Chapter 7 Quiz: Finance Instruments

Question 1

In a promissory note, which is a written promise to repay, the borrower is called the:

a. payee
b. maker
c. trustee
d. none of the above

Answer 1

b. maker (p. 159)

maker: the one promising to pay the money
payee: the one promised the payment

Question 2

A deed of reconveyence is the return of full title to whom:

a. the trustor, who is the borrower
b. the trustee, who is the third party in the transaction
c. the beneficiary, who is the lender
d. none of the above

Answer 2

a. the trustor, who is the borrower (p. 163)

a deed of reconveyence returns full title to the maker (trustor) of the debt when it has been paid in full.

• when the debt is paid in full, the beneficiary directs the trustee to reconvey the title to the trustor (maker)
• the trustee releases the lien of the trust deed by signing and recording a deed of reconveyance
• a deed of reconveyance returns full title to the maker (trustor) of the debt when it has been paid in full

Question 3

A deficiency judgment:

a. is part of a deed of reconveyence
b. is exercised by the vendee
c. may only be granted by a court of law
d. none of the above

Answer 3

c. may only be granted by a court of law (p. 167)

[short sale]

• a deficiency judgment is a court judgment ordering a debtor to pay the difference between the amount owed on the debt and the sale of the secured property
• a deficiency judgment may only be granted by a court of law. the courts are not involved in the trustee’s sale process

Question 4

The parties to a trust deed include the:

a. trustor
b. beneficiary
c. trustee
d. all of the above

Answer 4

d. all of the above (p. 161)

borrower: trustor (or grantor)
lender: beneficiary
independent third party: trustee; has the power of sale

Question 5

A trustee’s sale is an out-of-court sale conducted by the third party, known as the:

a. trustee
b. trustor
c. beneficiary
d. none of the above

Answer 5

a. trustee (p. 163)

[only in lien theory states]
-at the direction of the beneficiary, the trustee conducts an out-of-court sale, or auction to the highest bidder

-before the trustee can sell the property, certain legal requirements must be met:

1. the beneficiary (lender) prepares a document called the Declaration of Default, requesting the trustee to begin the foreclosure proceedings
2. trustee then prepares a Notice of Default and /Election to Sell, which is sent to the borrower
3. the trustee also notifies anyone who has subsequently recorded a request for notice of default and sale
4. the trustee is required to provide notice to subordinate lien holders and any and all other interested parties

Question 6

A lender’s right to declare a balance immediately due and payable in the event of default is called:

a. prepayment
b. acceleration
c. alienation
d. none of the above

Answer 6

b. acceleration (p. 171)

an acceleration clause allows the creditor or seller to accelerate the debt, that is, to declare the entire outstanding balance immediately due and payable in the event of default.

-almost all promissory notes, mortgages, deeds of trust, and many real estate contracts contain one or more acceleration clauses

Question 7

A mortgage that is junior (first in time) to another is called:

a. a priority lien
b. a non-priority lien
c. subordinate
d. none of the above

Answer 7

c. subordinate (p. 173)

a subordination clause states that the instrument in which it is contained will be subordinate (junior) to one or more other liens to be recorded later, for example, a construction loan.

-a subordination agreement accomplishes the same thing, but may be executed at any time (for example, when the later loan is made)

Question 8

A foreclosure that does not have to be taken to court is called:

a. nonjudicial
b. judicial
c. a reconveyence deed
d. a nonrecurring foreclosure

Answer 8

a. nonjudicial (p. 168)

JUDICIAL foreclosure: a foreclosure under a mortgage requires a COURT-ORDERED sale conducted by the sheriff or other court-appointed official

Question 9

Which of the following clauses limits the debtor’s right to transfer property?

a. acceleration
b. subordination
c. alienation
d. all of the above

Answer 9

c. alienation (p. 172)

[typical clauses in security instruments]
alienation clauses in loan documents limit the debtor’s right to transfer the property without the creditor’s permission.

-alienation refers to transfer of ownership

Question 10

A notice of sale:

a. requires only a 3-day notice
b. must be approved by a judge
c. is sent by the county sheriff
d. is published in a newspaper of general circulation for 21 days (3-week period)

Answer 10

d. is published in a newspaper of general circulation for 21 days (3-week period) (p. 166)

[default and foreclosure of a trust deed]

• after recording a “notice of default, and election to sell”, a trustee must wait three months (90 days) before publishing a “notice of sale”
• the notice must be published in a newspaper of general circulation once a week during the 21-day (3-week) publishing period