Consumer Protection Topics - Mortgages
A mortgage is a document signed by a borrower when a home loan is made that gives the lender a right to take possession of the property if the borrower fails to pay off the loan. Shopping around for a home loan or mortgage will help you to get the best financing deal. A mortgage--whether it's a home purchase, a refinancing, or a home equity loan--is a product, just like a car, so the price and terms are negotiable. You'll want to compare all the costs involved in obtaining a mortgage. Shopping, comparing, and negotiating can save you thousands of dollars.
Types of Mortgages
There are many types of home loans and the most common is a fixed rate loan that is repaid over 30 years. With a fixed rate loan, a borrower’s monthly principal and interest payments remain the same for the entire loan. Other loans have adjustable interest rates, which means a borrower’s principal and interest payments can increase (or decrease) over time. Less common, and perhaps more risky, are interest-only and negative amortization loans.
Consumer protections for home loans are in many cases based on the type of loan. For example, there are disclosure requirements specifically tailored for adjustable rate loans so consumers know how their payments may increase. Other protections are particular to property located in flood zones. The next section lists some of these consumer protections, focusing on those that provide the most benefit to the greatest number of consumers.
Consumer Protections Available
- The Equal Credit Opportunity Act (ECOA) prohibits lenders from discriminating against credit applicants in any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, age, whether all or part of the applicant's income comes from a public assistance program, or whether the applicant has in good faith exercised a right under the Consumer Credit Protection Act.
The Fair Housing Act prohibits discrimination in residential real estate transactions on the basis of race, color, religion, sex, handicap, familial status, or national origin.
Under ECOA and the Fair Housing Act, a consumer cannot be refused a loan based on these characteristics nor be charged more for a loan or offered less favorable terms based on such characteristics.
- The Truth in Lending Act (TILA), as implemented by Regulation Z, provide consumers with a variety of consumer protections, including:
- Lenders must give consumers a Good Faith Estimate (GFE) within three business days after receiving a loan application, which helps consumers shop for the best loan. The GFE includes a summary of loan terms and estimated settlement charges. It also includes information about key dates such as when the interest rate for the loan quoted in the GFE expires and when the estimate for the settlement charges expires. Starting October 3, 2015, a new, simplified form called the Loan Estimate will replace the current GFE.
- There are standard methods to calculate the loan’s annual percentage rate (APR), which is one way to compare the cost of different loans.
- Special rules and protections for high-cost (or “higher-priced”) mortgages and reverse mortgages.
- Loan originators cannot direct consumers to loans based on the fact that the originator will receive greater compensation for the loan (exceptions apply for home equity lines of credit and timeshares).
- The Real Estate Settlement Procedures Act (RESPA) requires lenders, mortgage brokers, or servicers of home loans to provide borrowers with pertinent and timely disclosures regarding the nature and costs of the real estate settlement process. RESPA also prohibits specific practices, such as kickbacks, and places limitations upon the use of escrow accounts.
- The Homeowners Protection Act of 1998 makes it easier for homeowners to cancel private mortgage insurance (PMI). PMI is insurance that protects lenders from the risk of default and foreclosure. PMI allows prospective buyers to obtain mortgage financing at affordable rates, even if they do not provide significant down payments. It is used extensively with loans where the borrower makes a down payment of less than 20%. In the past, homeowners have experienced problems in canceling PMI. At other times, lenders may have agreed to terminate coverage when the borrower’s equity reached 20%, but the policies and procedures used for canceling PMI varied widely among lenders.
The Homeowners Protection Act helps consumers cancel PMI in a few different ways:
- Written request. The homeowner sends a written request to their mortgage servicer to cancel PMI and the homeowner has made payments to reduce the loan balance to 80% of the original loan amount. For example, if the original sales price (or appraisal value at consummation, whichever is lower) and loan amount was $100,000 and regular payments have reduced the outstanding loan balance to $80,000, the homeowner can request to cancel PMI. Other factors matter as well, such as a good payment history and being current on your loan payments. But keep in mind that if the property value has decreased, cancelling PMI may not be possible.
- Automatic termination. For borrowers that are current on their loan, PMI automatically terminates once the principal balance reaches 78% of the original loan value. Using the same example, PMI would terminate for a loan with $100,000 original value once the homeowner reduced the outstanding balance to $78,000.
- Final termination. If a borrower took out a 30-year fixed rate loan, has made payments for 15 years, and is current on the loan, the loan servicer terminates PMI. In other words, more generally, the servicer terminates PMI coverage right after the borrower has reached the midpoint of the loan’s amortization period.
- Looking for the Best Mortgage
- Foreclosure Prevention
- Is Foreclosure Knocking at Your Door? - Espanol
- Beware of Foreclosure Rescue and Loan Modification Scams - Espanol
- Putting Your Home on the Loan Line is a Risky Business
- Appraisal Complaint Process
- Obtaining a Lien Release - Espanol
- Mortgage, Foreclosure, and Modification Scams (FTC)
- Reverse Mortgages (FTC)