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RP:16- Mortg Broker Law, article 5,6,7, truth in lending, APR, Respa,equal opportunity, fair lending
Terms in this set (9)
Let's begin here with the Mortgage Broker Law.
In the State of California, licensed real estate brokers and salespersons often act as loan brokers for prospective buyers. The Mortgage Broker Law has been set forth under the California Business and Professions Code to regulate this activity.
In California, a licensed salesperson or broker may assist the buyer in filling out the loan application for a financial institution OR arrange for financing for the buyer. Such financing is usually in the form of a trust deed. Keep in mind that a licensee who is acting as a loan broker by buying, selling, or exchanging loans DOES HAVE certain restrictions placed on him by the law.
The "Mortgage Loan Broker Law,"(also known as the Real Property Loan Law), is found under the California Business and Professions Code, Article 7, Sections 10240-10248. The Mortgage Loan Broker Law requires all loan brokers to give all borrowers the Mortgage Disclosure Statement BEFORE the borrower becomes obligated for the loan. The Mortgage Disclosure Statement is a form that clearly and completely states ALL the information and charges associated with a particular loan.
The Mortgage Loan Broker (Real Estate Salesperson or Broker) in this situation must:
Present this statement to the prospective borrower within 3 days of receipt of a completed written loan application OR before the borrower is obligated to take the loan, whichever is earlier.
Have the borrower sign the statement before the borrower becomes obligated to complete the loan.
Keep this form on file for 3 years.
Senate Bill 36 designed to bring California into compliance with the federal Secure and Fair Enforcement Mortgage License Act (SAFE Act) of the Housing and Economic Recovery Act of 2008 (Public Law 110-289) became effective on January 1, 2010. By January 31, 2010, or within 30 days of commencing the activity whichever is later, all licensees must report to the Bureau of Real Estate if they make, arrange or service loans secured by real property. This requirement applies to both residential and commercial businesses. The report must be completed online using Form RE 866- Mortgage Loan Activity Notification. Future business activity reporting will also be required.
Penalty fees can apply for failure to submit this required notification. Penalties are fifty dollars ($50) per day for the first 30 days the report is not filed and one hundred dollars ($100) per day for every day thereafter not to exceed a maximum of $10,000.
More Article 7
Remember that anyone who negotiates real estate loans MUST BE A REAL ESTATE LICENSEE. In addition to this regulation, anyone who makes COLLECTIONS on real estate loans, if that person makes more than 10 collections per year OR collects more than $40,000.00, he or she must be licensed as a California real estate BROKER.
Under Article 7, brokers who negotiate trust deed loans have specific limitations regarding commissions and expenses.
The maximum commissions for loans subject to Article 7 are:
1. For first loans:
a. 5 percent of the principal of a loan of less than 3 years;
b. 10 percent of the principal of a loan of 3 years or more;
2. For second or other junior loans:
a. 5 percent of the principal of a loan of less than 2 years;
b. 10 percent of the principal of a loan of at least 2 years but less than 3 years;
c. 15 percent of the principal of a loan of 3 years or more.
Any costs and expenses of making a loan must meet the requirements set forth in Article 7. The charges made to a borrower cannot exceed 5% of the loan or $390.00, whichever is greater, to a maximum of $700.00. Such charges include appraisal fees, escrow fees, notary and credit investigation fees, but EXCLUDE actual title charges and recording fees. Under Regulation 2843, the amount charged cannot exceed the actual costs and expenses paid, whether these are incurred or "reasonably earned." In addition, no charge can exceed the amount customarily charged for the same or comparable service in the community in which the services take place.
Here are some additional regulations set forth under Article 7:
On "hard money loans" (cash) of $30,000.00 and over for first trust deed loans, and $20,000.00 and over for JUNIOR deeds of trust, the broker MAY CHARGE as much commission as the borrower will agree to pay. *
The regulations also require that the broker provides to BOTH the buyer and seller, on first trust deed loans UNDER $30,000.00, and on junior trust deed loans UNDER $20,000.00, copies of the appraisal report.
