TX 122 Real Estate Principles II-Lesson 3 Flashcards
What are the two major interconnected groups of lenders in real estate financing?
Primary Lenders and Secondary Lenders
What do primary lenders do?
Provide funds to borrowers in the form of an investment and originate loans at the retail level
What is the primary market in real estate financing?
The area of financing with which the borrower has contact
Who are the primary lenders that make the majority of residential loans?
Mortgage bankers
What is the role of mortgage brokers?
Bring borrowers and lenders together and process loan applications
What are some major sources of loans on non-residential properties?
Life insurance companies, real estate investment trusts, Wall Street investment banks
What is the difference between pre-qualified and pre-approved?
Pre-qualified means a high probability of qualification; pre-approved requires a credit report and due diligence
What is the secondary market in real estate financing?
A place where primary market loans are sold to create new money to loan out
What is the function of Fannie Mae?
To fund FHA and VA loans with money raised from the sale of stock, bonds, and notes
What is the primary function of Freddie Mac?
Act as a secondary market for conventional home mortgages
What distinguishes Ginnie Mae from Fannie Mae and Freddie Mac?
Ginnie Mae is solely under the Department of Housing and Urban Development and does not buy or sell loans
What is a wrap-around loan?
A form of owner-financing where the seller maintains an outstanding first mortgage repaid by the new buyer
What is a blanket mortgage?
Covers more than one property or lot, typically used by developers
What is a reverse mortgage?
A loan for the elderly that provides monthly income secured by a note and deed of trust
What are direct lenders?
Financial institutions like banks and savings & loans that provide mortgage loans using collected deposits
What is the role of commercial banks in real estate financing?
Largest lenders involved in financing real estate, providing short-term financing and rarely fixed-rate loans
What is an acceleration clause?
Gives the lender the right to make the entire balance due upon any default by the borrower
Fill in the blank: The _____ is a document that is the borrower’s promise to pay.
Promissory Note
What is the definition of a package mortgage?
Includes both real and personal property in the loan
What is the difference between lien theory and title theory states?
Lien theory states give the deed to the borrower; title theory states give the title to the lender
What is a carry back in real estate financing?
Another name for owner financing where the seller loans money to the buyer
What is an equity share?
A loan where the lender receives a percentage of the equity in the property
What is a construction loan?
A short-term loan provided for the construction of a property
What does PMI stand for and when is it required?
Private Mortgage Insurance; required if the loan is greater than 80% LTV
True or False: Ginnie Mae is backed by the full faith and credit of the U.S. government.
True
What is the purpose of the secondary mortgage market?
To buy and sell home loans and servicing rights between lenders and investors
What are mortgage-backed securities?
Securities created by bundling multiple home loans together and selling them to investors
What are sources for second mortgages?
Home Equity Lines of Credit (HELOC), construction loans, bridge loans
These loans are often provided by banks, savings and loans, credit unions, and other lenders.
How do commercial banks function as mortgage lenders in small communities?
They represent the main source of all money, including mortgage money for farm loans.
What type of loans do Savings and Loans generally prefer to offer?
Adjustable loans.
What is the primary funding source for Savings and Loans?
Depositors’ accounts (savings and checking accounts, certificates of deposits, money market funds).
What organization federally charters most Savings & Loans?
Federal Home Loan Bank Board.
What is the insurance limit for accounts in Savings and Loans?
$100,000 by the Federal Savings & Loan Insurance Corporation (FSLIC).
What caused the collapse of many Savings and Loans in the 1980s?
Higher interest rates leading to losses on fixed-rate mortgages.
What types of loans do Credit Unions primarily provide?
Consumer loans (cars, furniture, appliances) and long-term mortgage money.
What regulatory body oversees Credit Unions?
State Banking Commissioner.
What is a significant advantage of loans from Credit Unions?
Lower incidence of foreclosure leading to lower mortgage insurance rates.
What are indirect lenders?
They provide mortgage origination services but rely on the secondary market for funds.
What is included in loan servicing?
Collecting loan payments, disbursing taxes and insurance, paying interest and principal to the investor.
What is the Servicing Release Premium (SRP)?
A fee paid to the originating company for the right to service the loan, usually between 1.0% and 2.0%.
