Lending laws: RESPA, Truth in Lending, TRID, Equal Credit Opportunity Act

Bottom line: four federal laws govern most home loans. RESPA stops kickbacks and demands settlement disclosure. Truth in Lending shows the true cost of credit. TRID combines the forms and sets the timing. ECOA bans discrimination in credit. As a broker you do not make loans, but you can lose your license by breaking RESPA Section 8, and you must not give credit advice you are not licensed to give.

RESPA: the Real Estate Settlement Procedures Act

Settlement services are the things needed to close a sale: lender, appraisal, title search, title insurance, escrow, inspection, and real estate brokerage itself. RESPA (12 U.S.C. 2601 et seq.) applies to federally related mortgage loans, which covers nearly every loan on a one-to-four-family home.

• Section 8 (12 U.S.C. 2607) bans kickbacks and unearned fees. A kickback is any payment or thing of value given for referring settlement business. A referral fee for sending a buyer to a lender, title company or inspector is illegal. Splitting a fee is also illegal if the person receiving part did no real work. Penalties include fines, jail, and civil damages up to three times the settlement charge.
• What is allowed: payment for goods or services actually provided; a bona fide salary to an employee; a normal split between cooperating brokers; and a payment from an affiliated business arrangement that is only a return on ownership.
• Affiliated business arrangement: a business relationship where the person who refers business (say, a brokerage) owns more than 1% of, or is affiliated with, the provider receiving the referral (say, a title company). It is allowed only if the referrer discloses the relationship in writing at or before the time of the referral, gives an estimate of the provider's charges, tells the consumer they are free to shop, and does not require use of the provider. Colorado repeats this: a licensee in such an arrangement must give a signed written disclosure complying with RESPA and may not require use of the provider or give or accept any kickback (C.R.S. 12-10-218(2)(b) to (d)).
• Servicing transfer notice, escrow limits: if the loan servicer (the company that collects the payments) changes, the borrower must get written notice. A lender may hold in an escrow account (money for taxes and insurance) no more than a limited cushion, generally about two months of payments.

Colorado also treats a violation of fair housing and lending law as a licensing issue; a broker who violates or aids a violation of the fair housing laws must tell the Commission within 30 days (4 CCR 725-1 Rule 6.23.B).

Truth in Lending and Regulation Z

The Truth in Lending Act (15 U.S.C. 1601 et seq.), carried out by Regulation Z (12 C.F.R. 1026), makes lenders show the cost of credit in the same way so people can compare. Two key numbers:

• Finance charge: the total dollar cost of the credit, including interest and some fees (such as origination fees and mortgage insurance), but not costs you would pay in a cash deal, such as title insurance or appraisal in most cases.
• APR (annual percentage rate): the cost of credit stated as a yearly rate that includes those fees, spread over the loan life. Because fees are added in, the APR is usually higher than the note rate.

Advertising rule: if an ad states any trigger term, it must also state the other key terms. Trigger terms are: the amount or percent of the down payment, the number of payments or period of repayment, the amount of any payment, and the amount of any finance charge. An ad that says "Only $1,500 a month, 5% down" has used triggers and must give the full list: amount or percent of down payment, repayment terms, and the APR (stating if the rate can rise). A broker's ad that quotes loan terms must follow this. A plain "rates from 6.5% APR" is fine. A bare "low payments!" is not a trigger.

Right of rescission: on a refinance or home equity loan on a borrower's principal home, the borrower has three business days to cancel after signing. It does not apply to a purchase loan.

TRID: the combined rule and its clocks

TRID (TILA-RESPA Integrated Disclosure) merged older forms into two:

1. Loan Estimate (LE): a 3-page estimate. The lender must deliver or place it in the mail within 3 business days after receiving the application, and at least 7 business days before closing. An application is six items: the borrower's name, income, Social Security number (to pull credit), the property address, an estimate of the property value, and the loan amount sought.
2. Closing Disclosure (CD): a 5-page form showing final terms and costs. The borrower must receive it at least 3 business days before consummation. Consummation is the day the borrower becomes legally bound to the loan, usually signing day, not funding day.

Business day for these clocks means every calendar day except Sundays and legal public holidays, so Saturday counts. A mailed CD is presumed received 3 business days after mailing; email counts the day it is sent if the borrower agreed to electronic delivery.

What resets the 3-day clock (a corrected CD, then a fresh 3 business days): the APR becomes inaccurate beyond tolerance (more than 1/8 of a percentage point on a regular loan), the loan product changes (for example, fixed to adjustable), or a prepayment penalty is added. Other changes, such as a small fee correction, need a corrected CD at or before closing but no new wait. A new LE is also needed if a valid changed circumstance raises fees.

ECOA: Equal Credit Opportunity Act

The ECOA (15 U.S.C. 1691 et seq.; Regulation B, 12 C.F.R. 1002) bans discrimination in any part of a credit deal based on:

• race, color, religion, national origin, sex (the CFPB reads this to include sexual orientation and gender identity), marital status, age (if the applicant can legally contract);
• receipt of income from a public assistance program;
• good-faith use of rights under the Consumer Credit Protection Act.

A lender must tell an applicant of its decision within 30 days of a complete application, and give a written reason if it turns the application down (an adverse action notice). Lenders may not discourage applicants because of a protected basis, and must treat part-time income and public assistance the same as other income.

From application to funding

1. Pre-approval (a lender checks credit and income; a pre-qualification is only an estimate).
2. Application, then the Loan Estimate within 3 business days.
3. Processing and underwriting (the lender verifies income, assets, credit and the property; the appraisal checks value).
4. Conditions cleared, then "clear to close."
5. Closing Disclosure at least 3 business days before signing.
6. Signing (consummation), then funding (the lender sends the money), then recording of the deed and deed of trust.

Risky loan features

The ability-to-repay rule (12 C.F.R. 1026.43) requires a lender to make a reasonable, documented decision that the borrower can repay. A qualified mortgage has safe features, including no negative amortization, no interest-only period, no balloon payment, and a cap on points and fees. Negative amortization means the balance grows because the payment is less than the interest. Other risky features are teaser rates (low start rate that jumps), prepayment penalties and loans made without verifying income.

Example with real numbers

A $500,000 house with a $400,000 loan at 6.5%, 30 years. The lender charges a 1% origination fee ($4,000), which is a finance charge.

1. Payment on $400,000 at 6.5%: about $2,528.27.
2. Amount financed: $400,000 - $4,000 = $396,000 (the buyer only really receives that).
3. Find the rate that makes $2,528.27 pay off $396,000 over 360 months: about 6.60%. That is the APR, slightly above the 6.50% note rate.
4. Timing: application is taken Monday, March 3. The LE is due by Thursday, March 6 (Tue, Wed, Thu are the three business days).
5. Closing is set for Friday, March 28. The borrower must receive the CD by Monday, March 24, so that Tue, Wed and Thu are the three business days before signing.
6. If on March 26 the lender swaps the loan to an ARM, the CD must be redone and the clock restarts. Closing moves to at least 3 business days after the new CD is received.

Kickback example: a broker sends a buyer to a lender who pays the broker $300 per closed loan. That is a Section 8 violation even if it is labeled a "marketing fee" without real marketing. Fix: no pay for referrals, or pay for a real, separately priced service.