Loans on owner-occupied homes that are negotiated by a broker for a term of 6 or more years may not have a balloon payment. In any situation that involves a balloon payment, the SELLER is required to notify the BUYER between 60 and 150 days BEFORE the payment is due.
If the home is NOT occupied by the owner, then the loans are exempt from balloon payments, IF the loan term is less than 3 years.
Threshold Reporting is the requirement to report annual and quarterly loan activities (review of trust fund) to the California BRE, IF, within the past 12 months, a broker has negotiated any combination of 10 or more loans to a subdivision OR a total of more than $1,000,000.00 in loans. Regulations for "big lending," as this is known, include the requirement that advertising must be reviewed by the BRE. The intent of the threshold reporting regulations is to protect the public by overseeing the loan activity of these "big lenders," who are using their real estate licenses to take on such activities.
*Note that usury laws have been passed to establish the maximum rate of interest that may be charged on specific types of loans. In CALIFORNIA , this maximum rate is 10%, or 5% over the Fed discount rate, whichever is greater. However, as noted above, there ARE cases in which the lender is exempt from this law.
Now we'll focus on additional requirements under the California Business and Professions Code.
Articles 5 and 6
Under Article 5, licensees are prohibited from pooling funds. This means that a broker must NOT accept funds UNLESS the funds are meant, and so noted, to be for a specific loan transaction. Before a broker can accept the lender's money, he must first OWN the loan OR have an unconditional written contract to buy a specific note; AND the broker must also have the authorization from the prospective borrower, giving him permission to negotiate a secured loan for the borrower.
Under Article 6, regulations are set forth for a real property securities dealer. A BRE broker license and the following endorsement are required. In California, anyone who wishes to sell real estate investment type security must FIRST obtain a Commissioner's Permit. This permit is the approval of the proposed real property security and plan of distribution, and will be granted if the Commissioner finds that the security and plan of distribution are fair. The permit is not a recommendation, but merely the Commissioner's authorization of the sale. The Commissioner's Permit is valid for one year, and it may NOT be used in advertising unless the permit is shown in FULL. The cost of the permit is $100.00. Note that the Commissioner's Permit requires a $10,000.00 surety bond.
A Real Property Securities Dealer is anyone acting as the principal or agent, who engages in the business of selling real property securities, including promissory notes or sales contracts, OR who accepts funds to be reinvested in real property securities or to be placed in an account. A California licensed broker is permitted to act in this capacity IF he first receives an RPSD endorsement on his broker license. This endorsement requires a broker to submit the endorsement fee of $100.00, along with the proof of a $10,000 surety bond.
Financing Laws - Truth in Lending
There are three major laws regarding financing.
1) Truth In Lending Law: ( Regulation Z)
The purpose of this law is DISCLOSURE. The law requires lenders to disclose to buyers the true cost of obtaining credit so that the borrower can compare the costs of various lenders. The regulation requires that the consumer be fully informed of all finance charges, as well as the true annual interest rate, before a transaction is consummated. The Truth in Lending Law does not control interest rates and does not control costs to close a transaction. (RESPA, the Real Estate Settlement Procedures Act, covers costs to close. This law will be covered shortly.)
Truth In Lending applies to residential loans, federally related 1-4 family properties, non-commercial properties, and family farms.
Commercial transactions are not covered under the Truth in Lending law.
Two major sections of Truth In Lending:
Annual Percentage Rate (A.P.R.)
Advertising - All terms listed in Column B must be disclosed if ANY ONE of the triggering terms in Column A is advertised.
Column A Column B
Trigger Terms: Required Disclosure:
Amt or % of down payment The amount or % of down payment
Amount of any installment Terms of repayment
Finance charge in dollars or that there is no charge for credit
Annual percentage rate and if increase is possible
Number of installments Total finance charge
Period of repayment Total # of payments and due dates
Truth in lending is violated when the phrase "no down payment required" is advertised without any other information.
Truth in Lending and the APR
Annual Percentage Rate - An expression of the relationship of the total finance charge to the total amount to be financed. Use of APR permits the consumer to compare rates.
A standardized yardstick expressing the true annual cost of borrowing is expressed as the "APR." This law does not include a computation of unearned finance charges.
