FEDERAL MORTGAGE-RELATED LAWS Flashcards
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FEDERAL MORTGAGE RELATED LAWS (24%)
Real Estate Settlement Procedures Act (RESPA), 12 CFR Part 1024 (Regulation X)
Purpose and Scope:
* RESPA became effective on June 20, 1975.
* It requires lenders, mortgage brokers, and servicers of home loans to provide borrowers with pertinent and timely disclosures about the nature and costs of the real estate settlement process.
* The regulation covers various aspects of the mortgage loan process, including applications, origination, title insurance, settlement (or closing), escrow accounts, and loan servicing.
* Regulation X implements the Real Estate Settlement Procedures Act of 1974 (RESPA), as amended (12 U.S.C. 2601 et seq.).
* It safeguards consumers when they apply for and have mortgage loans.
** Key Topics Covered by Regulation X:**
* Prohibition on Kickbacks and Unearned Fees: RESPA prohibits kickbacks and unearned fees related to real estate transactions.
* Mortgage Origination and Servicing Disclosures: Lenders must provide borrowers with clear information about loan terms, costs, and risks.
* Affiliated Business Arrangements: Disclosure requirements apply when referring borrowers to affiliated service providers.
* Title Insurance: RESPA addresses title insurance practices.
* Escrow Accounts: Rules govern the establishment and management of escrow accounts for property taxes, insurance, and other charges.
* List of Homeownership Counseling Organizations: Borrowers receive information about available counseling services.
* Mortgage Loan Servicing Requirements: Servicers must follow specific guidelines for handling mortgage loans.
* Force-Placed Insurance: Rules address force-placed insurance practices.
* Mortgage Loan Servicing Error Resolution and Borrower Information Requests: Procedures for addressing errors and borrower inquiries.
* Loss Mitigation: Guidelines for loss mitigation efforts to assist struggling borrowers.
Mortgage Loan Process Covered:
The mortgage loan process includes:
* Applications for Mortgage Loans: This includes the initial application process.
* Origination of Mortgage Loans: The steps involved in creating a mortgage.
* Title Insurance: Ensuring clear title to the property.
* Conducting the Settlement (or Closing): The finalization of the transaction.
* Escrow Accounts: Handling funds for taxes, insurance, etc.
* Mortgage Loan Servicing: Managing ongoing loan payments and communication with borrowers.
Key Topics Addressed by Regulation X:
* Prohibition on Kickbacks and Unearned Fees: Prevents unethical practices.
* Mortgage Origination and Servicing Disclosures: Ensures transparency.
* Affiliated Business Arrangements: Regulates relationships between service providers.
* Title Insurance: Guidelines for title insurance practices.
* Escrow Accounts: Rules for handling escrow funds.
* Mortgage Loan Servicing Requirements: Ensures fair treatment of borrowers.
* Loss Mitigation: Procedures for assisting distressed borrowers.
Additional Resources:
* Consumer FAQs: Answers common questions related to mortgages.
* Mortgage Servicing Compliance Resources: Guidance for industry professionals.
* RESPA Compliance Resources: Further information on compliance.
FEDERAL MORTGAGE RELATED LAWS (24%)
RESPA origins and purpose; definition of “mortgage broker”
RESPA Origins and Purpose:
* The Real Estate Settlement Procedures Act (RESPA) was enacted by the U.S. Congress in 1974.
* Its primary objectives include:
* Full Disclosure: RESPA mandates complete settlement cost disclosures for homebuyers and sellers during real estate transactions.
* Elimination of Kickbacks: It prohibits unethical practices where companies associated with real estate (such as lenders, agents, and title insurance providers) provide undisclosed kickbacks to each other.
* Limiting Escrow Accounts: RESPA limits the use of escrow accounts and ensures transparency in real estate costs.
* Over the years, RESPA has been amended and expanded to further protect real estate buyers and sellers.
How RESPA Works:
* Fee Disclosures: RESPA requires full disclosure of all costs and fees associated with real estate transactions involving properties with up to four units.
* Standardized Forms: Mortgage brokers must provide these disclosures using standardized forms such as the Good Faith Estimate (GFE) and the U.S. Housing and Urban Development settlement statement.
* Consumer Protection: RESPA ensures that consumers receive fair and honest treatment from all real estate service providers.
Definition of “Mortgage Broker”:
* A mortgage broker is a person (other than an employee of a lender) who:
* Renders origination services: Assists borrowers in obtaining mortgage loans.
