- venient FaxBack Services and receive your certificate same-day or next-day. Online: For immediate results, submit your payment and affidavit online, and print your official certificate! Important Note: Do not send your certificate of comple- tion or any other type of notice to the Department unless otherwise requested. Retain your certificate of completion for at least 4 years following the end of the renewal period. SUMMARY Keep this book as a valuable reference! You may study the 14-hour course with the book or online. You can 14hour_MortBroker.indb 5 5/5/05 5:02:29 PM Principal representatives, loan mortgage brokers always rely on Bert Rodgers Schools for quality, convenience, and value in continuing education. The deadline is August 31, 2006.
  8. 8. vi Bert Rodgers Schools of Real Estate, Inc. 14hour_MortBroker.indb 6 5/5/05 5:02:30 PM
  9. 9. Bert Rodgers Schools of Real Estate, Inc. vii How to Complete Your Continuing Education Requirement Online at www.bertrodgers.com Step 1: Study the 14-hour course in this book or online. Step 2: Register and Pay for the course affidavit. Click on Register For Courses. Choose a username and password and submit your credit card payment securely. Step 3: Enter your username and password and choose 14-Hour Course Including Affidavit. Finish the course by submitting your name, date and the time in hours to complete the course. Step 4: Upon successful completion of your course affidavit, print your official certificate of completion. Correspondence Step 1: Study the 14-hour course in this book. Step 2: Complete the Registration Form/Affidavit including the Course Completion Affidavit, Student Information, and Payment Method sections. If you choose an optional FaxBack Service, complete this section too. Step 3: Mail or fax the Registration Form/Affidavit to us and we mail your certificate the next business day. To receive a copy of your certificate sooner, choose one of our Priority FaxBack Services. Standard Tuition Your Registration Form/Affidavit is processed the same business day it is received, and your certificate of completion is sent to you by first-class mail the next business day. Priority FaxBack Services (optional) • Same-Day FaxBack ($10 service fee*, credit cards only). Fax your Registration Form/ Affidavit to us any business day by 12p.m. est. We will fax your certificate of completion to you by 4 p.m. the same day (continental United States only). • Next-Day FaxBack ($7 service fee*, credit cards only). Fax your Registration Form/ Affidavit to us any business day by 5p.m. est. We will fax your certificate of completion to you by 11 a.m. the following business day (continental United States only). *Priority FaxBack Service is available in the continental United States for the fees listed. For fax services outside of the continental United States, we charge an additional $10. Priority FaxBack Service Notes • To use the Priority FaxBack Service, payment must be made by credit card. • Fax your Registration Form/Affidavit to us at (941) 378-3883—be sure to provide your fax number. • Your certificate of completion will be faxed only if you pay for Priority FaxBack Service. • Priority grading includes three attempts to fax your certificate of completion. 14hour_MortBroker.indb 7 5/5/05 5:02:39 PM
  10. 10. viii Bert Rodgers Schools of Real Estate, Inc. Acknowledgments Bert Rodgers Schools of Real Estate, Inc. expresses our gratitude and appreciation to the authors, and others who have contributed to this mortgage brokering/lending distance learning program and the new edition of the Mark Mazzuki of Digital Ink Design Group for his cover design. Lori J. Rodgers and the Bert Rodgers Staff 14hour_MortBroker.indb 8 5/5/05 5:02:40 PM 14-Hour Mortgage Brokering/Lending Continuing Education Course. Bert Rodgers Schools would also like to thank Julie Wild of Wild Dezign for her typesetting expertise and An additional thank you to our instructor Janine Spiegelman.
  11. 11. © 2005 Bert Rodgers Schools of Real Estate, Inc. 1 LEARNING OBJECTIVES After completing this module, you should be able to: Florida Mortgage Brokerage and Act Rules and Regulations M O D U L E 1 1. Summarize the changes in the rules regulating mortgage brokerage and mortgage lending. 2. Identify the educational requirements for licen- sure in mortgage brokerage and lending. 3. Summarize the organizational structure of the Florida Department of Financial Services, includ- ing the Financial Services Commission and the Office of Financial Regulations. 4. Explain the powers and duties of the Financial Services Commission and the Office of Financial Regulations. 5. Explain the penalties, which could be imposed for a violation of Chapter 494, F.S. 6. Identify the prohibited practices pursuant to Chapter 494. 7. Explain the purpose for the enactment of the Florida Fair Lending Act. 8. Identify the types of transactions covered by the Florida Fair Lending Act. 9. Define a “high-cost home loan”. 10. Identify the acts prohibited by the Florida Fair Lending Act. 11. Identify the disclosure requirements of the Florida Fair Lending Act. 12. Explain the enforcement and penalties of any violation of the Florida Fair Lending Act. The Department of Financial Services regulates mortgage brokers (MB), mortgage brokerage busi- nesses (MBB), mortgage lenders (ML), and cor- respondent mortgage lenders (CL) by the use of Florida Statutes (F.S.) and the Florida Administrative Code (F.A.C.). Chapter 494, F.S., is known as the Florida Mortgage Brokerage and Lending Act Rules and Regulations. Chapter 494 originally became effective in October 1991, and several significant amendments have been made since 1991. Chapter 69V-40 of the Florida Administrative Code (formerly Chapter 3D-40 F.A.C.) is called Rules Regulating Mortgage Brokerage. Certain minor changes to Chapter 69V- 40 were made effective on August 2, 2002, and a few minor amendments have been made through 2003 and 2004. The purpose of this module is to review Florida mortgage brokerage rules and regulations. In 2002, the Florida Legislature created the Financial Services Commission (Commission), con- sisting of the Governor and the elected Cabinet. The Financial Services Commission serves as agency head for the Office of Financial Regulation (OFR or Office) and the Office of Insurance Regulation (OIR). OFR and OIR are administratively housed within the Department of Financial Services, headed by the Chief Financial Officer. The Office of Financial Regulation has offices located in Miami, Fort Lauderdale, West Palm Beach, Tampa, Orlando, Jacksonville, Pensacola and Fort Myers. The regional offices are primarily responsible for conducting examinations to ensure INTRODUCTION Clay Rodgers graduated from the University of Florida with a B.S. degree in Business Administration, majoring in Real Estate. He is President of Rodgers Appraisal Services, Inc., and has more than 20 years experience serving the appraisal needs of Florida’s mort- gage brokers and lenders. 14hour_MortBroker.indb 1 5/5/05 5:02:41 PM Janine Spiegelman, BS, received her degree from the University of Miami. licensed Florida Mortgage Broker State of Florida, Department of Banking and Finance (now known as The Department of Financial Services) as a Financial Examiner/ Analyst II. A , Janine worked for the
  12. 12. 2 Module 1 regulatory compliance by financial institutions and financial service companies. The Office examines and regulates all state- authorized or state-chartered banks, credit unions, trust companies, and foreign banking organizations to ensure they operate in a safe and sound manner and in compliance with applicable statutes and rules. It reviews and processes new state financial institution charter or license applications as well as applications relating to existing state financial institutions. The Office also regulates non-depository finan- cial service companies and related industries, includ- ing securities dealers and investment advisers, retail installment sales businesses, consumer finance com- panies, mortgage brokers and lenders, collection agencies and money transmitters; protects consumers from illegal financial activities; reviews all applications to conduct business as a financial service company or securities firm; reviews license applications for regu- lated individuals; and imposes licensing restrictions or denies licensure based on findings. The Office is responsible for conducting financial investigations into allegations of suspected illegal financial activities within jurisdiction of the Office. RECENT CHANGES IN FLORIDA STATUTES REGULATING MORTGAGE BROKERAGE AND MORTGAGE LENDING This section discusses the more significant changes in the rules regulating mortgage brokerage and mortgage lending. The most significant change is that all of Chapter 3D-40, F.A.C., Rules Regulating Mortgage Brokerage, including Chapter 3D-40.001 through 3D-40.290, have been moved to a new chap- ter entitled Chapter 69V-40, F.A.C. All references to the Department of Banking and Finance have been changed to the Financial Services Commission and the Office of Financial Regulation, depending on the specific division of responsibility between the new departments. The following are some of the impor- tant changes in these rules. Books and Records 69V-40.170, F.A.C. was amended to substitute the Office of Financial Regulation for all references to the Department of Banking and Finance. Application Procedure for Mortgage Broker License 69V-49.031(1), F.A.C. provides that all applications for licensure as a mortgage broker must be filed with the OFR. The new address is: Office of Financial Regulation 200 East Gaines Street Tallahassee, Florida 32399-0375 The application form for Licensure as a Mortgage Broker has been changed to OFR-MB-101, and is available by mail from the OFR (69V-40.031(a), F.A.C.). The fee, which must accompany the appli- cant’s fingerprint card, has changed from $15.00 to $23.00 (69V-40.031(c), F.A.C.). In the remainder of this section, all references to the Department of Banking and Finance have been changed to the Office of Financial Regulation. Application Procedure for Mortgage Brokerage Business License All applications for licensure as a mortgage broker- age business must now be filed with the OFR. (69V- 40.051, F.A.C.). The form that now must be used for this application is OFR-MB-201, and can be obtained by mail from the OFR or online. www.dbf.state. fl.us/licensing/mbbapp.pdf 69V-40.051(2), F.A.C. regarding the fingerprint cards and Biographical Summary, now provides as fol- lows: Each ultimate equitable owner of 10% or greater interest, the chief executive offi- cer and each director of an entity applying for licensure as a mortgage brokerage busi- ness, shall submit a completed fingerprint card and Biographical Summary, Form OFR- MBB-BIO-1 (revised 10/99), to the Office of Financial Regulation along with a $23 nonrefundable processing fee. Form OFR- MBB-BIO-1 is hereby incorporated by refer- ence and available by mail from the Office of Financial Regulation, 200 East Gaines Street, Tallahassee, Florida 32399-0375. All former references to the Department of Banking and Finance have been changed in this sec- tion to the Office of Financial Regulation. Application Procedure for Change in Ownership or Control of Saving Clause Mortgage Lending In 69V-40.100, F.A.C., all references to the Department of Banking and Finance have been changed to the Office of Financial Regulation. The application for Change in Ownership or Control of Saving Clause Mortgage Lending must use the new form OFR-MLST. The form must be mailed to the Office at the new address. The same changes to the fingerprint card filing and Biographical Summary that were made to the other license application regulations, (i.e. new form OFR-ML-BIO-1 and the new fee of $23), were also made to this section. NEW NEW NEW NEW 14hour_MortBroker.indb 2 5/5/05 5:02:42 PM
