Finance Laws Flashcards
A negotiable instrument
is a written, unconditional promise to pay, on demand or at a specified future time, a sum of money “to order” or “to bearer,” signed by its maker or payor (the borrower).
an endorsement
If the note is negotiable, the payee may transfer the note to another party, by writing their name across the back of the note. This signature is called an endorsement. When notes used in real estate loan transactions are sold, the endorser may endorse it “without recourse,” making it a qualified endorsement. Under a qualified endorsement, the endorser has no liability for default on the note. The holder of the note would have recourse only against the maker of the note and the property securing the note.
a prepayment privilege, or right to prepay
This gives the borrower the right to pay all or some of the outstanding principal balance during the term of the note before it is due, either with or without a prepayment charge. A prepayment privilege could be written simply as an “or more” clause, allowing the borrower to pay the specified amount or more without a penalty.
a prepayment penalty
A prepayment privilege could include a prepayment penalty clause providing for a fee for the privilege of paying off the loan ahead of schedule.
a lock-in clause
A note may contain a lock-in clause prohibiting any loan prepayment, at least for a certain period.
a late payment penalty
A note may include a late payment penalty provision to create motivation for timely payment. The penalty could be a specified dollar figure or a percentage of the overdue payment.
An acceleration clause
An acceleration clause allows the lender to declare the entire unpaid loan balance due upon a default of any of the terms or conditions of the document, including failure to pay insurance premiums, property taxes, or the principal and interest on the debt.
an alienation clause (or due-on-sale clause or call provision)
It provides that, if title is alienated (transferred to another) without the lender’s prior written consent, the lender may, at its option, call the loan due at once and require immediate payment in full of all sums owed. This provision prohibits assumption of the loan without the lender’s permission, so the lender can require that the new borrower submit to qualification on the same basis as the original borrower to ensure that their risk is not increased.
A defeasance clause
if the loan is paid according to the terms of the note and the other covenants are fulfilled, the lender will release the lien, so the borrower will regain clear title.
an assignment of rents clause
provides that the rents from the property are assigned to the lender as security for payment of the debt. As long as the borrower does not default in the loan terms, they may collect and retain the rents. If they default and the note is accelerated, or if they abandon the property, the lender has the right to enter the property, take possession and manage it, and collect all rents earned by the property.
A request for notice of default clause
provides for notification to the lender if another lien against the property is in default so the lender may take action to prevent loss resulting from foreclosure of the other lien.
mortgagor
the borrower gives the mortgage, the borrower is called the mortgagor.
mortgagee
the lender is receiving the mortgage, the lender is called the mortgagee.
a judicial foreclosure and sale
This would result in the property being foreclosed and sold through court action.
strict foreclosure
This would result in judicial foreclosure and the property given to the lender instead of being sold. In most states, this is not allowed.
a power of sale clause
This clause gives the lender the power to sell the property without a judicial foreclosure, upon default. The actual sale could be executed by the lender or its representative, typically referred to as a trustee.
equitable right of redemption (or equity of redemption)
A foreclosure wipes out the borrower’s equitable right of redemption (or equity of redemption). This is the right to pay off the mortgage debt plus interest and costs before the foreclosure.