What do mortgage companies typically do with the loans they originate?
Sell the loans to recapture their original money and profit.
What are Mortgage-Backed Securities (MBS)?
Securities backed by the value of mortgaged real estate.
What is a disadvantage of using a mortgage company?
They usually offer only their own programs and limited options.
What is the role of a mortgage banker?
They loan their own money and usually sell the servicing rights along with the mortgage.
What is warehousing in the context of mortgage banking?
A line of credit from a bank to fund loans until they are sold.
What is the advantage of using a mortgage broker?
They can shop many companies to find the lowest rates.
What are common sources of funding for larger commercial loans?
Pension funds and insurance companies.
What is a Real Estate Investment Trust (REIT)?
A company that makes loans secured by real property and enjoys federal tax advantages.
What is the structure of a limited partnership in real estate investment?
Limited partners pay for expenses and receive profits, but are not liable for losses beyond their investment.
What is a Real Estate Mortgage Trust (REM T)?
A type of REIT that buys and sells mortgages on real property.
What is a Real Estate Mortgage Investment Conduit (REMIC)?
An entity that holds pools of mortgages and mortgage-backed securities, treated like a partnership for tax purposes.
What is the primary concern in commercial property financing?
The property’s performance as the primary source to repay the loan.
True or False: Credit Unions typically offer loans with a down payment as low as 5%.
True.
Fill in the blank: The typical mortgage-backed security carries an interest rate of _______ or more above government securities.
1.00%.
What are REMICs?
REMICs are innovative structured products by Freddie Mac that increase demand for Gold PCs and help investors manage portfolios.
REMIC stands for Real Estate Mortgage Investment Conduit.
How does commercial property financing differ from residential financing?
In commercial property financing, the property itself is the primary source for loan repayment, while residential financing focuses on the borrower’s ability to make payments.
Commercial financing emphasizes the income stream and property performance.
What is a non-recourse loan?
A non-recourse loan is one where the borrower does not have to sign as a guarantor if the income stream quality is high enough.
This type of loan limits the lender’s recovery options to the collateral itself.
What types of properties are considered commercial?
Common types of commercial property include:
* Office Buildings
* Retail Buildings (Shoppettes, Neighborhood Centers, Regional Malls, Box Buildings)
* Industrial Buildings
* Multifamily Properties
* Special Purpose Properties (Hotels, Restaurants, Mobile Home Parks, Nursing Homes)
These properties are typically used for business purposes.
What is the typical loan to value (LTV) ratio for commercial property?
The typical LTV ratio for commercial property is 75%.
This means that lenders will finance up to 75% of the property’s value.
What are prepayment penalties in commercial loans?
Prepayment penalties can vary widely and may include:
* Lock-in periods preventing prepayment for a certain number of years
* A percentage penalty of the loan balance after the lock-in period
* A defeasance clause requiring substitute collateral for prepayment
These penalties often exist until the loan matures.
Which institutions are major sources of commercial property loans?
Major sources of commercial property loans include:
* Life Insurance Companies
* Pension Funds
* Commercial Banks
* Savings & Loans (S&Ls)
Life insurance companies are the largest single lenders in this sector.
What is the purpose of USDA loans?
USDA loans are designed to assist low- and moderate-income families in rural areas to purchase homes or fund rental units.
The program was previously known as the Farmers Home Administration (FmHA).
What are mortgage-backed securities (MBS)?
MBS are securities backed by mortgages that provide funds for loans not meeting Fannie Mae or Freddie Mac guidelines.
They are sold in the secondary market to various investors.
What is the Uniform Residential Loan Application?
The Uniform Residential Loan Application, also known as Fannie Mae Form 1003, is the standard application form used by lenders for mortgage financing.
It includes data on income, employment, net worth, and credit references.
What is the front-end ratio in income qualification?
The front-end ratio is the percentage of the total house payment compared to gross monthly income.
It assesses if the borrower can afford the mortgage payment.
What does the debt ratio (back-end ratio) include?
The debt ratio includes the entire house payment plus all long-term debts, such as:
* Charge card payments
* Car loans
* Student loans
* Alimony
* Child support
This ratio evaluates the borrower’s overall debt obligations.