  13. 13. Florida Mortgage Brokerage and Lending Act Rules and Regulations 3 Application Procedure for Mortgage Lender License 69V-40.200, F.A.C. has similarly been amended. The new application form for licensure as a mort- gage lender has changed to OFR-ML-222 and is to be mailed to the Office at the new address. Further, the surety bond must be submitted on new form OFR-ML-444, Mortgage Brokerage and Mortgage Lending Act Surety Bond. The completed finger- print card and Biographical Summary, new form OFR-ML-BIO-1, and the new nonrefundable, pro- cessing fee of $23 must be submitted to the Office. All references to the Department of Banking and Finance have been changed to the Office of Financial Regulation. Mortgage Lender License, Mortgage Lender License Pursuant to Saving Clause, and Branch Office License Renewal and Reactivation 69V-40.205, F.A.C. has also been amended. The new form for renewal and reactivation of a mortgage lender license is OFR-ML-R, and the new form for renewal and reactivation of a mortgage lender license pursu- ant to saving clause is OFR-ML-RS. The new form for branch office renewal is OFR-ML-RB, Mortgage Lender and Correspondent Mortgage Lender Branch Office License Renewal and Reactivation Form. All new forms must be filed with the Office. Application Procedure for Correspondent Mortgage Lender License 69V-40.220, F.A.C. has been amended to change the applicable forms, processing fees, and new references to the Office of Financial Regulation. The new appli- cation form for licensure as a correspondent mort- gage lender is OFR-CL-333. The new surety bond form is OFR-ML-444. The new fingerprint card and Biographical Summary form is OFR-CL-BIO-1, and the processing fee is now $23. All forms must be filed with the Office. Correspondent Mortgage Lender License and Branch Office License Renewal and Reactivation 69V-40.225, F.A.C. has been amended to change the applicable forms and new references to the Office of Financial Regulation. The new renewal and reac- tivation form for correspondent mortgage lender license is form OFR-CL-R. The new surety bond form is OFR-ML-444. The new Mortgage Lender and Correspondent Mortgage Lender Branch Office License Renewal and Reactivation form is OFR-ML- RB. All forms must be filed with the Office. Application Procedure for Mortgage Lender or Correspondent Mortgage Lender Branch Office License 69V-40.240, F.A.C. has been amended to change the application form and new references to the Office of Financial Regulation. The new application form for mortgage lender branch office or correspondent mortgage lender branch office license is OFR-ML- 222B. All forms must be filed with the Office. Principal Representative The regulations contained in 69V-40.242, F.A.C. have also been amended to change the applicable form and new references to the Office of Financial Regulation. The new Principal Representative Designation form is now OFR-ML/CL-PR. All forms must be filed with the Office. MORTGAGE BROKERAGE LICENSE LAW Chapter 494, F.S., is now divided into five parts: Part I, General Provisions (494.001-494.00295); Part II, Mortgage Brokers (494.003-494.0043); Part III, Mortgage Lenders (494.006-494.0077); Part IV, Florida Fair Lending Act (494.0078-494.00797); and Part V, Loans Under the Florida Uniform Land Sales Practices Law (494.008). NEW NEW NEW NEW NEW NEW 14hour_MortBroker.indb 3 5/5/05 5:02:42 PM
  14. 14. 4 Module 1 PART I: GENERAL PROVISIONS (494.001-494.00295) The Financial Services Commission The Financial Services Commission serves as agency head for the Office of Financial Regulation (OFR or Office) and the Office of Insurance Regulation (OIR). OFR and OIR are administratively housed within the Department of Financial Services, headed by the Chief Financial Officer. The Office examines and regulates all state-authorized or state-chartered banks, credit unions, trust companies, and foreign banking organizations to ensure they operate in a safe and sound manner and in compliance with applicable statutes and rules. The Office also regulates non- depository financial service companies and related industries, including securities dealers and investment advisers, retail installment sales businesses, consumer finance companies, mortgage brokers and lenders, collection agencies and money transmitters; protects consumers from illegal financial activities; reviews all applications to conduct business as a financial service company or securities firm; reviews license applica- tions for regulated individuals; and imposes licensing restrictions or denies licensure based on findings. The Office is responsible for conducting financial investi- gations into allegations of suspected illegal financial activities within its jurisdiction. Powers and Duties of the Commission and Office The Office of Financial Regulation is responsible for the administration and enforcement of the Florida Statutes regulating both mortgage brokers and mortgage lenders (494.003-494.0077 F.S), while the Financial Services Commission has authority to adopt rules pursuant to 120.563(1) F.S and 120.54 F.S to implement 494.001-494.0077 F.S. The Commission may adopt rules to allow electronic submission of any forms, documents, or fees required by Chapter 494. The Commission may also adopt rules to accept cer- tification of compliance with requirements of Chapter 494 in lieu of requiring submission of documents. The Office: • has the power to issue and to serve subpoenas and subpoenas duces tecum to compel the atten- dance of witnesses and the production of all books, accounts, records, and other documents and materials relevant to an examination or investigation. • may conduct an investigation of any person whenever the office has reason to believe, either upon complaint or otherwise, that any violation of 494.001-494.0077 F.S. has been committed or is about to be committed, and may, at inter- mittent periods, conduct examinations of any licensee or other person under the provisions of 494.001-494.0077 F.S. • may bring action through its own counsel in the name and on behalf of the state against any per- son who has violated or is about to violate any provision of 494.001-494.0077 F.S. or any rule of the commission or order of the office issued under 494.001-494.0077 F.S. to enjoin the per- son from continuing in or engaging in any act in furtherance of the violation. • has the power to issue and serve upon any per- son an order to cease and desist and to take corrective action whenever it has reason to believe the person is violating, has violated, or is about to violate any provision of 494.001- 494.0077 F.S., any rule or order issued under 494.001-494.0077 F.S., or any written agree- ment between the person and the Office. All procedural matters relating to issuance and enforcement of such a cease and desist order are governed by the Administrative Procedure Act. Note: The four provisions listed above are used for regu- lation of the Florida Fair Lending Act, under Section 494.00795, reviewed in section IV of this book. • has the power to order the refund of any fee directly or indirectly assessed and charged on a mortgage loan transaction which is unauthor- ized or exceeds the maximum fee specifically authorized in 494.001-494.0077 F.S. • may prohibit the association by a mortgage broker business, or the employment by a mort- gage lender or correspondent mortgage lender, of any person who has engaged in a pattern of misconduct while an associate of a mortgage brokerage business or an employee of a mort- gage lender or correspondent mortgage lender. • or its duly authorized representative, has the power to administer oaths and affirmations to any person. Penalties Whoever knowingly violates any provision of 494.0041(2)(e), (f), or (g); 494.0072 (2)(e), (f), or (g); or 494.0025 (1), (2), (3), (4), or (5), is guilty of a felony of the third degree, except that any person convicted of a violation of any provision of 494.001-494.0077 F.S., in which violation the total value of money and 14hour_MortBroker.indb 4 5/5/05 5:02:43 PM
  15. 15. Florida Mortgage Brokerage and Lending Act Rules and Regulations 5 property unlawfully obtained exceeded $50,000 and there were five or more victims, is guilty of a felony of the first degree. Each such violation constitutes a separate offense. In addition, if a mortgage transac- tion is made in violation of any provision of 494.001- 494.0077 F.S., the person making the transaction and every licensee, director, or officer who participated in making the transaction are jointly and severally liable to every party to the transaction in an action for dam- ages incurred by the party or parties. However, a per- son is not liable under this section upon a showing that such person’s licensees, officers, and directors who participated in making the transaction, if any, acted in good faith and without knowledge and, with the exer- cise of due diligence, could not have known of the act committed in violation of 494.001-494.0077 F.S. Prohibited Practices Section 494.0025 F.S. provides that it is unlawful for any person: To act as a mortgage lender in this state without a cur- rent, active license issued by the office pursuant to 494.001-494.0077, F.S. To act as a correspondent mortgage lender in this state without a current, active license issued by the office pursuant to 494.006-494.0077, F.S. To act as a mortgage broker in this state without a current, active license issued by the office pursu- ant to 494.003-494.0043, F.S. In any practice or transaction or course of business relating to the sale, purchase, negotiation, pro- motion, advertisement, or hypothecation of mort- gage transactions, directly or indirectly: • To knowingly or willingly employ any device, scheme, or artifice to defraud; • To engage in any transaction, practice, or course of business which operates as a fraud upon any person in connection with the purchase or sale of any mortgage loan; or • To obtain property by fraud, willful misrepre- sentation of a future act, or false promise. In any matter within the jurisdiction of the office, to knowingly and willfully falsify, conceal, or cover up by a trick, scheme, or device a material fact, make any false or fraudulent statement or rep- resentation, or make or use any false writing or document, knowing the same to contain any false or fraudulent statement or entry. To violate 655.922(2) F.S., subject to 494.001- 494.0077 F.S. Who is required to be licensed under 494.006 F.S.- 494.0077 F.S., to fail to report to the office the failure to meet the net worth requirements of 494.0061 F.S., 494.0062 F.S., or 494.0065 F.S. within 48 hours after the person’s knowledge of such failure or within 48 hours after the person should have known of such failure. To pay a fee or commission in any mortgage loan transaction to any person or entity other than a mortgage brokerage business, mortgage lender, or correspondent mortgage lender, operating under an active license, or a person exempt from licensure under this chapter. To record a mortgage brokerage agreement or any other document, not rendered by a court of com- petent jurisdiction, which purports to enforce the terms of the mortgage brokerage agreement. To use the name or logo of a financial institution, as defined in 655.005(1), F.S., or its affiliates or sub- sidiaries when marketing or soliciting existing or prospective customers if such marketing materials are used without the written consent of the finan- cial institution and in a manner that would lead a reasonable person to believe that the material or solicitation originated from, was endorsed by, or is related to or the responsibility of the financial institution or its affiliates or subsidiaries. 14hour_MortBroker.indb 5 5/5/05 5:02:43 PM
