Extending credit is a cornerstone of banking activity in the United States. Two major aims of lending regulation are to protect banks and to protect consumers. Congress has passed several laws designed to protect banks from lending that may destabilize the banking system and also protect consumers from being taken advantage of by banks.
Federal Lending Limits
Lending limits set by federal statute (12 U.S.C. § 84) cap the amount of money a bank can loan to any one borrower. Currently, the limit is 15 percent of its total capital plus surplus for loans unsecured by collateral and 10 percent of the total for secured loans. The purpose of this law is to prevent banks from losing too much of their capital in the event of one client’s default. It could cause instability in the banking system were this to occur in several banks at once.
Engaging in bank fraud by lying or misrepresenting facts for the purpose of receiving an extension of credit or loan is also prohibited by law.
Congress has passed several laws that protect credit-seeking consumers. The Equal Credit Opportunity Act (ECOA) prohibits institutions that regularly extend credit to consumers from discriminating on the basis of race, color, national origin, religion, sex, marital status, or age. The ECOA is codified at 15 U.S.C. § 1691 et seq., and it was passed in 1974 to ensure that all people have the same opportunity to borrow money. This law applies to banks, credit card companies, mortgage companies, department stores, and credit unions.
Under the ECOA, creditors may not discourage a person from applying for credit, impose different terms, or reject a credit application because of a person’s protected personal traits. However, creditors evaluating an applicant who lives in a community property state may inquire about marital status.
The Truth In Lending Act requires that banks plainly disclose a potential loan’s important details, such as the total amount financed, the interest rate, and associated fees. This law attempts to standardize the loan process to prevent consumers from agreeing to terms obfuscated by lenders.
Fair Housing Act and Other Mortgage-Related Laws
There are a number of laws that specific regulate mortgage lending. The Fair Housing Act (FHA), like the ECOA, prohibits discrimination on the basis of a person’s race, color, national origin, religion, sex, familial status, or disability in real estate transactions. Some prohibited actions include the refusal to approve a mortgage, the refusal to provide information about a mortgage, and the imposition of different terms on the basis of a protected characteristic.
The Home Mortgage Disclosure Act (HMDA) and Real Estate Settlement Procedures Act (RESPA) also impose disclosure requirements on banks that extend mortgages to the public. The HMDA requires that banks disclose data about the home-buying loans they have given for purposes of identifying whether they are adequately serving the needs of the community. RESPA requires that banks provide a good faith estimate of the costs associated with closing a loan used to purchase property. It also requires that once the costs are finalized, the consumer is given a list of all costs and fees and to whom they are paid.
The Fair Credit Reporting Act
Since a person’s credit history is one of the most important factors a bank considers when assessing whether to grant credit, Congress passed the Fair Credit Reporting Act (FCRA). The FCRA gives consumers the right to a free copy of their credit history reports from each of the three major credit reporting agencies every 12 months.