Chapter 15 - Government Regulation of Real Estate Closings

1. Chapter 15
Government Regulation of
Real Estate Closings

2. Objectives
• After reading this chapter, you should be able
to
– Understand the purposes of the Real Estate
Settlement Procedures Act (RESPA), the Truth-in-
Lending Act (TILA), the Home Ownership and
Equity Protection Act (HOEPA), and the adjustable
rate mortgage disclosure requirements.

3. Objectives
• After reading this chapter, you should be able
to
– Identify real estate loans that require a right of
rescission.
– Prepare right of rescission notice forms.
– Prepare adjustable rate disclosure forms.

4. Real Estate Settlement
Procedures Act (RESPA)
• Requires advance disclosure of settlement
costs
• Eliminates kickbacks and referral fees
• Mandates the maximum amount that may be
required to be placed in escrow accounts for
payment of recurring charges or assessments
that affect the lender's real property security

5. Real Estate Settlement
Procedures Act (RESPA)
• Transactions subject to RESPA
– Made by a lender regulated by a federal agency or
whose deposits are insured by a federal agency
– Made, insured, guaranteed, supplemented, or
assisted by a federal agency

6. Real Estate Settlement
Procedures Act (RESPA)
• Transactions subject to RESPA
– Intended to be sold to Fannie Mae or Freddie Mac
– Made by a creditor who makes or invests more
than $1 million per year in residential real estate
loans

7. Real Estate Settlement
Procedures Act (RESPA)
• Exemptions
– Loans to finance the purchase or transfer of 25 or
more acres
– Loans primarily for business, commercial, or
agricultural purposes

8. Real Estate Settlement
Procedures Act (RESPA)
• Exemptions
– Vacant lot loans in which no proceeds are used for
construction of a one- to four-family structure
– Construction loans
• Except when the construction loan is used or converted
to a permanent loan to finance the purchase by a first
user

9. Real Estate Settlement
Procedures Act (RESPA)
• Required disclosures and prohibitions
– Special information booklet
– Good faith estimates
– Mortgage servicing disclosure statement
– Uniform settlement statement
– One-day advance inspection
– Escrow limitation

10. Real Estate Settlement
Procedures Act (RESPA)
• Required disclosures and prohibitions
– Title insurance
– Kickbacks
– Unearned fees
– Penalties
• Paralegal's role
– Preparation of the uniform settlement statement
at the time of closing

11. Truth-in-Lending Act (TILA)
• Disclosures for closed-end real property
transactions
– Who must make disclosures?
– Who must receive disclosures?
– When must disclosures be made?
– What format must be used for disclosures?
– What must be disclosed?

12. Truth-in-Lending Act (TILA)
• Disclosures for closed-end real property
transactions
– Items that must be disclosed
• Creditor
• Amount financed
• Finance charge
• Annual percentage rate
• Prepaid finance charges

13. Truth-in-Lending Act (TILA)
• Disclosures for closed-end real property
transactions
– Items that must be disclosed
• Variable rate disclosure
• Payment schedule
• Total of payments
• Demand feature
• Prepayment provisions

14. Truth-in-Lending Act (TILA)
• Disclosures for closed-end real property
transactions
– Items that must be disclosed
• Late payment charges
• Security interest
• Insurance charges

15. Truth-in-Lending Act (TILA)
• Exempt transactions from TILA
– TILA applies only to consumer transactions
• Does not apply to a corporation, partnership, joint
venture, etc.
• Does not apply to loans for business, commercial, or
agricultural purposes

16. Truth-in-Lending Act (TILA)
• Right of rescission
– Gives the consumer, whose principal dwelling may
be encumbered to secure a real estate loan, a
three-business-day cooling-off period to think
over the transaction and cancel it for any reason
without penalty
– Does not apply to loans created or retained to
finance the acquisition or construction of a
dwelling

17. Truth-in-Lending Act (TILA)
• Right of rescission
– Who has right to rescind?
• Any natural person with an ownership interest in a
dwelling who uses it as a principal residence