* Serves as an intermediary: Acts as a bridge between the borrower and the lender.
* Handles transactions involving federally related mortgage loans: This includes closing loans in their own name in a table-funded transaction.
In summary, RESPA plays a critical role in promoting transparency, accountability, and consumer confidence in the real estate settlement process
FEDERAL MORTGAGE RELATED LAWS (24%)
Applicable loan types
- Home Purchase Loans: These are loans taken out to buy a home.
- Refinances: These are loans that replace an existing loan with a new one, usually with different terms.
- Property Improvement Loans: These are loans used for making improvements to a property.
- Home Equity Lines of Credit (HELOCs): These are lines of credit secured by a home.
- Reverse Mortgages: These are loans that allow homeowners to convert part of the equity in their homes into cash.
- Lender-Approved Assumptions: These are situations where a buyer takes over the seller’s mortgage.
- Installment Sales Contracts, Land Contracts, or Contracts for Deeds: These are also covered if the contract is funded in whole or in part by proceeds of a loan made by a lender, specified federal agency, dealer or creditor subject to the regulation.
Please note that RESPA is applicable to all “federally related mortgage loans”. This includes loans guaranteed by Fannie Mae, Freddie Mac, USDA, VA, FHA, and other government entities.
It isn’t the type of loan as much as the fact that the federal government is involved
Conventional Loans:
* These are home loans that are not backed by a government entity.
* Conventional loans typically require a higher credit score and a larger down payment.
* They offer flexibility in terms of loan amounts and property types.
Government-Backed Loans:
* These loans are insured or guaranteed by government agencies.
Common types include:
* FHA Loans: Insured by the Federal Housing Administration, they allow lower down payments and are suitable for first-time homebuyers.
* VA Loans: Available to eligible veterans and active-duty military personnel, offering favorable terms.
* USDA Loans: Designed for rural and suburban homebuyers, with no down payment requirements.
Fixed-Rate Mortgages:
* These have an unchanging interest rate throughout the loan term.
* Borrowers benefit from predictable monthly payments.
Adjustable-Rate Mortgages (ARMs):
* ARMs start with a fixed rate for an initial period (e.g., 5 years) and then adjust periodically.
* They can be advantageous if you plan to move or refinance before the rate adjusts.
Jumbo Loans:
* Jumbo loans exceed the loan limits set by Fannie Mae and Freddie Mac.
* They are suitable for high-value properties.
Other Types:
* Interest-Only Loans: Borrowers pay only interest for a specified period.
* Balloon Loans: A large final payment (balloon payment) is due at the end of the term.
* Reverse Mortgages: Designed for seniors, allowing them to tap into home equity.
FEDERAL MORTGAGE RELATED LAWS (24%)
RESPA prohibitions, limitations, & exemptions
Prohibitions:
* Section 8(a): Prohibits kickbacks for business referrals related to or part of settlement services involving federally related mortgage loans.
* Section 8(b): Prohibits unearned fee arrangements, i.e., splitting charges made or received for settlement services, except for services actually performed, in connection with federally related mortgage loan transactions.
Limitations:
* RESPA prohibits loan servicers from demanding excessively large escrow accounts.
* It restricts sellers from mandating title insurance companies.
Exemptions:
* Section 8©: Identifies certain payments that are not prohibited by Section 8.
These include:
* A loan primarily for business, commercial, or agricultural purposes.
* A temporary loan such as a construction loan.
* A loan secured by vacant or unimproved property where no proceeds of the loan will be used to construct a one-to-four family residential structure.
* An assumption, unless the mortgage instruments require lender approval for the assumption and the lender approves the assumption.
* A bona fide transfer of a loan obligation in the secondary market
Prohibitions and Limitations:
* Kickbacks and Unearned Fees: RESPA prohibits giving or receiving kickbacks, referral fees, or unearned fees in connection with real estate transactions. This ensures transparency and prevents unethical practices.
* Affiliated Business Arrangements: RESPA regulates relationships between service providers (such as lenders, title companies, and real estate agents). It requires disclosure when referring business to affiliated entities.
* Escrow Accounts: RESPA limits the amount that lenders can require borrowers to deposit into escrow accounts for taxes, insurance, etc.
* Loan Servicing Requirements: Lenders must provide accurate and timely information to borrowers regarding loan servicing, transfers, and escrow accounts.
Exemptions:
* Certain transactions are exempt from RESPA coverage:
* Business, Commercial, or Agricultural Loans: Loans primarily for business purposes are not subject to RESPA.
