Mortgage Lending: Legal Authority

Katherine Worthman Attorney

Federal Trade Commission

Division of Financial Practices

June 3, 2008

The views expressed are those of the speaker and not necessarily those of the FTC or any other person.

Mortgage Lending Authority

� Section 5 of the Federal Trade Commission Act (FTC Act)

� The Truth in Lending Act (“TILA”)

� The Home Ownership and Equity Protection Act (“HOEPA”)

� The Equal Credit Opportunity Act (“ECOA”)

Section 5

� Prohibits unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.

Section 5

� When is a mortgage advertisement deceptive?

� Representation or omission of information

� Material

� Mislead consumers acting reasonably under the circumstances

FTC Deception Policy Statement, appended to Cliffdale Associates, Inc., 103 F.T.C. 110, 174 (1984)

Section 5

� Representations can be either express or implied

� Information is material if it is likely to affect the consumer’s choice of, or conduct regarding, a product

Section 5

� Presumption of materiality when:

� Intent to make the claims

� Significantly involve areas with which reasonable consumers would be concerned

� Claims pertaining to the central characteristics of the product

Section 5

� What is acting reasonably?

� Do not need to establish actual reliance or consumer injury

� Conduct is deceptive even if it only has a tendency or capacity to deceive a significant minority

� Overall net impression standard

Section 5

� Any disclaimers must be “clear and prominent”

� Prominence

� Presentation

� Placement

� Proximity

Truth In Lending Act (TILA)

� Enacted as title I of the Consumer Credit Protection Act

� Regulation Z implements TILA

� Purpose of TILA

� To ensure that credit terms are disclosed in a meaningful way so consumers can compare credit terms more readily and knowledgeably

TILA

� Applies to both open-end and closed-end credit transactions

� Requires written disclosures regarding finance charges and annual percentage rates (APR)

� Three-day right of rescission

� Certain requirements for advertisers of credit terms

TILA – Key Definitions

� Credit: the right to defer payment of debt or to incur debt and defer its payment

� Consumer credit: credit offered or extended to a consumer primarily for personal, family, or household purposes

TILA – Key Definitions

� Finance charge

� The finance charge is the cost of consumer credit as a dollar amount

� Includes any charge imposed by the creditor as an incident to or condition of the extension of credit

� Does not include any charges paid in a cash transaction

TILA – Key Definitions

� Closed End APR

� Finance charge expressed as percentage

� Measures the total cost of credit

� Not an “interest” rate

TILA – Advertising Requirements

� Requirements apply in any medium

� Requirements apply to all advertisers (not just creditors)

TILA – Advertising Requirements

� Companies may advertise only credit terms that are actually available to the consumer.

� Companies may advertise terms that will be offered only for a limited time or terms that will become available at a known future date.

� Example: 3.95% 30 Year Mortgage

TILA – Mortgage Advertising Requirements

� If a mortgage ad uses a triggering term, must also include:

� The terms of repayment

� The “annual percentage rate,” using that term or the abbreviation “APR”

� If the APR may be increased after consummation of the credit transaction, that fact also must be stated

TILA –Disclosure Requirements

� The triggering terms for closed-end mortgage credit are:

� The amount of any payment

� The number of payments or the period of repayment

� The amount of any finance charge

TILA – APR Requirement

� If an ad shows the finance charge as a rate, that rate must be stated as an “annual percentage rate,”using that term or the abbreviation “APR” (even if it’s the same as the simple interest rate)

TILA - Written Disclosure Requirements

� Disclosures must be:

� Before consummation

� Clear and conspicuous

� In writing

� In a form the consumer may keep

TILA - Written Disclosure Requirements

� Required disclosures

� Identity of the creditor

� Annual Percentage Rate

� Finance Charge

TILA - Written Disclosure Requirements

� Amount Financed - amount of credit provided

� Determine the principal loan amount

� Add any other amounts that are financed by the creditor and are not part of Finance Charge

� Subtract any prepaid finance charge

� Finance Charge + Amount Financed = Total of Payments

TILA - Written Disclosure Requirements

� Total of Payments

� The amount paid when the consumer has made all scheduled payments

� Number, Amount & Timing of Payments

� Fact of a Security Interest in property

TILA - Right of Rescission

� For most home equity mortgage loans, the TILA provides a right to rescind.

� Under the right to rescind, the consumer has until midnight of the third business day to cancel the credit transaction for any reason.

TILA - Civil Liability

� If a creditor fails to comply with any requirements of the TILA it may be held liable to the consumer for:

� Actual damage

� Court costs and attorney fees

TILA - Civil Liability

� Creditor also may be held liable for either of the following:

� In an individual action relating to a mortgage, twice the amount of the finance charge involved, but not less than $200 or more than $2,000.

� In a class action, not more than $500,000 or 1 percent of the creditor’s net worth, whichever is less.

Home Ownership Equity Protection Act (HOEPA)

� Amended TILA

� Establishes disclosure requirements and prohibits various abusive practices in connection with high-cost mortgages

HOEPA

� What is a HOEPA loan?

� Applies to consumer loans

� Secured by consumer principal dwelling

� High rate or high fees

HOEPA – High Rate

� For first mortgages, the APR exceeds the comparable Treasury Security by more than 8percentage points

� For second mortgages, the APR exceeds the comparable Treasury Security by more than 10 percentage points

HOEPA – High Fees

� Fees exceed the greater of 8% of the loan amount or $561 (for 2008, changes annually)

� Includes points, origination fees, underwriting fees and similar charges

� Compensation to mortgage brokers

HOEPA – Prohibited Practices

� No pattern of lending without regard to consumer’s ability to repay loan

� No balloon payments in loans with less than five-year terms

� No default interest rates higher than pre-default rates

� No negative amortization

HOEPA – Prohibited Practices

� No prepayment penalties

� Unless otherwise lawful

� Only applies during the first 5 years

� Unless lender verifies certain income requirements of borrower

� No prepayment penalty allowed for refinancing with same creditor

Equal Credit Opportunity Act (ECOA)

� ECOA prohibits discrimination on the basis of, among other protected characteristics, race or national origin, in any credit transaction.

ECOA

� Forms of Prohibited Discrimination

� Disparate Treatment

� Disparate Impact

Mortgage Lending: Legal Authority

Katherine Worthman, Attorney

Federal Trade Commission

Division of Financial Practices

June 3, 2008