  16. 16. 6 Module 1 PART II AND III: MORTGAGE BROKERS AND MORTGAGE LENDERS The only relevant changes made to 494.003-494.797, F.S. were the substitution of the Financial Services Commission or the Office of Financial Regulation in place of the Department of Banking and Finance. PART IV: FLORIDA FAIR LENDING ACT ABUSIVE MORTGAGE LENDING In 494.0078, F.S. the Florida Legislature found that: “abusive mortgage lending has become a problem in this state even though most high-cost home loans do not involve abusive mortgage practices. One of the most com- mon forms of abusive lending is the making of loans that are equity-based rather than income-based. The financing of points and fees in these loans provides immediate income to the originator and encourages creditors to repeatedly refinance home loans. As long as there is sufficient equity in the home, an abu- sive creditor benefits even if the borrower is unable to make the payments and is forced to refinance. The financing of high points and fees causes the loss of equity in each refinanc- ing and often leads to foreclosure. Abusive lending has threatened the viabil- ity of many communities and caused decreases in home ownership. While the marketplace appears to operate effectively for conven- tional mortgages, too many homeowners find themselves victims of overreaching creditors who provide loans with unnecessarily high costs and terms that are unnecessary to secure repayment of the loan. The Legislature finds that as competition and self-regulation have not eliminated the abusive terms from home- secured loans, the consumer protection pro- visions of this act are necessary to encourage fair lending.” DEFINITIONS Section 494.0079, F.S. sets forth the following defini- tions. Affliate: Any company that controls, is controlled by, or is in common control with another company, as set forth in 12 U.S.C. 1841 et seq. and the regulations adopted thereunder. Annual percentage rate: The annual percentage rate for the loan calculated according to the provi- sions of 15 U.S.C. 1606 and the regulations adopted thereunder by the Federal Reserve Board. Borrower: Any natural person obligated to repay a loan, including, but not limited to, a coborrower, cosignor, or guarantor. Bridge loan: A loan with a maturity of less than 18 months that only requires the payment of interest until such time as the entire unpaid balance is due and payable. Commission: The Financial Services Commission. Office: The Office of Financial Regulation of the commission. Lender: Any person who makes a high-cost home loan or acts as a mortgage broker or lender, finance company, or retail installment seller with respect to a high-cost home loan, but shall not include any entity chartered by the United States Congress when engag- ing in secondary market mortgage transactions as an assignee or otherwise. Residential mortgage transaction: A transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained against the consumer’s dwelling to finance the acquisition or initial construction of such dwelling. 15 U.S.C. 1602(w) HIGH-COST HOME LOANS Definition The provisions of the Florida Fair Lending Act deal primarily with high-cost home loans. High-cost home loans are defined by 15 U.S.C. 1602(aa), which pro- vides in pertinent part as follows: (1) A mortgage referred to in this subsection 14hour_MortBroker.indb 6 5/5/05 5:02:44 PM
  17. 17. Florida Mortgage Brokerage and Lending Act Rules and Regulations 7 means a consumer credit transaction that is secured by the consumer’s principal dwelling, other than a residential mortgage transaction, a reverse mortgage transaction, or a transac- tion under an open end credit plan, if: (A) the annual percentage rate at consum- mation of the transaction will exceed by more than 10 percentage points the yield on Treasury securities having comparable periods of maturity on the fifteenth day of the month immediately preceding the month in which the application for the extension of credit is received by the cred- itor; or (B) the total points and fees payable by the consumer at or before closing will exceed the greater of: (i) 8 percent of the total loan amount; or (2) (A) After the 2-year period beginning on the effective date of the regulations promul- gated under section 155 of the Riegle Community Development and Regulatory Improvement Act of 1994, and no more frequently than biennially after the first increase or decrease under this sub- paragraph, the Board may by regulation increase or decrease the number of per- centage points specified in paragraph (1)(A), if the Board determines that the increase or decrease is: (i) consistent with the consumer protec- tions against abusive lending provided by the amendments made by subtitle B of title I of the Riegle Community Development and Regulatory Improvement Act of 1994; and (ii) warranted by the need for credit. (B) An increase or decrease under subpara- graph (A) may not result in the number of percent- age points referred to in subparagraph (A) being: (i) less that 8 percentage points; or (ii) greater than 12 percentage points. (C) In determining whether to increase or decrease the number of percentage points referred to in subparagraph (A), the Board shall consult with representatives of con- sumers, including low-income consumers, and lenders. (3) The amount specified in paragraph (1)(B)(ii) shall be adjusted annually on January 1 by the annual percentage change in the Consumer Price Index, as reported on June 1 of the year preceding such adjustment. (4) For purposes of paragraph (1)(B), points and fees shall include: (A) all items included in the finance charge, except interest or the time-price differen- tial; (B) all compensation paid to mortgage bro- kers; (C) each of the charges listed in section1605(e) of this title (except an escrow for future payment of taxes), unless: (i) the charge is reasonable; (ii) the creditor receives no direct or indi- rect compensation; and (iii) the charge is paid to a third party unaffiliated with the creditor; and (D) such other charges as the Board deter- mines to be appropriate. PROHIBITED ACTS Section 494.00791,F.S. provides for prohibited acts involving high-cost loans. Prepayment Penalties A high-cost home loan may not contain terms that require a borrower to pay a prepayment penalty for paying all or part of the loan principal before the date on which the payment is due. Notwithstanding paragraph (a), a lender making a high-cost home loan may include in the loan con- tract a prepayment fee or penalty, for up to the first 36 months after the date of consummation of the loan, if: • The borrower has also been offered a choice of another product without a prepayment penalty. • The borrower has been given, at least 3 business days prior to the loan consummation, a written disclosure of the terms of the prepayment fee or penalty by the lender, including the benefit the borrower will receive for accepting the prepay- ment fee or penalty through either a reduced interest rate on the loan or reduced points or fees. Default Interest Rate A high-cost home loan may not provide for a higher interest rate after default on the loan. However, this prohibition does not apply to interest rate changes in a variable rate loan otherwise consistent with the pro- visions of the loan documents, provided the change in interest rate is not triggered by a default or the accel- eration of the interest rate. Balloon Payments A high-cost home loan having a term of less than 10 years may not contain terms under which the aggre- 14hour_MortBroker.indb 7 5/5/05 5:02:44 PM (ii) $5 .28
  18. 18. 8 Module 1 gate amount of the regular periodic payments would not fully amortize the outstanding principal balance. However, this prohibition does not apply when the payment schedule is adjusted to account for the sea- sonal or irregular income of the borrower or if the loan is a bridge loan. Negative Amortization A high-cost home loan may not contain terms under which the outstanding principal balance will increase at any time over the course of the loan because the regular periodic payments do not cover the full amount of the interest due. Prepaid Payments A high-cost home loan may not include terms under which more than two periodic payments required under the loan are consolidated and paid in advance from the loan proceeds provided to the borrower. Extending Credit Without Regard to the Payment Ability of the Borrower A lender making a high-cost home loan shall not engage in any pattern or practice of extending high- cost home loans to borrowers based upon the bor- rowers’ collateral without regard to the borrowers’ ability to repay the loan, including the borrowers’ current and expected income, current obligations, and employment. Payments to a Home Contractor A lender shall not make any payments to a contractor under a home improvement contract from amounts of a high-cost home loan other than: • in the form of an instrument that is payable to the borrower or jointly to the borrower and the contractor; or • at the election of the borrower by a third-party escrow agent in accordance with terms estab- lished in a written agreement signed by the bor- rower, the lender, and the contractor prior to the date of payment. Due-On-Demand Clause A high-cost home loan may not contain a provision that permits the lender, in its sole discretion, to call or accelerate the indebtedness. This provision does not prohibit acceleration of the loan due to the borrower’s failure to abide by the terms of the loan, or due to fraud or material misrepresentation by the consumer in connection with the loan. Refinancing Within an 18-Month Period A lender, its affiliate, or an assignee shall not refinance any high-cost home loan to the same borrower within the first 18 months of the loan when the refinancing does not have a reasonable benefit to the borrower considering all of the circumstances, including, but not limited to, the terms of both the new and refi- nanced loans, the cost of the new loan, and the bor- rower’s circumstances. A lender or assignee shall not engage in acts or practices to evade this requirement, including a pat- tern or practice of arranging for the refinancing of the lender’s or assignee’s own loans by affiliated or unaffil- iated lenders or modifying a loan agreement, whether or not the existing loan is satisfied and replaced by the new loan, and charging a fee. Open-Ended Loans A lender shall not make any loan as an open-ended loan in order to evade the provisions of this act unless such open-ended loans meet the definition in 12 C.F.R. s. 226.2(a)(20). Recommendation of Default A lender shall not recommend or encourage default on an existing loan or other debt prior to and in con- nection with the closing or planned closing of a high- cost home loan that refinances all or any portion of such existing loan or debt. Prohibited Door-To-Door Loans A high-cost home loan may not be made as a direct result of a potential or future lender or its representa- tive offering or selling a high-cost home loan at the residence of a potential borrower without a prear- ranged appointment with the potential borrower or the expressed invitation of the potential borrower. This subsection does not apply to mail solicitations that may be received by the potential borrower. Late Payment Fees A lender may not charge a late payment fee for a high-cost home loan except as provided in 494.0079 (13)(a)(b)(c), F.S.: A late payment fee: • may not be in excess of 5 percent of the amount of the payment past due. • may only be assessed for a payment past due for 15 days or more. • may not be charged more than once with respect to a single late payment. If a late payment fee is deducted from a payment made on the loan and such deduction causes a subsequent default 14hour_MortBroker.indb 8 5/5/05 5:02:45 PM
