It is just common sense that anyone who qualifies under a mortgage lender’s underwriting guidelines can obtain a mortgage. Given that is true there must be a system in place to regulate those guidelines.
The good news is the United States federal government has 4 core laws that make the guidelines uniform and administered fairly and equally for all individuals. In fact, all lenders are required to operate under certain rules, regulations and procedures when taking loan applications.
Those rules, regulations and procedures are spelled out in the Equal Credit Opportunity Act (ECOA), Fair Credit Reporting Act (FCRA), Real Estate Settlement Procedures Act (RESPA) and the Truth In Lending Act (TILA). Your state may have another layer or two of requirements but this article only explains these four federal laws.
Equal Credit Opportunity Act (ECOA)
The ECOA prohibits discrimination in lending based on race, creed, religion, national origin, sex, marital status or age. This makes sense given its title, right? After all, if credit wasn’t equal for all, there wouldn’t be a need for this law. This law goes one step further and mandates the lender to send the applicant a written explanation stating the reason(s) for a rejection of the application. This letter must be mailed within 30 days of the turn down.
Fair Credit Reporting Act (FCRA)
The Fair Credit Reporting Act is important in every aspect of your credit life. You would be well advised to at least research this act on the Internet. When you apply for a mortgage, the lender pulls a credit report. The FCRA guarantees you will have access to that report.
This has become so common place that lenders automatically give you a copy for your records. They will even go over your report with you should you have a low credit score. Some lenders offer help to people with troubled credit so they are able to qualify for the loan.
Real Estate Settlement Procedures Act (RESPA)
The RESPA requires lenders to give a “good faith estimate” of all closing costs you are likely to pay. The idea is to keep the borrower from being forced to pay “hidden” fees at closing.
Keep in mind the lender won’t know the precise closing costs when you submit your application but the lender will be able to estimate the costs to within a few hundred dollars. Along with the good faith estimate you will receive the HUD approved information booklet that discusses closing costs. Read it.
Truth In Lending Act (TILA)
The TILA, like the FCRA, is important in every aspect of your credit life. It too should be researched and read. When you are applying for a mortgage loan, you may hear the term Reg Z because that is the paragraph that requires the lender to inform you of the annual percentage rate (APR) on the loan.
With a known APR you are better able to compare the relative value of different loans. In other words, you can see what loan makes sense for you at that point in time, at least in theory.
Remember, ALL lenders must abide by the above laws. Banks, mortgage brokers, mortgage bankers, savings and loans and credit unions are not exempt from the law. Knowing these laws exist should make you a smarter consumer.