What documentation is required for loan origination?
Documentation required includes:
* Loan application
* Income verification (tax returns, W-2s)
* Down payment proof (bank statements)
* Valid photo ID
These documents help verify the borrower’s financial status.
True or False: Commercial banks are long-term lenders.
False.
Commercial banks typically provide construction loans and mini perm loans, not long-term financing.
What is the role of the loan underwriter?
The loan underwriter reviews loan documentation and evaluates the risk of the borrower’s ability and willingness to repay the loan.
They assess both income and collateral value.
Fill in the blank: The _______ determines a borrower’s willingness to pay.
Credit
A credit report includes payment history and current liabilities.
What is the income used in qualifying ratios?
Income used is before taxes, social security, insurance, and 401 K contributions are taken out.
What does the Debt Ratio/TotaI Debt include?
Includes the entire house payment plus any long-term debts such as:
* Charge card payments
* Car loans
* Student loans
* Alimony
* Maintenance
* Child support
What were the original FNMA income guidelines for house payment and total debts?
House payment limited to one-fourth (25%) of the gross monthly income and total debts to one-third (33%) of the income.
What are the current acceptable qualifying ratios for lenders with strong compensating factors?
Ratios as high as 40% and 50%.
If a client earns $75,000 a year, what is the maximum monthly payment using a 33% front-end ratio?
$2,062.50
What is the back-end ratio maximum monthly payment for a client earning $75,000 at a 38% ratio?
$2,375.00
If monthly debts are $500, what is the maximum qualifying house payment using a back-end ratio of $2,375?
$1,875.00
What is residual income?
The amount left after the borrower pays monthly debts and housing expenses.
How is residual income calculated?
Start with the borrower’s monthly income and deduct:
* Social security and income taxes
* Health insurance premium
* Other monthly obligations
What does the credit report indicate about a borrower’s willingness to repay?
It shows the applicant’s credit history, including late payments and overall creditworthiness.
What are the two important dates in the bankruptcy process?
The filing date and the discharge date.
What factors determine a credit score?
Factors include:
* Credit history
* Outstanding debt
* Payment history
* Types of credit
* Credit inquiries
* Percentage of balance to limit
* Available credit
What is the range of credit scores?
Scores range from 350 (lowest) to 850 (highest).
What is one of the first steps to improve a credit score?
Correct misinformation on the credit report.
What is alternative credit?
Credit references provided by borrowers who may not have enough credit to establish a credit score.
What does an underwriter review regarding assets to close?
They check if the funds are from the buyer’s own accounts, borrowed, or gifted.
What is the Loan-to-Value Ratio (L-T-V)?
It measures the ratio of a loan to the appraised value of the property.
What happens when a buyer does not have the required 20% down payment?
They may need to obtain Private Mortgage Insurance (PMI) or pursue secondary financing.
What does Electronic Underwriting utilize to determine loan eligibility?
Uses computer modeling and risk analysis considering factors like credit, credit score, down payment, and liquid assets.
What is Desktop Underwriting (DU)?
A system used in electronic underwriting.
What are the most important factors used in the loan decision?
Credit score and quality, followed closely by liquid assets.
What is Desktop Underwriting (DU)?
The system used by FNMA to determine the qualifications for the proposed loan.
What does Freddie Mac use for loan qualification?
Loan Prospector (LP).
What is required for Electronic Underwriting?
Borrowers must have a credit score.
What happens if borrowers have a limited credit history?
The loan is ineligible for electronic underwriting.
What is the primary benefit of electronic underwriting?
It dramatically decreases the time needed to process and close loans.
What is a fixed-rate loan?
A loan with a fixed interest rate and fixed principal and interest payments for the entire term.
What is a balloon loan?
A partially-amortized loan where the entire balance is due sooner than the full term.
What is a Graduated Payment Mortgage (GPM)?
A loan with lower initial payments that increase over time, potentially leading to negative amortization.
What is an Adjustable Rate Mortgage (ARM)?
A loan with an interest rate that can change based on market conditions.
What are the components of an ARM?
- Initial Rate
- Fully Indexed Accrual Rate (FIAR)
- Margin
- Index
- Caps
What is negative amortization?
