Chapter 9: Financing Section 5: Secondary Mortgage Market

FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA): "Fannie Mae"

"Fannie Mae" was organized by Congress in 1938 as a government institution to purchase FHA mortgages from private lending institutions. In 1968, Fannie Mae became a private, profit-making mortgage corporation and since 1970 it has been authorized to purchase conventional loans as well as FHA loans. In 1982, Fannie Mae announced that it would purchase first mortgages and junior mortgages from any mortgage originator, including banks and individuals, such as sellers taking back purchase money mortgages. Note: The primary purpose of Fannie Mae is to purchase mortgages from primary mortgage lenders. Established by the federal government in 1938 and privatized in 1968: • 2008—Moved back under government control • Federal Housing Finance Agency appointed as conservator • Original purpose: To provide a place for banks and other lenders to sell their FHA-insured loans • The government got involved again to solve the problem of the uneven supply of money for mortgage loans by creating the Federal National Mortgage Association (Fannie Mae) as a secondary mortgage market. • Fannie Mae was originally established as a federal agency in 1938 for the purpose of providing a place for banks and other lenders to sell their FHA-insured loans • Process encouraged more banks to make FHA loans and allowed those banks to get more money to make the additional loans • Secondary market accomplished two things: • More money available for mortgage loans • Loan qualifications and terms made more consistent across the country The Federal National Mortgage Association (Fannie Mae) is the nation's largest investor in residential mortgages. Fannie Mae is able to purchase conventional mortgages as well as FHA and VA mortgages. Fannie Mae, currently under the conservatorship of the Federal Housing Finance Agency (FHFA), has been promised billions of dollars of capital as needed by the U.S. Department of the Treasury to ensure the company continues to provide liquidity to the housing and mortgage markets. Fannie Mae funds its operation by securitization. Securitization is the act of pooling mortgages and then selling them as mortgage backed securities. Conventional mortgage backed securities may be guaranteed by Fannie Mae as to full and timely payments of both principal and interest. Fannie Mae buys mortgages or interests in a pool of mortgages from lenders. Lenders whowishtosellloanstoFannieMaemustownacertainamountofstockinFannieMae. Thelender assembles a pool (collection) of loans, and then a participation interest in that pool (usually 50% to 95%) is sold to Fannie Mae. In this way, both the lender and Fannie Mae own an interest in the loans. Loans sold to Fannie Mae are usually serviced by the originating lender or another mortgage servicing company. Fannie Mae pays a service fee to lenders who continue to service the loans. Originally, banks and other lenders would make home mortgage loans to borrowers from deposits they collected from other customers, the primary market. If more people saved more money, then the lender could make more loans. But, if depositors were not saving money (for any number of reasons), the bank could not make additional home mortgage loans. This crisis was made worse by badloansandtaxlawchanges. Thesecircumstances,alongwithrisinginterestratesandadesire to shift credit risk, caused lenders to place even greater emphasis on the ability to sell their loans to the secondary market. After the creation of Fannie Mae (and other similar institutions later), lenders were able to sell certain mortgage loans from their portfolios to investors so lenders could replenish their supply of capital. Now, they had money again to re-lend to additional potential homebuyers. Once lenders realized the advantages of selling their home mortgages in the secondary market, they were quick to follow the criteria established by Fannie Mae (and others). Failing to do so would jeopardize their chance of selling their mortgages, so Fannie Mae was able to nationalize loan qualifications andotherlendingprocedures. Thisalsohelpedreduceoreliminatemuchofthevariationinloan quality, types of loan programs offered, and aspects of home loans that were made in different parts of the country. Fannie Mae secures funds to operate from the sale of notes or bonds, which are traded on the major securities market. Purchases are made weekly from sellers at auctions. Prices are thus kept in line with money market conditions. Fannie Mae is owned by its shareholders and managed independently of the government. When a mortgage has been assigned to Fannie Mae, the originator or primary lender continuesservicingtheloan,actingasacollectorforFannieMae. Theoriginalborrowermay never be aware that the mortgage has been assigned. In anticipation of selling its mortgage to Fannie Mae, the lender may charge discount points at the closing to help offset its loss when the loan is sold in the secondary mortgage market. Prior to December 1986, mortgages purchased by Fannie Mae were treated as being assumable, regardless of the terms of the mortgage contract between the lender and the borrower. Since then, assumptions are subject to buyer qualification by the primary lender. The creation of Fannie Mae was really the birth of the mortgage industry that we have today. Although initially S & Ls enjoyed a prominent place in the mortgage industry, their role diminished as they lost deposits to competing investments that offered higher rates of return. Furthermore, S & Ls were holding mortgage paper at much lower rates than the prevailing interest rates. This crisis was exacerbated by bad loans and tax law changes, as described earlier. These circumstances, along with rising interest rates and a desire to shift credit risk, caused lenders to place even greater emphasis on the ability to sell their loans. As more and more options became available, the secondary mortgage market, led by Fannie Mae, grew in importance as a source of funds for lenders and a means of readily available capital for potential homeowners at attractive interest rates.

2001 U.S Patriot Act

A federal legislation designed to curb terrorist activities. The Act increases the ability of law enforcement agencies to search telephone, e-mail communications, medical, financial, and other records; eases restrictions on foreign intelligence gathering within the United States; expands the Secretary of the Treasury's authority to regulate financial transactions, particularly those involving foreign individuals and entities; and enhances the discretion of law enforcement and immigration authorities in detaining and deporting immigrants suspected of terrorism-relatedacts. TheActalsoexpandsthedefinitionofterrorismtoincludedomestic terrorism, thus enlarging the number of activities to which the Patriot Act's expanded law enforcement powers can be applied. The Act impacts real estate and mortgage transactions because of the disclosure requirements associated with it. Borrowers are required to sign an additional disclosure that allows all financial institutions to obtain, verify, and record information that identifies each person who opens an account.

Truth in Lending Exceptions

A homeowner who sells a home and takes back a first mortgage to secure part of the purchase price is not subject to TIL. However, if the seller takes back a second mortgage, the transaction is subject to TIL. In the case of a mortgage assumption, the bank that holds the mortgage is subject to the law if the buyer enters into a written agreement with the bank to become personally liable on the debt.

Written Disclosure

A written disclosure statement of all finance charges, as well as the true annual interest rate (APR), must be given to the borrower prior to the closing. The disclosure must also include loan fees, finders' fees, service charges and point. Charges for title fees, legal fees, appraisal fees, credit report, survey fees and closing expenses do not have to be included as part of the finance charge but must be disclosed.

REQUEST A CREDIT SCORE

Although it is not free, consumers have the right to ask for a credit score from any consumer reporting agencies that create or distribute scores used in residential real property loans.

Adverse Action

Anyone who uses a credit report or another type of consumer report to deny an application for credit, insurance, or employment—or to take another adverse action—must provide the consumer with the name, address, and phone number of the agency that provided the information. TherequirementsunderFCRAdiffersomewhatfromthoseundertheECOA,although both laws can be satisfied with a single adverse action notice.

Flipping

Is a term used primarily in the United States to describe purchasing a revenue- generatingassetandquicklyreselling(or"flipping")itforprofit. Thoughflippingcanapplytoany asset,thetermismostoftenappliedtorealestateandinitialpublicofferings. Theterm"flipping"is frequently used both as a descriptive term for schemes involving market manipulation and other illegal conduct and as a derogatory term for legal real estate investing strategies that are perceived by some to be unethical or socially destructive.

Lenders NOT Subject to TIL

Lenders who extend credit to business organizations or for commercial purposes are not subject to TIL.

