Understanding Lending Laws

Thousands of people enter mortgage loans every day, but few of them really know what they’re getting into. When you sign that mortgage form, you’re not just borrowing money to buy a home. You’re signing up for a serious obligation and sealing a decades-long commitment with your lender. Even if you read every word of your contract, lenders—especially sub-prime ones—will always find a way to wring more money from your pockets. After all, that’s how they make a living.

Luckily, the government has taken steps to protect borrowers and make sure everyone gets a fair deal. The Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA) were put into place to prevent unfair lending practices. Knowing these two laws, and the rights they give you, can keep you from making the wrong decisions and making a 30-year mistake.

The Real Estate Settlement Procedures Act
The RESPA basically says that borrowers should be given all the pertinent information when buying a home. The law is designed to prevent the parties involved in the purchase from making kickbacks at your expense. These include your lender, realtor, broker, and the construction and insurance companies. Before the RESPA was enforced, these parties got huge kickbacks from undisclosed fees in the loan.

The RESPA requires mortgage companies to disclose all the expenses involved in the transaction, from the actual purchase price to the small one-off fees. This is called a good faith estimate. The estimate lists your expenses in six main categories:

-Loan fees
-Reserves
-Government charges
-Title charges
-Additional charges
-Fees to be paid in advance

The law also gives you the right to dispute (in writing) any vague or unexplained fees. This way, you know exactly where your money is going, and you can always speak up when you feel you’re being cheated.

The Truth in Lending Act
This law was passed in 1968 to protect borrowers in credit transactions. Like the RESPA, it requires maximum transparency from your lender in all aspects of the transaction, from the actual costs to the payment terms. The law is not limited to mortgage loans; it applies to all other credit transactions including car loans and payday loans.

The TILA does not directly regulate the amount you pay on the loan. Instead, it requires lenders to disclose certain costs so that you can compare and shop around for the best deals. The standard figure is called the annual percentage rate (APR), which reflects the total cost of the credit including interest, discount points and origination fees.

For refinancing and second mortgage loans, the TILA also allows you to cancel the transaction within three business days. This is known as the “right of rescission.” It basically serves as a cooling-off period—it gives you the time to go over the contract and change your mind before it’s too late.

There may be violations of the above regulations in your loan documents. Lenders typically are aware that they may have violated laws, thus, they are more willing to give you a good loan modification.

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