When the required payment does not cover the current interest charge, increasing the principal balance.
What is an Option ARM loan?
A loan combining features of ARM, GPM, and Negative Amortizing Loan, offering multiple payment options.
What are the four payment options in an Option ARM?
- Minimum payment based on low initial interest rate
- Pay only the monthly interest due
- Amortize over 30 years
- Amortize over 15 years
What is a Hybrid ARM?
A combination of fixed-rate and adjustable-rate mortgage, with a fixed rate for a specific time.
What is a budget loan?
A loan where the payment includes escrow for taxes and insurance, termed PITI.
What does PITI stand for?
Principal, Interest, Taxes, Insurance.
What is the purpose of escrowing for taxes and insurance?
To ensure property taxes and insurance premiums are paid on time.
What is an Interest Only (I/O) Loan?
A loan where the required payment covers only the monthly interest due.
True or False: Most loans require escrows for taxes and insurance.
True.
What can happen if an owner does not pay property taxes?
The county government could place a lien on the property.
What is the maximum interest rate change allowed in a life of loan cap?
The maximum interest rate allowed for the entire term of the loan.
What is a payment cap?
A limit on how much a payment can change, typically 7.5% per year.
Fill in the blank: The principal balance increases with each payment in __________.
Negative Amortization.
What is the usual cap for negatively amortized loans?
125% of the original loan amount.
What does CLTV stand for?
Combined Loan to Value
What additional insurance must be escrowed if a property is in a flood hazard area?
Flood insurance
What is an interest-only loan?
A loan where only the monthly interest is paid, not reducing principal
What is a disadvantage of an interest-only loan?
No principal reduction, which means no equity is built
What is the typical duration of the interest-only term in an interest-only loan?
Up to ten years
What happens to payments after the interest-only period ends?
Payments become fixed and start amortizing
What is a bi-weekly loan?
A loan with payments due every two weeks
How many payments does a bi-weekly loan equate to annually?
26 payments, equivalent to 13 monthly payments
What is a buy-down loan?
A loan that offers lower payments for the first two or three years
In a buy-down loan, what is the purpose of the initial lower interest rates?
To help borrowers qualify for the loan
What is a piggyback loan?
Taking out two mortgages on the same property
What is the purpose of an escrow account?
To hold funds for property taxes, insurance, and special assessments
When are escrow accounts required?
When the loan-to-value ratio (LTV) is greater than 80 percent
What types of payments are generally included in escrow accounts?
- Taxes
- Hazard insurance
- Private mortgage insurance
- One-time PMI premium
What is the purpose of Private Mortgage Insurance (PMI)?
To insure lenders against losses from non-repayment of low down payment loans
What LTV ratio typically requires PMI?
Above 80 percent
What is the ZOMP program?
A program allowing buyers to finance PMI as a one-time premium
What is one advantage of the one-time PMI premium?
No cash requirement at closing
What is a disadvantage of the one-time PMI premium?
It cannot be canceled after LTV drops below 80 percent
What does the term ‘LTV’ stand for?
Loan to Value
How is hazard insurance premium calculated?
Based on replacement value, depreciation, and proximity to fire services
What typical estimate do lenders use for taxes on new home construction?
2.5 percent of the sales price
What is the typical duration to pay off a normal 30-year loan with bi-weekly payments?
Approximately 20 years
What is the initial interest rate in a 2-1 buy down if the current rate is 8.00%?
6.00%
What is the second-year interest rate in a 2-1 buy down?
7.00%
What is a conventional mortgage?
A conventional mortgage is not guaranteed or insured by any government agency.
What standards do conventional loans typically meet?
Conventional loans usually meet current Fannie Mae (FNMA) or Freddie Mac underwriting standards.
What determines the amount loaned, interest rate, and fees in a conventional loan?
The lender, the borrower, and the marketplace.
What are typical loan terms for a conventional loan?
10 through 40 years.
What is the maximum loan-to-value (LTV) ratio for conventional loans without mortgage insurance?
80%.
What is a ‘due-on-sale’ clause in a conventional loan?
It limits the right to assume without the consent of the lender.