Loan Transactions Subject to TIL

Loans not secured by a lien on real estate are subject to TIL if: 1. The Loan is for personal, family, agricultural, or household purposes. 2. The loan does not exceed $25,000. 3. A finance charge is required. 4. The borrower is allowed to repay the loan in more than four installments.

"pretexting."

Pretexting Provisions, which protect consumers from individuals and companies that obtain their personal financial information under false, fictitious, or fraudulent pretenses, a practice known as "pretexting."

Privacy Rule

Privacy Rule governs the collection and disclosure of customers' personal financial information— known as nonpublic personal information—restricting when and under what circumstances such information may be disclosed to affiliates and to nonaffiliated third parties. Nonpublic personal information could include the following types of information:

once every 12 months

The FACT Act allows consumers to request and obtain a free copy of their credit report once every 12 months from each of these credit bureaus by contacting a centralized website, maintained in cooperation with the Federal Trade Commission, www.annualcreditreport.com or by calling 877-322-8228.

Truncation of Credit and Debit Card Numbers

The FACT Act also prohibits businesses from printing more than five digits of any customer's card number or card expiration dateonanyreceiptprovidedtothecardholderatthepointofsaleortransaction. Theprovision excludes receipts that are handwritten or imprinted, if that is the only method of recording the credit card number.

HOMEOWNERS PROTECTION ACT

The Federal Homeowners Protection Act of 1998 (HPA) requires that lenders or servicers to provide certain disclosures and notifications concerning private mortgage The federal Homeowners Protection Act of 1998 (HPA) requires lenders or servicers to provide certain disclosures and notifications concerning private mortgage insurance (PMI) on residential mortgage transactions. Most provisions of the Act do not apply to home loans made before July 29, 1999, or to mortgages where the lender pays the mortgage insurance (special disclosure rules apply to loans in these categories). This Act covers lenders that grant residential mortgages, defined as a mortgage, loan, or other evidence of a security interest created with respect to a single-family dwelling that is the primary residence of the borrower. A single-family dwelling is defined as a residence consisting of one familydwellingunit. TheHomeownersProtectionActalsorequireslendersthatrefinanceor servicehomemortgagestocomplywithitsterms. TheHPAdoesnotcoverloansthatdonothave privatemortgageinsuranceorloanssecuredbysecondormulti-familyhomes. TheHPArequires that lenders provide an initial written disclosure regarding PMI cancellation—and annual remindersofthisright—toresidentialmortgageborrowers. Thewrittennoticemustincludethese disclosures: Borrower Cancellation: The borrower's right to request cancellation of PMI when a mortgage has been paid down to 80% of its original appraised value or purchase price, whichever is less. Additionally, a borrower requesting PMI cancellation must have a good history of payment. • Automatic Termination: The automatic cancellation of PMI by the lender when a mortgage has been paid down to 78% of its original value, assuming the borrower is current with payments. • Prepayment: The borrower's right to accelerate the cancellation date by making additional payments that bring the loan-to-value ratio to 80 percent. The Act requires written disclosure for both adjustable rate and fixed rate home mortgages on primary residences. Disclosure requirements, however, vary depending on how the mortgage accrues interest: • Fixed Rate Mortgages: At the loan closing for a fixed rate mortgage, lenders must provide an initial amortization schedule with a written notice stating both the cancellation date that the borrower may seek to cancel PMI based on the amortization schedule and the automatic termination date. • Adjustable Rate Mortgages (ARMs): For ARM mortgages, an amortization schedule would not be provided at closing, but the lender must inform the borrower when the LTV reaches 80%. • A final disclosure must be sent to the borrower after the PMI coverage has been terminated or cancelled to notify the borrower that the borrower is no longer covered by PMI and that the borrower is not required to pay PMI premiums any longer. Additional disclosures are requiredforso-calledhigh-riskloans. Tokeepfromdestroyingtheintegrityofa relationship with a customer, financial information gathered as part of the loan process must be kept confidential. • It should never be revealed to unauthorized people nor taken advantage of for personal benefit. Variouslawshavebeenpassedthataddressthedisclosureandprotectionof private information. • This section discusses the following federal laws: • Fair Credit Reporting Act (FCRA) • Fair and Accurate Credit Transactions Act (FACT Act) • Gramm-Leach-Bliley Act • U.S. Patriot Act • National Do Not Call Registry

Gramm-Leach-Billey Act (GLB ACT)

The Financial Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act (GLB Act), includes provisions in Title V to protect and regulatethedisclosureofconsumers'personalfinancialinformation. Therearethreeprincipal parts to the privacy requirements: • The Financial Privacy Rule, • Safeguards Rule • Pretexting Provisions, which protect consumers from individuals and companies that obtain their personal financial information under false, fictitious, or fraudulent pretenses, a practice known as "pretexting." The GLB Act gives authority to eight federal agencies and the states to administer and enforce Title V. These regulations apply to "financial institutions," which include not only banks, securities firms, and insurance companies, but also companies providing many other types of financial products and services to consumers. Examples Include: • Lending, brokering, or servicing any type of consumer loan. • Transferring or safeguarding money. • Preparing individual tax returns. • Providing financial advice or credit counseling. • Providing residential real estate settlement services. • Collecting consumer debts. Information that many would consider private—including bank balances and account numbers—is regularly bought and sold by banks, credit card companies, and other financial institutions. The Privacy Rule governs the collection and disclosure of customers' personal financial information— known as nonpublic personal information—restricting when and under what circumstances such information may be disclosed to affiliates and to nonaffiliated third parties. Nonpublic personal information could include the following types of information: • What a consumer or customer puts on an application. • Data about the individual from another source, such as a credit bureau. • Transactions between the individual and the company, such as an account balance, payment history, or credit/debit card purchase information. • Whether or not an individual is a consumer or customer of a particular financial institution. These restrictions are based on a required Consumer Privacy Policy notice provided to the consumer, explaining the lender's information collection and information sharing practices, and giving the consumer instructions as to how to opt out of having this information shared. A financial institution must share its policy with consumers before they disclose personal information, as well as annually during the financial relationship. Even if a consumer does not opt-out, financial institutions are prohibited from disclosing—other than to a consumer reporting agency—access codes or account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing, or other marketing through electronic mail. The Safeguards Rule requires all financial institutions to design, implement, and maintain safeguards to protect customer information while it is in the custody and control of the institution anditsagents. Thisruleappliesnotonlytofinancialinstitutionsthatcollectinformationfromtheir own customers, but also to any institution—such as a credit reporting agency or even an educational institution—that receives customer information from other financial institutions. A written Safeguards Policy must include provisions that: • Ensure the security and confidentiality of customer records, • Protect against any anticipated threats or hazards to the security of such records. • Protect against the unauthorized access or use of such records or information in ways that could result in substantial harm or inconvenience to customers.

Other Activies of Fannie Mae and Ginnie Mae

To stimulate bank loans for the construction of low and moderate income housing, Fannie Mae and Ginnie Mae can make commitments to lending banks to buy original loans at current market rates, thus enabling the banks to make loans below market interest. Ginnie Mae purchases homestakenoverbyHUDonFHAforeclosures. Thelenderbuysthepropertyatforeclosureand sells it to HUD for the balance due on the mortgage plus costs. HUD sells the property privately, and Fannie Mae and Ginnie Mae subsidize the new mortgages for low-income purchases.

True or False: "Regulation Z" is the law calling for "full disclosure" in advertising."

True

True or False: " Original purpose of FNMA: To provide a place for banks and other lenders to sell their FHA-insured loans.