* Temporary Loans: Construction loans (temporary loans) are exempt unless they convert to permanent financing or finance the transfer of property title.
* Vacant or Unimproved Property: Loans secured by vacant or unimproved property are exempt unless used for specific purposes (e.g., constructing a residential structure within two years).
* Assumptions: Assumptions are exempt unless the lender requires approval for the assumption.
* Conversion of Loan Terms: Converting a loan to different terms (consistent with the original mortgage) is exempt if no new note is required.
* Secondary Market Transactions: Certain secondary market transactions are exempt, but mortgage servicing requirements still apply.
FEDERAL MORTGAGE RELATED LAWS (24%)
Settlement services
NMLS Consumer Access:
* NMLS Consumer Access is a fully searchable website that allows the public to view information concerning state-licensed companies, branches, and individuals licensed and registered through NMLS.
* It provides administrative and licensing information for companies, branches, and individuals involved in financial services.
* You can access NMLS Consumer Access at www.NMLSConsumerAccess.org.
Debt Settlement Services Provider Company License:
* Debt settlement services involve offering advice or acting as an intermediary between a debtor and creditors.
* The primary purpose is to negotiate settlements for less than the full amount of debt (including principal, interest, fees, or other charges).
* If you’re interested in providing debt settlement services, ensure compliance with licensing requirements.
Settlement Services Definition:
* Settlement services encompass various tasks related to real estate transactions.
These services include:
* Title searches and examinations
* Title certificates and title insurance
* Services rendered by attorneys
* Document preparation
* Property surveys
* Credit reports and appraisals
* Pest and fungus inspections
* Services by real estate agents or brokers
* Origination of federally related mortgage loans
* Loan processing and closing.
Title and Settlement Services:
* Title Services:
* Title refers to the legal ownership rights to a home.
* Before a home purchase or refinance transaction can close, the property must have a “clear” title, meaning no one has a claim to it in the form of outstanding liens or debts.
* The title company is responsible for finding anything that can hinder a clear title. If any issues are discovered, they take corrective action to enable the transaction to proceed.
* Title services include title due diligence work, preparing settlement documents, and issuing title insurance.
Settlement Services:
* Settlement services encompass various tasks related to closing a real estate transaction.
* The title company manages the escrow account, which holds funds set aside for the home purchase or refinance until certain conditions are met or the transaction is complete.
* During a loan transaction, the title company conducts essential work behind the scenes to ensure a smooth closing process.
Steps Taken by Title Companies:
Title Search and Examination:
* The title company conducts a title search to learn about the property’s history.
* This search reveals past ownership details and uncovers any red flags that could halt the transaction.
* For home purchase transactions, the title search identifies all owners involved in the property transfer.
Identifying Liens and Debts:
* The title company examines liens or judgments against the property, including bankruptcy cases, divorce agreements, outstanding mortgages, and overdue property taxes.
Ensuring Clear Title:
* Corrective action is taken to ensure a clear title, allowing for title insurance and a smooth loan process.
Managing Escrow Accounts:
* The title company handles funds held in escrow, such as earnest money deposits.
Behind-the-Scenes Work:
* While less visible than real estate agents or lenders, title companies play a crucial role in getting you to the closing table.
FEDERAL MORTGAGE RELATED LAWS (24%)
Required borrower information on application (Regulation X)
- Borrower’s Name: The full legal name of the individual applying for the mortgage.
- Borrower’s Monthly Income: Details about the borrower’s income, including salary, bonuses, commissions, and other sources.
- Borrower’s Social Security Number: Required to obtain a credit report and verify the borrower’s identity.
- Property Address: The address of the property being financed.
- Estimated Property Value: An estimate of the property’s worth.
- Mortgage Loan Amount Sought: The desired loan amount.
- Any Other Information Deemed Necessary by the Loan Originator: Additional details that the lender may require for credit evaluation or loan processing.
FEDERAL MORTGAGE RELATED LAWS (24%)
Foreclosure process
Default:
* A bank cannot initiate foreclosure on a home at will. Homeowners must first default on their mortgage by failing to make the required monthly payments.
* Lenders typically allow a grace period, recognizing that temporary financial hardships can occur in people’s lives.
* During this period, expect communication from the lender via emails, letters, and phone calls, urging payment.
* Lenders often offer alternatives, such as different payment plans, to help homeowners get back on track.
Notice of Intent to Foreclose:
* If the default persists, the lender sends a notice of intent to foreclose.
