Loan Compliance Under Federal Regulations
Truth-in-Lending Act - Part of the Consumer Credit Protection Act a.k.a. Regulation Z. This requires lenders to disclose the EFFECTIVE/TRUE COST of the credit and is expressed as an ANNUAL PERCENTAGE RATE (APR). It applies for individuals (NATURAL PERSON) applying for a loan for a single family home up to a 4-plex. An individual purchasing a 5 unit building or more is considered commercial and does not apply; the same is true for farms.
Personal Property - It also applies to personal property that is LESS THAN $25,000 ($24,999 or less).
Home Improvement Loans or Refinancing Loans have a THREE-BUSINESS-DAY RIGHT OF RECESSION on the part of the borrower. The right of recession DOES NOT APPLY to First Mortgages or Trust Deed financing for a home or condominium purchase.
Loan Proposal Requirement - Regulation Z requires the monthly payments amount, number of payments, finance charges, the term of the loan, AND the Amount of Down Payment.
Advertising Loans - All loan ads with any of the above information must ALSO DISCLOSE the cash price, the monthly payments amount, number of payments, finance charges, the term of the loan, the Amount of Down Payment, AND the effective Annual Percentage Rate (APR).
Creditor Definition - Creditors must follow Regulation Z. A creditor is an entity that extends credit more than 25 times a year OR more than 5 times if a dwelling is offered as security. So, for an entity that offers loan money for home purchases with a mortgage 6 or more times a year must abide by Regulation Z.
Equal Credit Opportunity Act (ECOA)
Credit application can only be considered on information regarding the applicant-s income, net worth (assets minus liabilities), job stability, and credit (FICO) rating. It cannot be based on race, color, religion, national origin, sex, marital status, age, or source of income when deciding credit.
If an application is rejected or credit is cancelled by lender, the lender has 30 days to inform the applicant of the reasons why.
Community Reinvestment Act
This is a Federal Act to prevent REDLINING by lenders. Redlining is when a lender refuses to issue loans in a specific portion of a city. The Act requires lenders to specify the communities where lending takes place and make available a list of the types of loans it issues in that area. It also gives lenders the option to disclose the AFFIRMATIVE ACTION PROGRAMS that are available for people within a community.
Usury Law - State Laws
Some States place a limit on the amount of interest that can be charged their residents with a good credit rating.
Loan Origination Costs
The loan origination costs are usually a percentage of the loan amount to cover the costs of obtaining a credit report, appraisal of the property, (percentage) points required by the lender, and the general administration costs in establishing the loan.
Lender Requirements (of obtaining a loan)
The lender will want a home inspection including a termite check, proof the homeowner has homeowner insurance, a title insurance policy on their behalf, a title search, and an escrow account to provide for property tax payment and insurance premium payments.
A loan is issued IF the buyer/borrower meets the conditional requirements established by the lender. The requirements are typically verification of job and income, marital status, the issuance of the lender-s title policy and title report, and issuance of a proper homeowner insurance policy.
In addition, the lender will require all liens be paid on the property, verification of the borrower-s bank accounts, and a copy of the escrow settlement sheet on behalf of the borrower/buyer.
The Promissory Note and the lien such as a mortgage protect the lender against non-payment by the borrower. Besides requiring payment, the clause requires the borrower to do UPKEEP ON THE PROPERTY, PAYMENT OF PROPERTY TAX, and PURCHASE HOMEOWNER-S INSURANCE. In addition, the borrower cannot make improvements to the property without the LENDER-S PERMISSION.
Foreclosure and Redemption Rights
Foreclosure - The ability of the lender to sell the property to cover the amount of the debt outstanding and owed the lender.
This form of foreclosure occurs in States that require the lender to go to court and prove default by the borrower. The judge orders an appraisal and sets a date for the sale of the property. Once the date is set, the borrower has an EQUITABLE REDEMPTION PERIOD to pay off the debt to the lender plus costs. After the sale, most States have an additional STATUTORY REDEMPTION PERIOD that the borrower can still pay off the debt to the lender plus costs. At the end of both redemption periods, the borrower must move out of the property.
In some southern States, the courts are not necessary. The mortgage contains a POWER-OF-SALE CLAUSE that allows the lender to sell the property without going through the courts. The borrower is allowed a specific time line to pay all the delinquent payments and costs. If payments are not made, the property is advertised and sold.
Few States allow this form of foreclosure. When the lender notifies the borrower/owner of delinquency and the papers filed with the court are served to the owner, the owner has a short period of time to pay off the debt and costs. If not done, the lender takes actual title to the property AND KEEP THE EQUITY THAT IS BUILT UP IN THE HOUSE, Normally, in most forms of foreclosure, the lender receives its debt and costs and pays whatever equity that is left to the homeowner. With Strict Foreclosure, this is not the case.
In a non-recourse loan, the borrower is NOT HELD PERRSONALLY LIABLE. An example would be an investor in a syndicate of investors. The lender for the syndicate cannot go after the individual investors. The real estate property is considered adequate to cover the loan.
Mortgage Terminology and Clauses
Pre-Payment Clauses - Some of the old existing mortgages at 8% or 10% interest MIGHT have a pre-payment penalty clause if the loan is paid off early. It is usually a percentage of the remaining mortgage balance that is paid off early.
With today-s low interest rates, the lender does not care if the mortgage is paid off early. They have no pre-payment penalty. These are known as OPEN MORTGAGES. This characteristic is allowed with what is called a PREPAYMENT PRIVILEGE CLAUSE.
Acceleration Clause - This is the clause that allows lenders to call a loan immediate due when the borrower is behind on payments. Typically, this is used by the lender when payments are in default, the home is destroyed by fire or natural event, or the home is sold to another party.
Escalation Clause - This is part of an ADJUSTABLE-RATE MORTGAGE. This allows the interest rate to be adjusted (upward) over the life of the loan. An Escalation Clause in a LEASE allows lease payments to be adjusted (upward) over the life of the lease agreement.
Interest Rates - Different Forms
Fixed Rate Interest - This means the interest rate charged will not change through the life of the loan.
Adjustable Rate Interest - The rate can change UP OR DOWN during the life of the loan.
Lock-In Clause - If a mortgage has an adjustable rate, the mortgage might have a lock-in clause during a PERIOD OF TIME that allows the borrower to switch to a fixed rate of interest. OR . . . it could mean that the loan CANNOT BE PREPAID unless all the contracted interest is paid.
Release Clause - Lenders MUST RELEASE THEIR INTEREST IN THE PROPERTY when a loan is paid off.
Lien Theory State - When paid off, the lender records with the county a MORTGAGE RELEASE filing or a SATISFACTION PIECE filing with the county where the property is located.
Title Theory State - When paid off, the lender records with the county a DEFEASANCE CLAUSE filing.
Trust Deed - When a borrower pays off a trust deed, the trustee records a RECONVEYANCE DEED with the county.
In either case, the lender is RELEASING ITS INTEREST in the property as required in the Release Clause.
ALIENATION CLAUSE - This clause is usually in all mortgages and trust deeds. It states that if the title is conveyed to another party WITHOUT THE LENDER-S CONSENT, the lender can collect all of the debt outstanding.
SUBORDINATION - If a lender has a 1st lien position on property, it can agree to have a second lien position (SUBORDINATE) to another lien if it wants to.
The study of system of rules which a particular country or community recognizes as regulating the actions of its members and which it may enforce by the imposition of penalties.