Lending Regulation

Posted on 12月 16, 2019 by Nancy Liu | Category: Real Estate

Regulations on Real Estate Lending

There are two major regulations on real estate lending.  One is the Real Estate Settlement Procedures Act, also called RESPA.  The other is the Truth in Lending Act.

1. Real Estate Settlement Procedures Act (RESPA)

In 1974, the United States Congress passed a consumer-protection statute called Real Estate Settlement Procedures Act (RESPA).  The purpose of RESPA was to reform the closing process, allow consumers to obtain more information related to real estate settlement, and protect consumers from unnecessary kickbacks and referral fees that increase the closing cost.  RESPA also limits the highest amount allowed to be reserved in the escrow account. RESPA applies to mortgages secured by one-to-four-family residential properties [Nancy – I’m not sure what this sentence means – I think it should be punctuated one- to four-family residential properties].  The following explains the important provisions of RESPA. 

Good Faith Estimates

The mortgage broker or lender must give the borrower estimated total closing costs within three business days of receiving the loan application.  This estimate should include and explain all fees the borrower is likely to pay in the lending and settlement process.  The Good Faith Estimate must include the estimated monthly payment and the required amount for closing as well.

Uniform Settlement Statement (HUD-1)

RESPA requires all of the lending settlements to use the HUD-1 Uniform Settlement Statement to accurately show all fees and costs related to the closing, including any and all fees, costs, prorates and monetary transactions between the borrower, the lender and the seller in connection with the settlement.  Fees that were not reflected on the HUD-1 cannot be charged separately. 

Preview your HUD-1 one day before closing

At the borrower’s request, the attorney can provide the borrower with a copy of the HUD-1 Settlement Statement the day before the closing date for review.  This is to help the borrower understand what monetary transfer will occur at closing. However, sometimes the lender’s documents are not provided to the attorney on time, which causes delay in the HUD-1 preparation.

Limits on Escrow Account

Under RESPA, the highest amount reserved in the Escrow Account cannot exceed the total amount of the hazardous insurance or property tax, plus a cushion amount equal to two months of the hazardous insurance or property tax.  That is to say, the total amount put into the Escrow Account cannot exceed the total disbursement for fourteen months’ property tax and hazardous insurance payment.

Possibility of Mortgage Servicing Transfer

The lender must disclose the intent or possibility of transferring the loan to another service lender at closing.  Borrower’s interest rate or other loan terms will not be affected by the transfer.  It simply means the borrower will make the mortgage payment to another lender. 

2. Truth in Lending Act (TILA)

The Truth in Lending Act requires the lender to provide a disclosure statement which shows all the fees in the lending transaction truthfully. TILA applies to anyone who practices consumer credit transactions.  Therefore, TILA applies to investors who offer owner financing to their buyers in several transactions in a year, even though investors are not lending entities. TILA requires the lender to disclose the annual percentage rate (APR) to the borrower, and the total amounts he has paid to the lender at the end of the loan term.  The APR for a home loan is an annual calculation that includes the interest rate quoted by the lender, plus additional loan closing costs such as origination fees and points.  The important thing to keep in mind about the loan’s APR is that it will be higher than the actual interest rates because of these additional factors.

In addition to financial disclosure, TILA provides consumers with substantive rights, which are intended to protect consumers.  One such right is the right of rescission in refinancing transactions.  If the borrower refinances his loan and the loan is secured by the borrower’s principal dwelling, each owner of the house will have the right to rescind the transaction.  This is also called the right to cancel.  Each owner of the principal dwelling has the right to cancel the loan, even though she/he may not be the borrower.  A typical situation is where both the husband and wife are on the title of the house, and the husband is the only borrower.  If the husband refinances  the house, the wife must consent because she has the right to rescind the transaction.  If the wife finds that her husband obtained loans secured by the principal dwelling without her approval, she can challenge the loan.

At closing, lenders must provide certain disclosures and multiple copies of the right of rescission notice to EACH owner of the house.  Then lenders must wait at least three business days (Saturday is considered a business day) before disbursing loan proceeds.  Therefore, if you refinance your house, your loan won’t be established until three business days after closing.  If you are waiting for the money out of the refinance, you must consider these three days before you can get the money.  When a consumer rescinds a transaction, the security interest on the house becomes void and the consumer will no longer be liable for any amount in connection with the transaction, including any finance charge.  Within 20 calendar days after receipt of a notice of rescission, the lender is required to return any money given in connection with the transaction.

This article is only for your reference. Please do not apply mechanically to any exact cases. You are welcome to consult our attorneys at Liu & Associates, P.C. For contact information, please click here.