* This notice informs the homeowner that foreclosure proceedings will begin unless the mortgage is brought current.
Foreclosure Filing and Trial:
* Depending on the state, the foreclosure process can be judicial or non-judicial.
* In a judicial foreclosure, the lender files a lawsuit to initiate foreclosure. The borrower may contest the lawsuit in court.
* If the borrower loses, the house goes into foreclosure and can be sold at auction.
Notice of Sale and Eviction:
* After the legal process, the lender issues a notice of sale, specifying the date and time of the foreclosure auction.
* If the property is not redeemed or sold during the auction, it becomes bank-owned.
* Finally, the homeowner faces eviction if they do not vacate the property voluntarily.
** Pre-Foreclosure Notice:**
* Borrowers receive a pre-foreclosure notice, which informs them of the impending foreclosure proceedings.
* This notice provides an opportunity for borrowers to explore alternatives, such as loss mitigation options.
Loss Mitigation Application:
* Borrowers can apply for loss mitigation during the pre-foreclosure stage.
* Loss mitigation includes options like loan modification, repayment plans, or forbearance.
Notice of Foreclosure:
* After the pre-foreclosure period, borrowers receive a formal notice of foreclosure.
* This notice outlines the foreclosure process and the timeline for further actions.
Legal Proceedings:
* Depending on the state, the foreclosure process may be judicial (involving court proceedings) or non-judicial (handled outside of court).
* Borrowers have the right to respond in court if it’s a judicial foreclosure.
Loan Cure and Stopping Foreclosure:
* Borrowers can still cure the default by bringing the loan current before the foreclosure sale.
* If successful, the foreclosure process stops.
Military Protections:
* Special protections apply to military service members facing foreclosure.
* These protections include postponing foreclosure during active duty and additional rights.
Loan Payoff:
* Borrowers can pay off the outstanding loan amount to prevent the foreclosure sale.*
FEDERAL MORTGAGE RELATED LAWS (24%)
Initial escrow statements
Definition:
* The initial escrow account statement is the first disclosure statement that the servicer delivers to the borrower concerning their escrow account.
* It provides essential information related to how the borrower’s escrow account will operate.
Contents of the Initial Escrow Account Statement: The initial escrow account statement must include the following details:
* Monthly Mortgage Payment: Specifies the amount of the borrower’s monthly mortgage payment.
* Escrow Portion: Outlines the portion of the monthly payment allocated to the escrow account.
* Itemized Anticipated Disbursements: Breakdown of anticipated disbursements from the escrow account (e.g., property taxes, homeowner’s insurance).
* Anticipated Disbursement Dates: Specific dates when these disbursements are expected.
* Cushion Amount: The servicer sets aside a cushion (a buffer) in the escrow account to cover potential fluctuations.
* Trial Running Balance: An estimate of the account balance over time.
Submission Process:
* For escrow accounts established after settlement (and which are not a condition of the loan), a servicer must submit an initial escrow account statement to the borrower within 45 calendar days of the date of establishment of the escrow account.
* The format for the initial escrow account statement should be substantially in accordance with the requirements set forth in § 1024.17(h).
FEDERAL MORTGAGE RELATED LAWS (24%)
Equal Credit Opportunity Act (ECOA), 12 CFR Part 1002 (Regulation B)
Purpose:
* The ECOA aims to promote equal access to credit for all creditworthy applicants, regardless of certain personal characteristics.
* These characteristics include race, color, religion, national origin, sex, marital status, age, and source of income (including public assistance).
* The regulation prohibits creditor practices that discriminate based on any of these factors.
Applicability:
* Regulation B applies to all creditors, including credit unions.
* It ensures that credit applicants are treated fairly and without bias during the lending process.
Key Provisions:
* Adverse Action: When a creditor takes adverse action (such as denying credit), they must provide a notice explaining the reasons for the decision.
* Notification: Creditors must notify applicants of action taken on their credit applications.
* Reporting: Credit history should be reported in the names of both spouses on an account.
* Record Keeping: Creditors must retain records of credit applications.
* Collection of Information: For certain dwelling-related loans, creditors collect information about the applicant’s race and other personal characteristics.
* Appraisal Reports: Applicants must receive copies of appraisal reports used in credit transactions.
FEDERAL MORTGAGE RELATED LAWS (24%)
ECOA permissible acts
Regulation B, which implements the Equal Credit Opportunity Act (ECOA), safeguards consumers during credit transactions. Here are key aspects:
Prohibition on Discrimination:
* Creditors cannot discriminate based on:*
* Race
* Color
* Religion
* National origin
* Sex
* Marital status
* Age
* Receiving public assistance
* Exercising rights under consumer protection laws.