18. Truth-in-Lending Act (TILA)
• Right of rescission
– Notice of the right to rescind
• Must disclose:
– Retention or acquisition of a security interest in the
consumer's principal dwelling
– Consumer's right to rescind
– How the right of rescission may be exercised
– Effects of rescission
– Date at midnight when the three-business-day rescission
period expires

19. Truth-in-Lending Act (TILA)
• Right of rescission
– How a consumer rescinds
– Effect of rescission
– Waiver of the right to rescind
– Disbursement of money before expiration of
rescission period

20. Home Ownership and Equity
Protection Act (HOEPA)
• Targets protection for consumers who enter
into subprime loans
– High-cost mortgages typically aimed at
homeowners with limited incomes who have
developed equity in their homes by eithe:
• Paying down their first mortgages
– Or receiving an inheritance
• A rise in real estate values

21. Home Ownership and Equity
Protection Act (HOEPA)
• Loans regulated by HOEPA
• HOEPA disclosure and prohibition
– If a loan has a variable interest rate, the following
must be disclosed:
• Potential increase in the interest rate and monthly
payment
• Amount of a single maximum monthly payment based
on the maximum interest rate increase

22. Home Ownership and Equity
Protection Act (HOEPA)
• HOEPA and higher-priced mortgage loans
– Includes
• Home purchase
• Home improvement loans
• Refinances
• Home equity loans

23. Home Ownership and Equity
Protection Act (HOEPA)
• HOEPA and higher-priced mortgage loans
– Prohibits
• Extending credit without determining that the
borrower has the ability to repay
• Relying on income and/or assets and failing to verify
them using reasonably reliable third-party
documentation
• A prepayment penalty if the loan payment can change
in the initial four years from closing

24. Adjustable Interest Rate
Disclosures
• Adjustable rate mortgage (ARM) disclosure
requirements
– Types of loans covered
– When disclosures must be made
– Content of disclosures
– Subsequent disclosures
– Index requirements
– Interest rate cap

25. Checklist: Disclosure Forms
• Real Estate Settlement Procedures Act
(RESPA)
– Special information booklet
– Good faith estimate
– Uniform settlement statement
• HUD–1

26. Checklist: Disclosure Forms
• Truth-In-Lending Act (TILA)
– Truth-in-lending disclosure statement
– Right of rescission notice
– Affidavit of no rescission

27. Checklist: Disclosure Forms
• ARM disclosure requirements
– Consumer handbook on adjustable rate
mortgages
– ARM loan program disclosure form

28. Predatory Lending Laws
• Generally regulate high-interest-rate or high-
fee mortgages
– Cap the amount of prepayment fees that can be
charged for an early payment of the high-cost loan
– Prohibit the loan documents from allowing an
increase in the interest rate after default

29. Predatory Lending Laws
• Generally regulate high-interest-rate or high-
fee mortgages
– Prevent the lender from charging the borrower
any fees or other charges to modify, renew,
extend, or amend a high-cost loan or to defer any
payment due under the terms of the high-cost
loan

30. Predatory Lending Laws
• Most predatory lending laws prohibit the
practice of flipping
– When a creditor makes a high-cost home loan to a
borrower who refinances an existing home loan
that has been consummated within the prior five
years
• New high-cost loan does not provide reasonable
tangible net benefits to the borrower

31. Mortgage Fraud
• Mortgage fraud includes:
– Use of false appraisals
– Phony borrower
– Stolen identification
– Forged deeds
– Forged credit reports
• Straw buyers

32. Ethics: Communication with
Parties Represented by an
Attorney
• Professional ethics require that attorneys and
paralegals shall not communicate with a party
the attorney or paralegal knows to be
represented by a lawyer in a pending matter
without the prior consent of the lawyer
representing such party
– Protects the confidential relationship between a
lawyer and a client

33. Summary
• Paralegal involved in the closing of a
residential real estate loan transaction must
be aware of the federal laws that regulate the
transaction
– Most law firms have the necessary forms to
comply with the federal laws
• Paralegal need only make certain that the forms are
properly completed and the necessary disclosures are
made to the consumer or borrower at the appropriate
times