What is required regarding property insurance in a conventional loan?
The property must be kept adequately insured.
What are prepayment penalties in the context of conventional loans?
Fees that may be charged for paying off the loan early; previously common but now rare.
When is Private Mortgage Insurance (PMI) typically required?
When the loan balance exceeds 80% of the purchase price.
What does PMI protect?
It protects the lender from loss.
What are amortized loans?
Fixed-term loans where the borrower makes a series of equal payments to pay off the loan.
What is an adjustable-rate mortgage (ARM)?
A mortgage with an introductory interest rate that adjusts annually after a set period.
What is the most popular type of ARM?
The 5/1 ARM.
What are the three major indexes for ARMs?
- Weekly constant maturity yield on one-year Treasury bill
- 11th District cost of funds index (COFI)
- London Interbank Offered Rate (Libor)
What is a periodic rate cap in an ARM?
It limits how much the interest rate can change from one year to the next.
What is the mission of the Federal Housing Administration (FHA)?
To make home ownership available to more people, improve housing construction standards, and create better methods for financing mortgage loans.
What does FHA insurance protect?
It protects private lenders against financial loss.
What is the maximum loan amount for FHA loans based on?
The lower of either the sales price or the appraised value.
What percentage is typically required for the cash down payment on an FHA-insured mortgage?
3.5% of the sales price.
What is the Up-Front Mortgage Insurance Premium (UFMIP)?
A lump sum payment of 3.8% of the loan amount paid at closing.
What is a significant change to FHA loan requirements since September 1989?
New buyers must qualify to assume an FHA loan.
What is required regarding property standards for FHA loans?
The property must meet FHA construction standards, called minimum property requirements (MPR).
What is the maximum loan amount for FHA loans determined by?
The lower of the sales price or the FHA Conditional Commitment value.
What is the mortgage insurance premium (MIP) paid by the borrower for?
To insure the loan.
What is the current upfront MIP rate?
1.75 percent of the loan amount.
What must FHA loans have in terms of escrow?
Escrows of taxes, insurance, and flood insurance (when applicable).
What does VA stand for in the context of loans?
Department of Veterans Affairs.
What does the VA provide for loans?
A guarantee against default.
What is a VA Loan?
A loan guaranteed by the Department of Veterans Affairs Loan Guarantee Program
What does the VA guarantee cover?
The lender against default for up to 60% of the purchase price or the remaining entitlement, whichever is lower
What is the minimum active duty requirement for VA loan eligibility?
At least 180 days of active duty
What is a Certificate of Eligibility?
A document proving eligibility for a VA loan
What form must veterans fill out to obtain a Certificate of Eligibility?
VA form 1880
What is the current amount of a veteran’s entitlement?
$36,000
What is the maximum VA loan entitlement amount without a down payment?
$144,000
True or False: The VA sets maximum loan amounts.
False
What does the VA do in case of borrower default?
Pays the lender the amount of the entitlement or the actual loss from foreclosure, whichever is less
What is the VA’s term for an appraisal?
Certificate of Reasonable Value (CRV)
What happens if the sales price exceeds the CRV?
The difference must be paid in cash
What are discount points?
Prepaid interest charged by lenders
What fee is required at closing for VA loans?
Funding fee
Who is exempt from paying the VA funding fee?
- Veterans receiving VA compensation for service-connected disabilities
- Surviving spouses of veterans who died in service or from service-connected disabilities
What is the purpose of the VA escape clause?
Protects the veteran from paying more than the appraised value
Who can assume a VA-guaranteed loan?
Anyone
What is the role of the Texas Department of Savings and Mortgage Lending (TDSML)?
Regulates the state’s thrift industry and the mortgage industry
What is the Secure and Fair Enforcement for Mortgage Licensing (S.A.F.E.) Act of 2008?
Defines a residential mortgage loan primarily for personal, family, or household use secured by a mortgage
Who is required to have a Residential Mortgage Loan Originator License?
Individuals taking residential mortgage loan applications for compensation
What types of loans does TDSML regulate?
- Residential mortgage loans
- Home equity loans
- Secondary mortgage loans
What does the VA not demand regarding taxes and insurance premiums?
