Chapter 7: Processing: Credit and Disclosures

1. Chapter 7:Processing: Credit and Disclosures By Dr. D. Grogan M.C. “Buzz” Chambers

2. PREVIEW The U. S. is a credit society: we spend now and pay back later. This requires a borrower credit history. The purpose of this unit is to familiarize the mortgage loan broker with what the underwriter and lender will expect to establish the creditworthiness of the borrower, including the credit laws regulating consumer credit. This involves fair lending practices. The FICO score and credit history of the borrow largely determines if the borrower may obtain a loan and the rate of interest charged on the loan.

3. STUDENT LEARNING OUTCOMES 1. To Describe credit bureau services. 2. Discuss how to establish credit. 3. Read a credit report and interpret the ratings. 4. Explain the facts about the FICO score and the rating. 5. Indicate the components of the Equal Credit Opportunity Act (ECOA). 6. Outline the anti-discrimination credit applicant provisions.

4. 7.1 CREDIT • A credit report: • demonstrates how well a borrower has handled credit. • Shows the pattern of how the borrower uses credit. • lists the accounts receivable as reported by various firms that have extended credit to a borrower. • shows when a bill was paid in relation to when the due date for the payment was expected. • lists debts, payment history, banks, credit card companies, and department stores. • shows the history of tax liens or a bankruptcy. • is a computer-generated number that provides a snapshot of how likely a consumer is to repay a debt.

5. The Four “C’s” of Credit: CHARACTER - Want or Intend to repay [Credit History] CAPACITY - Ability to repay [Earning Power] CAPITAL - Financial Strength to repay [Collateral] CONDITIONS - Economic Environment [Economic Conditions]

6. Fair Credit Reporting Act Requires that, if a loan is denied, lender or mortgage broker must: • Give applicant a statement of denial reasons. • Include the name of the federal agency that can be contacted if the applicant feels discriminated against. • If denial is based on information contained in the applicant’s credit report, inform applicant of the right to receive a free copy of the report, and how to do so. • Information can be obtained from the Board of Governors of the Federal Reserve System, through the Federal Reserve Board.

7. Fair Lending NoticeRIGHT OF PRIVACY ACT: This is a notice to you as required by the Right to Financial Privacy Act of 1976 that the Department of Housing and Urban Development has a right to access to financial records held by a financial institution in connection with the consideration of assistance to you. Financial records will be made available to the Department of Housing and Urban Development without further notice or authorization, but will not be disclosed or released to another government agency or department without your consent except as required or permitted by law.

8. Fair Lending NoticeFAIR CREDIT REPORTING ACT: YOUR COMPANY NAME, as a part of the processing of your real estate loan, may request a consumer report bearing on your creditworthiness, standing, and capacity. This notice is given pursuant to the Fair Credit Reporting Act of 1971, Section 601 to Section 622, inclusive. You are entitled to such information within 60 days of written demand therefore made to the credit reporting agency pursuant to Section 606(b) of the Fair Credit Reporting Act.

9. Fair Lending Notice EQUAL CREDIT OPPORTUNITY ACT: The Federal Equal Opportunity Act, 15 U.S.C. 1961cc., prohibits discrimination against credit applicants on the basis of sex and marital status. Beginning March 23, 1977, the act extends this protection to race, color, religion, national origin, age (provided the applicant has the capacity to contract), whether all or part of the applicant's income is derived from any public assistance program, or if the applicant has in good faith exercised any right under the Consumer Credit Protection Act. The federal agency which administers compliance with this law concerning this lender is the Federal Trade Commission, 450 Golden Gate Ave., San Francisco, CA 94102.

10. Fair Lending Notice STATE OF CALIFORNIA: Under the Housing Financial Discrimination Act of 1977, it is unlawful for a financial institution to refuse to make a loan, or offer less favorable terms than normal (such as higher interest rate, larger down payment, or shorter maturity) based on the following considerations. Neighborhood characteristics (such as the average age of the homes or the income level in the neighborhood), except to the limited extent necessary to avoid unsafe and unsound business practices. Race, color, sex, religion, marital status, national origin, or ancestry. It is also unlawful to consider, in appraising a residence, the racial, ethnic, or religious composition of a particular neighborhood whether or not such composition is undergoing change. To find out about your rights, contact The Department of Real Estate.

11. 7.2 Credit & FICO Score Percent Credit Area 35% based on your payment history 30% based on amounts owed 15% based the length of time the credit history has been established 10% based on new credit 10% based on types of credit that are used

12. Type of information that must be provided: 1. credit score. 2. range of possible credit scores under the model used. 3. key factors (up to four) that adversely affected the consumer’s score in the model. 4. date the credit score was created. 5. name of the person or entity who provided the credit score.

