4.3 Financing Regulations and Foreclosure

TILA, Regulation Z, and APR

The Truth in Lending Act (TILA), implemented by Regulation Z, requires lenders to disclose the true cost of credit so borrowers can comparison-shop. Its centerpiece is the annual percentage rate (APR) — the yearly cost of the loan expressed as a percentage that includes interest plus certain finance charges (points, origination fees, mortgage insurance). Because the APR folds in these extra costs, it is typically higher than the note rate and is the best apples-to-apples comparison figure.

TILA also governs advertising: if an ad states any specific credit term (such as a down payment, payment amount, or rate), it triggers disclosure of additional terms — these are "trigger terms." For certain refinances on a primary residence, TILA grants a three-day right of rescission, allowing the borrower to cancel within three business days. (This rescission right does not apply to a loan used to purchase the home.)

RESPA, ECOA, and TRID Disclosure Timing

The Real Estate Settlement Procedures Act (RESPA) regulates the settlement (closing) process on residential loans. RESPA's core prohibitions:

• No kickbacks or referral fees for the referral of settlement-service business (Section 8).
• No requiring the use of a particular title company or affiliated provider.

The Equal Credit Opportunity Act (ECOA) prohibits discrimination in any credit transaction based on race, color, religion, national origin, sex, marital status, age, or receipt of public assistance.

TRID and the Two Key Forms

TRID (TILA-RESPA Integrated Disclosure) merged the older disclosures into two forms with strict timelines the exam loves to test:

If, after the CD is issued, the APR changes beyond tolerance, the loan product changes, or a prepayment penalty is added, a corrected CD must be reissued and a new 3-business-day waiting period begins.

Predatory Lending, HOEPA, and Usury

Predatory lending describes abusive practices that strip borrower equity or set up loans the borrower cannot repay — excessive fees, loan flipping, balloon payments hidden in fine print, and steering. To combat this, the Home Ownership and Equity Protection Act (HOEPA) — an amendment to TILA — imposes extra disclosures and protections on high-cost mortgages that exceed APR or points-and-fees thresholds. HOEPA loans face restrictions such as bans on balloon payments (with limited exceptions), prepayment penalties, and mandatory pre-loan homeownership counseling.

Usury laws cap the maximum interest rate a lender may legally charge. Charging interest above the state usury limit is illegal and can void the lender's right to collect interest. While many first-lien residential mortgages are exempt from state usury caps under federal preemption, the concept is widely tested.

Quick Reference

• TILA → discloses APR and finance charges; right of rescission on refinances.
• RESPA → settlement process; bans kickbacks.
• ECOA → bans credit discrimination.
• HOEPA → protects against high-cost predatory loans.
• Usury → caps the legal interest rate.

Foreclosure Types and Alternatives

When a borrower defaults, the lender enforces the security instrument through foreclosure, which extinguishes the borrower's interest and applies the sale proceeds to the debt. Three methods appear on the exam:

• Judicial foreclosure: The lender files a lawsuit; a court orders the property sold at a sheriff's sale. Common in lien-theory states where the lender holds only a lien.
• Non-judicial foreclosure: Conducted under a power-of-sale clause in a deed of trust — the trustee sells the property without court involvement. Faster and common in title-theory/deed-of-trust states.
• Strict foreclosure: A court sets a deadline; if the borrower fails to pay, title passes directly to the lender with no sale. Used in only a few states.

Redemption Rights

The equity of redemption lets a defaulting borrower reclaim the property by paying the full debt before the foreclosure sale. Some states also grant a statutory right of redemption for a period after the sale.

Alternatives to Foreclosure

• Deed in lieu of foreclosure: The borrower voluntarily deeds the property to the lender to satisfy the debt and avoid foreclosure. It does not erase junior liens, which remain attached.
• Short sale: With lender approval, the property is sold for less than the balance owed, and the lender accepts the shortfall, usually to avoid the cost of foreclosing.

Where Each Loss Goes: Deficiency Judgments

When a foreclosure or short sale leaves the lender owed money after the sale, the unpaid remainder is called a deficiency. In states that permit it, the lender may seek a deficiency judgment against the borrower personally for that shortfall. Some states bar deficiency judgments on purchase-money loans for an owner-occupied home, an important consumer protection. For the exam, link the concept back to the note: because the note is a personal promise to repay, the borrower can remain liable for the gap even after losing the property, unless a state anti-deficiency statute or a negotiated short-sale waiver releases that liability.

This is why a short sale or deed in lieu is rarely "free" — the agent should always advise the client to confirm in writing whether the lender waives the deficiency.