The mortgage industry in the US is regulated on the federal level by a number of Congressional acts and federal agencies. However, it can get complicated fairly quickly, as each state also has its own laws and regulations. We often get asked about these, and while this article shouldn’t be construed as legal advice in any way, we did want to give LOs and our other readers a quick primer on the legal state of the mortgage industry.
Federal Mortgage Laws
The Truth in Lending Act (TILA), passed in 1968, protects borrowers by requiring lenders and creditors to disclose the terms of a loan. TILA standardizes terms, making it easier to compare between different offers.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010 after the Great Recession, massively overhauled the whole financial services industry. Among many innovations of the Dodd-Frank Act were the elimination of the Office of Thrift Supervision and creation of the Consumer Financial Protection Bureau (CFPB), responsible for consumer protection in the financial sector, including mortgages.
The Code of Federal Regulations (CFR) provides the official texts for various agency regulations, including mortgage regulations. CFR is updated once per year.
State Mortgage Regulations
While the mortgage industry is regulated federally, each state has its own set of laws, too. First, let’s talk about recourse and non-recourse redemption periods, which differ from state to state.
When a lender forecloses on a mortgage, it’s not uncommon for the debt to exceed the amount recovered through the foreclosure sale. In states classified as “non-recourse,” the lender cannot seek a judgment against the debtor to recover the deficiency, whereas in “recourse” states, lenders are allowed to seek a deficiency judgment. Since almost all states allow conditional deficiency judgments, it’s difficult to classify states as strictly recourse or non-recourse.
Another point of difference is the time in which a debtor may redeem a mortgage default. To varying degrees, all states allow debtors to cure defaults before a property is sold through the foreclosure process. Many states, under various conditions, allow debtors to redeem even after the foreclosure sale.
It’s also important to mention how different states deal with fraudulent or abusive lending practices.
Loan flipping is the process of inducing a borrower to repeatedly refinance an existing mortgage, each time charging fees for both the new loan and a prepayment penalty on the old loan. Typically, the fees are financed into the loan. Over time, the borrower becomes hopelessly indebted and often ends in default and foreclosure. Flipping is considered a predatory tactic and thus is banned in many states, including California, Colorado, and Florida. States like Utah, Texas, and Louisiana have no specific laws which ban loan flipping.
Negative amortization is a financial term referring to an increase in the principal balance of a loan caused by a failure to cover the interest due on that loan. Although it can help provide more flexibility to borrowers, it can also increase their exposure to interest rate risk. States like Georgia, Illinois, and Minnesota restrict the use of negative amortization.
A prepayment penalty is a fee that some lenders charge if you pay off all or part of your mortgage early. Typically, a prepayment penalty only applies if you pay off the entire mortgage balance – for example, because you sold your home or are refinancing your mortgage – within a specific number of years (usually three or five years). In some cases, a prepayment penalty could apply if you pay off a large amount of your mortgage all at once. The majority of states allow prepayment penalties, however, there are some exceptions, notably Maine, Massachusetts, and Nevada.
Although the main legal aspects are regulated on the federal level, it’s important to know the intricacies of the state regulations. These are just a few examples, and we all know how complex state by state regulation can get. Would you like us to write more about it? Leave us a note letting us know in the comments!
FAQs
Most states allow lenders to impose a fee if borrowers pay off mortgages before a specific date – typically in the first three years after taking out a mortgage. While Alaska, Virginia, Iowa, Maryland, New Mexico, and Vermont have banned prepayment penalties, other states allow them with certain conditions.
Who enforces the majority of mortgage lending laws and regulations? ›
The FTC enforces laws that protect consumers from deceptive mortgage practices by certain kinds of lenders. The FTC also takes action when companies use illegal tactics directed to people facing foreclosure.
Who regulates mortgage companies in the United States? ›
Federal Trade Commission – The Federal Trade Commission (FTC) is an independent government agency whose primary role is to ensure the protection of consumers. The commission regulates mortgage companies engaging in deceptive and unfair practices that affect their consumers.
