There are many loan options and costs to consider. Knowing available mortgage options can help you compare offers, understand closing and settlement costs, learn about insurance requirements, and avoid scams. Luckily there are many federal and state laws and regulations that help protect mortgage borrowers. In this article we’ll discuss mortgage types, mortgage disclosure laws and the frequency and type of information mortgage lenders must give to help you completely understand the terms and conditions of your mortgage loan. We’ll also talk about other laws addressing discrimination in mortgage lending.
Written by Attorney Tori Bramble.
Updated December 22, 2021
Applying for a mortgage loan can be stressful. There are many loan options and costs to consider. Knowing available mortgage options can help you compare offers, understand closing and settlement costs, learn about insurance requirements, and avoid scams. Luckily there are many federal and state laws and regulations that help protect mortgage borrowers.
In this article we’ll discuss mortgage types, mortgage disclosure laws and the frequency and type of information mortgage lenders must give to help you completely understand the terms and conditions of your mortgage loan. We’ll also talk about other laws addressing discrimination in mortgage lending.
A mortgage is a loan where a bank, credit union, or other financial institution lends a borrower money to buy a home. In return for this homebuying loan, the borrower pays the loan back to the lender in monthly payments over a specified period of time.
A home loan is a secured loan. The loan is “secured” by the home, which is used as collateral. This means that if you don’t make your payments, the lender can take back the collateral —your home — through a process called foreclosure. The other common type of loan is an unsecured loan. With an unsecured loan, there’s isn’t any property backing the loan and protecting the lender. Credit cards and student loans are unsecured loans.
It’s helpful to know certain mortgage terms so you can make well-informed decisions before buying real estate. Here’s a brief rundown of important terms:
Mortgagee and mortgagor: These are formal terms for the mortgage lender and borrower. The “mortgagee” is the borrower. The lender is the “mortgagor.”
Mortgage servicer: Borrowers make mortgage loan payments to a mortgage servicer. The mortgage servicer can be the original lender or a company that buys the rights to service the mortgage from the original lender.
Private mortgage insurance: Called PMI for short, this is a mortgage insurance premium that protects lenders when buyers default on loans. Conventional mortgage lenders require PMI for borrowers who put down less than a 20% down payment. PMI premium costs vary by lender. The cost of PMI is added to the monthly mortgage payment.
Adjustable rate mortgage (ARM): These mortgages have interest rates that can be adjusted with the market. They usually have an initial low fixed rate, but this may be adjusted over time based on the market index. There’s also usually a cap on the interest rate that can be charged.
A foreclosure happens when a homeowner doesn’t pay their mortgage. Foreclosure is a legal process where the lender takes back the house. If you’re in this situation and you can’t pay off the outstanding mortgage lien or sell the real estate before a bank foreclosure, your property will go to foreclosure auction where it will be sold. And if it isn’t sold at auction, the lending financial institution takes ownership of it.
There are federal laws that protect homeowners facing foreclosure. These residential real estate regulatory laws were put into place to protect borrowers from dishonest lenders. Specific federal laws designed for borrowers are the Fair Debt Collections Practices Act (FDCPA) and dual tracking restrictions.
The Fair Debt Collections Practices Act
The Fair Debt Collection Practices Act (FDCPA) is a federal law that protects consumers from abusive debt collectors. While it’s usually thought of as applying to collection agencies, it can also help borrowers in foreclosure fight a foreclosure. The FDCPA prevents debt collectors from:
Contacting consumers when they have an attorney.
Trying to collect false amounts.
Attempting to collect on debts after a consumer asks for confirmation that they actually owe a debt.
U.S. courts are divided on whether the FDCPA applies in foreclosures. If you need more information about whether the FDCPA applies to you, get legal advice.
Dual Tracking Restrictions
Dual tracking happens when a mortgage servicer is processing a loss mitigation application and proceeding with a foreclosure process at the same time. During the 2008 mortgage crisis, dual tracking was common. It caused many people to lose their property because sometimes the foreclosure process was purposefully completed before the loan modification process. But now, federal law restricts lenders from foreclosing on a borrower while also processing a loan modification or other foreclosure prevention option.
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Major Laws Governing Mortgage Lending Process
Both the federal government and state governments have passed laws that protect consumers in relationships with lenders. These laws were designed to make sure borrowers seeking homeownership are treated fairly and equally during the homebuying process. The government has enacted laws to require lenders to make truthful, clear disclosures about their loan products and terms, as well as to protect people from discrimination in lending.
The major laws we’ll discuss below are the Truth in Lending Act, the Fair Housing Act and Equal Credit Opportunity Act, the Fair Debt Collections Practices Act, the Real Estate Settlement Procedure Act, and other federal and state laws.
Truth in Lending Act (TILA)
TILA was passed to make sure lenders treat consumers fairly and inform them about the actual cost of credit. It applies to secured and unsecured loans, such as mortgage loans, auto loans, and credit cards. Under TILA, lenders must offer easy-to-understand loan information (called disclosures) to borrowers so that they’re able to compare interest rates and terms when loan shopping. Lenders are required to disclose a loan product’s annual percentage rate, the total number of payments during the loan term, and loan charges and fees.