  19. 19. Florida Mortgage Brokerage and Lending Act Rules and Regulations 9 on a subsequent payment, no late payment fee may be imposed for such default. If a late pay- ment fee has been imposed once with respect to a particular late payment, no such fee shall be imposed with respect to any future payment which would have been timely and sufficient, but for the previous default. Modification or Deferral Fees A lender may not charge a borrower any fees or other charges to modify, renew, extend, or amend a high- cost home loan or to defer any payment due under the terms of a high-cost home loan on a minimum of one modification, renewal, extension, or deferral per each 12 months of the length of the loan. HIGH-COST LOAN DISCLOSURES Section 494.00792, F.S. provides for required disclo- sures for high-cost home loans. A lender making a high-cost home loan shall pro- vide a notice to a borrower. (The required notice is found in Figure 1.1.) Annual Percentage Rate A lender making a high-cost home loan shall disclose: • In the case of a fixed mortgage, the annual percentage rate and the amount of the regular monthly payment. • In the case of any other credit transaction, the annual percentage rate, the amount of the reg- ular monthly payment and the amount of any balloon payment permitted under this section, a statement that the interest rate and monthly payment may increase, and the amount of the maximum monthly payment based upon the maximum interest rate allowed pursuant to law. Notice to Purchasers and Assignees All high-cost home loans shall contain the following notice: Notice: This is a mortgage subject to the provisions of the Florida Fair Lending Act. Purchasers and assignees of this mortgage could be liable for all claims and defenses with respect to the mortgage which the borrower could assert against the creditor. Timing of Disclosure The disclosure required by this subsection shall be given not less than 3 business days prior to the con- summation of the high-cost home loan. New disclosures are required when, after disclo- sure is made, the lender making the high-cost home loan changes the terms of the extension of credit, including if such changes make the original disclo- sures inaccurate, unless new disclosures are provided that meet the requirements of this section. A lender may provide new disclosures pursuant to paragraph (b) by telephone, if: 1. The change is initiated by the borrower. 2. At the consummation of the high-cost home loan: Figure 1.1: Required Disclosure for High-Cost Home Loans In addition to other disclosures required by law, the following notice in conspicuous type, must be given to the borrower. Notice to borrower. If you obtain this high-cost home 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 not meet your obligations under the loan. Mortgage loan rates and closing costs and fees vary based on many factors, including your particular credit and financial circumstances, your employment history, the loan-to-value requested, and the type of property that will secure your loan. The loan rate and fees could also vary based upon which lender or broker you select. As a borrower, you should shop around and compare loan rates and fees. You should also consider consulting a qualified independent credit counselor or other experienced financial adviser regarding the rates, fees, and provisions of this mortgage loan before you proceed. You should contact the United States Department of Housing and Urban Development for a list of credit counselors available in your area. You are not required to complete this agreement merely because you have received these disclosures or have signed a loan appli- cation. Borrowing for the purpose of debt consolidation can be an appropriate financial management tool. However, if you continue to incur significant new credit card charges or other debts after this high-cost home loan is closed and then experience financial difficulties, you could lose your home and any equity you have in it if you do not meet your mortgage loan obligations. Remember that property taxes and hom- eowners’ insurance are your responsibility. Not all lenders provide escrow services for these payments. You should ask your lender about these services. Also, your payments on existing debts contribute to your credit rating. You should not accept any advice to ignore your regular payments to your existing creditors. (Chapter 494.00792 F.S.) 14hour_MortBroker.indb 9 5/5/05 5:02:46 PM
  20. 20. 10 Module 1 • The lender provides the disclosures in writ- ing to the borrower. • The lender and the borrower certify in writ- ing that the new disclosures were provided by telephone no later than 3 days prior to the consummation of the high-cost home loan. A creditor must disclose to any high-cost home loan borrower the rights of the borrower to rescind the high-cost home loan within 3 business days pursu- ant to 15 U.S.C. s. 1635(a) and shall provide appro- priate forms for the borrower to exercise his or her right to rescission. The notice, forms, and provisions thereof must be in accordance with the requirements of 15 U.S.C. s. 1635(a). REGULATION OF THE FLORIDA FAIR LENDING ACT The Office of Financial Regulation and the Financial Services Commission is responsible for the adminis- tration and enforcement of The Florida Fair Lending Act. Duties include investigations, examinations, injunctions, and orders. Powers and Duties of the Commission and Office In addition to the provisions listed within the Powers and Duties of The Commission and Office in Part I of this module, section 494.00795, F.S. provides: • Any person having reason to believe that a pro- vision of this act has been violated may file a written complaint with the office setting forth the details of the alleged violation. • The office may conduct examinations of any person to determine compliance with this act. • Whenever the office finds a person in violation of this act, it may enter an order imposing a fine in an amount not exceeding $5,000 for each count or separate offense, provided that the aggregate fine for all violations of this act that could have been asserted at the time of the order imposing the fine shall not exceed $500,000. • Any violation of this act shall also be deemed to be a violation of chapter 494, chapter 516, chapter 520, chapter 655, chapter 657, chapter 658, chapter 660, chapter 663, chapter 665, or chapter 667. The commission may adopt rules to enforce this subsection. Enforcement of the Florida Fair Lending Act Section 494.00796 F.S. provides: • Any person or the agent, officer, or other rep- resentative of any person committing a mate- rial violation of the provisions of this act shall forfeit the entire interest charged in the high- cost home loan or contracted to be charged or received, and only the principal sum of such high-cost home loan can be enforced in any court in this state, either at law or in equity. • A creditor in a home loan who, when acting in good faith, fails to comply with the provisions of this act shall not be deemed to have violated this act if the creditor establishes that within 60 days after receiving any notice from the borrower of the compliance failure, which compliance failure was not intentional and resulted from a bona fide error notwithstanding the mainte- nance of procedures reasonably adapted to avoid such errors, the borrower has been notified of the compliance failure, appropriate restitution has been made to the borrower, and appropri- ate adjustments are made to the loan. Bona fide errors shall include, but not be limited to, cleri- cal, calculation, computer malfunction and pro- gramming, and printing errors. An error of legal judgment with respect to a person’s obligations under this section is not a bona fide error. • The remedies provided in this section are cumu- lative. CONCLUSION In conclusion, it is important to be aware of current rules and regulations governing the mortgage lend- ing business and the extent to which they affect daily practice. These rules and regulations apply to a wide range of topics, including licensure requirements, continuing education requirements, and penalties for violations of the rules. The Department of Financial Services is responsible for regulating the activities of mortgage brokers, mortgage brokerage businesses, mortgage lenders, and correspondent mortgage lend- ers by the use of Florida Statutes and the Florida Administrative Code and, when necessary, for impos- ing penalties on licensees found to be in violation. 14hour_MortBroker.indb 10 5/5/05 5:02:46 PM
  21. 21. Florida Mortgage Brokerage and Lending Act Rules and Regulations 11 R E V I E W Q U E S T I O N S — M O D U L E O N E Following are review questions. While you are not required to answer these questions to complete the 14-hour course, they are intended to help you evaluate your comprehension of the material. Choose the best response to each review question. The answers to the review questions are found at the end of each section. Transfer your answers to the space provided on the Answer Sheet. 1. The Financial Services Commission serves as agency head for which of the following? a. Office of Financial Regulation (OFR or Office) b. Office of Insurance Regulation (OIR) c. both the Office of Financial Regulation and the Office of Insurance Regulation d. neither the Office of Financial Regulation and the Office of Insurance Regulation 2. Which of the following is now responsible for the administration and enforcement of the Florida Statutes regulating both mortgage brokers and mortgage lenders? a. Department of Banking and Finance b. Office of Financial Regulation c. Financial Services Commission d. Division of Securities and Finance 3. Which of the following has the authority to adopt rules to implement the provisions of Chapter 494 F.S.? a. Department of Banking and Finance b. Office of Financial Regulation c. Financial Services Commission d. Division of Securities and Finance 4. Which of the following has the authority to conduct investigations of any person who has allegedly violated the provisions of Chapter 494 F.S.? a. Department of Banking and Finance b. Office of Financial Regulation c. Financial Services Commission d. Division of Securities and Finance 5. A violation of any provision of 494.001-494.0077 in which violation the total value of money and property unlawfully obtained exceeded $50,000 and there were five or more victims, is guilty of a: a. misdemeanor of the second degree. b. misdemeanor of the first degree. c. felony of the second degree. d. felony of the first degree. 6. Pursuant to the Florida Fair Lending Act, one of the most common forms of abusive lending is the making of loans that are: a. equity-based rather than income-based. b. income-based rather than equity-based. c. value-based rather than equity-based. d. value-based rather than income-based. 7. The Florida Fair Lending Act deals primarily with what type of loans? a. no-cost home loans b. high-cost loans c. high-cost home loans d. any loan in which discount points are charged to the borrower 14hour_MortBroker.indb 11 5/5/05 5:02:47 PM