What is the most commonly reported complaint related to mortgage lending? ›
Poor communication, or a lack of responsiveness, is the most common complaint in the mortgage lending process.
How do I waive a prepayment penalty? ›
One option is to try negotiating a lower fee, but the best way to avoid the penalty altogether is to switch to a different loan type or lender. Since not all lenders charge the same prepayment penalty, make sure to shop around and compare lenders to find the best mortgage option for you.
What states are banning payday loans? ›
As of 2022, payday loans are currently illegal in these thirteen states: Arizona, Arkansas, Connecticut, Georgia, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont, West Virginia, and the District of Columbia.
Who holds lenders accountable? ›
As the primary regulator responsible for the Truth in Lending Act, the CFPB is committed to ensuring that lenders comply with the law's requirements.
What is the May 1st mortgage rule? ›
Under a new rule from the Federal Housing Finance Agency (FHFA), which took effect on May 1st, borrowers with lower credit ratings and less money for a down payment will qualify for better mortgage rates, while those with higher ratings will pay increased fees.
What is an example of a fair lending violation? ›
For example, if a lender refuses to make a mortgage loan because of your race or ethnicity, or if a lender charges excessive fees to refinance your current mortgage loan based on your race or ethnicity, the lender is in violation of the federal Fair Housing Act.
What are federal laws for mortgages? ›
Specific areas of focus include the Truth in Lending Act (TILA), the Ability-to-Repay/Qualified Mortgage (ATR/QM) Rule, the Real Estate Settlement Procedures Act (RESPA), the TILA-RESPA Integrated Disclosure (TRID) Rule, Flood Insurance, Mortgage Servicing Rules, the Home Ownership and Equity Protection Act (HOEPA) ...
Fannie Mae and Freddie Mac are both GSEs that buy and guarantee mortgages, allowing lenders to free up capital to issue new loans. There are some differences, however. Fannie Mae is publicly traded, while private shareholders own Freddie Mac.
What is loan flipping? ›
How loan flipping works. The typical situation involves a lender that coaxes and convinces a homeowner to repeatedly refinance their mortgage while also persuading them to borrow more money each time.
Do banks take CFPB complaints seriously? ›
The complaints may be vague and unsupported but banks have to take them seriously, he said. If the CFPB decides to take an enforcement action based on complaints, legal costs for banks defending action can be tens of millions of dollars a month.
What is mortgage lender negligence? ›
If the mortgage lender has committed negligence, they can be sued. For example, if the mortgage company negligently fails to include terms in the loan agreement that were agreed to by both of the parties or if they breached their fiduciary duties.
What is a CFPB violation? ›
When a financial institution, individual, or other entity subject to the CFPB's authority breaks the law, the CFPB may take enforcement action against them. In certain cases, the CFPB may partner with other federal, state, or local agencies to investigate the wrongdoing and coordinate the enforcement action.
Does Texas have prepayment penalties? ›
Section 302.102 of the Texas Finance Code prohibits residential mortgage lenders from implementing any kind of prepayment penalty if the borrower is occupying the purchased property as their homestead and the interest rate on the loan is higher than 12%, with a few exceptions.
Do mortgages still have prepayment penalties? ›
Some lenders charge a fixed amount, while others charge a certain number of months' interest or a percentage of your loan balance. Your mortgage contract will detail the specifics. Since Dodd-Frank became law, mortgage prepayment penalties can only be charged during the first three years of repayment.
Are prepayment penalties illegal in Florida? ›
—A licensee may not require a borrower to pay a prepayment penalty for paying all or part of the loan principal before the date on which the payment is due.
Is legal illegal for a lender to charge a prepayment penalty? ›
A licensee may not charge a consumer a prepayment penalty on any consumer loan (including commercial loans less than $5,000). (This provision added by AB 539 is not applicable to a loan secured by real estate. Mortgages remain subject to other laws regarding prepayment penalties.)
