Lesson 7:

1. Lesson 7: The Financing Process

2. Loan Costs • Primary consideration for most buyers in choosing lender is how much loan will cost.

3. Loan Costs • Primary consideration for most buyers in choosing lender is how much loan will cost. • In addition to interest rate, cost of loan may include: • loan origination fee, • discount points, • miscellaneous charges, and • mortgage broker’s fee.

4. Loan Costs Points • Point = percentage point • 1 point = 1% of loan amount

5. Loan Costs Points • Point = percentage point • 1 point = 1% of loan amount • Usage issue: • Some lenders use “points” to refer to origination fee and discount points together. • Others use “points” to refer only to discount points.

6. Loan Costs Loan origination fee • Origination fee pays for lender’s expenses, such as staff compensation, facilities costs, and other overhead. • Charged in almost every mortgage transaction. • Typically around 1% of loan amount. • Paid at closing, usually by borrower.

7. Loan Costs Discount points • Discount points are a lump sum paid at closing to increase lender’s upfront yield (profit) on loan. • In exchange for upfront payment, lender charges borrower lower interest rate. • May save borrower money in long run, depending on how long she owns home.

8. Loan Costs Discount points • How many discount points lenders charge varies depending on market conditions and other factors. • Might charge 4 to 6 points for1% interest rate reduction.

9. Loan Costs Discount points • Example: Market rate for mortgage: 5.25% Lender charges 4 points for 1% rate reduction $300,000 Loan amount x 4% 4 points $12,000 Cost of discount If lender is paid $12,000 up front, will charge borrower only 4.25% interest on loan.

10. Loan Costs Discount points • Discount points may be paid by buyer or seller. • Buydown = Paying lender discount points to “buy down” buyer’s interest rate.

11. Loan Costs Discount points • Discount points may be paid by buyer or seller. • Buydown = Paying lender discount points to “buy down” buyer’s interest rate. • When buyer pays points, pays lender in cash at closing. • When seller pays points, amount is withheld from loan amount and deducted from seller’s proceeds at closing.

12. Loan Costs Miscellaneous fees • In addition to an origination fee and discount points, lenders often charge borrowers other fees, such as: • application fee • document preparation fee • underwriting fee

13. Loan Costs Miscellaneous fees • In addition to an origination fee and discount points, lenders often charge borrowers other fees, such as: • application fee • document preparation fee • underwriting fee • These vary widely from one lender to another. • Borrower should ask loan originator if any can be reduced or waived.

14. Loan Costs Mortgage broker’s compensation • Buyers working with mortgage broker are generally charged amortgage broker’s fee. • May be separate fee or included in points quote for loan.

15. Loan Costs Mortgage broker’s compensation • Buyers working with mortgage broker are generally charged amortgage broker’s fee. • May be separate fee or included in points quote for loan. • Shouldn’t make loan more expensive than one obtained without a broker’s help. • Broker gets loan at wholesale price, marksit up to retail price, keeps overageas fee.

16. Loan Costs Mortgage broker’s compensation • Controversy over another form of mortgage broker compensation: yield spread premium (YSP).

17. Loan Costs Mortgage broker’s compensation • Controversy over another form of mortgage broker compensation: yield spread premium (YSP). • Broker persuades borrower to accept a loan at “above par” (higher-than-market) interest rate.

18. Loan Costs Mortgage broker’s compensation • Controversy over another form of mortgage broker compensation: yield spread premium (YSP). • Broker persuades borrower to accept a loan at “above par” (higher-than-market) interest rate. • Lender pays broker YSP based on difference between market rate and borrower’s rate.

19. Loan Costs Mortgage broker’s compensation • Controversy over another form of mortgage broker compensation: yield spread premium (YSP). • Broker persuades borrower to accept a loan at “above par” (higher-than-market) interest rate. • Lender pays broker YSP based on difference between market rate and borrower’s rate. • Practice gives mortgage brokers incentive to steer borrowers to more expensive loans.

20. Comparing the Cost of Loans Truth in Lending Act • The various fees charged in addition to interest make it hard to compare loans offered by different lenders. • Truth in Lending Act (TILA): federal consumer protection law that requires lenders to disclose the cost of a loan using certain figures and terminology, to make comparison easier.

21. Truth in Lending Act Annual percentage rate • Most important TILA disclosure: annual percentage rate (APR). • APR expresses relationship between all of the financing charges and the amount borrowed as a percentage. • To determine which of two loans is more expensive, compare APRs, not just interest rates.

22. Truth in Lending Act Total finance charge • Another key TILA disclosure: total finance charge. • Total finance charge includes: • interest, • origination fee, • discount points paid by borrower, • mortgage broker’s fee, • finder’s fee, • service fee, and/or • mortgage guaranty or insurance fees.

23. Truth in Lending Act Total finance charge • Total finance charge does NOT include: • title insurance costs, • credit report charges, • appraisal fee, or • discount points paid by seller.

24. Loan Costs No-fee or low-fee loans • Some lenders offer no-fee loansor low-fee loans. • No major lender charges such as origination fee or discount points. • Only (or almost only) financing charge is interest. • Interest rate often much higher than rate for loan with standard fees. • Helpful for buyers with little cash for closing.