13. Credit authorization Original signature must be in the file of the loan broker. Authorizes release of a photocopy to a subsequent party. The form may also authorize employment verification and bank account verification.

14. CREDIT HISTORY Credit must be run by independent consumer reporting agency. Business credit required if self employed. Most lenders concerned about complying with FNMA guidelines for: Overall payment pattern over past 24 months Derogatory credit over past 7 years Acceptable if past 12 months shows: Revolving charge paid within 60 days & no 3 past due Installment credit paid within 60 days & no 2 past due Housing debt with no past due

15. Credit-reporting bureau • Experian http://www.experian.com • Trans Union http://www.transunion.com • Consumer disclosure Center • http://www.transunion.com • Equifax http://www.Equifax.com • Uniquote http://www.fairisaac.com • Fair, Isaac & Company, Inc. (FICO) • Telecheck http://www.telecheck.com

16. Needed to run a credit check 1. Full name, including first, middle, and last, plus nickname and maiden name, if appropriate (the credit bureau accesses only the names that the consumer stated) 2. Date of birth (DOB) 3. Social security number (SSN) 4. Current address (for the past 2 years) 5. Former address (for the past 5 years)

17. To maintain a high FICO score: 1. Credit lines: Small balance on more cards is better than maximum balance debt on less lines of credit. Six credit cards with small balances are better than three cards with high unpaid balances. 2. Payment record: Pay everything on time. 3. Credit report: Order a copy and dispute any incorrect or derogatory information that drags down the score.

18. 7.3 Privacy Policy The written privacy notice must include: 1. Information received from an application for an extension of credit, such as the name, address, and telephone number of the prospective borrower. 2. Information about a transaction with the lender, the lender’s affiliates, or nonaffiliated third parties, such as account balance, payment history, and account activity of a borrower. 3. Information received from a consumer reporting agency, such as a credit bureau, relating to creditworthiness of a borrower. 4. Information received from an applicant’s employer or other third parties.

19. 7.4 Equal Credit Opportunity Act Enforced by the Board of Governors of the Federal Reserve System, through the Federal Reserve Board. • Prohibits lender or mortgage broker from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, or age, among other things, or if applicant has exercised any right under any federal consumer credit protection law. • Requires mortgage broker to inform applicant of action taken within thirty days of loan application • Requires mortgage broker to inform borrower of right to receive a copy of the property appraisal, and how obtained

20. 7.5 Non-Traditional Credit Reports • Sources include a copy of front and back of canceled checks for payment of: 1. Rent (matching rent receipts may also support payment, obtaining verification from the current and previous landlord) 2. Utilities (gas, electric, water, telephone, cable TV) 3. Insurance (life, automobile, health) 4. Personal property tax payments 5. Other regular payment records

21. 7.6 The Housing Financial Discrimination Act of 1977 • Fair Lending Notice • illegal to discriminate in providing financial assistance because of race, color, religion, sex, marital status, national origin or ancestry, or age. • lender cannot offer different terms and conditions for the loan from one neighborhood or area to another.

22. Derogatory Credit Undisclosed debt: concealing liability Judgment, Garnishment or Lien Bankruptcy: Must be fully discharged FNMA won’t approve if borrower has been a foreclosure defendant within past three years Foreclosure:

23. Anti-DiscriminationFederal Fair Housing Laws Title VIII of the Civil Rights Act of 1968 1988 Amendment: include Handicapped & Families with children Administered by HUD and prohibits: Advertising a preference in publishing Blockbusting or panic selling Handicapped persons to alter their expenses Familial status of parent or guardian

24. Anti-DiscriminationFederal Fair Housing Laws Housing for older persons: 80% occupied by persons 55 or older 100% occupied by persons 62 or older Consequences of Violations: File action in federal court File a complaint with HUD Claims are excluded from E & O insurance

25. Fair Housing Act Prohibits discrimination in residential real estate transactions on the basis of race, color, religion, sex, handicap, familial status or national origin. • Applies to those who provide advertising, lending real estate brokerage activities and other services, and also applies to the home seller. • Is enforced by the Office of Fair Housing and Equal Opportunity of the Department of Housing and Urban Development.

26. Unruh Civil Rights Act - Prohibits discrimination based on age, sex, race, color, religion, ancestry, or national origin. Fair Employment and Housing Act - Prohibits discrimination based on race, color, religion, sex, marital status, national origin, or ancestry & enforced by Dept of Fair Employment and Housing. California Civil Code Sections 54-55.1 - Prohibit discrimination against persons who are blind, visually handicapped, deaf, or otherwise physically disabled and applies to rental, leasing or sale of housing. Housing Financial Discrimination Act - Prohibits redlining with complaints handled by Secretary for Business & Transportation. Anti-Discrimination State Laws .