Truth in Lending Protects Homeowners
As you may already know, one of the main causes of our recent housing market crisis was over-lending to homeowners who later found themselves in over their heads with mortgages they could not afford. Many of these homeowners reported feeling tricked by their lenders, because they did not feel as though they were fully informed about the terms of their loans, some of which were even commonly called “liar loans.”
While we should all take measures to educate ourselves on a mortgage before signing on the dotted line, both California and federal law are pretty clear in their requirements that lenders are truthful and honest in their practices, and federal law especially has been strengthened in this area since the down-turn. In Realty Projects, Inc v Smith (1973), the California Supreme Court concluded that mortgage brokers have a “statutory duty, under the Real Estate Law, of fair and honest dealing imposed upon all real estate licensees (brokers and salesmen), when acting as or for mortgage loan brokers, in all of their dealings as such licensees. . . . Second, this statutory duty of fair and honest dealing by licensees, when acting as licensees, extends to their dealings with prospective borrowers before the execution of any loan authorization agreement by the loan officer and the prospective borrower.” This ruling has continued to be upheld in later rulings.
These standards of honesty and strict federal disclosure regulations require mortgage brokers to fully disclose the terms of any loan at first contact with a client – not just on closing day, when buyers feel pressured to finish the deal. The purpose of this rule is to prevent mortgage brokers from using bait-and-switch tactics, in which home buyers believe they are receiving certain loan terms which are then changed at the last minute. Truth in lending and laws and related regulations are designed to protect home buyers from shady lending practices. But since it’s always better to prevent a situation than litigate it after the fact, buyers should be on guard for these signs of a dishonest lender:
- Lofty promises that anyone can receive a mortgage, regardless of bad credit
- Claims that no other mortgage company will lend to a particular home buyer
- Promises or insinuations that a particular loan will solve all financial problems
- The lender encourages the borrower to falsify information on the loan application
- High pressure tactics
- Fees are considerably higher on closing day than originally estimated – these are prohibited by law.
Since knowledge equals power, buyers should compare rates and fees among several different mortgage lenders. In most cases, dishonest lending practices can be avoided when the buyer is educated on the warning signs and is proactive in researching options. In the event that dishonesty is only discovered after closing day, homeowners should consult with a qualified real estate attorney about their options to resolve the problem.