  22. 22. 8. A mortgage referred to in the Florida Fair Lending Act means a consumer credit transaction that is secured by: a. the consumer’s principal dwelling, other than a residential mortgage transaction. b. any real property owned by the consumer. c. any property owned by the consumer, other than the consumer’s principal dwelling. d. the consumer’s principal dwelling, including a residential mortgage transaction. 9. For purposes of the Florida Fair Lending Act, a “residential mortgage transaction” means any transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained against the consumer’s dwelling to finance: a. the construction of additions to the dwelling. b. any improvements made to the dwelling. c. an equity line-of-credit loan. d. the acquisition or initial construction of the dwelling. 10. The Florida Fair Lending Act prohibits all of the following acts except: a. a home loan in which a higher rate of interest is charged after default on the loan. b. a home loan in which the outstanding principal balance will increase at any time over the course of the loan because the regular periodic payments do not cover the full amount of the interest due. c. a home loan which contains a prepayment clause allowing the borrower to prepay the outstanding principal balance before maturity, without a penalty. d. a home loan which was based upon the borrower’s collateral without regard to the borrower’s current and expected income, current obligations, and employment. 11. The special disclosures required by the Florida Fair Lending Act must be provided to the borrower: a. not less than 3 days prior to the consummation of the high-cost home loan. b. not less than 5 days prior to the consummation of the high-cost home loan. c. not less than 3 business days prior to the consummation of the high-cost home loan. d. not less than 5 business days prior to the consummation of the high-cost home loan. 12. What portion of the interest charged in a high-cost home loan must be forfeited by the person or the agent, officer, or other representative of any person committing a material violation of the provisions of the Florida Fair Lending Act? a. 25% b. 75% c. 100% d. none ANSWERS: 1)c.2)b.3)c.4)b.5)d.6)a.7)c.8)a.9)d.10)c.11)c.12)c. 12 Module 1 Transfer your answers to the space provided on the Answer Sheet. 14hour_MortBroker.indb 12 5/5/05 5:02:47 PM
  23. 23. © 2005 Bert Rodgers Schools of Real Estate, Inc. 13 LEARNING OBJECTIVES After completing this module, you should be able to: Real Estate Finance and Mortgages M O D U L E 2 1. Identify the mortgage programs available to the real estate industry. 2. Know how the Federal Truth in Lending Act (TILA), Real Estate Settlement Procedures Act (RESPA), and the Equal Credit Opportunity Act (ECOA) apply to real estate and mortgage trans- actions. 3. Know the basic concepts of the mortgage amorti- zation process. 4. Be familiar with basic guidelines for qualifying for a real estate mortgage, the mortgage applica- tion process, and the tax benefits of home own- ership. GLOSSARY AND ACRONYMS Many names used in real estate finance are referenced by acronyms. Also many financial terms often require more precise definitions than are normally used in everyday conversation. These acronyms and terms are defined at the beginning of this module to assist in fully understanding the material presented. This list is not all-inclusive, but does cover material used in this module. Prior to studying the course material, it is suggested that the reader review the glossary. Americans With Disabilities Act (ADA): The act to eliminate discrimination against individuals with disabilities and allow them to enter the economic and social mainstream of society. Effective 1/26/1992 Annual Percentage Rate (APR): The yearly interest rate that reflects the actual cost of the mortgage. It includes points and other costs paid by the borrower, almost always higher than the rate advertised, and must be disclosed to the borrower. The APR allows a borrower to make a direct comparison of different mortgages. Appraisal: This is an estimate of value of the property in question. It is made by a professional appraiser, and is usually the amount the lender will use to determine a mortgage amount. Closing costs: All the charges associated with plac- ing a mortgage. They can include origination fees, discount points, appraisal fee, title search and insur- ance, survey, recording fees, cost of credit reports, search fees and special delivery costs. Closing, or settlement costs, may add 3% to 6% to the mort- gage amount. Community Home Buyers Program (CHBP): A program designed to give credit worthy buyers the opportunity to purchase a home if they earn up to 115% of an area’s median income. Generally more flexible than other mortgages and requires a down payment as low as 5% of the mortgage. Community Reinvestment Act (CRA): Directs lenders to work with community groups and local government officials to identify the credit needs of the community. A CRA sign is required in the lobby of the lender. Robert K. Strickland CCIM, GRI is a Certified Commercial Investment Member (CCIM) recognized as a professional in commercial real estate brokerage, valuation, and investment analysis. He is a state-licensed real estate instructor. A graduate of the U.S. Military Academy at West Point, Bob is a retired USAF Colonel serving on 160 combat missions in jet fighters in SEA. 14hour_MortBroker.indb 13 5/5/05 5:02:48 PM
  24. 24. 14 Module 2 Consumer Credit Protection Act (TILA): A lender must disclose finance costs to the borrower with a Truth-In-Lending disclosure within three business days of the loan application. The TILA is to ensure the meaningful disclosure of credit and terms to poten- tial borrowers. It lists the APR, the finance charge, and any other costs of making the loan. Regulation Z enforces TILA through regulation of advertising credit availability by the advertiser and the creditor. For closed-end consumer credit advertisements, the entire opportunity must be described; the sales price, the amount or percentage of down payment, terms of repayment, APR, and any other facts that will affect the borrower’s loan if any of the specifics are given. For example, if the APR is stated “8.75% APR”, the remaining terms must be stated. However, if only general terms like “no down payment”, are used, it is not necessary to disclose any other terms of the credit offering. Conventional mortgages: Mortgages not insured or guaranteed by FHA or the VA. Credit score: A numerical measurement based on an analysis of the borrower’s credit report that reflects the management of credit by the borrower. For infor- mation used by the three major credit bureaus, con- tact them at: Equifax, 800-525-6285 www.equifax.com; Experian, 888-397-3742 www.experian.com; TransUnion, 800-680-7289 www.transunion.com. Debt ratio: This is a term used by Lenders to com- pare the total monthly income to the total monthly obligations of a borrower. Debts included are monthly housing expenses, all monthly installment debts with more than 10 months to run, child support or alimony, all revolving credit, and any negative cash flows from investment properties. For conventional mortgages, this ratio is calculated by dividing the total monthly obligations by the stable gross monthly income. It should not exceed 36%, but FHA allows up to 41%. Department of Housing and Urban Development (HUD): A Federal Agency that provides a number of guidelines and safeguards in the housing market for lenders, buyers, sellers, and tenants. HUD is involved lenders should be aware of the latest changes to HUD- enforced programs, particularly in the area of Civil can provide a wealth of useful information on various HUD programs. Department of Veterans Affairs (VA): Guarantees real estate loans to qualified veterans, who may finance up to 100% of the purchase price of a home. Lenders in the private sector provide the funds and must qual- ify to participate in the VA programs. More infor- mation on VA mortgages and homes available in the program may be found at www.vahomes.org/sp/. Down Payment Assistance Programs (DAPs).: Programs designed to contribute funds necessary to close the purchase of a home. These programs come in many shapes and sizes, and may include outright grants to certain low-income buyers. Energy Efficient Mortgage (EEM): Energy mort- gages offer special financing for homes that are desig- nated energy efficient or can be made energy efficient. An official home energy rating or Home Energy Rating System (HERS) report is required to secure an EEM. Equity: The value of the home minus all mortgages. Escrow: Usually a third party (such as a title com- pany or an attorney) account designated to hold funds deposited as “good faith money” during the sale nego- tiations. Escrow can also be defined as the funds col- lected by lenders in addition to mortgage payments, to pay taxes and insurance with low loan to value ratio mortgages (below 80/20 LTV). Equal Credit Opportunity Act (ECOA): Prohibits discrimination and promotes the availability of credit to all credit worthy applicants regardless of race, color, religion, national origin, sex, marital status, age, receipt of public funds assistance, or good faith exer- cise of any rights under the Consumer Credit Protection Act. Each borrower must be evaluated under the same underwriting standards, and must be notified in writ- ing within 30 days of the loan decision. Verbal denials are prohibited. Fair Housing Act: Prohibits lenders from discrimi- nation based on a borrower’s race, national origin, color, religion, sex, handicap, or familial status. Note that individuals infected with AIDS, or are HIV positive must receive the same protection as other protected groups. All applicants must be reviewed on the same underwriting standards, and all proper- ties must be appraised so that the age or location of the property does not discriminate in the estimate of reviewed periodically to insure compliance. Although Public are Federal Laws and guidelines, each State has parallel laws and guidelines that will apply in the mortgage marketplace as well. Check www.fairhous- Federal Home Loan Mortgage Corporation (FHLMC, Freddie Mac): A secondary mortgage market entity that purchases conventional mortgages from the primary lenders. 14hour_MortBroker.indb 14 5/5/05 5:02:48 PM HUD and homes and communities involved with the Rights.The web site at www.hud.gov/homes/index. in a number of programs affecting real estate, and cfm value. Lending practices of all lending institutions are this act and many others affecting lenders and the ing.com and HUD Resources for more information.