*Liability Theories:
* ECOA recognizes two primary theories of liability:
* Disparate treatment: Occurs when a creditor treats an applicant differently based on prohibited factors (e.g., race or national origin).
* Disparate impact: Arises when a creditor’s neutral policies or practices disproportionately affect a protected class unless a legitimate business need justifies the impact.
Notification of Action Taken:
* Creditors must inform applicants of action taken on their credit applications, including adverse action.
* Applicants receive written explanations for denials or unfavorable terms.
Appraisal and Other Valuations:
* Applicants must receive copies of appraisal reports used in credit transactions.
* Lenders cannot discriminate based on property location or borrower characteristics.
Special Purpose Credit Programs:
* ECOA allows special credit programs to benefit certain groups.
* These programs must meet specific criteria and serve legitimate needs.
Regulation B Coverage:
* Regulation B covers creditor activities before, during, and after the extension of credit.
* It addresses topics such as:
* Discrimination
* Discouragement
* Notification of action taken (including adverse action)
* Appraisal and other written valuations
* Special purpose credit programs
* Limitation on collection of certain protected information
Why was ECOA enacted? ECOA was passed at a time when discrimination against women applying for credit was common. It was originally passed in October of 1974 to prohibit lending discrimination based on sex or marital status. In March of 1976, it was amended to further prohibit lending discrimination based on race, color, religion, national origin, age, the receipt of public assistance income, or exercising one’s rights under certain consumer protection laws1
FEDERAL MORTGAGE RELATED LAWS (24%)
Factors that cannot be used to discriminate
Certainly! The Equal Credit Opportunity Act (ECOA) prohibits lenders from discriminating against credit applicants based on specific factors. Here are the key factors that cannot be used to discriminate:
- Race
- Color
- Religion
- National origin
- Sex
- Marital status
- Age (as long as the applicant is legally able to enter into a contract)
- Receiving money from public assistance programs (e.g., Social Security Disability Insurance or SNAP)
- Exercising rights under certain consumer protection laws
These protections ensure that credit decisions are made fairly and without bias.
FEDERAL MORTGAGE RELATED LAWS (24%)
Circumstances where loan can be denied
here are several circumstances where a mortgage loan application can be denied.
Here are some common reasons:
Insufficient Credit History:
* Lenders assess creditworthiness based on credit reports and scores.
* Limited credit history or a low credit score can lead to denial.
High Debt-to-Income Ratio (DTI):
* If your debt payments (including the mortgage) exceed a certain percentage of your income, lenders may deny the loan.
Inadequate Income:
* Insufficient income to cover mortgage payments can result in denial.
* Lenders evaluate your ability to repay the loan.
Property Issues:
* Appraisal issues (such as low property value or significant defects) can lead to denial.
* The property must meet certain standards.
Employment Changes:
* Recent job changes or unstable employment history can raise concerns.
* Lenders prefer stable income sources.
Credit Report Red Flags:
* Negative items on your credit report (such as late payments, collections, or bankruptcies) can impact loan approval.
Down Payment Shortfall:
* If you don’t meet the required down payment, lenders may deny the loan.
**Insufficient Collateral: **
* For some types of loans, such as a mortgage or auto loan, the value of the property or car being purchased serves as collateral. If the collateral is deemed insufficient, the loan may be denied
Insufficient Credit:
* If you don’t have a significant credit history, lenders may deny your mortgage application.
* Building a positive credit history is essential to demonstrate responsible credit management.
Insufficient Income:
* Lenders calculate your debt-to-income ratio (DTI) to ensure you can handle monthly payments.
* If your income isn’t substantial enough to cover the mortgage and other debts, you may be denied.
Record of Late Payments:
* Previous late payments on debts (such as student loans or auto loans) can negatively impact your mortgage application.
* Lenders prefer borrowers with a consistent payment history.
High Loan-to-Value Ratio (LTV):
* Lenders consider your LTV, which compares the mortgage principal to the home’s value.
* A lower LTV (achieved through a larger down payment) is preferable.
Job Change:
* Recent job changes can raise concerns about income stability.
* Lenders prefer borrowers with steady employment.
Unexplained Cash Deposits:
* Large, unexplained cash deposits in your bank account can lead to denial.
* Lenders want to verify the source of funds.
