Consumer Credit Protection Act
The Consumer Credit Protection Act (CCPA) is a comprehensive federal law composed of a number of specific acts relating to consumer credit and indebtedness. Among the specific acts that are most relevant to the real estate licensee are the Truth in Lending Act and Equal Credit Opportunity Act. These acts are discussed below.
Truth-in-Lending and Regulation Z
The Consumer Credit Protection Act, enacted in 1969 and since amended by the Truth-in-Lending Simplification and Reform Act, is implemented by the Federal Reserve’s Regulation Z. Regulation Z applies to all loans secured by a residence. It does not apply to commercial loans or to agricultural loans over $25,000. Its provisions cover the disclosure of costs, the right to rescind the credit transaction, advertising credit offers, and penalties for non-compliance with the act.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) established the Consumer Financial Protection Bureau (CFPB.) to protect consumers by carrying out federal consumer financial laws. The CFPB consolidates most Federal consumer financial protection authority in one place, including enforcement of RESPA, ECOA, and Truth in Lending.
Disclosure of costs. Under Regulation Z, a lender must disclose all finance charges as well as the true Annualized Percentage Rate (APR) in advance of closing. A lender does not have to show the total interest payable over the loan term or include in finance charges such settlement costs as fees for appraisal, title, credit report, survey, or legal work. Disclosure must be distinctly presented in writing.
Rescission. A borrower has a limited right to cancel the credit transaction, usually within three days of completion of the transaction. The right of rescission does not apply to “residential mortgage transactions,” that is, to mortgage loans used to finance the purchase or construction of the borrower’s primary residence.
- a down payment percentage or amount
- an installment payment amount
- a specific amount for a finance charge
- a specific number of payments
- a specific repayment period
- a statement that there is no charge for credit
If any of these items appears in the advertising, the lender must disclose the down payment amount or percentage, repayment terms, the APR, and whether the rate can be increased after consummation of the loan.
Noncompliance. Willful violation of Regulation Z is punishable by imprisonment of up to a year and/or a fine of up to $5,000. Other violations may be punished by requiring payment of court costs, attorneys’ fees, damages, and a fine of up to $1,000.
Equal Credit Opportunity Act
ECOA prohibits discrimination in extending credit based on race, color, religion, national origin, sex, marital status, age, or dependency upon public assistance. A creditor may not make any statements to discourage an applicant on the basis of such discrimination or ask any questions of an applicant concerning these discriminatory items. A real estate licensee who assists a seller in qualifying a potential buyer may fall within the reach of this prohibition. A lender must also inform a rejected applicant in writing of reasons for denial within 30 days. A creditor who fails to comply is liable for punitive and actual damages. Other details of this act were discussed earlier.
Real Estate Settlement Procedures Act
RESPA (See also RESPA/TRID in next section)is a federal law which aims to standardize settlement practices and ensure that buyers understand settlement costs. RESPA applies to purchases of residential real estate (one- to four-family homes) to be financed by “federally related” first mortgage loans. Federally related loans include:
- VA- and FHA-backed loans
- other government-backed or -assisted loans
- loans that are intended to be sold to FNMA, FHLMC, GNMA, or other government-controlled secondary market institutions
- loans made by lenders who originate more than one million dollars per year in residential loans.
In addition to imposing settlement procedures, RESPA provisions prohibit lenders from paying kickbacks and unearned fees to parties who may have helped the lender obtain the borrower’s business. This would include, for example, a fee paid to a real estate agent for referring a borrower to the lender.
To assist in informing and educating borrowers, RESPA requires that lenders provide a loan applicant with a loan information booklet and a loan estimate. The booklet, produced by the Consumer Financial Protection Bureau, explains RESPA provisions, general settlement costs, and the required Closing Disclosure form. The lender must provide the estimate of closing costs within three days following the borrower’s application. RESPA is discussed further in the next section.
Disclosures. The Consumer Financial Protection Bureau (CFPB) requires lenders to use two specific forms to disclose settlement costs to the buyer. A lender must provide a Loan Estimate (H-24) within three days of receiving the loan application and allow the buyer to see the Closing Disclosure (H-25) three days before loan consummation. A lender must also provide a buyer with a copy of the information booklet, “Your Home Loan Toolkit,” concerning mortgage loan, closing costs and closing procedures. The disclosures specify:
- settlement charges
- title charges
- recording and transfer fees
- reserve deposits required
- tax and insurance escrow deposits required
- any other fees or charges
- total closing costs
The disclosure forms vary, depending on loan type. The costs in the Closing Disclosure must match those in the Loan Estimate within certain standards.