True

FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC):

"Freddie Mac" provides a secondary mortgage market for S&L members of the Federal Home Loan Bank System. FHLMC deals primarily in conventional mortgages. Freddie Mac issues guaranteed securities known a Participation Certificates against its own mortgage pools. • The Federal Home Loan Mortgage Corporation (Freddie Mac) was created in 1970 as a nonprofit, federally chartered institution controlled by the Federal Home Loan Bank System. • Like Fannie Mae, Freddie Mac is currently under the conservatorship of the Federal Housing Finance Agency. • Unlike Fannie Mae, Freddie Mac does not guarantee payment of its mortgages. • The primary function of Freddie Mac was to help S & Ls acquire additional funds for lending in the mortgage market by purchasing the mortgages they already held. • Freddie Mac may deal in FHA, VA, and conventional mortgages. • While Fannie Mae emphasizes the purchase of mortgage loans, Freddie Mac also actively sells the mortgage loans from its portfolio, thus acting as a conduit for mortgage investments. • The funds generated by the sale of the mortgages are then used to purchase more mortgages. • Freddie Mac issues its own mortgage backed securities, which are backed by the conventional mortgages it purchases. • Freddie Mac purchases mortgages through its immediate delivery program or its forward commitment purchase program. • Immediate delivery program: • The lender must deliver the mortgages that Freddie Mac has agreed to purchase within 60 days. • Failure to deliver can mean that a seller will be banned from further Freddie Mac sales for two years. • The immediate loan delivery program can involve either whole loan purchases or participation purchases. • Forward commitment purchase program: • Commitments are made for six and eight-month periods, but the sale and delivery of mortgages is at the option of the lender. • There's a non-refundable commitment fee payable to Freddie Mac. • Freddie Mac issues its own mortgage backed securities, which are backed by the conventional mortgages it purchases. • Freddie Mac purchases mortgages through its immediate delivery program or its forward commitment purchase program. Since lenders want to sell their loans to the secondary agencies, they must follow the underwriting guidelines of those agencies. In their efforts to increase the quality of loans they purchase, the agencies force the lenders to upgrade the quality of loans they make. Not only can the agencies refuse to purchase loans that don't follow their guidelines, they can also request lenders to repurchase loans already sold if it's later discovered that the lender violated underwriting guidelines. Thus, the secondary market encourages lenders to implement their own quality control programs and review buyer and property qualifications more carefully. Because the secondary market performs such an important function in providing liquidity of mortgage funds, the standards set by the secondary market have a great influence on lending activities in the primary market. Once secondary agencies began accepting adjustable rate mortgages (ARMs), 15-year fixed-rate mortgages, and convertible ARMs, these types of financing became more readily available in the primary market. Lenders were more willing to make these kinds of loans when they knew the loans could be sold to the secondary market. In contrast, option ARMs and no documentation/no qualification loans are not being purchased by the secondary market; therefore, these types of financing are virtually nonexistent today.

Government National Morgage Association (GNMA)

"Ginnie Mae" is a government owned corporation, operating under the Department of Housing and Urban Development (HUD) which was created in 1968 when Fannie Mae became a private corporation. Through its mortgage backed securities (MBS) program, Ginnie Mae has created new sources of credit for FHA, VA, and FmHA mortgages. Primary lenders or mortgage originators create pools of mortgagesofsimilarinterestrateandmaturity. Thisisknownas"packaging",andthepoolsmust have a minimum value of $1 million. Ginnie Mae sells government guaranteed certificates representing undivided ownership's in the pool. These are known as pass though securities since theinvestorreceivesperiodicpaymentsofprincipalandinterest. Theinterestrateis1/2%less than the interest rate on the loans in the pool. Mortgage backed securities are sold by security dealers in minimum units of $25,000 each • The Government National Mortgage Association (Ginnie Mae) was created in 1968 as a government-owned corporation, operating under the Department of Housing and Urban Development (HUD). • A primary function of Ginnie Mae is promoting investment by guaranteeing the payment of principal and interest on FHA and VA mortgages through its mortgage backed securities program. • This program, supported by the federal government's borrowing power, guarantees interest and principal mortgage payments to mortgage holders. • Another function of Ginnie Mae is special assistance financing for urban renewal and housing projects, with below-market rates to low-income families. Ginnie Mae's activity in this area has decreased as its mortgage backed securities program has grown. • Primary function: To promote investment by guaranteeing the payment of principal and interest on FHA and VA mortgages through its mortgage-backed securities program • This program, supported by the federal government's borrowing power, guarantees interest and principal mortgage payments to mortgage holders. • Another function of Ginnie Mae is special assistance financing for urban renewal and housing projects, with below-market rates to low-income families. Ginnie Mae's activity in this area has decreased as its mortgage backed securities program has grown.

Housing and Economic Recovery Act of 2008

(add more from above from the HOEPA) This act is a major housing law designed to assist with the recovery and the revitalization of America's residential housing market. • HERA has multiple purposes: • The modernization of the Federal Housing Administration. • Foreclosure prevention. • And the enhancement of consumer protections.

Secondary Mortgage Market Agencies

1. Federal National Mortgage Association (Fannie Mae) 2. Government National Mortgage Association (Ginnie Mae) 3. Federal Home Loan Mortgage Corporation (Freddie Mac)

Money Flow in Home Mortgage Financing

1. Mortgage funds loaned to a homebuyer by a lending institution in the primary market and mortgage is then sold to secondary market agency, which may sell it to other investors in the form of mortgage-backed securities (MBS') MBS Bond-type securities. - Long term - Pay interest semiannually - Provide for repayment at a specified date 2. Pass-through securities - More common - Pay interest and principal payments on a monthly basis Because the primary lender sold the mortgage on the secondary market, the lender can take the money from the sale and make another mortgage loan, then sell that new loan to the secondary market,andcontinuethecycle. Thesecondarymarketagencycanpoolthemortgagesitbuysto create MBS' which the secondary market participant then sells to investors As the secondary market agency sells the MBS' to investors, it now has more funds to buy more mortgages and create more MBS pools to sell to investors again, and the cycle continues.

Home Ownership and Equity Protection Act (HOEPA)

