Lending laws: RESPA, Truth in Lending and ECOA

Three federal laws shape how buyers borrow money: RESPA governs settlement costs and referral fees, Truth in Lending governs credit disclosures and ads, and the Equal Credit Opportunity Act governs who gets credit.

RESPA: no kickbacks

The Real Estate Settlement Procedures Act (12 U.S.C. 2601 and following) applies to federally related mortgage loans. In plain terms, that is most loans secured by a lien on residential property designed for one to four families, made by a federally regulated or insured lender or otherwise tied to a federal program or agency (2602(1)).

Section 2607 is the part licensees run into:

• (a) Kickbacks. No one may give or accept any fee, kickback or thing of value under an agreement to refer settlement service business.
• (b) Unearned fees. No one may give or accept a share of a settlement service charge except for services actually performed.

What is allowed (2607(c))

• Payments for services actually performed, such as attorney fees and bona fide salaries
• Cooperative brokerage and referral arrangements between real estate agents and brokers, such as a commission split between the listing and selling brokerages
• Affiliated business arrangements, if the customer gets a written disclosure and estimate of charges, is free to choose another provider, and the only extra benefit is a return on ownership

Penalties (2607(d))

Truth in Lending and Regulation Z ads

The Truth in Lending Act is carried out by Regulation Z (12 CFR part 1026). Its advertising rule matters to licensees because they write property ads that often mention financing.

If an ad for closed-end credit states any of these triggering terms (1026.24(d)(1)):

1. the amount or percentage of a down payment;
2. the number of payments or period of repayment;
3. the amount of any payment;
4. the amount of any finance charge;

then the ad must also state (1026.24(d)(2)):

• the down payment amount or percentage;
• the repayment terms over the full term of the loan, including any balloon payment;
• the annual percentage rate, using that term, and whether it may increase after closing.

The official commentary says that general phrases do not trigger the rule. Examples include "no down payment," "monthly payments to suit your needs," and stating the APR by itself.

Equal Credit Opportunity Act

ECOA (15 U.S.C. 1691) bars a creditor from discriminating against an applicant in any part of a credit transaction on the basis of:

• race, color, religion, national origin, sex, marital status or age (if the applicant can legally contract);
• the fact that some or all of the applicant's income comes from a public assistance program;
• the applicant's good-faith exercise of rights under the consumer credit laws.

Notice that ECOA adds marital status, age and public assistance income, which are not on the Fair Housing Act list. A creditor must tell an applicant what it decided within 30 days after receiving a completed application (1691(d)(1)).