  25. 25. Real Estate Finance and Mortgages 15 Federal Housing Administration (FHA): A fed- eral agency that helps people become homeowners by providing special insurance, lower down payments and more flexible qualifying standards for mortgages granted by qualified lenders. There are numerous programs available from the FHA. A recent and very beneficial addition to the paperwork required is the FHA Home Inspection Notice Form, which puts the Buyer on notice that a home inspection, while not required, is a very prudent step prior to purchase. Federal National Mortgage Association (FNMA Fannie Mae): A secondary market entity that pur- chases conventional mortgages from primary lenders. Fixed rate mortgage: A mortgage that has an inter- est rate that does not change (fixed) for the life of the mortgage. Also monthly payments generally do not change. Government National Mortgage Association (GNMA, Ginnie Mae): A secondary mortgage mar- ket entity that purchases FHA and VA mortgages from primary lenders. Home Mortgage Disclosure Act (HMDA): Lenders must maintain records by census tract of borrowers to whom they are making loans in their community. An HMDA notice must be posted in the lender’s lobby advising the public of the availability of these records. Home Energy Rating System (HERS): An evalua- tion to determine the costs of energy improvements as compared to the energy savings. Housing payment: P & I, insurance, taxes and if applicable, PMI, homeowners association dues, and other secondary mortgage payments. Housing ratio: A measure of the percentage of the borrower’s stable monthly gross income which is used to pay PITI, other mortgage insurance, homeowner’s dues, and any secondary financing as compared to the gross income: housing payment divided by stable gross monthly income should not exceed 28% for conven- Interest: The cost of borrowed money, paid to the lender. Lead-based paint disclosure rule: The lead-based paint disclosure for all homes built prior to 1978 became mandatory is 1996. It is designed to protect children from lead poisoning and must be given to all buyers or tenants prior to any offer to sell or lease. In addition to providing the pamphlet, “Protect Your Family from Lead in Your Home”, the disclosure explains the lead-base paint hazard and provides a record of lead-based paint on the property if available, offers an inspection opportunity and puts a notice in any contract for sale or lease of a qualifying property. Loan to Value Ratio (LTV): The ratio of borrowed money to the value of the property. For example, if the purchase price is $100,000 and the loan is $80,000, the LTV is 80/20 or 80% of the purchase price is financed. Loan discount points (points): Points represent additional fees paid to the lender to add additional profit to the mortgage, or to lower a long-term inter- est rate based on the market. (More points paid up front give the lender an incentive to provide a lower a long term rate.) Each point represents 1% of the loan amount. Two points on a $100,000 loan is $2000, but each point paid changes the loan percentage amount by 1/8%. An 8% mortgage with one point would actually be 8.125 % over the life of the loan. Mortgage Insurance Premium (MIP): This refers to the mortgage insurance premium charged by FHA Lenders as part of the up front costs of a mortgage and the monthly MIP charged as part of the PITI. On an FHA loan, the MIP is always higher than a con- ventional mortgage, as FHA charges 1.5% of the pur- chase price up front and a renewal premium of .5% annually. Conventional lenders can be as low as .5% up front, and .3% annually. Nehemiah Program: The largest down payment assistance program in the US. The down payment provided is usually 1% to 6% of the loan amount. Negative amortization: A repayment of the loan that does not cover the full amount of the interest owed, which results in an increasing principal amount dur- ing the life of the loan. Non-recourse loan: A loan that does not require a personal guarantee from the borrower. Origination fee: The fee charged by the lender for services performed in processing the initial applica- tion for the loan. Portfolio loan: In order to maintain liquidity, most lenders sell most of the loans they make to buyers, (FNMA, GNMA, or FHLMC), in the secondary market. At times however, a lender may choose to make a loan, then retain it in its own portfolio. When a lender retains a loan, it is described as a portfolio loan. Reasons vary from property type to terms and conditions of the mortgage. Prepaids: Any funds paid prior to closing that reduce the amount required at closing, such as appraisal fees, attorney fees, insurance, or interest. Prepaid interest: Interim interest paid at closing that accrues on the mortgage between the closing date and the payment date of the first mortgage payment. Prepayment penalties: Lenders sometimes place mortgages with attractive benefits that may change 14hour_MortBroker.indb 15 5/5/05 5:02:49 PM tional loans. FHA may allow up to 31%.
  26. 26. 16 Module 2 depending on the financial climate. To continue to receive these benefits, a lender may put in a prepay- ment penalty to offset the loss of these benefits if the borrower pays the mortgage off before the due date. For example if a lender sets a rate near the top of the market, then the market falls significantly, it would be to the borrowers advantage to refinance, but the lender would lose the better rate. To recover the lost interest, the lender might require a cash payment in addition to the payoff amount. Principal: The actual amount of the mortgage or the amount remaining after payment begins- the face amount of the loan. PITI (principal, interest, taxes and insurance): Acronym for the individual parts of a typical monthly mortgage payment where taxes and insurance are escrowed. Private Mortgage Insurance (PMI): A mortgage insurance policy required by the lender that covers the top end of the mortgage, i.e. the loan amount over 80% of the purchase price. It is generally required on all mortgages that have an LTV of less than 80/20. The policy insures the lender against losses where the borrower has less than 20% equity. If a borrower is required to have PMI at the beginning of a mortgage, it can generally be dropped at the request of the bor- rower once the equity reaches 20%. When the equity reaches 22%, the lender must remove the PMI. Real Estate Settlement Procedures Act (RESPA): Under RESPA, lenders must make full disclosure of the estimated closing costs associated with the loan the borrower is applying for within three business days of the application. The lender must also provide the HUD booklet, “Settlement Costs and You”, and a Uniform Settlement Statement must be prepared at closing listing all the costs associated with the loan. Reverse mortgages: This is a special type of mort- gage that allows senior citizens to use the equity in their home as a source of income. Rather than mak- ing monthly payments, a lender will make monthly payments to the owners and increase the mortgage amount. Fannie Mae has a similar program for home purchases called the “Home Keeper”. The buyers must have a substantial cash down payment but will have no monthly payments. A typical scenario for this type of mortgage would look like this: Purchase price $158,000, down payment – $64,000. The lender will hold the $94,000 balance as a first mortgage and require no monthly payment. A danger is that the homeowner will run out of equity. In both cases the lender owns the home less any equity remaining when the final settlement is made. Self-employed borrowers. If a borrower has 25% or more ownership in a business and is not otherwise employed, he will be required to provide a 2-year self employment record to insure he has a stable employ- ment record before a lender will consider his mort- gage application. Stable monthly income: This is the verified gross monthly income from all primary sources of employ- ment. Part time employment, commissions, bonuses, and overtime will not be considered if appropriate verification cannot be provided to show they will con- tinue. Title insurance: An insurance policy purchased from a Title Company that insures against errors in title search, and essentially guarantees that the title on the property insured has no outstanding recorded claims against it. Certain unrecorded claims may be covered. Variable Rate Mortgage (VRM) - Adjustable Rate Mortgage (ARM): The rate on a VRM/ARM is adjusted periodically to reflect the current market. The rate goes up or down as the market rates change. There is a relatively new program called a two-step mortgage that allows the borrower to take advantage of lower initial rates of an ARM, and then adjust to a fixed rate in the fifth or seventh year of the mortgage. There are also a wide variety of other ARM’s available in the market 14hour_MortBroker.indb 16 5/5/05 5:02:50 PM
  27. 27. Real Estate Finance and Mortgages 17 In the early years of this country, home buying was a very simple process. A person saved his money and at some point he accumulated enough cash to buy a home. This process, while simple for the frugal saver, did not offer enough opportunity for the average person. Circumstances varied with every family and demand increased to the point where conventional lenders (banks, then S & L’s) began to offer interest only loans so that a borrower paid only the interest monthly or annually until the balance or “the bal- loon” came due. Unfortunately many families could not control their income to the point where they were able to accumulate the cash to pay the principal outstanding when the note came due. This was par- ticularly true in the Depression era, 1929-1934, when literally thousands lost their homes and farms. When President Franklin D. Roosevelt came into office in 1932, he realized that home ownership was a key fac- tor in creating a strong national economy, as well as helping people recover their personal wealth and their self-esteem. In 1934 President Roosevelt created the Federal Housing Administration (FHA) to help provide adequate home financing and to encourage new construction of housing. It was not a true financing program, but an insurance program to indemnify conventional lenders against losses and share some of the risk in the event of default by the buyer. It was also the first time that lenders began to offer amortiz- ing loans. Since that time mortgage lending has gone through an incredibly evolutionary process, generated not only by economic conditions, but also by the on- going process of government involvement to protect the borrower population. It has also become very obvious that licensees need to be very knowledgeable of the mortgage process, particularly since the major- ity of the home buying population today still requires a mortgage to own a home. Before discussing the types of mortgages avail- able, you should remember that all mortgages have two main documents, the actual mortgage and the note. The mortgage pledges the property as collateral for the debt, and the note is a promise to repay from the borrower. Depending on the ownership entity, the note may be signed by only one party or by all par- ties who are bound in the purchase. A