3rd to last Unit Flashcards
Per the list on the previous screen, lenders have to disclose a loan’s APR (annual percentage rate), but what is that? What does it mean? An APR is a powerful tool that gives non-expert consumers the ability to compare loans directly.
The Total Cost of the Loan
A loan’s APR is the TOTAL cost of getting that loan, expressed as a percentage. In other words, it is the ratio of the total cost of financing to the loan amount. The cost of financing includes interest paid, discount points, and loan fees, but does not include other fees that would have to be paid regardless of financing (for example, title insurance or home inspection fees).
Previously, lenders could offer a very low interest rate, but then hide the true cost of the loan in fees. This made the actual amount the borrower paid much higher than the interest rate would lead them to believe.
The loan’s APR shows the consumer the true cost of the loan, allowing them to easily compare one lender’s offer to another.
EXAMPLE
Let’s say you’re looking to take out a $100,000 fixed-rate loan with a 10-year repayment term. You shop around, and find that Slimy National Bank is offering loans at 3% interest (with a financing charge of $9,000, hidden way down in the fine print). Meanwhile, Wholesome Credit Union offers loans at 4.5% interest, with no financing fees. You might get tricked into taking Slimy’s loan. But the Slimy National Bank’s loan has an APR of 5%, while Wholesome’s APR is 4.5%. Seeing the APR lets you choose the actual best deal.
APR Calculations
The APR is not simple to calculate, and it is not always calculated in the same way. Each lender decides which fees and charges go into the calculation. The following are usually, but not always, included in a lender’s APR calculation:
Application fee
Discount points
Document preparation fees (when paid for the lender’s document preparation)
Origination fee
Private mortgage insurance (PMI) premiums
Processing fee
Underwriting fee
Good News
You don’t have to learn how to calculate a loan’s APR. That’s what us robots are for! Go online and find an APR calculator if you simply must do it, but it’s more important that you understand why APR is important than understand how it’s calculated.
Annual Percentage Rate
Now let’s take a look at another law that protects consumers during the borrowing process. Congress enacted the Real Estate Settlement Procedures Act (RESPA) in 1974 as a response to abuses in the real estate settlement process, including the practice of kickbacks, referral fees, or fee splitting, which had the effect of needlessly increasing the costs of settlement services.
RESPA Goals
RESPA aims to:
Help consumers become better shoppers for settlement (loan closing) services by requiring disclosures that spell out the costs associated with closing
Eliminate kickbacks and unearned referral fees that unnecessarily increase the costs of closing a transaction
Before TRID transferred the responsibility to the CFPB, RESPA was administered by the Department of Housing and Urban Development, using Regulation X (but nobody calls RESPA Reg X). Why do people call TILA by its regulation name but RESPA by its law name? I don’t know, Anthony, life is a rich tapestry, full of surprise and delight.
Which Loans Does RESPA Cover?
For a loan to fall under RESPA, it has to be what is called a federally related mortgage loan. This is a loan that is directly or indirectly supported by federal regulation, insurance, guarantees, supplements, or assistance. This also includes loans that the originating lender intends to sell to a federal program, like Fannie Mae.
RESPA applies to most loans that are secured by a mortgage lien placed on a one- to four-family residential property.
These loans include:
Purchase loans
Assumptions
Property improvement loans
Refinancing loans and equity lines of credit (generally)
One- to four-family structures, individual units of condos or cooperatives, or manufactured homes
Property where a new dwelling will be constructed
Installment sales contracts, land contracts, or contracts for deeds
RESPA rules also apply to the following:
Loans made by a lender, creditor, or dealer
Loans made or insured by an agency of the federal government
Loans made in connection with a housing or urban development program administered by an agency of the federal government
Loans made and intended to be sold by the originating lender or creditor to Fannie Mae, Ginnie Mae, or Freddie Mac
Loans that are the subject of a home equity conversion mortgage or reverse mortgage issued by a lender or creditor subject to the regulation
Exemptions to RESPA
As you can tell, RESPA covers a lot of residential mortgage loans. But there are a few exemptions:
A summary of RESPA exemptions.
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RESPA also doesn’t apply if a federally related mortgage loan is converted to different terms, if a new note is not required.
RESPA
Some of RESPA’s regulations — such as its disclosure requirements — apply only to lenders. However, some RESPA regulations also apply to license holders.
Let’s look at a few sections of RESPA that are relevant to our interests.
Section 8(a) - Business Referrals Section 8(a) of RESPA specifically prohibits:
The giving and accepting of any fee, kickback or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.
Did you catch that? It prohibits anyone from engaging in these activities. Not just real estate agents.
To reiterate, RESPA explicitly prohibits the payment of kickbacks, or unearned fees, in any real estate settlement service. It prohibits referral fees when no services are actually rendered.