Inspection Issues:
* If the home inspection reveals significant issues (such as structural problems or safety hazards), lenders may deny the loan.
FEDERAL MORTGAGE RELATED LAWS (24%)
Regulation B
Regulation B, which implements the Equal Credit Opportunity Act (ECOA), safeguards consumers during credit transactions. Here are key aspects:
Prohibition on Discrimination:
* Creditors cannot discriminate based on the following reasons:
* Sex
* Race
* Religion
* Color
* National origin
* Marital status
* Age (as long as the applicant is legally able to enter into a contract)
* Receiving money from public assistance programs (e.g., Social Security Disability Insurance or SNAP)
* Exercising rights under certain consumer protection laws
Notification of Action Taken:
* Creditors must inform applicants of action taken on their credit applications, including adverse action.
* Applicants receive written explanations for denials or unfavorable terms.
Appraisal and Other Valuations:
* Applicants must receive copies of appraisal reports used in connection with credit transactions.
* Lenders cannot discriminate based on property location or borrower characteristics.
Special Purpose Credit Programs:
* ECOA allows special credit programs to benefit certain groups.
* These programs must meet specific criteria and serve legitimate needs.
Individual Actions:
* Creditors that fail to comply with Reg B will be held liable for punitive damages up to $10,000 in individual actions.
* Class Actions: For class actions, the creditor could face a penalty of $500,000 or 1% of the creditor’s net worth, whichever is lower
Remember that understanding ECOA ensures fairness and equal access to credit for all consumers.
FEDERAL MORTGAGE RELATED LAWS (24%)
Notifying borrower of action taken (timing)
Timing of Notice:
* Within 30 days of receiving a completed application, the mortgage lender must notify the applicant of the credit decision.
* This notification applies to various scenarios:
* Approval of the application.
* Counteroffer made by the lender.
* Adverse action taken (such as denial of credit) based on the application.
* If the applicant does not expressly accept or use the credit offered within 90 days after receiving a counteroffer, the lender must also notify the applicant.
Incomplete Applications:
* If an application is incomplete regarding matters that the applicant can complete, the lender has two options:
* Notify the applicant of the action taken (in accordance with the 30-day rule).
* Inform the applicant of the incompleteness.
Delivery of Notice:
* The lender delivers or mails the notice to the applicant’s last known address.
* Oral notification occurs when the lender communicates the credit decision directly to the applicant.
Adverse Action Notices:
* If the lender denies credit, the adverse action notice must include specific reasons for the denial.
* Note that the lender is not required to hold a counteroffer open for 90 days or any specific length of time
**Counteroffer: **
If a counteroffer is made and the applicant does not expressly accept or use the credit offered, the creditor must notify the applicant within 90 days.
Under the Equal Credit Opportunity Act (ECOA), creditors are required to notify applicants of the action taken on their credit application. Here are the key points regarding notification:
Timing of Notice:
* Once a creditor has obtained all the information it typically considers in making a credit decision, the application is considered complete.
* Within 30 days of receiving a completed application, the creditor must notify the applicant of the credit decision.
Types of Notices:
* The notification can be in the form of an adverse action notice, which informs the applicant that their request for credit has not been approved.
* The regulation does not mandate the use of the specific term “adverse action.” Instead, the creditor can use any words or phrases that describe the action taken on the application.
* If an applicant expressly withdraws their credit application, the creditor is not required to comply with notification requirements.
Delivery of Notice:
* Notification occurs when the creditor delivers or mails a notice to the applicant’s last known address.
* In the case of oral notification, it occurs when the creditor communicates the credit decision to the applicant.
Location of Notice:
* The required notifications may appear on either or both sides of a form or letter.
When it comes to notifying borrowers of action taken on their credit applications, Regulation B (which implements the Equal Credit Opportunity Act (ECOA)) provides specific guidelines:
Timing of Notification:
* A creditor must notify an applicant of action taken within 30 days after receiving a completed application concerning approval, counteroffer, or adverse action on the application.
* Once the creditor has all necessary information for a credit decision, the application is considered complete.
Oral or Written Notification:
* The creditor can provide the notification orally or in writing.
* The goal is to inform the applicant promptly about the credit decision.
Business Credit Applicants:
* For business credit applicants, the creditor must notify them within a reasonable time of receiving a completed application1.
Remember that timely communication is essential during the mortgage application process.