Legal fees to prepare deeds, survey fees, recording fees, and title insurance premiums, are not included in the finance charges.
In order to be considered a creditor under TRUTH IN LENDING, a lender must lend funds 25 times a year and/or must lend the funds for at least 5 housing loans annually. An owner of property advertising acreage for sale could advertise "no down payment." The owner is not considered a lender under Truth In Lending guidelines.
Rescission Clause - (Does not apply to residential purchase money or first mortgage or deed of trust loans.) A clause in a contract, required by some state subdivided land sales laws, that informs a purchaser of his/her rescission rights as provided by state law.*
HOME IMPROVEMENTS - APPLIANCES - FURNITURE! 3-day Right of Rescission applies here.
* In California, the right of rescission generally does NOT APPLY to first deeds of trust to buy a home, NOR does it apply to loans carried back by the seller in the transaction.
2) REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA) - Created to ensure that the buyer and seller in a residential real estate transaction involving a new first mortgage loan have knowledge of all settlement costs. Administered by HUD.
Applies only when the purchase is financed by a federally related mortgage loan. FHA - VA Loan to be sold to GNMA or FHLMC.
Must be a new first mortgage loan, second mortgage (junior), or a refinance. Does not apply to loans secured by mortgaged property larger than 25 acres, installment land contracts, contracts for deed, construction loans, or home improvement loans.
Lenders must give a copy of the HUD booklet "Real Estate Settlement Costs and You" to every person at the time of application for a loan.
Lenders must provide a good faith estimate of settlement costs at the time of loan application or within three business days of application.
Uniform Settlement Statement (HUD Form 1) - This is a form designed to detail all financial particulars of a transaction. This must be made available to the borrower at or before closing. The borrower may request to see the form one business day prior to closing.
RESPA prohibits kickbacks or unearned fees paid to lender for referring customers to insurance agencies, etc.
RESPA is administered by the Department of Housing and Urban Development.
R E S P A K (a memory tool to help you remember that RESPA prohibits KICKBACKS to real estate licensees.)
Violators of RESPA can face punishments of up to one year in jail, and/or a $10,000.00 fine.
Equal Credit Opportunity Act
3) Equal Credit Opportunity Act - A law for lenders that prohibits them from discriminating against race, color, religion, national origin, sex, family size, handicap, marital status, age, or dependency on public assistance in the granting of credit to consumers.
ECOA indicates that a lender can base lending decisions on an individual's income, net worth, job stability, and credit rating.
Income would most interest a lender when making a loan. If a person applying for a loan is relying on income from child support for repayment of a loan, the income must be revealed to the lender.
On the last several screens, you have reviewed the Truth In Lending Law, The Real Estate Settlement Procedures Act, and the Equal Credit Opportunity Act. While all of the information in this unit and others is important, you must understand the purposes of all of these federal laws.
Fair Lending Laws
Federal legislation passed in 1974 to ensure that the various financial institutions and other firms engaged in the extension of credit exercise their responsibility to make credit available with fairness and impartiality and without discrimination on the basis of race, color, religion, national origin, sex or marital status, age, receipt of income from public assistance programs (food stamps, social security), and ensure good faith exercise of any right under the Consumer Credit Protection Act. (Creditor must state reasons for denial of credit.) The act applies to all that regularly extend or arrange for the extension of credit. A real estate licensee is considered a "creditor" if the licensee routinely assists sellers in determining whether a proposed buyer in a land contract or purchase-money mortgage is creditworthy. Regulation B, which implements the act, contains partial exemptions from procedural provisions for business, securities and public utilities credit. The overall enforcing agency for ECOA is the Federal Trade Commission.
Lenders can base lending decisions on a consumer's:
A lender cannot discriminate based on minority background, but can refuse a loan if the person cannot qualify financially (bad credit).
The Housing Financial Discrimination Act, or the Holden Act, is the California State law prohibiting financial institutions from engaging in discriminatory loan practices. This law attempts to prohibit redlining. Redlining, as you may recall, is the illegal loan practice under which a lender refuses to grant a housing loan in a certain geographic area, based on the neighborhood trends, and without regard for any merits of the borrower or the home itself.
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