Mortgage Lending Legal Authority


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Mortgage Lending Legal Authority

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Mortgage Lending Legal Authority

  1. 1. Mortgage Lending: Legal Authority Katherine Worthman Attorney Federal Trade Commission Division of Financial Practices June 3, 2008 The views expressed are those of the speaker and not necessarily those of the FTC or any other person.
  2. 2. Mortgage Lending Authority Section 5 of the Federal Trade Commission Act (FTC Act) The Truth in Lending Act (“TILA”) The Home Ownership and Equity Protection Act (“HOEPA”) The Equal Credit Opportunity Act (“ECOA”)
  3. 3. Section 5 Prohibits unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.
  4. 4. Section 5 When is a mortgage advertisement deceptive? Representation or omission of information Material Mislead consumers acting reasonably under the circumstances FTC Deception Policy Statement, appended to Cliffdale Associates, Inc., 103 F.T.C. 110, 174 (1984)
  5. 5. Section 5 Representations can be either express or implied Information is material if it is likely to affect the consumer’s choice of, or conduct regarding, a product
  6. 6. Section 5 Presumption of materiality when: Intent to make the claims Significantly involve areas with which reasonable consumers would be concerned Claims pertaining to the central characteristics of the product
  7. 7. Section 5 What is acting reasonably? Do not need to establish actual reliance or consumer injury Conduct is deceptive even if it only has a tendency or capacity to deceive a significant minority Overall net impression standard
  8. 8. Section 5 Any disclaimers must be “clear and prominent” Prominence Presentation Placement Proximity
  9. 9. Truth In Lending Act (TILA) Enacted as title I of the Consumer Credit Protection Act Regulation Z implements TILA Purpose of TILA To ensure that credit terms are disclosed in a meaningful way so consumers can compare credit terms more readily and knowledgeably
  10. 10. TILA Applies to both open-end and closed-end credit transactions Requires written disclosures regarding finance charges and annual percentage rates (APR) Three-day right of rescission Certain requirements for advertisers of credit terms
  11. 11. TILA – Key Definitions Credit: the right to defer payment of debt or to incur debt and defer its payment Consumer credit: credit offered or extended to a consumer primarily for personal, family, or household purposes
  12. 12. TILA – Key Definitions Finance charge The finance charge is the cost of consumer credit as a dollar amount Includes any charge imposed by the creditor as an incident to or condition of the extension of credit Does not include any charges paid in a cash transaction
  13. 13. TILA – Key Definitions Closed End APR Finance charge expressed as percentage Measures the total cost of credit Not an “interest” rate
  14. 14. TILA – Advertising Requirements Requirements apply in any medium Requirements apply to all advertisers (not just creditors)
  15. 15. TILA – Advertising Requirements Companies may advertise only credit terms that are actually available to the consumer. Companies may advertise terms that will be offered only for a limited time or terms that will become available at a known future date. Example: 3.95% 30 Year Mortgage
  16. 16. TILA – Mortgage Advertising Requirements If a mortgage ad uses a triggering term, must also include: The terms of repayment The “annual percentage rate,” using that term or the abbreviation “APR” If the APR may be increased after consummation of the credit transaction, that fact also must be stated
  17. 17. TILA –Disclosure Requirements The triggering terms for closed-end mortgage credit are: The amount of any payment The number of payments or the period of repayment The amount of any finance charge
  18. 18. TILA – APR Requirement If an ad shows the finance charge as a rate, that rate must be stated as an “annual percentage rate,” using that term or the abbreviation “APR” (even if it’s the same as the simple interest rate)
  19. 19. TILA - Written Disclosure Requirements Disclosures must be: Before consummation Clear and conspicuous In writing In a form the consumer may keep
  20. 20. TILA - Written Disclosure Requirements Required disclosures Identity of the creditor Annual Percentage Rate Finance Charge
  21. 21. TILA - Written Disclosure Requirements Amount Financed - amount of credit provided Determine the principal loan amount Add any other amounts that are financed by the creditor and are not part of Finance Charge Subtract any prepaid finance charge Finance Charge + Amount Financed = Total of Payments
  22. 22. TILA - Written Disclosure Requirements Total of Payments The amount paid when the consumer has made all scheduled payments Number, Amount & Timing of Payments Fact of a Security Interest in property
  23. 23. TILA - Right of Rescission For most home equity mortgage loans, the TILA provides a right to rescind. Under the right to rescind, the consumer has until midnight of the third business day to cancel the credit transaction for any reason.
  24. 24. TILA - Civil Liability If a creditor fails to comply with any requirements of the TILA it may be held liable to the consumer for: Actual damage Court costs and attorney fees
  25. 25. TILA - Civil Liability Creditor also may be held liable for either of the following: In an individual action relating to a mortgage, twice the amount of the finance charge involved, but not less than $200 or more than $2,000. In a class action, not more than $500,000 or 1 percent of the creditor’s net worth, whichever is less.
  26. 26. Home Ownership Equity Protection Act (HOEPA) Amended TILA Establishes disclosure requirements and prohibits various abusive practices in connection with high- cost mortgages
  27. 27. HOEPA What is a HOEPA loan? Applies to consumer loans Secured by consumer principal dwelling High rate or high fees
  28. 28. HOEPA – High Rate For first mortgages, the APR exceeds the comparable Treasury Security by more than 8 percentage points For second mortgages, the APR exceeds the comparable Treasury Security by more than 10 percentage points
  29. 29. HOEPA – High Fees Fees exceed the greater of 8% of the loan amount or $561 (for 2008, changes annually) Includes points, origination fees, underwriting fees and similar charges Compensation to mortgage brokers
  30. 30. HOEPA – Prohibited Practices No pattern of lending without regard to consumer’s ability to repay loan No balloon payments in loans with less than five- year terms No default interest rates higher than pre-default rates No negative amortization
  31. 31. HOEPA – Prohibited Practices No prepayment penalties Unless otherwise lawful Only applies during the first 5 years Unless lender verifies certain income requirements of borrower No prepayment penalty allowed for refinancing with same creditor
  32. 32. Equal Credit Opportunity Act (ECOA) ECOA prohibits discrimination on the basis of, among other protected characteristics, race or national origin, in any credit transaction.
  33. 33. ECOA Forms of Prohibited Discrimination Disparate Treatment Disparate Impact
  34. 34. Mortgage Lending: Legal Authority Katherine Worthman, Attorney Federal Trade Commission Division of Financial Practices June 3, 2008