The Alphabet Soup of Lending Laws


On the same day this week, somebody take our real estate class asked the same question as another student taking our online real estate classes: “What do I need to know about financing laws when I take my NJ real estate license exam?”

Let’s talk about the various federal and state laws that govern lending for residential mortgages.


ECOA is the Equal Credit Opportunity Act. Realtors are not involved with this law although it could be a state exam question. The Equal Credit Opportunity Act was enacted in 1974 and states that individuals applying for loans and other credit can only be evaluated using factors that are directly related to their creditworthiness. It prohibits banks and lenders from considering consumers’ race, color, national origin, sex/gender, religion, marital status, and age (so long as they are old enough to legally sign a loan document).

Regulation Z and the Truth in Lending Act.

Regulation Z was implemented by the Federal Reserve Board in 1968 as part of a general move to protect the public from predatory lenders. Congress affirmed this by passing the Truth in Lending Act—called TILA. TILA and Regulation Z thus accomplish the same purpose: they make banks, mortgage companies, credit card companies and installment lenders fully disclose the real cost of borrowing money.

Note that in our real estate world, Reg Z and TILA only apply to residential owner-occupied properties of up to 4 units, such as a single family home, a duplex, triplex or 4-plex. TILA and Reg Z does not apply to commercial loans

One of the requirements of the Truth in Lending Act——is that the lender must disclose not only the interest rate, but also the annual percentage rate, or APR.

APR vs. Interest rate.

You will often hear clients ask the mortgage company something like, “I thought you promised us a 4% interest rate. Why does this say 4.125% APR?” That’s because TILA says the lender must give both the basic interest rate—called the NOTE rate, and the Annual Percentage Rate. The APR is the total cost of the loan after adding in the various bank charges and amortizing them over the life of the loan. Bank A may offer a 4% “Interest” rate while Bank B is offering a 4.1% interest rate. That’s a no-brainer, right? Bank A is cheaper. But wait a minute, Bank A may charge a large origination fee and other lender charges that are way higher than Bank B. So when all those fees are added up, Bank B—at the higher promissory note rate—may be the less expensive loan.

For example, you borrow $200,000 at a 6% interest rate. $200,000 times 6% means you would be paying $12,000 a year in interest—or $1,000 a month. But the mortgage company charges $5,000 in lender fees, such as their origination fee, appraisal fee,, etc. Even though you pay those fees upfront at the closing, the government makes the bank amortize those over the life of the loan AS IF they were added to your monthly payments. So the bank has to add that $5,000 to the $200,00 and calculate it as if the buyer were getting a loan of $205,000. Six percent interest on $205,000 is $12,300 a year. Now simply divide that annual interest payment of $12,300 by the original loan amount of $200,000 and what do you get? 0.0615—or 6.15%. There you go! The INTEREST rate is 6% but the TRUE cost of the loan, the APR, is 6.15%

TILA and Advertising.

You may have noticed that when there is a car ad on TV advertising, for example, “The new Ford Escape for only $399 a month” that the entire lower part of the screen fills up with minute disclosure language. That is because auto financing follows the same rules from the Truth in Lending ad that real estate professionals must follow. We can give the price of the home with no problem. But the moment we use a TRIGGERING TERM, we must disclose ALL the terms that apply to that offer.

Triggering terms would include examples such as:

  • The amount of a down payment expressed as a percentage or a dollar amount, such as: “You can buy this home for only 3 1/2% down” )
  • The amount of any payment expressed as a percentage or a dollar amount (example: “monthly payments of only $1995”)
  • The number of payments, the total time required to pay and period of repayment (example: “30-year loans available” or “low monthly payments”)
  • The finance charge amount (example: “Less than $200 in closing costs”)

The Federal Trade Commission dictates what qualifies as a triggering term.

Remember, the New Jersey Real Estate Commission also dictates that ANY time a licensee advertises a specific mortgage rate or monthly payment, the ad MUST then state, “To qualified buyers.”

If any of the above term triggers are used, then the following must be disclosed:

  • The amount or percentage of the down payment
  • The repayment terms.
  • The annual percentage rate (APR); the term must be spelled out.
  • If the APR can be raised after the credit is extended, then that fact must be disclosed.

Our exam prep books available at can be a tremendous help when you need to remind yourself of the most important point to pass the NJ real estate license exam.

If you have wondered “Is there a real estate school near me” or would like to take online real estate classes, give us a call at 609.354.8104 or go to

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