A 1994 amendment to the Truth in Lending Act establishes disclosure requirements and prohibits deceptive and unfair practices in lending. HOEPA also establishes requirements for certain loans with high interest ratesand/orfees. TherulesfortheseloansarecontainedinSection32ofRegulationZ,which implements the Truth in Lending Act. This Act is enforced by the Federal Trade Commission for non-depository lenders and by each state's attorney general. HOEPA also gives the Federal Reserve Board broad regulatory authority to prohibit additional practices it finds to be unfair or deceptive, not just for HOEPA loans but all consumer mortgage loans. A lender who violates HOEPA may be sued by the consumer, who may be able to recover statutory and actual damages, court costs, and attorney's fees. In addition, a violation of HOEPA may enable a consumer to rescind the loan for up to three years. A loan that is subject to the Home Ownership and Equity Protection Act may not include the following terms: • A payment schedule that provides for regular periodic payments that do not fully amortize and result in a balloon payment on HOEPA loans having terms of less than five years, unless it is a bridge loan of less than one year used by consumers to buy or build a home. • Negative amortization—smaller monthly payments that do not fully pay off the loan and that cause an increase in the borrower's total principal debt are prohibited. Any interest rate changes and payment schedule caps must be coordinated to avoid this situation. • A repayment schedule that consolidates more than two periodic payments that are to be paid in advance from the proceeds of the loan. The borrower should get the maximum use of the funds and have a legitimate opportunity to use the loan proceeds. • Default interest rates higher than pre-default rates. • Rebates—a refund calculated by a method less favorable than the actuarial method for rebates of interest arising from a loan acceleration due to default. • Prepayment penalties are generally prohibited, although there are exceptions. Prepayment penalties are allowed if limited to the first two years of the loan or if the source of the prepayment funds is a refinancing by the lender or lender affiliate. They're also allowed if the amount of the periodic payment of principal, interest, or both will not change at any time during the first four years of the loan. Prepayment penalties may also be allowed in cases where the borrower's debt-to-income ratio does not exceed 50%. • Demand clauses, including any provision that would enable the creditor to call the loan before maturity, are strictly prohibited. Only certain behavior of the consumer would permit the lender to call the loan in, such as; fraud, material misrepresentation, default, or damage to the security property. Lenders may not grant loans solely based on the collateral value of the borrower's property without regard to the borrower's ability to repay the loan, including the consumer's current and reasonably expected income, employment, assets other than the collateral, current obligations, and mortgage- related obligations, which include expected property taxes, premiums for mortgage-related insurance required by the lender, and similar expenses. Income and assets can include: • Expected income or assets, • Tax returns and W-2s, • Payroll receipts, • Financial institution records, or • Other third-party documents that provide reasonably reliable evidence of the consumer's income or assets. The amounts the lender uses to verify the repayment ability cannot be materially greater than the amounts the lender could have verified when the loan was consummated. Furthermore, the lender must determine the borrower's repayment ability using the largest paymentofprincipalandinterestscheduledinthefirstsevenyearsfollowingconsummation. The lender must also consider the current obligations and mortgage-related obligations and assess the borrower's repayment ability taking into account at least one of the following: • The ratio of total debt obligations to income • The income the consumer will have after paying debt obligations A lender is not presumed to be in compliance if the regular periodic payments for the first seven years of the transaction would cause the principal balance to increase or if the term of the loan is less than seven years and the regular periodic payments when aggregated do not fully amortize the outstanding principal balance. The requirement to prove ability to repay does not apply to temporary or "bridge" loans with terms of twelve months or less, such as a loan to purchase a new dwelling where the borrower plans to sell a current dwelling within 12 months. With the passage of the Housing and Economic Recovery Act of 2008, amending Regulation Z and the Truth in Lending Act, a new category of loans was defined: Higher-priced mortgage loans. While the high-cost loans defined and regulated by HOEPA are less common in today's credit market, the federal government recognized that there was still a segment of the loan market between average rate, or prime, loans and loans that do not meet the fee or APR trigger requirements of HOEPA. In order to further protect consumers, the Truth in Lending Act sets forth specific requirements for handling these higher-priced loans. Higher-priced loans are closed-end mortgage loans secured by the borrower's principal dwelling where the APR exceeds the applicable average prime offer rate by at least: • 1.5 percentage points for first lien loans, or • 3.5 percentage points for junior lien loans. This definition does include home purchase loans, but it does not include loans to finance: • The initial construction of a dwelling. • A temporary or "bridge" loan with a term of 12 months or less, such as a loan to purchase a new dwelling where the consumer plans to sell a current dwelling within 12 months. • A reverse-mortgage transaction. • A home equity line of credit. Unlike the HOEPA APR test, a higher-priced loan's APR is measured against the applicable average prime offer rate, which is an annual percentage rate derived from average interest rates, points, and other loan pricing terms that are currently offered to consumers by a representative sample of lendersformortgagetransactionsthathavelow-riskpricingcharacteristics. Theaverageprime offer rate for both fixed and adjustable rate loans is published in a table and updated at least weekly.

Example of APR

APR Explanation Example: $200,000 at 6.0% for 360 months P&I = $1,199.19 Repay: $200,000.00 PRN $231,677.99 INT $431,677.00 Assume $ 6,000 -included Closing Costs (1 point + $4,000 other APR closing costs) Helpful Hints: APR A mortgage loan with an 11% interest rate may have an APR of 11.5%, representing the total cost of the loan, including all finance charges spread over the life of the loan. And even though different interest rates may apply during the loan term (e.g., with adjustable rate mortgages), the loan still has only one initial APR. $ 6,000 -included Closing Costs (1 point + $4,000 other APR closing costs) If there $6,000 in closing costs, the APR would have to be 6.29% as the borrower would have use of only $194,000. ($200,000 - $6,000) but makes repayment on $200,000.

Community Reinvestmnet Act

Congress enacted the Community Reinvestment Act (CRA) in 1977 to encourage financial institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound lending practices. The CRA requires that each insured depository institution's record in helping meet the credit needs ofitsentirecommunitybeevaluatedperiodically. Thatrecordistakenintoaccountinconsidering an institution's application for deposit facilities, including mergers and acquisitions. CRA examinations are conducted by the federal agencies that are responsible for supervising depository institutions: The Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS). In some states, the requirements of CRA have been extended to mortgage lenders. Make sure you know the laws of the states in which you conduct business. The Home Mortgage Disclosure Act (HMDA), enacted by Congress in 1975, is enforced by the Federal Reserve Board's Regulation C and applies to certain financial institutions, including banks, savings associations, credit unions, and other mortgage lending institutions. HMDA provides loan data that can be used by the public to assist in: • Determining whether financial institutions are serving the housing needs of their communities. • Aiding public officials in distribution of public-sector investment in order to attract private investment where needed. • Identifying possible discriminatory lending patterns through the collection and disclosure of data about applicant and borrower characteristics. As the name implies, the Home Mortgage Disclosure Act is a disclosure law that relies upon public scrutiny for its effectiveness. It does not prohibit any specific activity of lenders, and it does not establish a quota system of mortgage loans to be made in any metropolitan statistical area (MSA) or other geographic area as defined by the Office of Management and Budget. The provisions of HMDA affect applications for residential loans, including: • Home purchase. • Home improvement. • Refinancing, and • Subordinate financing. It does not apply to loans on vacant land, new construction, or on loans that are sold as part of a pool for servicing.

Copy of Consumer Credit File

Consumers are entitled to a free copy of their credit file from a consumer credit reporting agency (CRA) under these circumstances: • Information in a credit report resulted in adverse action. • The consumer was a victim of identity theft and a fraud alert was inserted in credit file. • The credit file contains inaccurate information as a result of fraud. • The consumer is on public assistance or is unemployed. Additionally, all consumers are entitled to one free disclosure every 12 months upon request from each of the three nationwide credit bureaus.

Dispute Incomplete or Inaccurate Information

Consumers have the right to disputeanyincompleteorinaccurateinformationthattheyfindintheircreditreport. The consumer reporting agency must correct or delete inaccurate, incomplete, or unverifiable information.

Limit Prescreened Offers

Consumers may choose to limit "prescreened" offers of credit and insurance based on information in their credit report. Unsolicited prescreened offers for credit and insurance must include a toll-free phone number to call to be removed from the lists on which these offers are based.

Role of Credit Cedit Scores

Copy of Consumer Credit File! Consumers are entitled to a free copy of their credit file from a consumer credit reporting agency (CRA) under these circumstances: • Information in a credit report resulted in adverse action. • The consumer was a victim of identity theft and a fraud alert was inserted in credit file. • The credit file contains inaccurate information as a result of fraud. • The consumer is on public assistance or is unemployed. Additionally, all consumers are entitled to one free disclosure every 12 months upon request from each of the three nationwide credit bureaus. Dispute Incomplete or Inaccurate Information. Consumers have the right to dispute any incompleteorinaccurateinformationthattheyfindintheircreditreport. Theconsumerreporting agency must correct or delete inaccurate, incomplete, or unverifiable information.

