Financing Legislation

There are four different laws that deal with financing legislation. The first ones are called usury laws. Usury laws set the maximum interest rates that lenders can charge by law. It keeps lenders from basically charging excessive rates of interest. The second financing legislation law is called the Truth in Lending Act, TILA and also referred to as Regulation Z. This law is primarily about disclosing loan costs to potential borrowers. It applies to residential home loans. The law does not, however, apply to commercial or business loans. The law says that when a borrower goes into apply for a loan, that the lender must tell the borrower the annual percentage rate or APR. The APR is basically the total of all the loan costs expressed as a percentage. 

Truth in lending also deals with the right of rescission on a borrower's home loan. The right of rescission is a three-day right to back out of a loan commitment. The right of rescission does not apply to brand new first mortgages, but it does apply to second mortgages and refinances, those types of loans. Truth in lending also applies to advertising requirements. There are what are called trigger terms, which are specific loan terms such as the interest rate, the number of payments due, the mortgage payment, etc. As long as any trigger term is in the advertisement, then a required list of all disclosure of loan terms must also be in the advertisement, including the APR, the number of payments, the financing totals. All those items must also be included. In other words, this eliminates lenders from advertising only one specific term.  If you look at the whole package, the whole deal is not so great after all. It eliminates bait advertising.

A third financing legislation law is called the Real Estate Settlement Procedures Act. This is who we refer to as RESPA. The whole purpose of RESPA is for disclosure of the total closing cost, whereas Truth in Lending or Regulation Z was about disclosure of loan costs only. RESPA deals with the total closing costs, things like the surveys, the inspections, all of the closing costs. The main idea is as follows, a borrower within three business days of a loan application is given what is called a home loan toolkit. This is a booklet that explains all of the closing costs. Also, within three days of a loan application, the borrower must be given what's called a loan estimate. This is again coming from the lender and this is an estimate of what all of the total closing costs will be.

Finally, there is what is called a closing disclosure and this must be given to the borrower no later than three business days before closing. The closing disclosure will list all of the actual final closing costs for both the seller and the buyer. Finally, RESPA also prohibits kickbacks, which means that there can be no referral fees involved in the closing process. In other words, the lender cannot kick back $200 to a real estate broker for referring all of those broker’s buyers to that lender. That would be illegal. The final financing legislation law is called the Equal Credit Opportunity Act, which is basically fair housing for lenders. It says lenders cannot discriminate based on race, color, religion, national origin, sex, marital status, age, or because you get public assistance.