Fair Housing Act & Equal Credit Opportunity Act
The Fair Housing Act (FHA) and Equal Credit Opportunity Act (ECOA) both forbid discrimination based on a person’s race, color, religion, sex, handicap, familial status, or national origin. The FHA seeks to prevent discrimination in all kinds of public and private housing and in the mortgage application process. Anyone experiencing discrimination can file a complaint with the U.S. Department of Housing and Urban Development (HUD).
Under the ECOA, creditors can’t discriminate against borrowers on the basis of race, color, religion, national origin, sex, marital status, age, or their status as a recipient of public assistance. They also can’t discriminate against borrowers who attempt to exercise their rights under the act. The ECOA also requires creditors to tell applicants why they were denied credit if the applicants request this.
Fair Debt Collections Practices Act (FDCPA)
As we discussed earlier in this article, the FDCPA is a federal law that prevents debt collectors from being abusive to consumers. Specifically, the FDCPA’s purpose is to eliminate abusive, false, and unfair debt collection practices. Homeowners are protected because third-party collectors acting on a lender’s behalf are prohibited from using obscene language or making threats to collect on debts. Collectors aren’t allowed to call a consumer after certain hours or call or write to them if they ask not to be contacted. These are just some available protections.
Real Estate Settlement Procedures Act (RESPA)
In the past, during the real estate loan settlement process, there were practices that didn’t fall in line with the best interests of consumers. The Real Estate Settlement Procedures Act (RESPA) requires lenders, mortgage brokers, and mortgage servicers to provide homebuyers and sellers with complete breakdowns of settlement costs with written disclosures. RESPA also requires these lenders to provide disclosures in connection with home loan refinances. Most loans, refinances, and lines of credit fall under RESPA. If a loan servicer violated RESPA’s provisions, a consumer can sue them.
Homeowners Protection Act (HPA)
The HPA was passed to address homeowners’ unnecessary continued payment of private mortgage insurance (PMI). The HPA addresses PMI cancellation. Prior to the HPA being passed, borrowers were challenged when they wanted to cancel their private mortgage insurance coverage. The HPA sets standards for canceling and terminating private mortgage insurance and requires lenders to make disclosures and notify borrowers. It also requires lenders and mortgage services to return any unearned premiums to borrowers.
State Mortgage Regulations
In addition to federally regulated mortgage laws, there are state mortgage lending laws and regulations protecting consumers. Many of these state laws are similar to federal laws but give residents of these states more protection.
State Foreclosure Laws
For example, some states have mortgage regulations that apply to foreclosures. When a lender forecloses on a mortgage it has to follow federal law, and it must follow the state law where the property is located. In some states when a lender forecloses it can sue the borrower to collect on the balance due. This is called a deficiency judgment. But in other states, lenders can’t go after the borrower and get a deficiency judgment. California, for example, has serious anti-deficiency laws that limit lenders’ ability to collect on a deficiency.
State Laws on Mortgage Redemption
Also, there are also laws related to redeeming a mortgage (getting your property back) after falling behind on payments. Some states let debtors cure a default before real estate is sold at foreclosure. This means they let the borrower catch up with payments, so they can keep the house. Other states let people redeem a property after a foreclosure sale.
Other Important State Laws
There are also state laws relating to deceptive and abusive lending practices, such as loan flipping, negative amortization, and prepayment penalties.
Loan flipping occurs when a borrower is convinced to refinance an existing mortgage many times. The abuse comes in when the lender charges fees for both the existing loan and the new loan. Some states like California ban loan flipping, while others like Louisiana allow it.
Likewise, with negative amortization lenders increase a loan balance because the payments don't cover the interest accruing on the loan and a prepayment penalty (fees charged when borrowers pay off all or part of a mortgage). Some states ban these practices, while others don’t.
These are just a few examples. With the complexities of state laws, seek legal advice from a local attorney about your state's laws if you aren’t sure how these laws apply to you.
Federal Laws That Protect Homeowners Against Foreclosure
Federal laws protect homeowners during the foreclosure process. These laws assist borrowers by making sure mortgage companies and loan servicers help consumers when they can’t make their payments on time. These laws also discourage dishonesty by mortgage servicers in their dealings with borrowers.
To recap, servicers are required under federal law to work with homeowners who are having trouble making their mortgage payments. They must contact borrowers and let them know in person, by phone, or in writing, that there are options (called loss mitigation) to avoid foreclosure. These include loan modifications, repayments plans, and forbearance agreements, which can help the borrower to save their home.
Servicers are also legally required to tell borrowers who the specific team or person is that will help them throughout the foreclosures process. Also, servicers are prohibited by federal law from dual tracking. As discussed earlier, this means pushing them through both the foreclosure and foreclosure prevention process at the same time.
Federal and state laws help protect consumers from unfair and fraudulent lender practices. They also help protect consumers who are making big purchases, like purchasing a home, car, or other big-ticket items. These laws specifically tell lenders what they can and can’t do and are in place with the consumer’s protection in mind. These laws also prevent lenders from confusing buyers about the terms and conditions of their loans, including their interest rate and payment terms.
Here we’ve learned about the varied federal and state laws and regulations focused on helping mortgage borrowers. It’s important to know what laws are here to protect you so that you can enter into a mortgage loan or other loan with confidence. This will help you steer clear of paying more than you should for a loan or signing for a loan that benefits only the lender.