25. Loan Costs and Financing Options Origination fee Discount points Buydown Mortgage broker’s fee Truth in Lending Act APR Total finance charge No-fee or low-fee loan Home buyer counseling

26. Lesson 14: Fair Lending and Consumer Protection

27. Consumer Protection Laws • Federal consumer protection laws that apply to mortgage loan transactions: • Truth in Lending Act • Real Estate Settlement Procedures Act

28. Consumer Protection Laws Truth in Lending Act • Truth in Lending Act(TILA) – 1968 • Implemented by Federal Reserve Board’s Regulation Z. • Requires disclosure of finance charges. • Regulates advertising of consumer credit.

29. Truth in Lending Act Loans covered by TILA • TILA applies only to consumer loans. Consumer loan = a loan used for personal, family, or household purposes. • Consumer loan is covered by TILA if it is to be repaid in more than four installments (or is subject to finance charges) and is either: • for $25,000 or less, or • secured by real property.

30. Truth in Lending Act Loans covered by TILA • Thus, TILA applies to any mortgage loan used for personal, family, or household purposes, such as: • buying or remodeling a home, • consolidating personal debt, or • sending kids to college.

31. Truth in Lending Act Loans exempt from TILA • TILA only applies to loans made to natural persons.

32. Truth in Lending Act Loans exempt from TILA • TILA only applies to loans made to natural persons. • Doesn’t apply to: • 1) loans made to corporations or organizations; • 2) loans made for business, commercial, or agricultural purposes; or • 3) loans > $25,000 not secured by real property.

33. Truth in Lending Act Loans exempt from TILA • TILA only applies to loans made to natural persons. • Doesn’t apply to: • 1) loans made to corporations or organizations; • 2) loans made for business, commercial, or agricultural purposes; or • 3) loans > $25,000 not secured by real property. • Most seller financing is also exempt.

34. Truth in Lending Act Disclosure requirements • Lender must give mortgage loan applicant disclosure statement with estimates of loan costs within 3 days of receiving written application.

35. Truth in Lending Act Disclosure requirements • Lender expected to use best info reasonably available in preparing TILA disclosure statement. • If estimates later prove incorrect, revised disclosures required.

36. Truth in Lending Act Disclosure requirements • Two most important disclosures: • Total finance charge • “Dollar amount your credit will cost you” • Annual percentage rate (APR) • “Cost of your credit as a yearly rate”

37. TILA Disclosure Requirements Total finance charge • For mortgage loan, these expenses would be included in total finance charge, if applicable: • Interest • Origination fee • Points paid by borrower • Finder’s fee • Service charge • Mortgage insurance premiums • Guaranty fee • Mortgage broker’s fee

38. Application fee Appraisal fee Document prep fee Notary fee Credit report fee Survey fee Title report fee Title insurance premiums Pest inspection fee Flood inspection fee Impounds Points paid by seller Late payment fees Fees charged on default TILA Disclosure Requirements Total finance charge Not part of total finance charge for mortgage loan:

39. TILA Disclosure Requirements Other disclosures • TILA disclosure statement must also show: • Lender’s identity • Amount financed • Payment schedule • Total payments • Any prepayment penalty • Late charges • Assumption policy

40. TILA Disclosure Requirements ARMs • APR for ARM can’t be calculated in same way as APR for fixed-rate loan, because total amount of interest to be charged is unknown at outset. • When calculating APR for ARM, lender may use loan’s initial interest rate. • Must state that APR is subject to increase after closing.

41. TILA Disclosure Requirements ARMs • Numerous special disclosures required for ARM secured by principal dwelling. • CHARM booklet: “Consumer Handbook on Adjustable-Rate Mortgages.”

42. TILA Disclosure Requirements ARMs • Numerous special disclosures required for ARM secured by principal dwelling. • CHARM booklet: “Consumer Handbook on Adjustable-Rate Mortgages.” • Specific disclosures about ARM program(s) the applicant is considering, such as: • how interest rate and payment may change; • index used to determine ARM’s interest rate.

43. TILA Disclosure Requirements ARM adjustment notice • For ARM secured by principal dwelling, lender must notify borrower each time interest rate is being adjusted. • Notice explains effect of adjustment on payment, loan balance, other aspects of loan. • If payment amount will change, adjustment notice must be sent at least 25 days, but no more than 120 days, before change.

44. Truth in Lending Act Right of rescission • If security property is borrower’s existing principal residence, borrower has right of rescission.

45. Truth in Lending Act Right of rescission • If security property is borrower’s existing principal residence, borrower has right of rescission. • May rescind loan agreement any time within3 days after: • signing agreement, • receiving disclosure statement, or • receiving notice of right of rescission.

46. Truth in Lending Act Right of rescission • If borrower doesn’t receive statement or notice, right of rescission doesn’t expire for 3 years.

47. Truth in Lending Act Right of rescission • Right of rescission applies to: • home equity loans • refinancing with a new lender • Doesn’t apply to purchase loans.

48. Truth in Lending Act Advertising under TILA • TILA advertising rules apply to anyone who advertises consumer credit, not just lenders.

49. Truth in Lending Act Advertising under TILA • TILA advertising rules apply to anyone who advertises consumer credit, not just lenders. • Rules prohibit: • Bait and switch tactics. • Misleading ads that feature only most attractive terms and disguise true cost of loan.

50. Truth in Lending Act Advertising under TILA • It’s legal to state cash price or APR in ad. • But if particular “trigger” terms (such as downpayment, interest rate, or monthly payment) are stated, the rest of the terms must also be stated.