Significant Changes Coming to Fair Lending Rules
Edward I. Sumber, Esq. | March 2015
This column has frequently addressed issues of fair housing. Never previously addressed is the issue of fair lending. Realtors need a clear understanding of the significant changes that will become effective on August 1, 2015 when the TILA/RESPA final rule will become effective.
What is TILA and What is RESPA?
TILA is the Truth in Lending Act, the intent of which was to “assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit…” TILA Section 102(a); 15 U.S.C. 1601(a).
RESPA is a law known as the “Real Estate Settlement Procedures Act,’’ which requires that creditors or brokers provide consumers with a good faith estimate of settlement charges and that the person conducting the settlement (the closing) “…provide the consumer with a statement that records all charges imposed upon the consumer in connection with the settlement.” RESPA Sections 4(b), 5(c); 12 U.S.C. 2603(b) and 2604(c).
What is Happening on August 1, 2015?
In July 2010, Congress responded to the numerous complaints regarding abuses that occurred in the mortgage markets and other financial markets in the late 2000s and enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). This act placed an imperative on the Bureau of Consumer Financial Protection (commonly referred to as the “CFPB”, the acronym for the Consumer Financial Protection Bureau) to issue integrated mortgage disclosures under both the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z). In 2013, the CFPB released the final rules that will become effective on August 1, 2015. On January 18, 2015, the CFPB amended its proposed rules to address comments from many of the industry experts who have responsibility for their lending institutions to comply with the new rules. On August 1, 2015, the familiar HUD-1 will disappear and lenders will be required to follow new and stringent disclosure rules using forms not previously seen in real estate transactions.
Federal Fair Lending Regulations and Statutes
While these new rules are about to go into effect, the entire lending industry must also comply with federal fair lending laws. The two principal laws that apply are the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA).
The ECOA prohibits discrimination in any aspect of a credit transaction. It applies not only to real estate transactions but also to credit to small businesses, corporations, partnerships and trusts. Discrimination is prohibited based upon:
- Race or color;
- National origin;
- Marital status;
- Applicant’s receipt of income derived from public assistance programs and;
The applicant’s exercise in good faith of any right under the Consumer Credit Protection Act.
Specific lending acts and practices are prohibited or permitted as described in extensive regulations under the ECOA.
The Fair Housing Act, which is implemented through regulations promulgated by the Department of Housing and Urban Development (HUD), prohibits discrimination in all aspects of residential real estate-related transactions. Such transactions include: loans to buy, build or repair a dwelling; the purchase of real estate loans; selling, brokering or appraising residential real estate; and selling or renting a dwelling. The factors under the Fair Housing Act regarding discrimination are based upon:
- Race or color;
- National origin;
- Familial status; and Handicap
What Mortgage Lenders Cannot Do
As a result of these two acts, mortgage lenders cannot discriminate in mortgage lending on the basis of any of the prohibited factors listed. As to residential real estate transactions, a lender may not, on the basis of a prohibited factor:
- Fail to provide information or services relating to, or provide different information or services relating to any aspect of the lending process including credit availability, application procedures and lending standards.
- Discourage or selectively encourage applicants with respect to inquiries about or applications for credit.
- Refuse to extend credit or use different standards in determining whether to extend credit.
- Vary the terms of credit offered, including the amount, interest rate, duration and type of loan.
- Use different standards to evaluate collateral.
- Treat a borrower differently in servicing alone or invoking default remedies.
- Use different standards for pooling or packaging a loan in the secondary market.
What are the Types of Lending Discrimination?
Our courts have recognized three types of lending discrimination under the ECOA and FHA:
- Overt evidence of disparate treatment;
- Comparative evidence of disparate treatment; and
- Evidence of disparate impact.
These aspects of recognized discrimination do not require intent on the part of the lender. A lender may be charged with explicitly having considered prohibited factors (overt evidence). Sometimes, however, differences in treatment are not explainable by legitimate non-discriminatory factors (comparative evidence).
On August 1, 2015, the familiar HUD-1 will disappear and lenders will be required to follow new and stringent disclosure rules using forms not previously seen in real estate transactions.
Disparate impact occurs when a lender applies a rationally (or otherwise) neutral policy or practice equally to all credit applicants, but the policy or practice disproportionately excludes or burdens certain persons on a prohibited basis. An example of a disparate impact occurs when a lender refuses to lend on loans in amounts that are less than $60,000. If the policy has been in effect over a period of years and it is shown that it disproportionately excludes minority applicants from consideration because of their income levels or the value of the houses in the area in which they live, the court can determine that even though there was no intent on the part of the lender, there was a disparate impact rendering the lender liable for a violation of the FHA or ECOA.
Who Enforces Fair Lending?
The Fair Housing Act is enforced by HUD’s Office of Fair Housing and Equal Opportunity. HUD has extensive procedures for the filing of complaints. Numerous federal agencies are also available to assist. The consumer also has the ability to seek assistance from the U.S. Justice Department or to personally use the federal court system for redress in the event of discrimination. HUD has an online complaint system in which consumers are assured that if they make a complaint through the housing discrimination website, the complaint will be analyzed and a representative of HUD will communicate with them. HUD also maintains an inquiry line where individuals who believe they may have experienced discrimination can be guided by experts. The number in the New York metropolitan area is 1-800-496-4294. HUD maintains a complaint line at 1-800-685-8470. The Federal Trade Commission also has a bureau that will examine a complaint.
The Consumer Financial Protection Bureau is responsible for consumer advocacy over the entire system. The Consumer Financial Protection Bureau has a direct complaint line at 855-411-2372 and also invites aggrieved borrowers to visit its website at www.ConsumerFinance.gov.
Legal Column author Edward I. Sumber, Esq. is the principal of the law firm of Edward I. Sumber, P.C. The firm has been counsel to the Hudson Gateway Association of Realtors, Inc. since 1974 and the firm was responsible for incorporating the Hudson Gateway Multiple Listing Service, Inc. in 1976. For information about Edward I. Sumber, P.C. go to http://www.sumberlaw.com.