APR

For residential mortgages, disclosure of the annual percentage rate (APR) is very important. The APR tells a borrower the total cost of financing a loan in percentage terms, as a relationship of the total finance charges to the total amount financed. Finance charges are more than just interest, or thenoteratethatappearsinthepromissorynote. Theyincludeanypointsrequiredbythelender foranyreason,loanoriginationfees,etc. When the buyer must pay points and a loan fee, the APR will be higher than just the interest rate. The specific provisions of the Act are implemented by Regulation Z. The federal Truth-In-Lending law is administered by the Federal Reserve Board, which established "Regulation Z" to implement the law. The Federal Trade Commission is responsible for enforcing TIL. In practice, the Federal Truth-In-Lending Law is referred to as "Regulation Z." Note: "Regulation Z" is the law calling for "full disclosure" in advertising.

Participation Certificates

Freddie Mac issues guaranteed securities known a Participation Certificates against its own mortgage pools.

U.S Department of Housing and Urban Development (HUD)

HUD promulgated Regulation X, which implements RESPA. In reference to the Real Estate Settlement ProceduresActof1974,RegulationXhasalsobeenmodifiedin2013. TheConsumerFinancial Protection Bureau (CFPB) has amended Regulation X, and implemented a commentary that sets forth an official interpretation to the regulation. Specifically, the Regulation X final rule implements Dodd-Frank Act sections addressing servicers' obligations to correct errors asserted by mortgage loan borrowers; to provide certain information requested by such borrowers; and to provide protections to such borrowers in connection with force-placed insurance. HUD's Office of Consumer and Regulatory Affairs/Interstate Land Sales is responsible forenforcingRESPA. ThepurposesofRESPAaretohelpconsumersbecomebettershoppersfor settlement services and to eliminate unnecessary increases in the costs of certain settlement services due to kickbacks and referral fees. A special HUD booklet entitled, "Settlement Costs and You," must be given to the buyer along with the commitment. At the closing, the bank is required to provide the buyer and seller with closing information prepared on a special HUD form known as the Uniform Settlement Statement, which is designed to detail all financial particulars of a transaction. Theactualsettlementcostsdonothavetobegiventothebuyeruntilthedayofthe final closing unless the buyer requires them at least one business day prior to settlement. If such is the case the buyer must be shown any settlement costs that are known and available at the time of the request. A standard form that clearly shows all charges imposed on borrowers and sellers in connection with the settlement. RESPA allows the borrower to request to see the HUD-1 Settlement Statementonebusinessdaybeforetheactualsettlement. Thesettlementagentmustthenprovide the borrowers with a completed HUD-1 Settlement Statement based on information known to the agentatthattime. TheHUDUniformClosingStatementisillustratedinChapter17.

Fraud Alerts and Freezes

If a consumer believes he or she has been a victim of identity theft, the FACT Act allows the consumer to contact the credit bureau and place a fraud alert. If you are running a credit report and you see a fraud alert, you must contact the person whose name is on the account at a number she provided to the credit bureau or take other reasonable steps to ensure thatthepersonapplyingforamortgageloanisnotreallyanidentitythief. TheFACTActalso allows consumers to place a credit freeze in order to prevent the information from showing on a credit report. The consumer may then "thaw" the credit report when they apply for a loan. The Act also allows members of the military who are deploying overseas to place a credit freeze, thereby making fraudulent applications for credit more difficult.

Real Estate Settlement and Procedures Act (RESPA)

In 1974 RESPA was passed by Congress became effective on June 20, 1975. It was to insure that buyers and sellers of one to four family residences have knowledge of all the settlement costs. RESPA applies only to federally regulated, first mortgage loans made by banking institutions. Federally related loans include those made by banks whose deposits are insured by the FDIC, or by lenders who originate FHA/VA loans, HUD loans and loans intended to be sold to Fannie Mae, Ginnie Mae or Freddie Mac. According to RESPA, settlement services can be defined to include any service provided in connection with a prospective or actual settlement, including, but not limited to, any one or more of the following: • Origination of a federally related mortgage loan (including, but not limited to, the taking of loan applications, loan processing, and the underwriting and funding of such loans). • Services by a mortgage broker (including counseling, taking of applications, obtaining verifications and appraisals, and other loan processing and origination services, and communicating with the borrower and lender). • Any services related to the origination, processing or funding of a federally related mortgage loan. • Title services, including title searches, title examinations, abstract preparation, insurability determinations, and the issuance of title commitments and title insurance policies. • Services by an attorney. • Preparation of documents, including notarization, delivery, and recordation. • Rendering of credit reports and appraisals. • Inspections, including inspections required by applicable law or any inspections required by the sales contract or mortgage documents prior to transfer of title. • Conducting of settlement by a settlement agent and any related services. • Services involving mortgage insurance. • Services involving hazard, flood, or other casualty insurance or homeowner's warranties. • Services involving mortgage life, disability, or similar insurance designed to pay a mortgage loan upon disability or death of a borrower, but only if such insurance is required by the lender as a condition of the loan. • Services involving real property taxes or any other assessments or charges on the real property. • Services by a real estate agent or real estate broker. • Any other services for which a settlement service provider requires a borrower or seller to pay.

Three Day Right of Recission

In any contract or transaction resulting in a mortgage or lien being placed against a person's home or a home, which the person expects to acquire, the customer (buyer) has the right to rescind the transaction until midnight of the third business day following the date of consummation of the transaction or the date of delivery of the disclosure statement. Thepurposeofrescissionistogiveunwaryhomeownersanopportunitytocancela home improvement contract, which results in a second mortgage or lien on their home to secure payment. The right of rescission does not apply to first mortgage loans to finance the purchase of a home or initial construction of the borrower's principal residence, and to seller financing (purchase money mortgage) unless it is a second mortgage. Rescission does not apply to a mortgage take- overunlessthebuyerbecomescontractuallyliabletothelender. Purchaseandsaleagreements are not covered by TIL. The right of rescission applies to refinancing a home mortgage loan and to financing the purchase of investment property, such as a non-occupied, three family houses. The bank withholds the funds until the fourth business day after the mortgage documents have been signed.

(p. 174) Figure 9:3 Primary or TraditionalMortgage Market

In order to understand the secondary mortgage market it is helpful to compare it to the traditional or primary mortgage system which is illustrated in Figure 9:3. Traditionally, mortgages were made to borrowers by local banks using money borrowed from depositors in the same community. These lenders consisted of S&Ls, mutual savings, cooperative banks, commercial banksandcreditunions. Theprimarylendersestablishedtheirowninterestrates,loanterms, loan-to-value ratio, application procedure, borrower qualifications and appraisal requirements. In the secondary mortgage market system, as illustrated in Figure 9:3, money flows from investor to borrowers through a conduit of discount purchases (packagers), investment bankers and stock brokers. In order to maintain uniformity and to protect mortgage purchasers, HUD requires the use of standardized procedures and forms for loan applications, appraisals, title insurance, credit report, closing statements, approval requirements, promissory notes and mortgages.

nonpublic personal information

Privacy Rule governs the collection and disclosure of customers' personal financial information— known as nonpublic personal information—restricting when and under what circumstances such information may be disclosed to affiliates and to nonaffiliated third parties. Nonpublic personal information could include the following types of information:

Seller Required Title Insurance

Section 9 of RESPA prohibits a seller from requiring the home buyer to use a particular title insurance company, either directly or indirectly, as a condition of sale, buyers may sue a seller who violates this provision for an amount equal to three times all charges made for the title insurance. RESPA does not apply to transactions financed by a purchase-money mortgage taken back by the seller, and installment contract or the buyer's assumption of a take-over mortgage. Real Estate Settlement Procedures Act (RESPA), a good faith estimate of settlement costs MUST: Covers loans secured with a mortgage placed on residential properties designed for occupancy of from one to four families—most conventional loans and government-sponsored loans such as FHA, VA, and USDA—including most purchase loans, assumptions, refinances, property improvement loans, home equity lines of credit, and some construction loans. The following types of transactions are not covered: • An all-cash sale. • A sale where the individual home seller takes back the mortgage. • A rental property transaction. • Temporary construction loans. • Other business purpose transaction. • Property of 25 acres or more. • Vacant or unimproved property unless a dwelling will be constructed or moved onto the property within two years.