FEDERAL MORTGAGE RELATED LAWS (24%)
Required disclosures when application denied mortgage
Under the Equal Credit Opportunity Act (ECOA), if a financial institution denies a mortgage application, it is required to provide specific disclosures to the applicant. Here are the key points regarding these disclosures:
Reason for Denial:
* The lender must inform the applicant of the specific reason for the denial.
* This explanation should be provided in writing upon the applicant’s request.
* If credit played a role in the denial, the lender must include details about the credit score used and the name of the credit reporting agency.
Notification Requirement:
* Borrowers have the right to know why their application was rejected if they ask within 60 days of being turned down.
The creditor must provide a letter citing the specific reason, such as “your income was too low” or “you haven’t been employed long enough”
**Equal Credit Opportunity Act (ECOA): **
* According to the ECOA, lenders are required to tell you why you’ve been turned down, if credit played a role.
* They must include a letter with the specific details, as well as the name of the credit reporting agency that supplied the information they were using
FEDERAL MORTGAGE RELATED LAWS (24%)
Adverse action: definition/examples/notifications/timing
Under the Equal Credit Opportunity Act (ECOA), when a borrower’s credit application is denied, the lender provides an adverse action notice. Here are the key points regarding adverse action:
Adverse Action:
* Adverse action refers to specific actions taken by a creditor in response to a credit application. It includes:
* Refusal: When a creditor declines to grant credit in substantially the amount or on substantially the terms requested in an application.
* Counteroffer: If the creditor makes a counteroffer (offering credit in a different amount or on other terms) and the applicant uses or expressly accepts the credit offered.
Examples of adverse actions:
* Denying a credit application.
* Offering credit with different terms than requested.
* Revoking an existing credit line.
* Reducing a credit limit.
* Closing an account.
* Taking any other action unfavorable to the applicant.
Definition:
* Adverse action refers to a notice given by a lender when a borrower’s credit application is denied.
* These notices are typically delivered within seven to 10 business days following the decision to deny the loan application, usually in writing, although they may be communicated verbally as well.
Notification Requirements:
* The regulation does not require that a creditor use the term “adverse action” explicitly.
* Instead, the creditor may use any words or phrases that describe the action taken on the application.
* When an applicant expressly withdraws a credit application, the creditor is not required to comply with the notification requirements.
* Notification occurs when the creditor delivers or mails a notice to the applicant’s last known address or, in the case of oral notification, when the creditor communicates the credit decision to the applicant.
Timing of Notice:
* Once a creditor has obtained all the information it normally considers in making a credit decision, the application is considered complete.
* Within 30 days of receiving a completed application, the creditor must notify the applicant of the credit decision.
In summary, adverse action notices are crucial for transparency and compliance with ECOA regulations, ensuring borrowers are informed about the denial of their credit application.
FEDERAL MORTGAGE RELATED LAWS (24%)
Information required on application; definition of “elderly”
Information Required on Mortgage Application:
* The Equal Credit Opportunity Act (ECOA) does not prescribe a specific list of information that must be collected on a mortgage application.
* However, creditors are expected to act with reasonable diligence to collect the necessary information to complete the application.
* Creditors have the latitude to establish their own information requirements, but they must ensure that the application is complete.
Definition of “Elderly”:
* The term “elderly” refers specifically to the age of natural persons.
* It signifies the number of fully elapsed years from the date of an applicant’s birth.
* In the context of credit applications, “elderly” typically refers to individuals who are 62 years old or older.
* Remember that creditors must provide accurate and complete information to applicants while adhering to ECOA regulations.
FEDERAL MORTGAGE RELATED LAWS (24%)
Mortgage loan originator (MLO) actions when borrower refuses to provide race/gender information
When a borrower declines to provide information on ethnicity, race, or sex during a mortgage application process, the Mortgage Loan Originator (MLO) must take specific actions in accordance with the Equal Credit Opportunity Act (ECOA) and its implementing Regulation B. Here’s what the MLO should do:
Information Requested:
* When an applicant applies for credit primarily for the purchase or refinancing of a dwelling (to be occupied as a principal residence), the MLO must request the following information as part of the application:
* Ethnicity and race: Using either aggregate categories (e.g., Hispanic or Latino, American Indian or Alaska Native, etc.) or specific categories/subcategories defined in appendix B to 12 CFR part 1003.
* Sex.
* Marital status: Categories include married, unmarried, and separated.
* Age.
Obtaining Information:
* The MLO has the option to list these questions directly on the application form or on a separate form that refers to the application.
* The applicant(s) are asked but not required to supply this information.
