5.4 Lending Compliance: TILA, RESPA, TRID & Usury Exemptions

5.4 Lending Compliance: TILA, RESPA, TRID & Usury Exemptions

Real estate mortgage originations operate under strict federal consumer protection statutes and state regulatory constraints. Real estate brokers must understand the governing disclosure rules under TILA, RESPA, and TRID, as well as the unique statutory exemptions granted under California usury law.

---

Truth in Lending Act (TILA / Regulation Z)

Enacted by Congress in 1968 and enforced by the Consumer Financial Protection Bureau (CFPB), TILA (12 CFR Part 1026 / Regulation Z) promotes meaningful disclosure of credit terms so consumers can compare loan costs effectively.

Key TILA Provisions

1. Annual Percentage Rate (APR):
   • Expresses the total annual finance charge—including interest, loan origination fees, discount points, and prepaid finance charges—as a standardized annual percentage.
   • APR represents the true cost of borrowing and is generally higher than the nominal interest rate on the note.
2. Right of Rescission (3-Day Cooling-off Period):
   • Applies to consumer credit transactions secured by a borrower's principal residence, such as refinances, home equity loans, and second mortgages.
   • Does NOT apply to purchase-money first mortgages used to acquire a home.
   • The borrower has the legal right to cancel the loan transaction without penalty until midnight of the third business day following loan consummation, delivery of notice of right to rescind, or receipt of disclosures (whichever occurs last).
3. Advertising & Trigger Terms:
   • If a real estate advertisement contains specific financial details—known as Trigger Terms—it automatically triggers mandatory disclosure of all other credit terms.
   • Trigger Terms include: Down payment amount or percentage ("Only 3.5% down!"), monthly payment figure ("Pay $1,800/month!"), number of payments, or finance charge amount.
   • Mandatory Required Disclosures: Amount or percentage of down payment, terms of repayment, and the APR (written out in full).
   • Non-Trigger Terms: General statements like "Easy financing," "Low down payment," or "Competitive interest rates available."

---

Real Estate Settlement Procedures Act (RESPA / Regulation X)

Enacted in 1974 and enforced by the CFPB, RESPA (12 CFR Part 1024 / Regulation X) governs federally related mortgage loans secured by 1-to-4 unit residential real estate, prohibiting unethical kickbacks and regulating settlement procedures.

RESPA Section 8 Anti-Kickback Enforcement

• Strict Prohibition: Section 8 explicitly prohibits giving or receiving any fee, kickback, or "thing of value" (cash, trips, free marketing services, gifts) in exchange for referring real estate settlement business (e.g., referrals between real estate brokers, mortgage lenders, title companies, escrow officers, and home inspectors).
• Unearned Fees: Prohibits splitting charges or receiving unearned fees for services not actually performed.
• Affiliated Business Arrangements (AfBA): Real estate licensees may refer clients to affiliated settlement service providers (e.g., a brokerage-owned title or escrow company) only if they provide a written AfBA Disclosure at or prior to referral, disclose the financial relationship, and do not compel the client to use the affiliate.

Escrow / Impound Account Restrictions

RESPA caps the maximum reserve buffer a lender can demand in an escrow impound account for property taxes and hazard insurance to no more than 1/6th of total estimated annual disbursements (equivalent to 2 months of escrow cushion).

---

TRID (TILA-RESPA Integrated Disclosures)

TRID, often called the "Know Before You Owe" rule, consolidated pre-existing TILA and RESPA disclosures into two standardized consumer-friendly forms.