Escrow
What is the maximum loan amount set by GNMA for VA loans?
$484,350
Fill in the blank: The VA will issue a _______ for loan guarantee.
Certificate of Reasonable Value (CRV)
What must the veteran do to apply for a VA loan?
Apply to any VA-approved lender
What is the primary responsibility of the TDSML?
Licensing and regulation of the mortgage industry in Texas
True or False: The VA allows secondary financing on VA loans.
False
What must be paid in cash if the CRV is lower than the purchase price?
The difference between the sales price and the appraised value
What happens to a veteran’s eligibility when their VA loan is assumed by another veteran?
The original veteran’s eligibility is restored
What is the total amount regulated by the Texas Department of Savings and Mortgage Lending?
Over $9.5 billion.
How many Residential Mortgage Loan Originators are regulated throughout Texas?
Over 20,000.
How many Mortgage Banking Companies does the Texas Department of Savings and Mortgage Lending regulate?
Over 400.
What is the primary commitment of the Texas Department of Savings and Mortgage Lending?
Comprehensive regulation of savings institutions, mortgage loan originators, mortgage companies, and mortgage bankers.
List three characteristics that the Texas Department of Savings and Mortgage Lending strives to embody.
- Fairness
- Ethical Conduct
- Professionalism
What is the SAFE Mortgage Licensing Act of 2008 designed to establish?
A Nationwide Mortgage Licensing System and Registry.
What are the minimum guidelines required by HUD under the SAFE Mortgage Licensing Act?
Registration, licensing, education, and testing.
What is the minimum passing grade for the licensing test according to the SAFE Mortgage Licensing Act?
75%.
True or False: The Texas SAFE Act allows licensed real estate brokers to perform real estate brokerage activity without a mortgage loan originator license.
True.
Define ‘real estate brokerage activity’ as per the Texas SAFE Act.
- Acting as a real estate broker or sales agent
- Bringing together parties interested in real property transactions
- Negotiating contract provisions related to real property transactions.
What types of properties does Texas Farm Credit finance?
- Farm and Ranches
- Other Rural Property
- Property Improvements
What is predatory lending?
A situation where a lender takes advantage of a borrower.
What act was enacted to combat predatory lending abuses?
Home Ownership and Equity Protection Act (HOEPA) of 1994.
List two positive effects of government regulation in the mortgage market.
- No prepayment penalties
- Assumable loans
What is the minimum down payment required for an FHA loan?
3.5 percent.
What percentage of subprime mortgages are currently seriously delinquent according to a Freddie Mac report?
19.92 percent.
What effect does an increase in foreclosures in a neighborhood have on property values?
It lowers property values.
How much of the mortgage-backed securities were issued by Fannie Mae, Freddie Mac, and Ginnie Mae in 2013?
98 percent.
What is one consequence of extra regulations in the mortgage lending process?
Higher costs for consumers.
What is an Installment Land Contract?
A type of seller financing used by buyers who cannot qualify for conventional financing.
In an Installment Land Contract, when does the buyer receive legal title?
When the seller delivers the deed after a portion of the purchase price is paid.
What are the two types of seller financing in Texas?
- First lien
- Second lien
What must a seller do to become a first lien lender?
The seller cannot owe anything on their property.
How is ‘equity’ defined in real estate?
The difference between the fair market value of the property and the mortgage amount owed.
What is owner financing?
When owners finance all or part of the purchase price during periods of tight money.
What is owner financing?
Owner financing is when owners finance all or part of the purchase price, often benefiting both the buyer and seller.
What advantages does owner financing provide to buyers?
Owner financing allows for a lower interest rate than the current market and can help buyers who lack the required down payment.
What is a ‘second mortgage’ in the context of owner financing?
A second mortgage is provided by the seller to the purchaser who has a first mortgage but lacks some of the required down payment.
What are private ‘hard money’ investors?
Private ‘hard money’ investors provide funds secured by real property for loan financing, often at higher interest rates.
What is the role of portfolio lenders?
Portfolio lenders, such as local community banks or credit unions, decide on the loan and keep it in-house rather than selling it.
What is the Federal Home Loan Bank system?
The Federal Home Loan Bank system consists of eleven FHLBs that provide cash advances to members for housing and community economic development.