* If the applicant(s) choose not to provide the information, the MLO must:
* Note this fact on the form.
* To the extent possible, determine the ethnicity, race, and sex of the applicant(s) based on visual observation or surname.
* If ethnicity and race information is collected using specific categories/subcategories, the MLO must comply with any restrictions on visual observation or surname-based collection.
Additional Considerations:
* If the application is taken entirely by mail, internet, or telephone, and the applicant declines to provide the requested information, the MLO must use the code for “information not provided by applicant in mail, internet, or telephone application.”
FEDERAL MORTGAGE RELATED LAWS (24%)
Co-signer requirements
Definition of a Co-Signer:
* A co-signer is someone who agrees to take on the financial responsibility of the primary borrower’s loan if they can no longer make payments.
* Co-signers can be family members, friends, spouses, or parents.
* Co-signing on a loan is not just a character reference; it’s a legally binding contract.
* As a co-signer, the lender can come after you for payments if the primary signer defaults on the mortgage, even if you don’t live in the home.
Co-Signer vs. Co-Borrower:
* Both co-signers and co-borrowers share the responsibility of taking out a loan.
* You can also be a nonoccupant co-borrower, meaning you’ve agreed to take on responsibility for the payments on a mortgage even if you don’t live in the home.
* From a lending perspective, there’s no difference between being a co-signer and a co-borrower; the terms are synonymous.
However, legally, there’s a distinction:
* A co-borrower appears on the property’s title.
* A co-signer does not typically appear on the title.
* Being on the title comes with its own set of rights and responsibilities.
Requirements for Co-Signers:
Co-signers need to meet certain criteria:
* Good credit score: Lenders typically require a minimum credit score (e.g., 620 for conventional loans).
* Low debt-to-income ratio (DTI): Co-signers should have a DTI of 70% or lower if the down payment is less than 20%.
* Ability to cover payments: Co-signers must be financially capable of covering the monthly mortgage payment if the borrower can’t.
Co-signers must also live in the United States for most of the year
FEDERAL MORTGAGE RELATED LAWS (24%)
Acceptable income for loan review
Employee Wages and Salary Income:
* Full-time employment is the most common type of income for home buyers.
* Lenders verify this income using recent pay stubs and one to two years of income tax returns.
Self-Employed, Freelance, and Gig Work Income:
* Income from services outside of traditional employment scenarios.
* Typically requires at least two years of documented history and tax returns.
Part-Time Income:
* Similar to full-time employment requirements, but often two years of income history is needed.
Tips:
* Tip income must be accounted for with two years’ worth of documentation from either W-2s or Form 4137.
Bonuses and Commissions:
* Lenders use the average bonus or commission income over the last two years.
Interest and Dividend Income:
* Generally eligible, but there may be restrictions for investment income received for six months or less.
Retirement, Government, and Pension Income:
* Income from IRAs, 401K plans, pensions, and other retirement accounts is typically allowed.
Social Security Income:
* Lenders often allow monthly payments to adults and children with low income or disabilities, as well as older adults age 65 and over.
Disability Payments:
* Disability income is almost always eligible unless benefits expire in the next three years.
** Child Support and Alimony:**
* Lenders may consider court-ordered child support or alimony payments.
* Verify child support income by obtaining the divorce or separation agreement and proofs of payment (e.g., copies of checks or bank statements).
Rental Income:
* Income from rental properties can be included.
Boarder Income:
* Income from renting out a room in your home.
Royalty Income:
* Income from royalties, such as book or music royalties.
FEDERAL MORTGAGE RELATED LAWS (24%)
Creditworthiness factors
Credit History:
* Your overall credit report, including details about your debt, credit limits, and payment history.
* Lenders review whether you’ve had any past-due amounts, defaults, bankruptcies, or collection items.
Credit Score:
* A three-digit number based on factors in your credit report.
* A high credit score indicates high creditworthiness, while a lower score suggests lower creditworthiness.
Payment History:
* Lenders consider whether you’ve made payments on time.
* Late payments or missed payments negatively impact creditworthiness.
Income and Employment History:
* Lenders assess your income stability and employment track record.
* A steady income stream enhances creditworthiness.
Debt-to-Income Ratio (DTI):
* The ratio of your debt payments to your income.
* A lower DTI indicates better creditworthiness.
Available Assets and Liabilities:
* Some lenders consider your available assets and the number of liabilities you have.
Purpose of Credit:
* Lenders evaluate whether the credit is for a home purchase, refinancing, or other purposes.