non-recourse note indicates that the party signing will not be held personally liable for repayment. In most residen- tial purchases, the note will be a recourse loan, i.e., the borrower will be held personally responsible for repayment. Today there are two types of mortgages available for most residential purchases — conven- tional and Government insured/guaranteed. CONVENTIONAL MORTGAGES Conventional mortgages are available from creditors who regularly extend consumer credit that is subject to a finance charge, or payable by written agreement in more than four installments. Banks, savings and loan institutions, mortgage companies, and individu- als make up this category of lenders and the loans may be insured or uninsured depending on the down payment, financial strength of the borrowers, and the quality and location of the property. If a down payment is less than 20% of the purchase price, the lender will generally require private mortgage insur- ance (PMI) to cover his risk above 80% of the value limit on single family loans if they are to be sold to Freddie Mac or Fannie Mae. There are as many loan programs as lenders in this segment of the market, but the basic categories are: fixed rate loans with terms up to 30 years, many varieties of ARMs, and interest only loans with balloon payments. Traditionally, conven- tional mortgages required a fairly stringent qualify- ing standard, 20% down payment and were amortized over thirty years. New products in the market greatly expand the types of loans now offered from conven- tional lenders. Since it is almost impossible for a lender to hold every mortgage it makes in its own portfolio, the Government found it necessary to establish a sec- ondary market to buy the loans from these primary lenders to keep a ready supply of cash in market. To implement a viable secondary marketplace, the Federal Government created FNMA, or Fannie Mae, and FHLMC, or Freddie Mac, to buy these loans and keep the primary lenders solvent. Further, to insure quality and a standardized product, it was necessary to create a wide variety of rules and regulations govern- ing initial qualifications for borrowers, loan approval and processing procedures, and minimum property standards. Other guidelines to match these mortgages to other laws governing banking standards, civil rights laws and environmental regulations were required as well. FHA MORTGAGES FHA mortgages are mortgages granted by FHA qualified lenders (HUD approved). The loans are insured by the FHA, which removes much of the risk of default from the primary lender. Since 1934, FHA has been supplying Americans of modest means with an opportunity for home ownership, either as a new purchase or to refinance an existing mortgage. These PART I: REAL ESTATE FINANCE 14hour_MortBroker.indb 17 5/5/05 5:02:50 PM home, in an unlimited amount, there is a $ , 04 0017 of the home. While a lender may match a loan to the
  28. 28. 18 Module 2 loans generally offer lower down payments and easier buyer qualifying standards, but the home as well as the buyer must qualify. There are a number of spe- cific requirements for FHA properties that will be investigated by the Lender to make sure the home qualifies under FHA standards. A typical example is the requirement for the roof to have a certain amount of economic life remaining. Make sure the applicant understands that these requirements are for his pro- tection, but may complicate a purchase if the home does not initially qualify for the FHA loan. Eligible properties include one to four unit houses and condo- miniums. Under the single-family construction pro- gram, FHA assists builders in obtaining construction financing by allowing buyers to be approved prior to the start of construction. In the past few years conventional lenders have modified their loans to resemble FHA loans, but there are still some major differences. For first time home- buyers, the minimum FHA cash down payment is 3% of the value of the home, but part of this can be used for closing costs. Conventional lenders also offer a 3% down payment loan, but it must be used for the purchase price only. Qualifying standards are more reduced waiting times after a bankruptcy or foreclo- sure. FHA loans include higher payment to income ratio. Conventional lenders require a range of 25%- is also higher with FHA loans. Total debt payment including debts with more than 10 months remain- tional lenders use 36% as a limit. Single family loan Some geographic areas may be higher as some coun- ties in Florida and for example, Alaska, Guam and tend to be similar, but a recent analysis of national are about .2 percentage points higher than conventional rates. FHA does insure ARM’s under several of its programs (Sections 203b, 234c, and 203k). Probably the biggest difference is in the payment of the mortgage insurance premium (MIP). FHA requires an up-front payment of 1.5% of the purchase price, but it can be added to the loan. If the mortgage collect the premium monthly. GNMA buys FHA insured loans in the secondary market to keep the pri- mary lenders solvent. Generally, FHA mortgages can be reassigned to qualified borrowers, but conventional The FHA market tends to be most active in areas of lower priced homes. Many lenders specialize in this market and because of the many and changing rules for FHA loans, it is necessary to keep good lines of communication open with loan officers who specialize in FHA mortgages, including property qualifications. Down payment assistance programs (DAPS) are loan programs designed to assist first time homebuyers. Nehemiah, Hart, Neighborhood Gold, CHDAP, and CHAFA are examples of programs for down payment assistance. As part of the FHA package, HUD now offers homeowners age 62 and older a Reverse Mortgage Program. If the homeowner has paid off his home mortgage or has only a small balance remaining, he may borrow against the equity in his home. He can receive the payments as a lump sum, monthly, or as a line of credit. Unlike ordinary home equity loans, a HUD reverse mortgage does not have to be repaid as long as the borrower lives in the home. The loan is recovered at sale of the home. The home’s value, age of the borrower and the interest rate determine the amount of the loan. The older the borrower is, the greater the LTV. There are no income or asset limi- tations on a reverse mortgage, but the total amount is generally capped by the FHA maximum mortgage limit for the area. Even with FHA MIP, the HUD reverse mortgage program is generally less expensive than a loan from a conventional lender. FHA has an energy efficient mortgage program that allows borrowers to be eligible for up to 97% financing including closing costs for including energy efficient components in the improvements to an exist- ing home or in new construction. The improvements must be cost effective in that the cost is less than the total present value of the energy saved over the useful life of the energy improvement. The cost as compared to the savings is determined by a home energy rating system (HERS). A final point — if you are dealing with a buyer who has paid off an FHA mortgage in the past, he may have money owed to him. About 100,000 FHA borrowers, or 1 in 10, left money in their escrow accounts when they paid off the loan. The average amount was $700 so it would be worthwhile to have the buyer check the status of any previous FHA loans. Call 800-697-6967, or write: HUD, PO Box 23669, Washington, DC, 20026-3699. VA MORTGAGES The Veterans Administration was an outgrowth of World War II, when hundreds of veterans were return- ing to civilian life after service during the war. Most came back with few marketable skills and even less money, but they were ready to get on with their lives and looked to the Federal Government for help. Thus 14hour_MortBroker.indb 18 5/5/05 5:02:51 PM as well. Conventional lenders that require insurance, loans are rarely assumable. Go to the FHA Connect- ion.at www.hud.gov/offices/hsg/connect.cfm credit checks and 28%. FHA allows as much as 31%. The debt burden amounts are greatly reduced in the FHA programs. Hawaii. Interest rates rates indicated FHA rates is longer than15years, an annual premium is required lenient as well, with alternative ing can be as much as 43% of income while conven-
  29. 29. Real Estate Finance and Mortgages 19 the VA, now the Department of Veterans Affairs, was formed to assist in a number of ways from education to mortgages. A VA loan is a real estate loan guaran- teed by the Department of Veterans Affairs. Funds for these loans are provided by private sector VA qualified primary Lenders. They are available only to qualified veterans and can be up to 100% of the purchase price of the home. The VA is very strict in determining who is qualified for a VA loan, and these qualifications change as national events change military manpower requirements. The current service dates for eligible veterans with at least 90 days service: • WW II – 9/16/1940 to 7/25/1947 • Korea – 6/27/1950 to 1/31/1955 • Vietnam – 8/5/1964 to 5/7/1975 • Persian Gulf – after 7/2/1990 • Gulf War – 8/2/1990 to Undetermined and officer service after 10/16/1981. Members of Selected Reserves and National Guard are eligible after six years of service regardless of status- active or discharged. Based on current overseas assignments, there will be a number of new military personnel eligible. Go to www.homeloans.va.gov/elig2.htm for the latest information. VA financing covers houses, town houses or con- dominiums in a VA approved project, new construc- tion, home improvement and energy improvement loans, refinancing of existing home loans and pur- chase of a manufactured home and/or lot. A certificate of eligibility is required as first step toward getting a VA loan. At that time the service record of the apply- ing veteran will be evaluated to determine eligibility. Another point that could further assist veterans in using VA loans is the loan entitlement amount. A VA loan is a guaranteed loan, thus the VA simply provides an entitlement amount, which is in effect a down pay- ment amount from the veteran. Since the early years of VA loans this entitlement amount has increased, or in many cases, the loan associated with the entitle- ment has been paid off the current maximum guar- anteed loan is $60,000 but for loans in excess of $144,000, the limit is 25% of the FHMLC conform- limit on the size of a VA guaranteed loan, provided the Veteran is qualified for the loan from a credit and income standpoint. Lenders, however, will usually limit the maximum amount to 4 times the amount of the Veteran’s available entitlement plus any downpay- are now available under the VA. Should a Veteran have a bankruptcy, the VA credit standards follow these guidelines: a. less than 3 years – loan not available unless sig- nificant credit re-established. b. 3 to 5 years – some consideration, but accept- able if reasonable credit re-established. c. Over 5 years – may be disregarded. Any VA loan can be prepaid without penalty. To check on the status of any current entitlement or restoration of entitlement, a veteran can contact the nearest VA office and complete Form 26-1880. One unique feature of a VA loan is the requirement for the veteran to pay