For example, a mortgage lender would be prohibited from giving money or anything of value to a real estate agent for the agent’s referring one of their customers to the lender. A 2010 RESPA rule prohibits a broker or agent from receiving a fee for referring a particular homebuyer or seller to a home warranty company; such a payment would be an illegal kickback.
These Are Okay
The following are fees that are NOT considered illegal kickbacks:
Fee splitting among cooperating brokers or members of multiple listing services
Brokerage referral arrangements
The division of a commission between a broker and their sales agents
Referrals made by an employee to generate business for the company itself
Section 8(b) - Splitting Charges On fee-splitting, Section 8(b) states that:
No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.
So, for example, a mortgage lender can’t share part of their origination fee with a license holder for referring a client. Even though it doesn’t cost the borrower any extra — they’re just sharing the fee they would charge any borrower — it’s still prohibited by RESPA.
Section 8(c) - Fees, Salaries, Compensation, or Other Payments Section 8(c)(2) states:
Nothing in this section shall be construed as prohibiting… the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.
8(c) is just trying to make sure you get paid for your work, Anthony. Payment for labor? That gets the RESPA Thumbs Up™ 👍.
Payment for something other than a service performed or item of value? That’s a no from RESPA 👎.
Computerized Loan Origination (CLO)
A broker may charge a fee for using a computerized loan origination (CLO) system to help a buyer select and originate a mortgage as long as the fee is disclosed on the estimate of closing costs and is reasonably related to the value of services provided.
The SAFE Act requires a person who takes a loan application or discusses/negotiates rates or terms to be licensed as a residential mortgage loan originator. More on that later.
Now let’s take a look at another law that protects consumers during the borrowing process. Congress enacted the Real Estate Settlement Procedures Act (RESPA) in 1974 as a response to abuses in the real estate settlement process, including the practice of kickbacks, referral fees, or fee splitting, which had the effect of needlessly increasing the costs of settlement services.
RESPA Goals
RESPA aims to:
Help consumers become better shoppers for settlement (loan closing) services by requiring disclosures that spell out the costs associated with closing
Eliminate kickbacks and unearned referral fees that unnecessarily increase the costs of closing a transaction
Before TRID transferred the responsibility to the CFPB, RESPA was administered by the Department of Housing and Urban Development, using Regulation X (but nobody calls RESPA Reg X). Why do people call TILA by its regulation name but RESPA by its law name? I don’t know, Anthony, life is a rich tapestry, full of surprise and delight.
Which Loans Does RESPA Cover?
For a loan to fall under RESPA, it has to be what is called a federally related mortgage loan. This is a loan that is directly or indirectly supported by federal regulation, insurance, guarantees, supplements, or assistance. This also includes loans that the originating lender intends to sell to a federal program, like Fannie Mae.
RESPA applies to most loans that are secured by a mortgage lien placed on a one- to four-family residential property.
These loans include:
Purchase loans
Assumptions
Property improvement loans
Refinancing loans and equity lines of credit (generally)
One- to four-family structures, individual units of condos or cooperatives, or manufactured homes
Property where a new dwelling will be constructed
Installment sales contracts, land contracts, or contracts for deeds
RESPA rules also apply to the following:
Loans made by a lender, creditor, or dealer
Loans made or insured by an agency of the federal government
Loans made in connection with a housing or urban development program administered by an agency of the federal government
Loans made and intended to be sold by the originating lender or creditor to Fannie Mae, Ginnie Mae, or Freddie Mac
Loans that are the subject of a home equity conversion mortgage or reverse mortgage issued by a lender or creditor subject to the regulation
Exemptions to RESPA
As you can tell, RESPA covers a lot of residential mortgage loans. But there are a few exemptions:
A summary of RESPA exemptions.
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RESPA also doesn’t apply if a federally related mortgage loan is converted to different terms, if a new note is not required.
An affiliated business arrangement (ABA) is when a real estate brokerage offers closing, moving, and other services from companies that operate under the same corporate umbrella as the brokerage. For example, a real estate firm, title insurance company, mortgage broker, home inspection company, and even a moving company may agree to offer a package of services to consumers.
As you can imagine, some clients might find this bundling helpful and cut down on the work they have to do to find trustworthy service providers. But it’s also a setup that’s ripe for pressure tactics and kickbacks. That’s why RESPA has rules about how ABAs can do business.
Affiliated Business Arrangement Restrictions
To comply with RESPA regulations, an ABA must:
Provide consumers with written disclosure of the affiliation
Provide consumers with estimated charges for provided services
Communicate to consumers that they are free to obtain services elsewhere
Refrain from charging or paying referral fees among the subsidiary companies
Essentially, brokerages can bundle these services together, but they have to make it clear to clients that they’re free to go elsewhere for any of the offered services. They also can’t give each other referral fees.
