Notes and Their Provisions - Part 1 - Chapters 62-64 Flashcards
Determine the provisions and conduct needed for a lender or carryback seller to establish their right to collect a late charge
For a lender or carryback seller to establish the right to enforce collection of a late charge:
- a late charge provision needs to exist in the note
- a scheduled payment needs to be delinquent
- a notice of amounts due has been delivered to the owner
- the dollar amount of the late charge is within the limits set by applicable statutes and reasonableness standards
- accounting requirements for semi-annual and annual reports have been complied with
For a late charge provision to be complete, it needs to include:
- the amount of the late charge
- the duration of any grace period
- a requirement for notice from the trust deed holder to impose the late charge and make a demand for its payment
Differentiate late charge arrangements based on the type of property securing repayment, and whether the loan was arranged by a broker
Late charge provisions included in notes used by institutional lenders are generally non-negotiable because the lender must adhere to establish uniformities such as ceiling set by statutes or pooling arrangements in the secondary mortgage money market.
The late charge amount on a private lender loan which is NOT MADE OR ARRANGED BY A BROKER and is secured by an owner-occupied single-family residence is limited to the greater of:
- 6% of the delinquent principal and interest payment
- or $5
For private lender loans MADE AND ARRANGED BY A REAL ESTATE BROKER (called BROKERED LOAN) and secured by any type of real estate, the late charge is limited to the greater of:
- 10% of the delinquent principal and interest payment
- or $5
Like an owner-occupied single-family residence SFR loan, and installment on a private lender loan made or arranged by a broker on any type of property is NOT LATE if it is received by the lender within 10 days after the installment is due.
Understand how late charges are enforced and calculated
Refusal or failure of an owner to pay a late charge when demanded does not justify a call of the loan or initiation of foreclosure by itself.
No lender or carry-back seller is entitled to foreclose on an owner who has tendered all installments which are due, but has failed to pay outstanding late charges. Collection of late charges when no other monetary breach exists needs to be enforced by means other than foreclosure.
Additionally a private lender making a loan on any type of real estate is required to furnish the owner with a “semi annual accounting” for the total amount of late charges due and unpaid during the accounting.
For late charges on a carry back note secured by property improved with only a one to four-unit residence, the carry-back seller needs to also provide the owner with an “annual accounting” statement detailing any late charges due and unpaid during the entire year.
balloon payment
A BALLOON PAYMENT is any final payment on a note which is greater than twice the amount of any one of the six regularly scheduled payments immediately preceding the date of the final balloon payment.
If a private lender loan made or arranged by a broker contains a due date for a final balloon payment, a late charge may be assessed on the final balloon payment if it is not received within 10 days after it’s due date.
brokered loan
A BROKERED LOAN is a private lender loan made or arranged by a real estate broker.
grace period
A GRACE PERIOD is the time period following the due date for a payment during which payment received by the lender or landlord is not delinquent and a late charge is not due.
TEN DAYS is the minimum grace period allowed for a private lender secured by an owner-occupied SFR, even if the homeowner agrees to a shorter grace period, or no grace period is agreed to.
late charge
A LATE CHARGE is a fee imposed as an additional charge under a provision in a promissory note, lease or rental agreement when payments are not received by their due date or during a grace period.
Understand how prepayment penalties were historically used by lenders to prevent the loss of interest.
Prepayment penalties were historically used by lenders in an effort to prevent the loss of interest until the funds were re-lent to another borrower.
Determine whether a prepayment penalty is prohibited under the Dodd-Frank Wall Street Reform and Consumer Protection Act
A property owner’s right to prepay principal to reduce their debt or pay off and release the trustee lien on their property is established by the terms of the promissory note. Further, prepayment penalties are regulated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Prepayment penalties ARE ALLOWED ON QUALIFIED MORTGAGES (but are prohibited on all mortgage loans which are NOT qualified mortgages). A qualified mortgage is any consumer loan secured by an owner or non-owner-occupied 1 to 4 unit residential property.
However, there are a few exceptions – prepayment provisions are are prohibited on the following types of qualified mortgages that have:
- an adjustable rate of interest
- an annual percentage rate APR exceeding the average Prime offer rate in a comparable Residential Mortgage Loan By set quotas.
Prepayment penalties on qualified mortgages cannot exceed:
- 3% of the outstanding balance on the mortgage during the first year of payment
- 2% of the outstanding balance on the mortgage during the second year of payment
- 1% of the outstanding balance on the mortgage during the third year of payment
- 0% after the first three years following the recording of the mortgage
Further, a SFR secured lender on the payoff of a consumer mortgage may only charge a prepayment penalty if:
- the prepayment penalty does not extend beyond three years after the date of the mortgage’s closing
- the prepayment penalty provision is not included in the terms of any REfinancing by the same lender of the mortgage paid off
- at closing, the borrowers total monthly payments on installment debt are less than 50% of their verified gross income
- the monthly payments do not change or adjust during the first four year period after closing
Advise on the enforceability of a prepayment penalty provision in a note secured by a trust deed containing a due-on clause
Prepayment penalty provision in all notes secured by a trust deed containing a due on clause encumbering an owner-occupied, 1 to 4 unit residential property are UNENFORCEABLE if the lender or carry-back seller:
- calls the mortgage due for a transfer in violation of the due on clause
- starts foreclosure to enforce a call under the due on clause
- fails during the pendency of the sale of property subject to the mortgage to approve, within 30 days of receipt of the completed credit application from a qualified buyer, the Assumption of the mortgage or carry-back note.
However, a seller carrying back note, secured by 124 unit residential property, can barr prepayment only for the calendar year of sale, if they have not already carried back more than 4 notes in the same year.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act is a enactment created in 2010 detailing significant changes to the US Financial regulation in response to the 2007 financial crisis.
due-on clause
A DUE-ON CLAUSE is a trust deed provision used by lenders to call the loan immediately due and payable, a right trigger by the owners transfer of any interest in the real estate, with exceptions for intra-family transfers of their home.
prepayment penalty
A prepayment penalty is a provision in a note giving a lender the right to levy a charge against a borrower who pays off the outstanding principal balance on a loan prior to the expiration of the prepayment provision. The prepayment penalty agreement is included in the promissory note. It is not a provision in the trust deed, since it relates to the payment of the debt, not the care and maintenance of the real estate.
Understand what constitutes a final/balloon payment on a note
A final balloon payment is any payment on a note which is an amount greater than twice the amount of any of the six regularly scheduled payments immediately preceding the date of the final balloon payment.
Calculate the amount of a final/balloon payment
The final/balloon payment due includes all principal and interest and any other charges due between the date of the “Notice of Balloon Payment Due” and the actual due date of the money.