What is the purpose of the Federal Housing Administration (FHA)?
The FHA insures mortgage loans against default to protect lending institutions.
What is the mission of the Department of Housing and Urban Development (HUD)?
HUD’s mission is to create strong, sustainable, inclusive communities and quality affordable homes for all.
What does the Federal Uniform Commercial Code Bulk Transfer Act (1966) protect?
The Bulk Transfer Act protects creditors in the event of a bulk transfer of stock in trade.
What must a seller do under the Bulk Transfer Act?
The seller must compile a complete list of existing creditors and an identifiable schedule of property.
What is the Equal Credit Opportunity Act (ECOA)?
The ECOA is a law that prohibits discrimination in credit transactions based on race, color, religion, national origin, sex, marital status, or age.
What rights does the ECOA provide to consumers?
The ECOA allows consumers to obtain their credit report and prohibits discrimination based on various factors.
What does the Home Mortgage Disclosure Act (HMDA) require?
HMDA requires lending institutions to report public loan data to assist in identifying discriminatory lending patterns.
What is FIRREA (1989)?
FIRREA is a comprehensive law providing guidelines for the regulation of financial institutions, created in response to Savings and Loan failures.
What does the National Flood Insurance Act (1968) provide?
The act made federally backed flood insurance available for the first time, mandating its purchase for properties in designated flood hazard areas.
What is the Right to Financial Privacy Act (RFPA)?
RFPA protects the confidentiality of personal financial records and limits government access to such records.
What are the exceptions to the RFPA regarding government access to financial records?
Exceptions include customer authorization, subpoena, qualified search warrant, judicial subpoena, and formal written request.
What immunity do financial institutions have under the RFPA?
Financial institutions have immunity from civil liability for reporting known or suspected criminal offenses or suspicious activity.
What is the Leach-Bliley Financial Modernization Act of 1999 designed to do?
The act protects individual privacy by limiting how financial information can be shared or sold between businesses.
What must financial institutions provide to customers under the Leach-Bliley Act?
They must provide privacy notices explaining information-sharing practices and allow customers to limit some sharing.
What is the distinction between a consumer and a customer under the Leach-Bliley Act?
A consumer is an individual using financial services for personal use, while a customer has a continuing relationship with the institution.
Fill in the blank: The _______ prohibits discrimination in credit transactions based on race, color, religion, or other factors.
Equal Credit Opportunity Act (ECOA)
True or False: The National Flood Insurance Reform Act of 1994 requires homeowners to purchase flood insurance.
False
Fill in the blank: The _______ provides guidelines for the regulation of financial institutions and was passed to help recover from Savings and Loan failures.
FIRREA
What are Non-Opt-Out Provisions?
Situations where customers cannot opt out of information sharing, such as when contracting for outside services
For example, financial institutions can share information for essential services like loan processing.
What is prohibited under Non-Opt-Out Provisions?
Companies receiving information cannot share or sell it to other organizations or use it for marketing purposes.
What is ‘pretexting’?
The practice of obtaining customer information from financial institutions under false pretenses.
What is defined as an electronic signature (eSignature) under the U.S. Federal ESIGN Act?
An electronic sound, symbol, or process attached to or logically associated with a contract executed by a person with the intent to sign.
What does the Uniform Electronic Transactions Act (UETA) establish?
Electronic records and signatures as the legal equivalent of paper writings and manual signatures.
Is UETA a procedural or substantive law?
Procedural law.
What must both parties agree on to conduct a transaction electronically under UETA?
Both parties must agree to conduct the transaction electronically.
What does E-Sign specify?
The legal effect and enforceability of electronic contracts and signatures.
True or False: E-Sign addresses how to establish the authenticity of electronic signatures.
False.
What must consumers do to allow eSignatures under E-Sign?
Give consent communicated electronically.
What happens if a consumer withdraws consent to use electronic records?
The parties must complete the rest of the transaction in paper format.
What is the PATRIOT Act?
An act to restrict money laundering to help fund terrorists, enacted after the September 11, 2001 attacks.
What does Section 358 of the PATRIOT Act permit?
Disclosure of financial information to intelligence agencies in investigations related to international terrorism.