The Fair and Accurage Credit Transaction Act of 2003 (FACTA)

Sometimes referred to as either the FACT Act or simply FACTA, this amended the federal Fair Credit Reporting Act and is intended primarily to help consumers fight the growing crime of identity theft. Accuracy, privacy, limits on information sharing, and new consumer rights to disclosure are included in the FACT Act.

State Truth-in-Lending Law

States are required to adopt TIL laws, which are equivalent to the federal law, in which case the state administers and enforces the law. In Massachusetts, the TIL is covered by M.G.L., Chapter 140C. The Truth in Lending Act was updated, effective in 2009, to address the unique challenges in advertising open-end credit plans secured by the borrower's dwelling. The Real Estate SettlementProceduresActof1974wasnewlyenactedin2013. TheConsumerFinancialProtection Bureau (CFPB) is also amending Regulation Z, which implements the Truth in Lending Act and the official interpretation to the regulation, which interprets the requirements of Regulation Z. These finalrulesimplementprovisionsoftheDodd-FrankActregardingmortgageloanservicing. The Regulation Z final rule implements Dodd-Frank Act sections addressing initial rate adjustment notices for adjustable-rate mortgages, periodic statements for residential mortgage loans, prompt creditingofmortgagepayments,andresponsestorequestsforpayoffamounts. Thisfinalrulealso amends current rules governing the scope, timing, content, and format of disclosures to consumers regarding the interest rate adjustments of their variable-rate transactions. Remember, open-end refers to loans where credit is extended to the borrower during the term and the lender may impose a finance charge on the outstanding unpaid balance, such as a home equity line of credit (HELOC).

Loan Application

Submission of a borrower's financial information in anticipation of a credit decision, which includes: • Borrower's name. • Borrower's monthly income. • Borrower's SSN (to obtain a credit report). • Property address. • Estimate of value of the property. • Loan amount. • Any other information deemed necessary. • RESPA requires lender (or mortgage broker) to provide certain disclosures at application or within three business days, unless... • Applicant withdraws application or • Lender turns down the loan within three business days. RESPA requires the lender to give the buyer/borrower an approximation or "good faith estimate" of the closing costs upon issuing a written loan commitment. This lists the charges the buyer is likely to pay at settlement. A Good Faith Estimate is not a loan commitment. It is simply an estimate of settlement charges the borrower is likely to incur on a specific loan. Recall that prior to delivery of the mandated disclosures; the only fee that may be charged to a borrower is for a credit report. Once the borrower receives the GFE and other mandated disclosures and indicates an intention to proceed, the loan originator may collect other loan origination fees. Note: According to RESPA a good faith estimate of settlement cost must include the real estate broker's fee.

Real Estate Mortgage Lenders Subject to TIL

TIL does not apply to individual lenders who do not make mortgage loans as part of their regular business, such as sellers who take back deferred purchase money mortgages or sell property subject to a mortgagetakeover. Thisexception applies only to a first mortgage.

True or False: " Primary function of GNMA: To promote investment by guaranteeing the payment of principal and interest on FHA and VA mortgages through its mortgage-backed securities program"

TRUE

The Federal Consumer Credit Pretection Act of 1968

The Consumer Credit Protection Act, which is better known as the Truth-In-Lending Law (TIL), requires that everyone who regularly extends or arranges for loans to consumers must give the consumer a meaningful disclosure in writing of the terms of the transaction. The Truth in Lending Act (TILA) was enacted to prevent abuses in consumer credit cost disclosures. It requires lenders to disclose consumer credit costs in a uniform manner to promote informed use of consumer credit, enabling themtocomparecreditcostsandshoparoundforthebestcreditterms. Thedisclosuremustspell out every detail of the credit transaction so that the borrower does not have to make any computationstotranslatepercentagesintodollaramountsorviceversa. Thetotalfinancecharge or cost of borrowing the money must be disclosed as a dollar amount and as an annual percentage rate (APR). Truth-In-Lending imposed neither uniform interest rates nor finance charges. Rather, it addresses itself to the mode and language of disclosure. Under the Act, the definition of credit includes all real estate loans made to consumers, no matter what the amount if the loan is for other than business or commercial purposes. (One exemption from coverage of the Act is credit or more than $25,000 that is not secured by real property). For residential mortgages, disclosure of the annual percentage rate (APR) is very important. The APR tells a borrower the total cost of financing a loan in percentage terms, as a relationship of the total finance charges to the total amount financed. Finance charges are more than just interest, or thenoteratethatappearsinthepromissorynote. Theyincludeanypointsrequiredbythelender foranyreason,loanoriginationfees,etc. When the buyer must pay points and a loan fee, the APR will be higher than just the interest rate.

Provisions of FACTA

The FACT Act actually contains seven major titles: Identity Theft Prevention and Credit History Restoration, Improvements in Use of and Consumer Access to Credit Information, Enhancing the Accuracy of Consumer Report Information, Limiting the Use and Sharing of Medical Information in the Financial System, Financial Literacy and Education Improvement, ProtectingEmployeeMisconductInvestigations,andRelationtoStateLaws.E.g. AccesstoCredit Reports. One of the major provisions of the FACT Act is to allow consumers easier access to their credit reports as a way to spot possible identity theft and to allow dispute of inaccurate information. TheFACTActrequiresthatconsumersapplyingforcreditreceivetheHomeLoan Applicant Credit Score Information Disclosure notice, which explains their rights. Prior to the passage of the FACT Act, consumers had to pay to get a copy of their report from each of the three national credit bureaus: Equifax, Experian, and TransUnion. The FACT Act allows consumers to request and obtain a free copy of their credit report once every 12 months from each of these credit bureaus by contacting a centralized website, maintained in cooperation with the Federal Trade Commission, www.annualcreditreport.com or by calling 877-322-8228. To protect sensitive data, the FACT Act allows consumers who request a copy of their credit report to also request that the first five digits of their Social Security number (or similar identification number) are not included in the file.

Regulation V, The Fair Credit Reporting Act (FCRA)

The FCRA is a federal law dealing with the granting of credit, access to credit information, the rights of debtors, and the responsibilities of creditors. In brief, the FCRA gives consumers access to the same information aboutthemselvesthatlendersusewhenmakingcreditdecisions. TheFederalTradeCommission publishes guides for consumers that explain all of their rights under the FCRA, including the ability toseekdamagesforviolationsoftheirrights. Identitytheftvictimsandactivedutymilitary personnel have additional rights.