Affiliated Business Arrangement
It is a violation of RESPA for a seller to require a buyer to buy title insurance from a specific title company to be allowed to purchase the property. Sellers get to choose their own title companies.
However, if the seller were to pay for all the costs for themselves and the buyer, then the seller would be free to mandate the title company with whom they wish to do business.
RESPA Escrow Rules
RESPA sets limits on the amount of money a lender is allowed to keep in an escrow account. Remember that lenders often collect insurance and tax payments for the borrower in advance and keep them in escrow accounts. The lender then uses that money to pay the insurance company and the tax authority for the borrower. That way the lender can ensure the borrower is current on insurance and taxes. RESPA allows lenders to keep up to 14 months of payments in escrow accounts.
It’s important to note that the establishment of escrow accounts, cushions, and interest paid on these accounts are not required by law but are all options available to the lender.
RESPA Repayment Rules
RESPA also sets guidelines on the repayment of money owed to, or by, the borrower. If a borrower’s escrow account has more money than is allowed (remember, 14 months of payments), but less than $50 extra, the lender can either return the money to the borrower or apply it to future payments. If the amount owed to the borrower is more than $50, the lender has 30 days to return the money to the borrower.
On the other hand, if the borrower owes the lender less than one month’s escrow payment, the lender may request that the funds be paid within 30 days. Otherwise, the lender must spread the repayment over a 12-month period (increasing the monthly escrow payment until the money is paid back).
Other RESPA Rules: Title Companies and Escrow
Okay, Anthony, that’s TILA and RESPA for you. We’re going to revisit them in the next chapter when we talk about TRID rules, but first I wanted to do some practice with you about TILA advertising disclosures.
The main two things future real estate you will need to look out for are:
Not taking kickbacks (pretty easy to remember)
Not violating TILA advertising rules
So let’s look at a few ads, and you can decide if they trigger a TILA disclosure or not.
Scenario: Little Stego Neighborhood Ad
Here’s an ad for a home for sale:
“Amazing deal on a cute bungalow in trendy Little Stego neighborhood. 4 beds, 2 baths, neighborhood pool access, only $2,500 a month!”
TILA Practice: Would This Trigger a Disclosure?
TILA and RESPA are laws put into place to protect consumers. We can’t all be experts on mortgages, but we should all be able to understand how to shop for one. It’s the job of the government to ensure consumers can make informed decisions when purchasing complicated financial products.
Key Terms
Here are the key terms you learned in this chapter:
Real Estate Settlement Procedures Act (RESPA)
passed to eliminate kickbacks in lending and disclose the costs of closing a loan
Regulation Z
the part of the Truth in Lending Act (TILA) that seeks to protect consumers by requiring proper disclosures and fair lending practices
Key Concepts & Principles
Here are the concepts and principles you’ll want to master from this chapter.
What TILA Does
TILA protects consumers against inaccurate and unfair credit billing and credit card practices. It requires lenders to provide consumers with loan cost information so that consumers can comparison shop for certain types of loans.
In addition to providing a uniform system for disclosures, the Act:
Protects consumers against inaccurate and unfair credit billing and credit card practices
Provides consumers with rescission rights
Provides for rate caps on certain dwelling-secured loans
Imposes limitations on home equity lines of credit and certain closed-end home mortgages
Provides minimum standards for most dwelling-secured loans
Delineates and prohibits unfair or deceptive mortgage lending practices
TILA, RESPA, and TRID
The laws, the organizations that regulate them, and the names of the regulations.
A chart stating the purpose, the agency in charge of, and the enforcement arm of TILA, RESPA, and the Dodd-Frank Act.
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Reg Z Rules
The four big Reg Z rules to know are:
Loan originator compensation rules: no kickbacks
Disclosure of loan terms: creditors must disclose terms to all borrowers
Right of rescission for loans using an already-owned house as collateral: borrowers have a three-day period to back out of the loan if they’re getting a refinance or home equity loan
Rules for advertising loan rates: certain things trigger a full disclosure of loan rates
Trigger Items
If any of the following trigger items appear in an ad, full disclosure becomes a requirement to stay compliant with Reg Z:
Monthly payment amount
Number of payments
Amount of down payment
Finance charges
Loan terms
Full Disclosure
What does full disclosure mean? If any of the trigger items appear in an ad, ALL of the following items must also appear in the ad:
Cash price
Required down payment
Number, amount, and due date of all payments
Total of all payments to be made, unless the loan is for buying a home
APR
RESPA Rules
RESPA prohibits kickbacks for referrals for closing services.
Per RESPA, sellers can’t require buyers to use their preferred title company unless they are paying for all of the title fees.
RESPA allows lenders to keep up to 14 months of payments in escrow accounts.
Chapter Summary