+-------------------------------------------------------------------------+
|                        TRID MANDATORY TIMELINE                          |
|                                                                         |
|  [Day 0]   LOAN APPLICATION SUBMITTED                                   |
|            Borrower submits 6 items: Name, Income, SSN, Property        |
|            Address, Estimated Value, Loan Amount Requested              |
|                 |                                                       |
|                 v                                                       |
|  [3 Days]  LOAN ESTIMATE (LE) DELIVERED                                 |
|            Lender must deliver or mail LE within 3 business days       |
|                 |                                                       |
|                 v                                                       |
|  [Underwrite] UNDERWRITING & PROCESSING                                 |
|                 |                                                       |
|                 v                                                       |
|  [3 Days]  CLOSING DISCLOSURE (CD) RECEIVED BY BORROWER                 |
|            Borrower must RECEIVE CD at least 3 business days            |
|            prior to loan consummation (signing)                         |
|                 |                                                       |
|                 v                                                       |
|  [Closing] LOAN CONSUMMATION                                            |
|            Borrower executes note and deed of trust                     |
+-------------------------------------------------------------------------+

1. Loan Estimate (LE)

• Replaced the old Good Faith Estimate (GFE) and Initial TILA disclosure.
• Must be delivered or placed in the mail by the lender within 3 business days of receiving a completed loan application.
• Application Definition: Under TRID, a loan application exists as soon as the lender receives six specific pieces of information: (1) Borrower Name, (2) Borrower Income, (3) Social Security Number, (4) Property Address, (5) Estimated Property Value, and (6) Requested Loan Amount.

2. Closing Disclosure (CD)

• Replaced the HUD-1 Settlement Statement and Final TILA disclosure.
• Combines itemized settlement costs with final loan terms.
• Mandatory 3-Business-Day Waiting Period: The borrower must receive the Closing Disclosure at least 3 business days prior to loan consummation (the date the borrower executes the legally binding loan documents).
• Changes Requiring a New CD & 3-Day Waiting Period Reset:
  1. The APR increases by more than 1/8th of 1% (0.125%) for a fixed-rate loan or 1/4th of 1% (0.25%) for an adjustable-rate loan.
  2. The lender changes the underlying loan product (e.g., switching from a fixed-rate to an ARM).
  3. A prepayment penalty is added to the loan terms.

---

Equal Credit Opportunity Act (ECOA / Regulation B)

Enforced under Regulation B, ECOA prohibits credit discrimination based on race, color, religion, national origin, sex, marital status, age, or receipt of public assistance income.

• Lender Timeline: Lenders must notify applicants of credit approval, counteroffer, or adverse action (denial) in writing within 30 calendar days of receiving a completed application.
• Right to Appraisal: Borrowers have the right to receive a copy of all written appraisals developed in connection with an application for credit secured by a first lien on a dwelling.

---

California Usury Law & Broker Exemption

Usury is the illegal charging of interest on a loan in excess of maximum statutory rate limits established by law.

California Constitutional Usury Limits (Cal. Const. Art. XV)

1. Personal/Family/Household Loans: Maximum allowable interest rate is 10% per annum.
2. Other Loans (Business/Investment): Maximum rate is the higher of 10% per annum or 5% above the Federal Reserve Bank of San Francisco discount rate.

CRITICAL EXEMPTION: California Real Estate Broker Exemption

Under California Constitution Article XV and codified in California Business & Professions Code §10131.1 and Civil Code §1916.1, real estate loans that are made or arranged by a licensed California Real Estate Broker and secured directly or collaterally by a lien on real property are EXEMPT from California usury interest caps.

+-------------------------------------------------------------------------+
|            CALIFORNIA BROKER USURY EXEMPTION MATRIX                     |
|                                                                         |
|  SCENARIO A: Private Lender lends at 14% interest directly              |
|              WITHOUT a licensed broker.                                 |
|              --> RESULT: USURIOUS & ILLEGAL (Exceeds 10% cap)           |
|                                                                         |
|  SCENARIO B: Private Lender lends at 14% interest on real property      |
|              ARRANGED by a licensed CA Real Estate Broker.              |
|              --> RESULT: FULLY EXEMPT & LEGAL under Civil Code §1916.1  |
+-------------------------------------------------------------------------+

What Constitutes "Made or Arranged" by a Broker?

• Made by a Broker: The licensed broker acts as a lender, extending their own funds.
• Arranged by a Broker: The broker acts as an agent for compensation in soliciting lenders, negotiating loan terms, or structuring the real estate financing transaction.
• Purpose of Exemption: Allows private money ("hard money") lenders to fund higher-risk real estate development and bridge loans in California through licensed real estate brokers without violating usury statutes.