Real Estate Financing and Investing/Effect of Violations
Violation of Regulation Z provisions can lead to both civil and criminal penalties. Civil penalties include a penalty of up to $1,000 paid to the borrower, actual damages plus attorney's fees. Criminal penalties include a fine of up to $5,000, up to one year in jail, or both.
Equal Credit Opportunity Act
As originally passed, the Equal Credit Opportunity Act prohibits discrimination by lenders on the basis of sex or marital status in any aspect of a credit transaction. As of 1977, the act was extended to cover additional protected groups of borrowers. These include individuals who are discriminated against on basis of race, color, religion, national origin, age, receipt of income from a public assistance program and good faith exercise of rights under the Consumer Protection Act.
Exceptions to the protection of the law are individuals who do not have contractual capacity (minors) and individuals who are not citizens and whose status might affect a creditor`s rights and remedies in the case of a default.
The purpose of this law and Regulation B, which was issued by the Board of Governors of the Federal Reserve System, was to assure that lenders would not treat one group of applicants more favorably than other groups except for reasonable and justifiable business reasons. Strict rules have been established to require fair dealing in all aspects of a credit transaction.
A creditor failing to comply with the law is subject to civil liability for damages in individual or class actions. These damages can be actual or punitive. Punitive damages are intended to punish a wrongdoer. These are limited to $10,000 in individual actions or the lesser of $500,000 or one percent of a creditor`s net worth in class actions. A class action occurs when a specific group of individuals has been harmed from a violation of the law. In general, lawsuits must be filed within two years of a violation.
The law is very broadly worded and covers all phases of a credit transaction. The following is a lender`s lists of "do`s" and "don'ts":
- Do not ask about a person`s birth control practices or intentions to bear children; however, a neutral question such as whether the applicant expects his or her income to be interrupted in the future is considered proper.
- Do tell the applicant that income from alimony or child support need not be disclosed unless the applicant wishes this source of income considered.
- Do tell the applicant that the federal government needs certain information for monitoring purposes, but that this information will not be used as a means of discrimination. Note that the applicant may decline to furnish this information.
- Do not require a spouse to co-sign a credit instrument except where state laws, such as California`s community property law, require a signature to create a proper lien on property serving as security for a loan.
- Do not use age in evaluating an applicant`s creditworthiness. One exception to this rule is if the applicant is considered "elderly" (age 62 or over), and the age is being considered to favor the applicant.
- Do not require the applicant to reveal marital status. This extends to the use of courtesy titles (Ms., Mr., Mrs., Miss) unless requested by the applicant.
- Do furnish credit information in the names of both spouses for the purpose of establishing a credit history in each name if both are participating in the loan.
- Do notify the applicant within 30 days whether you are approving the loan or taking an adverse action.
- Do give a specific reason for an adverse action. Specific reasons could include: no credit file, insufficient credit references, law suits, liens, excessive obligations, delinquent credit obligations, unable to verify employment or income, denial by Federal Housing Administration (FHA) or other government programs, inadequate collateral.
- Do retain records for at least 25 months after notifying applicant of action taken.
Fair Credit Reporting Act
This act, which became effective April, 1971, attempts to regulate the action of credit bureaus that give out erroneous information regarding consumers. First, Banks and credit companies must make a consumer`s credit file available to the person in question. Further, the consumer upon examining the file, has the right to correct any error that may appear in the credit reports.
Secondly, if a creditor denies a loan to an applicant, the applicant must be given the name and address of the credit bureau that supplied the credit information to the creditor. Upon request, the credit bureau must supply the consumer with the pertinent information contained in the applicant`s credit file. Finally, the act limits the access of the consumer`s credit records to people who: (1) evaluate an applicant for insurance, credit or employment; (2) secure the consumer`s permission; or (3) secure court permission.
Community Reinvestment Act
In order to prevent the practice of redlining and disinvestments in central city areas, Congress passed the Community Reinvestment Act. `Redlining` is a practice whereby lenders refuse to make loans in certain geographic areas of a city. It is as if someone had taken a red pencil and drawn a line around the boundary of neighborhood and said that no loans would be made in that neighborhood.
To comply with the act, lenders must prepare Community Reinvestment Statements. These statements contain up to four basic elements:
- The lender delineates a `community` in which its lending activities take place. The lender may use political boundaries, to designate an `effective lending territory` in which a `substantial portion` of its loans are made, or any other `reasonably delineated local area.` Care must be taken that such designations do not unreasonably exclude territory occupied by persons of low or moderate incomes (see also requirements in Federal Fair Housing Laws)
- The lender must make available a listing of the types of credit it offers in each community.
- Appropriate notice and information regarding lending activity by territory must be given or made available for public inspection. The specific language of the notice is dictated by the government.
- The lender has the option to disclose affirmative programs designed to meet the credit needs of the community.
National Flood Insurance
In 1968, Congress enacted the National Flood Insurance Program. The intent of this legislation is to provide insurance coverage for those people suffering both real and personal property losses as a result of floods. To encourage the buying of national flood insurance, any real property located in a flood plain area cannot be financed through a federally regulated lender unless flood insurance is purchased.