Equal Credit Opportunity Act (ECOA)

The Federal Equal Credit Opportunity Act (ECOA) prohibits lenders and others who grant or arrange credit to consumers from discrimination against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age(provided the applicant is of legal age),or dependence on public assistance. Note: The (ECOA) prohibits a lender from refusing credit on the basis of age. Furthermore, lenders and other creditors must inform all rejected credit applicants of the principal reasons for the denial or terminationofcredit. Thisnoticemustbeinwritingwithin30days. TheFederalregulations provide that the borrower is entitled to a copy of the appraisal report if the borrower paid for the appraisal. Thelawprotectsaborroweragainstanycreditorwhoregularlyextendscredit, including banks, small loan and finance companies, retail and department stores, credit card companies, and credit unions. Anyone involved in granting credit, such as real estate brokers and mortgage brokers who arrange financing, is covered by the law. Businesses applying for credit also are protected by the law. The law was originally passed in 1974 to prohibit lending discrimination on the basis of sex or maritalstatus. Thislawledto,amongotherthings,therequirementthatcreditbureausmaintain separatecreditfilesonmarriedspouses,ifsorequested. Thelawensuredthatwomenreceived thesameconsiderationbylenderswhenapplyingforcredit. Thelawwasexpandedin1976to include all of the protected classes listed above. Most notable among the law's revisions is prohibiting the discrimination against a potential borrower on public assistance. To comply with the ECOA, you usually may not ask interested borrowers of their marital status. Nor can you ask someone about their spouse unless it is a joint application and the spouse will use the account or be contractually liable, or if the applicant is relying on their spouse's income or alimony, orchildsupportfromaformerspousetoqualifyfortheloan. Whentheloanissecuredby property—as with a mortgage—you may ask about a spouse if you are doing business in a "community property" state. When permitted to ask about marital status, you may not ask the applicant if he or she is widowed or divorced, however. You may use only these terms: • Married • Unmarried • Separated Additionally, you cannot ask an applicant about any plans for having or raising children, but you can ask questions about expenses related to any dependents. Creditors can consider the age of an applicant for credit under these circumstances: • The applicant is too young to sign contracts, generally under age 18. • The creditor would favor applicants age 62 and older. • It is used to determine the meaning of other factors important to creditworthiness, such as to determine if an applicant's income might drop because of impending retirement. • It may be used in a valid credit scoring system that favors applicants depending on their age.

Enforcement and Penalties

The Federal Trade Commission (FTC) is responsible for enforcingRegulationZrealestateprovisions. "RegulationZ"requiresa"disclosurestatement"on principal residences of any value. Creditors who violate the TIL are subject to civil and criminal sanctions. For an intentional violation, a borrower may recover up to $1,000 plus legal costs in a civil action against the creditor. A creditor who is convicted of knowingly and willfully violating the Truth-In-Lending Law can be fined up to $5,000, and sentenced to one year in prison. However, if the creditor makes a simple error in a disclosure statement (not a deliberate violation), the creditor will not be subject to sanctions provided to error is corrected within fifteen days from the time it is discovered. Massachusetts imposes similar civil and criminal sanctions for violations.

Home Mortgage Disclosure Act (HMDA)

The Home Mortgage Disclosure Act (HMDA), enacted by Congress in 1975, is enforced by the Federal Reserve Board's Regulation C and applies to certain financial institutions, including banks, savings associations, credit unions, and other mortgage lending institutions. HMDA provides loan data that can be used by the public to assist in: • Determining whether financial institutions are serving the housing needs of their communities. • Aiding public officials in distribution of public-sector investment in order to attract private investment where needed. • Identifying possible discriminatory lending patterns through the collection and disclosure of data about applicant and borrower characteristics. As the name implies, the Home Mortgage Disclosure Act is a disclosure law that relies upon public scrutiny for its effectiveness. It does not prohibit any specific activity of lenders, and it does not establish a quota system of mortgage loans to be made in any metropolitan statistical area (MSA) or other geographic area as defined by the Office of Management and Budget. The provisions of HMDA affect applications for residential loans, including: • Home purchase. • Home improvement. • Refinancing, and • Subordinate financing. It does not apply to loans on vacant land, new construction, or on loans that are sold as part of a pool for servicing.

Secure and Fair Enforcement for Mortgage Licensing Act (Safe Act)

The SAFE ACT is a key component of HERA. It is designed to enhance consumer protection and reduce fraud by requiring states to establish national minimum standards for mortgage training, including pre-licensing and annual continuing education. Furthermore, under the SAFE Act, all mortgage loan originators (MLOs) must be either state-licensed or federally registered. Mortgage loan originators seeking state-licensure or currently holding a state license are required to pass the SAFE Mortgage Loan Originator Test, which includes a national component and may have a state-specific component. The SAFE Act requires all states to implement a Mortgage Loan Originator (MLO) licensing process that meets certain standards through the Nationwide Mortgage Licensing System & Registry (NMLS). The NMLS, which was started in 2004 by the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR), is responsible for providing a centralized and standardized system for mortgage licensing that accommodates both theregulatoryagenciesandthemortgageindustry. TheNMLSwebsitecontainsvaluable comprehensive information for all mortgage loan originators, including specific details about the steps necessary to set up an account, schedule a test appointment, and access state-specific requirements. • Provide uniform license applications and reporting requirements for state licensed-loan originators. • Provide comprehensive licensing and supervisory database. • Aggregate and improve flow of information to and between regulators. • Provide increased accountability and tracking of loan originators. • Streamline the licensing process and reducing regulatory burden. • Enhance consumer protections and support anti-fraud measures. • Provide consumers with free, easy-to-access information about a loan originator's employment history and any public disciplinary and enforcement actions. • Establish a means by which residential mortgage loan originators would be required to act in the best interests of the consumer. • Facilitate responsible behavior in the subprime mortgage market place. • Provide comprehensive training related to nontraditional mortgage products. • Facilitate collection and disbursement of consumer complaints on behalf of state mortgage regulators To meet its objectives, the SAFE ACT requires all residential mortgage loan originators to be either state-licensed or federally registered: • A mortgage loan originator employed by a federally insured depository institution or any credit union or an owned and controlled subsidiary that is federally supervised must be registered. • All other mortgage loan originators, without exception, must be state licensed. Applicants must submit to a background check, which includes fingerprints, personal history, a credit report, and criminal check. In addition, anyone who is applying for a loan originator license: • Can never have had a revoked loan originator license. • Can never have been convicted of a felony involving fraud, dishonesty, breach of trust, or money laundering. • Cannot have been convicted of any other felony within the past seven years. All licensed or registered loan originators will be identified by a unique ID number. State-licensed MLOs must complete at least 20 hours of approved pre-licensing education which includes these topics: • Federal law and regulation (3 hours) • Ethics, including fraud, consumer protection, and fair lending (3 hours) • Nontraditional mortgage products (2 hours) It is up to each state to determine whether or not to also require state-specific topics. The SAFE Act mandates that all state-licensed mortgage loan originators pass a national licensing exam covering these topics: • Federal mortgage-related laws (35%) • General mortgage knowledge (25%) • Mortgage loan origination activities (25%) • Ethics (15%) Individual states may determine how to handle state-specific portions of the exam.

Safeguards Rule

The Safeguards Rule requires all financial institutions to design, implement, and maintain safeguards to protect customer information while it is in the custody and control of the institution anditsagents. Thisruleappliesnotonlytofinancialinstitutionsthatcollectinformationfromtheir own customers, but also to any institution—such as a credit reporting agency or even an educational institution—that receives customer information from other financial institutions. A written Safeguards Policy must include provisions that: • Ensure the security and confidentiality of customer records, • Protect against any anticipated threats or hazards to the security of such records. • Protect against the unauthorized access or use of such records or information in ways that could result in substantial harm or inconvenience to customers.

