Question:

What are the federal laws against predatory lending?

Answer:

The three major federal laws against predatory lending are the Truth in Lending Act (TILA), RESPA, the Real Estate Settlement Procedures Act; and HOEPA, the Home Ownership and Equity Protection Act.

Federal Laws against Predatory Lending Explained

TILA requires disclosures on credit rates and terms. Consumers are empowered to cancel certain loan agreements. TILA also regulates certain aspects of credit card and high rate credit. Certain home equity plans and high cost mortgages are also limited by TILA. Regulation Z is the part of TILA most visible to the borrower and most often cited in loan documents.

RESPA is another great federal law against predatory lending. It sets the requirements for providing GFE and HUD-1 settlement costs by lenders. Escrow funds are also regulated under RESPA. RESPA violations are not grounds for a lawsuit; consumers are only allowed to use RESPA violations to prove unethical lender practices.

HOEPA seems to be the best federal instrument to restrict predatory lending. However, unfortunately, HOEPA rarely applies. HOEPA rules apply only in case interest rates reach 8% or higher, or in case of extremely high rates. HOEPA requires loan terms disclosures within 3 business days prior to completion of the loan transaction. Plus,

  • Prepayment penalties are usually not allowed under HOEPA;
  • Balloon payments and negative amortization are forbidden;
  • Borrower payment ability has to be evaluated, etc.

Federal attempts to curb predatory lending would be much more successful if HOEPA 8% interest boundary did not exist.

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