2 pages/≈550 words
Literature & Language
Law - Policies and Regulations (Case Study Sample)
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Law - Policies and Regulations
Law - policies and regulations
How does the law protect borrowers from the lending practices that led to the recent recession?
The current recession began form the sub prime mortgage crisis after borrowers began defaulting on their loans. Most of the mortgage customers were not credit worthy and when interest rates rose up they were unable to pay, causing liquidity shortage for mortgage backed securities. Even after the recession the Truth in Lending Act (TILA) is still in force whereby mortgage providers have the obligation to provide correct information pertaining to the terms of the mortgage. If there is no full disclosure then the borrower can rescind the mortgage within period three business days (Miller & Cross, 2012 p. 386). The Dodd Frank Act further broadened TILA in protection of borrowers through offering legal assistance, and protecting consumers in cases of reverse mortgages and banning short selling (Shearman & Sterling LLP, 2010 p.7)
What protection exists for borrowers who take out high-cost, high-fee, or higher-priced mortgages from the lending practices that led to the recession?
Before the recession, the mortgage industry proved to be lucrative and mortgage providers at times stood accused of having predatory lending practices. Through this practice there was deception through alterations of the terms of the mortgages. With regards to high cost mortgages, there are other disclosures besides TILA including explanation of balloon payments deferral payments and debt acceleration. Under the Home Ownership and Equity Protection Act (HOEPA), the failure to disclose information to a consumer makes the lender liable to damages equated to finance charges and fees already paid (Miller & Cross 2012 p. 388). In addition, there is also a Home Affordable Modification Program created in 2009, meant to ensure that private lenders could decrease the amount of monthly payments payable by borrowers who defaulted (Miller & Cross 2012, p. 390).
Al and Betty Smith’s home is valued at $200,000. They have paid off their mortgage and own the house outright—that is, they have 100 percent home equity. They lost most of their savings when the stock market declined during the Great Recession. Now they want to start a new business and need funds, so they decide to obtain a home equity loan. They borrow $150,000 for ten years at an interest rate of 12 percent. On the date they take out the loan, a ten-year Treasury bond is yielding 3 percent. The Smiths pay a total of $10,000 in fees to Alpha Bank. The Smiths are not given any notice that they can lose their home if they do not meet their obligations under the loan. Two weeks after completing the loan, the Smiths change their minds and want to rescind the loan.
Is the Smiths’ loan covered b...
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