What is the SAFE Mortgage Licensing Act of 2008?
An act that establishes a Nationwide Mortgage Licensing System and Registry to increase uniformity and reduce regulatory burdens.
What does HOEPA stand for?
Home Ownership and Equity Protection Act.
What types of loans are exempt from HOEPA coverage?
- Reverse mortgages
- Construction loans
- Loans from Housing Finance Agencies
- USDA Rural Housing Service Direct Loan Program.
What additional requirements are there for ‘High Cost’ mortgages under HOEPA?
- Prohibited from offering balloon loans
- No pre-payment penalties
- Financing points and fees restrictions.
What is the role of the Consumer Finance Protection Bureau (CFPB)?
To regulate and oversee financial companies, responding to complaints and protecting consumers.
What did the Dodd-Frank Act transfer to the CFPB?
Rulemaking authority for TILA, RESPA, SAFE Act, and HOEPA.
What does RESPA regulate?
Closing costs and settlement procedures in real estate transactions.
What does RESPA prohibit?
Payment or receipt of any ‘kickbacks’ or referrals that increase costs related to settlement services.
What are the penalties for RESPA violations?
- Criminal penalties up to $10,000 or one year imprisonment
- Civil suits can recover three times the settlement service charge.
What does Regulation Z require?
Disclosure of important credit terms and the prohibition of misleading practices by lenders.
What is the purpose of the Truth in Lending Act (TILA)?
To protect consumers from misleading lending practices.
What must lenders disclose at the time of loan application?
- Who the lender is
- Payment schedule
- Prepayment clauses.
What does APR stand for in loan terms?
Annual Percentage Rate
APR represents the yearly cost of borrowing expressed as a percentage.
What must lenders disclose at the time of loan application?
- Who the lender is
- Payment schedule
- Prepayment clauses
- Late payment charges
- Insurance required
- Filing fees
- Collateral required
- Required deposits
- Assumability
- Balloon payment, if any
- Total sales price
- Adjustable-rate features, if any
- Itemization of amount financed
What is the role of the Consumer Financial Protection Bureau (CFPB)?
To protect consumers from unfair, deceptive, or abusive acts and enforce existing consumer financial protection laws
The CFPB consolidates consumer protection responsibilities that were previously held by multiple agencies.
What are ‘trigger terms’ in loan advertising according to Regulation Z?
Specific words that require additional information to be provided in advertisements
Examples include down payment amount, payment amount, and finance charge.
What must be included in an advertisement if a trigger term is used?
- The amount or percentage of the down-payment
- Terms of repayment
- Annual percentage rate (APR)
- Any potential increase in the rate after consummation
How long is the right of rescission in a consumer credit transaction?
Three business days
This right does not apply for certain types of loans such as those for purchasing or constructing residential real estate.
What happens if a lender fails to notify the borrower of the right to rescind?
The right continues for three years or until the property is sold
What are the eight required underwriting guidelines for Ability to Repay (ATR)?
- Current or reasonably expected income or assets
- Current employment status
- Monthly mortgage payment
- Monthly payment on any simultaneous loans
- Other property-related expenses
- Other debts
- Monthly debt-to-income ratio
- Credit history
What constitutes a ‘Qualified Mortgage’ (QM)?
- Provides regular periodic payments
- No negative amortization, balloon payments, or interest-only payments
- Total points and fees do not exceed 3% of the loan amount
- For adjustable loans, maximum interest rate must be used for qualifying
- Total debt-to-income ratio does not exceed 43%
What loans are exempted from the Ability to Repay (ATR) rule?
- Home Equity Lines of Credit (HELOCs)
- Reverse Mortgages
- Time shares
- Construction or bridge loans
- Non-standard loans like loan modifications
What must lenders provide borrowers regarding appraisals?
A free copy of any written appraisal or valuation used in the lending decision
What are the two new disclosures required by the CFPB for mortgage loans?
- Loan Estimate
- Closing Disclosure
When did the CFPB’s new mortgage disclosure rules take effect?
October 1st, 2015
What is the purpose of the ‘Know Before You Owe’ initiative?
To ensure consumers are better informed and can more easily compare loan products