a “funding fee”. The purpose of the funding fee is to help the government offset the cost of any foreclosure. To encourage a larger down payment, the funding fee is calculated as a percentage Disabled veterans do not pay funding fees. Speciality Adapted Housing grants up to $50,000 are available to veterans with service connected disabilities who have lost the use of both arms. Regulations and documentation for a VA loan application can be voluminous; therefore the licensee would be well served to maintain close contact with a loan officer from a VA qualified lender who spe- cializes in VA mortgages. GNMA buys these loans in the secondary market to keep the primary lenders solvent. COMPARISON OF THE THREE LOAN PROGRAMS As a quick comparison of the three types of loan programs, Ginnie Mae allows you to pre- pare a chart. (www.ginniemae.gov/ypth/index. asp?Section=YPTH) While there are a wide vari- ety of loan products available in the market place, this table compares only the basic loan for each program. For example, the house under consideration meets the criteria for each program and is offered for sale at $175,000. Mortgage available is a 30 year term, fixed rate at 6.5%. Monthly housing costs less mortgage payment are set at $386. Cash required at closing was estimated up front with the program calculating any overages. As you can see in Table 2.1 (page 20), there is a vast difference in cash required. The conventional mortgage has a lower monthly payment, but the down payment will require a lot more cash. Also note that the VA purchase ends up with a larger mortgage than the cost of the house. This will have a definite impact when the time comes to sell. Also timing may be a fac- tor, as the VA and FHA loans may take longer to close because of the additional paperwork. For a rent versus buy comparison, go to http://www.ginniemae.gov/ 14hour_MortBroker.indb 19 5/5/05 5:02:51 PM • 181days continuous active duty for peacetime service • 2 years service for enlisted service after 9/7/1980 ing loan limit of $417,000, or $104,250. There is no ment. Adjustable rate and hybrid ARMs of the purchase price up to a maximum of 3.3% of the loan amount, www.warm -7.html.s.vba.va.gov/pam26
  30. 30. 20 Module 2 rent_vs_buy/rent_vs_buy_calc.asp?. FEDERAL TRUTH IN LENDING ACT (TILA) (15 U.S.C. 1601 et seq.) The purpose of the TILA is to assure that consum- ers are fully informed of the terms and cost of credit in typical consumer credit transactions which include home mortgages, home equity loans and home improvement loans as well as other types of credit such as credit cards, auto purchases, store credit and install- ment loans. The Board of Governors of the Federal Reserve System is authorized to administer and imple- ment TILA rules and regulations regarding consumer credit. Regulation Z, published by the Board, requires a very specific explanation and description of the cost of credit both in dollars and percentage rates. It also includes some very specific requirements when adver- tising credit for the above listed loans. TERMS Before a consumer or homebuyer enters into an installment credit contract, the consumer must be given the following information in a format that is easy to understand. Total sale price: This number must include the offered price, down payment, or trade-in, and any interest or other charges. Amount financed: The borrowed amount plus the cost of any extended warranties. Finance charges: A dollar amount of the cost of credit such as interest, credit life insurance, loan origination fees, discount, etc. It does not include credit applica- tion fee, title work, cost of credit report, application fees, attorney’s fees, or escrow payments. Annual percentage rate (APR): The APR is the cost of credit as expressed as an annual percentage rate. It is calculated by including all the costs of the loan into a new annual rate. It is almost always higher than the initial quoted, or base rate and represents a uniform true cost of credit which can then be compared to other purchase options, so the consumer can shop for the best credit terms. Total amount of payments: This figure is a total amount that will be paid over the life of the loan. It is the total of the interest and the principal and is calcu- lated by multiplying the monthly P & I by the num- ber of payments. Payment schedule: A statement which sets forth the monthly payment amount and the payment due date. In addition to the above information, lenders are required to disclose late payment penalties and when they apply, any prepayment penalties, variable interest rates, and if the lender is being given a security inter- est in the property or merchandise being financed. There is a three-day “cooling off” period for refinanc- ing principal residences. REGULATION Z Under Regulation Z, advertisers and lenders must also clearly state the exact terms of any credit being offered in order for the consumer to be able to make direct comparisons of various credit opportunities. While consumer credit is divided into open-end and closed end categories, real estate lending is consid- ered closed-end, and is credit extended for personal, family or household purposes, but does not include business and agricultural loan or loans over $25,000 that are not secured by real property. It is tradition- ally extended by a creditor that regularly extends con- Table 2.1: Comparison of FHA, VA and Conventional Loans LOAN A FHA LOAN B VA LOAN C CONV Sale Price $175,000 $175,000 $175,000 Loan Amount $148,750 Monthly Mtge. Payment Monthly Expense $ 386 $ 386 $ 386 Total Monthly Cost Downpayment $ 0 $ 26,250 Closing Costs $ 6,112 Total Cash $ 32,362 Source: http://www.ginniemae.gov/2_prequal/le_intro_quesitons.asp 14hour_MortBroker.indb 20 5/5/05 5:02:52 PM $173,569 $ 1,365 $ 1,752 $ 5,250 $ 1,736 $ 6,986 $178,588 $ 1,326 $ 1,712 $ 6,723 $ $ 1,242 $ 1,629 0
  31. 31. Real Estate Finance and Mortgages 21 sumer credit subject to a finance charge and meets other conditions usually associated with real estate lending or general consumer credit. If an advertise- ment promotes closed-end credit through a creditor, both the advertiser and the creditor must comply with the requirements of Regulation Z. Seller financing usually does not meet the definition of a creditor, and does not have to comply with Regulation Z. There are some other advertising rules that apply under the Federal guidelines that must be considered when advertising properties that fall under HUD guidelines. Under Part 109 of the Federal Fair Housing Act, HUD publishes an outline of phrases, symbols, words, and visual aids that may convey discrimina- tory preferences or limitations. For example, words that imply blindness, deafness, mental illness, physical handicap, etc. or, words like “restricted”, “exclusive”, “private”, “integrated” and similar terms that indi- cate one race, a language other than English or other national origin indicators should be avoided. Even advertising property as ‘distressed, needs repairs, etc.” may be discriminatory under some conditions. To get a current list of words and phrases that are considered discriminatory, go to www.fairhousing.com/ There are some very specific financial disclosures that are required under Regulation Z if certain finan- cial terms are used in an ad. Similarly, other terms do not trigger the full disclosure requirement under the Regulation. For example if the terms “No down payment, easy monthly payments, no closing costs, or financing available” or similar non-specific words are used, there are no further disclosures required. If, however, specific terms such as “ 10% down, 95% financing, or low 7.5% mortgage, etc.” are used, the remaining details of the financing opportunity must be disclosed – “sales price $125,000, monthly payment $578 P & I, APR-8.5%, mortgage amortized over 30 years” etc. In summary, all details of the offered financing must be disclosed – monthly payment in either PI, PIT or PITI, down payment in percent if price is given or amount, APR, and term of the loan in order for the consumer to compare credit offerings and make knowledgeable decisions. The variety of loan products in the market today including ARM/VRMs, buydowns, and other special features of mortgages make it imperative that credi- tors and advertisers fully understand the requirements for advertising financial opportunities in Regulation Z and how they apply to the product offered, and then comply accordingly. There are significant penalties for violation of these rules, both civil and criminal. REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA) 12 U.S.C. 2601 RESPA is one of a number of federal consumer pro- tection statutes that are designed to make consumers more knowledgeable about real estate transactions, and to reduce the cost of real estate settlement ser- vices. RESPA was first passed in 1974 and its primary purposes were to help consumers become better shop- pers for settlement services and to eliminate kickbacks and referral fees that increased the costs of real estate settlement services. HUD is responsible for enforcing RESPA, and it covers several types of loans on one to four family residential properties. Specifically, home purchase loans, mortgage assumptions, refinancing, property improvement, and equity lines of credit fall under RESPA. At the time of application or within three days, lenders and mortgage brokers must provide potential borrowers the following information: • The Special Information Booklet, “Settlement Costs and You”, which provides the borrower with consumer information on real estate ser- vices to be provided in the purchase transac- tions only. • A good faith estimate (GFE) of the settlement (or closing) costs for the transaction. Actual charges may differ. • A Mortgage Servicing Disclosure Statement as to the lender’s intent to sell or hold the mort- gage. • Information on how to submit a complaint and complaint resolution. If the lender intends to refer the potential bor- rower to another service provider, the borrower must be given an Affiliated Business Arrangement (AfBA) disclosure that describes the business arrangement with the original lender and the fees to be charged. As the transaction proceeds toward closing, the a HUD-1 Settlement Statement.This is astandard- ized form that clearly shows all charges imposed on the borrower and the seller in connection with the settlement. One day prior to closing the lender or closing agent must provide the borrower a copy of the completed HUD-1 closing statement, using infor- mation available at that time. At the time of closing, the lender also provides the borrower with an Initial Escrow Statement showing the escrow payment and the amount to be deposited at closing for the escrow account. After closing the lender must provide an escrow statement annually and the borrower must be notified (by a Servicing Transfer Statement) if the lender sells or assigns the servicing and/or the mort- gage to another party. There are several other sections of the RESPA that licensees need to understand: Section 6. Borrowers who have problems with 14hour_MortBroker.indb 21 5/5/05 5:02:53 PM closing agent prepares asettlement statement described as

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