International Finances: How are US Lenders protected by the Federal Government (US)?

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A lender, be it any person, group or any financial institution, is responsible for extending funds to any individual or business, while expecting the same funds to be returned with a profit at a specified time. They will offer the loans after analysing the credit history, and credit report of the borrower, along with that they will also analyse the income of the borrower.

However, even after such strong scrutiny and analysis, a lot of money lenders suffer in the financial markets, specifically at the hands of the borrowers as well as in the derivatives market. From hazy terms and conditions to negotiating interest rates to an extreme low, and even missing out on payment deadlines, lenders face a ton of problems.

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To counteract such problems, the authorities of the country, the Central or Federal Governments have come up with specified laws and guidelines. So if you're an amateur lender, who is looking for a way into the money market, here's a guide on how you can protect yourself.

Lending money and its benefits

A loan, in the simplest of terms, is a fund that any person can borrow from either a formal source like a bank, or an informal source like friends, relatives etc. Lending out the extra cash deposits has multiple benefits, because it helps generate extra income. Loans are always extended with an interest rate, thus giving the lender a handsome profit. Giving loans further helps in growing the overall supply of money in an economy. It opens up healthy competition and boosts the financial market of a country.

Basics of Stock, Borrow & Lending

Before understanding how the authorities are offering protection to the lenders, it's vital that you understand the basics of stock, borrowing and lending. Also going by the acronym SLB, stock lending and borrowing is a methodology by which any trader can borrow stocks and shares while simultaneously lending their owned shares. It is characterised by a fixed tenure and attracts a certain interest rate. There will be a quoted lending and borrowing fee, and exchanges take place if and when the quotations match. 

The Truth In Lending Act or TILA

The federal law TILA or Truth In Lending Act was enacted for consumer protection in 1968. It is designed to safeguard the relationship between a consumer and the lender. The consumers were offered protection in lending and TILA has been implemented via an array of regulations.

It mentions that credible information must be given to the borrower before the lender can offer credit. This includes the loan terms, the total cost that the borrower has to incur, and so on. This helps the borrower to compare the information and make an informed decision.

What kind of credits are covered under TILA?

There are mainly two credit types that the TILA provision covers. The first one is an open-end credit, where you can make repetitive withdrawals, the upper limit being a pre-sanctioned amount. The most common examples include reverse mortgages, credit cards, etc. 

The second one is a closed-end credit which specifies a predetermined amount of loans. The most common examples are home loans, car loans, etc.

What are the provisions under it?

There are four vital disclosures mentioned under the TILA. These are the payment numbers, late fines, and amount of monthly payment if there's any provision for loan repayment without attracting a penalty. 

What are its benefits?

The most obvious benefit of TILA is that it allows the borrowers to make an informed decision before they opt for the credit. The act ensures that the lenders will not hide the terms of loans. There can be no abrupt changes on either side in the loan terms and conditions, thus making sure that neither party is vulnerable to exploitation.

Another benefit of TILA is the rescission rights. It means that if the consumer isn't satisfied with the credit terms, then within three days of contract framing, they have the right to cancel the same with a full refund. 

The Real Estate Settlement Procedures Act (RESPA) 

The RESPA, unlike TILA, is an act for maintaining healthy relationships between professionals in the real estate field and lenders.

The Act was enacted in 1975 by the U.S. Congress with a motive to neutralise real estate abusive practices. Owing to this act, the loan providers can not make demands for huge escrow accounts.

Requirements of RESPA

This Act makes it mandatory for lenders to provide their borrowers with a disclosure related to all real estate finances, laws for consumer protection, services of settlement, etc. 

Summing up

Now that you know the details of how you can save yourself from exploitation, you should learn more about investing your money properly. You can opt for an investment banking certification, such as the one offered by Imarticus. Imarticus's Certified Investment Banking Operations Professional is an investment banking certification course which runs on a mixed module of online live training sessions and classroom sessions spanned over 150 learning hours.

The programme curriculum is punched with fundamentals of money markets, risk regulation and management and prepares the learner towards securing a job in a leading company.

Here are some course highlights:

  • Ideal for graduates of finance with less than 3 years of work experience.
  • Over 40,000 placements in over 500 renowned companies like JP Morgan, Morgan and Stanley, etc.
  • All round career support including risk management, gaining hands-on training etc.
  • Robust curriculum paired with experiential learning.
  • This is an attractive opportunity to learn from the best educators and experts in the industry.

So here's a chance to boost your investing skills and enter the money market or derivatives market with Imarticus.

Visit Imarticus Learning to know more about this course! 

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