Laws That Govern Mortgage Companies

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Nailing down a mortgage is a long and tough process, for the lender as well as for the borrower. While the borrower is committing to a long-term financial obligation, a lender must set credit guidelines, review each application carefully and follow more than a dozen federal laws that apply to big banks as well as small, local mortgage lenders. If you are in the mortgage business, you need to be aware of new federal guidelines meant to protect borrowers against predatory lending practices.

Equal Credit Opportunity Act

Federal and state law sets out the rules for mortgage lending. The federal statutes supersede local rules, and they are in force for all lenders in the United States. The Equal Credit Opportunity Act, for example, bans lender discrimination based on race, gender, religion, national origin, age or marital status. If you deny an application for a mortgage, you must send the applicant a written notice within 30 days, giving the reason for the rejection.

Fair Credit Reporting Act

A credit check is standard practice when you're reviewing a loan application. The Fair Credit Reporting Act requires you to provide the applicant a copy of the credit agency report, whether or not you approve the loan. This allows the applicant to dispute any inaccurate or incomplete information in the credit report, and it requires the credit bureau to correct verified errors. The result could be a revised credit score that would meet your lending guidelines.

Closing Costs and Fees

Once you approve the loan application, and the buyer and seller sign a purchase agreement, you are required to work up an itemized "good faith estimate" of all closing costs. The Real Estate Settlement Procedures Act, which governs this process, is designed to prevent any surprises when the buyer signs the paperwork at the closing. Closing costs can include document fees, survey fees, real estate taxes and insurance, title search expenses, and any points paid by the buyer to lower the interest rate on the loan. Although some fees will vary slightly, this estimate is supposed to give your best estimate of what closing costs will be.

Truth in Lending

Under the Truth In Lending Act, your must clearly state the annual percentage rate the borrower will be paying on the loan. This APR information is a way for borrowers to make honest comparisons between two or more loan packages. Truth in Lending also requires mortgage lenders to offer a three-day "cooling off" period after the documents are signed. This "right of rescission" allows the borrower to back out of the loan on reconsideration of the costs of long-term, monthly debt service.

Predatory Lending

The 2007-08 crash in the housing market inspired the Mortgage Reform and Anti-Predatory Lending Act. The goal of this federal law was to prevent mortgage lenders from taking advantage of unqualified borrowers. The law prevents lawsuits against lenders who abstain from predatory lending, which generally is defined as making subprime loans, interest-only mortgages, and "teaser" rates combined with large balloon payments. Closing costs and fees can't exceed 3 percent of the loan amount, and lenders are supposed to give borrowers several options on points and rates to allow mortgage comparison shopping.


About the Author

Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.

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