Advertising, Truth-In-Lending Requirements

The interest rate in an advertisement must only be stated as an annual percentage rate (APR). Any ad for the sale of real estate, which includes certain words or phrases, may trigger the required disclosure of other items. Thefollowingaretriggerwordsorphrases: 1. The amount or percentage of down payment. "5% down" or "$5,000 down", or "95% financing", or "low down payment." 2. The dollar amount of payment. "Monthly payments only $599." 3. The number of payments. "Only 60 monthly payments and you own it." 4. The period for repayment. "35 year financing." 5. The finance charge in dollars or that there is no charge for credit. "Total finance charge for first year $1,999" or "No interest for the first year." If the ad contains any of the above trigger terms, then the following disclosures must appear in the ad: 1. The cash price or amount of the loan. 2. The cash amount of the down payment or indication that no down payment is required. 3. The terms of repayment - number of payments, amount and frequency. 4. The Annual Percentage Rate (APR). An ad that reads, "ONLY $4,500 DOWN" would be in violation unless it also contained the following statement: "Financing Terms: 9% APR, 30-year mortgage for $85,500, monthly payments $724.17 including P&I."

secondary mortgage market

The secondary mortgage market is a system, which allows mortgage lenders to sell their loans. Most secondary mortgage market activity began in 1969 and 1970 when high interest rates being offered by competing borrowers caused may depositors to withdraw their money from savings banksforinvestmentsofhigheryieldsthanthefixedratesofferedbythebanks. Thisoutflowof cash left the banks with insufficient capital to make new home mortgage loans, and there was a danger that the outflow could exceed the repayments of outstanding loans. The secondary mortgage market provided primary lenders an opportunity to liquidate some of these mortgages and to reinvest the money at higher market rates. As a result, the secondary mort- gage market has indirectly helped the sale of homes during tight mortgage times. Private investors and government agencies that buy and sell real estate mortgages, originally established by the federal government in an attempt to moderate local real estate cycles The secondary mortgage market also provides a means for investing in real estate loans through the purchase of mortgage-backed securities. Mortgage market originators and lenders sell their loansatdiscounttosecondarymortgagemarketparticipants. Themortgageloansarepackaged and sold in small units by investment bankers and stockbrokers to investors in the form of "pass through" securities. Investors include individuals, institutions, pension funds, life insurance companies and S&Ls. Interestingly, S&Ls are the largest sellers and the largest buyers in the secondary mortgage market. Primary and secondary markets, both, are trying to maximize returns on investment dollars. As interest rates rise, it is more profitable to sell older loans with lower interest rates so the lender has new money to lend again at higher interest rates

Home Seller Program

Thehomesellerprogramisasecondarymarketforsellerswho take back purchase money mortgages. Fannie Mae will purchase seller take-back mortgages provided they meet Fannie Mae loan qualification specifications.

3 Major Discount Purchasers in the Secondary Mortgage Market

There are several secondary market participants which purchase discounts mortgages at weekly auctions. Thediscountvariesaccordingtothecurrentinterestratesandothereconomictrends. The 3 are the following: FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) AKA Fannie Mae GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) AKA Ginnie Mae. FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) AKA Freddie Mac.

Section 114

ThisresultedinSection114oftheFACT Act, known as the Red Flags Rules, which require:

Red Flags Rules

ThisresultedinSection114oftheFACT Act, known as the Red Flags Rules, which require: • Financial institutions and creditors to implement a written identity theft prevention program. • Card issuers to assess the validity of change of address requests. • Users of consumer reports to reasonably verify the identity of the subject of a consumer report in the event of a notice of address discrepancy. • The act applies to federal and state-chartered banks and credit unions, non-bank lenders, mortgage brokers, any person that regularly participates in a credit decision—including setting the terms of credit, and any person who requests a consumer report. Every organization has the flexibility to define a program that is appropriate to the size and operation of their particular business.

Security and Disposal

To further protect the privacy of consumer financial information, the FACT Act requires businesses to take measures to responsibly secure and dispose of sensitive personal information that is found in a consumer's credit report. Reasonable methods for security and disposal include: • Burning or shredding papers that contain consumer report information so that information cannot be reconstructed. • Destroying or erasing electronic files or media so that information cannot be recovered or reconstructed. • Placing all pending loan documents in locked desks, cabinets, or storage rooms at the end of the work day. • Several widely reported surveys on the number of identity theft victims were released as Congress went into final hearings on FCRA amendments. One report released by the Federal Trade Commission in September 2003 estimated that approximately 10 million peoplewerevictimsofidentitytheftin2002alone. ThisresultedinSection114oftheFACT Act, known as the Red Flags Rules, which require: • Financial institutions and creditors to implement a written identity theft prevention program. • Card issuers to assess the validity of change of address requests. • Users of consumer reports to reasonably verify the identity of the subject of a consumer report in the event of a notice of address discrepancy. • The act applies to federal and state-chartered banks and credit unions, non-bank lenders, mortgage brokers, any person that regularly participates in a credit decision—including setting the terms of credit, and any person who requests a consumer report. Every organization has the flexibility to define a program that is appropriate to the size and operation of their particular business.

True or False: " The primary purpose of Fannie Mae is to purchase mortgages from primary mortgage lenders. "

True

Factors of Stable Local Real Estate Markets

When the secondary market players buy mortgages from local banks, those local banks then have more money to lend again to otherpotentialhomeownersintheirarea. Whenlocalbanksinvestsurplusfundsinrealestate investments from other regions of the country, the effects of local real estate cycles can be moderated as the banks also have stable investments from other areas that may be going through different phases of the real estate cycle. An important by-product of secondary mortgage markets is the standardization of loan criteria. Any changes implemented by secondary mortgage markets become requirements around the country for those wanting to sell mortgages in the secondary market.

Illegal Flipping

While house flipping is not illegal, some investors use fraudulent appraisals and title work to flip houses illegally. Flipping, the technique of buying properties and quickly reselling them for a profit is one of the oldest and most widely used real estate investing techniques. Yet, people unfamiliar with flipping often ask, isn't flipping properties illegal? The answer is...it depends. If you do it legally, it's legal. If you do it illegally, it's illegal. Let's examine how illegal flipping usually works. An investor buys a fixer upper. They usually do notbuyitatanappropriatediscount. Theyalsotypicallydoasubparrehabtotheproperty. Then, the investor lines up a naive buyer (although oftentimes the buyer is in on the scheme too), an appraiser, a mortgage broker, and a closing agent. The investor conspires with the appraiser to artificially inflate the value of the home and the closing agent facilitates the transaction, oftentimes giving the buyer a "kickback" for their cooperation in the scheme. In fact, all parties usually get a piece of the fraudulent gains. In these schemes, the buyer obtains financing through a lender who is unaware of any manipulation in the appraisal or misinformation provided during the loan application process. Since important facts were misrepresented to the lender, the parties have committed bank fraud. As a result, this typeofflippingisillegal. Theresultofthissituationisthatthebuyerpaidtoomuchforthehouse andisstuckwithamortgagetheycannotafford. Thebankisultimatelyforcedtoforecloseonthe house and incur a sizeable loss when they sell it.

Section 32 of Regulation Z

erulesfortheseloansarecontainedinSection32ofRegulationZ,which implements the Truth in Lending Act.

Refinancing

he right of rescission applies to refinancing a home mortgage loan and to financing the purchase of investment property, such as a non-occupied, three family houses. The bank withholds the funds until the fourth business day after the mortgage documents have been signed.

Under the Fair Credit Reporting Act, Consumer Reporting Agencies

• May not report outdated negative information. In most cases, a consumer reporting agency may not report negative credit information that is more than seven years old, or bankruptcies that are more than ten years old. There is no time limit on the reporting of criminal convictions. • Mustlimitaccesstoacreditfile. Aconsumerreportingagencymayprovideinformationto people with a legitimate business need—usually to consider an application with a creditor, insurer, employer, landlord, or other business. The FCRA specifies those with a valid need for access. • May not give out consumer credit information to an employer, or a potential employer, without written consent given to the employer by the consumer.

Difference Between Primary and Secondary Markets:

• Secondary markets buy real estate loans as investments from all over the country. • Primary markets are usually local in nature, with local lenders making local loans.