Mortgage Course Flash Cards

Bridge Mortgage

- A short-term loan that temporarily extends financing between the termination of one mortgage and the beginning of another - Serves as a lien against the property up for sale until it is sold - Once the property sells, the loan is paid in full releasing the lien

Negative amortization

- Allows borrower to defer a portion of the interest payment -When interest portion of a payment is not covered, the borrower still owes the portion that was not paid (means principal amount increases) - This loan product (called an option ARM) was popular when home values were rising and the deferred interest could be hedged against the rising property values.

Balloon mortgage

- Allows borrower to have payment terms that will not pay off the loan by the due date - When due date arrives, borrowers will owe a lump sum to pay off the loan - Loan popular in a rising property value market place because the borrowers could refinance the loan to pay of the loan - Risky because if property values fall, then property value may not secure the loan and create a problem for borrower to get financing - A 360/120 balloon means: >Borrower making payments based on a 360-month amortization >Loan is due in 120 months and will require a lump sum payment

Fair Housing Act, a.k.a., FH Act

- Also known as Title VIII of the Civil Rights act of 1968 - The Department of Housing and Development (HUD) is responsible for the enforcement of the Act - Since HUD is also responsible for the Federal Housing Administration (FHA) the _____ _______ ________ is referred to as the ____ ______ to avoid confusion - Congress passed this act to address the problem of unlawful discrimination in housing based on a number prohibited factors.

Fixed Rate Home Equity Loans

- Generally referred to as a second mortgage - Fixed rate and a fixed term, generally with a 15-year maximum - All the proceeds are received at closing and the loan is fully amortized, meaning the payment plan will pay off the loan by the loans due date.

Time Limits on Credit Reporting

> Bankruptcy filings may only be reported for a period of ten years > All other derogatory credit reporting is limited to seven years: - Civil suits - Judgements - Paid tax liens - Charged off accounts

Fair Credit Reporting Act (FCRA)

> Congress passed the law in 1970 > Is implemented by Regulation V, is Title VI of the Consumer Credit Protection Act > FCRA is enforced by the CFPB (Consumer Financial Protection Bureau)

Lien

A claim that is recorded in the courthouse records letting the public know that there is an official claim outstanding. Some liens are voluntary and some are not. Generally, liens must be satisfied by the time a sale of the property is completed.

Construction Loans

A construction loan is a temporary loan during the construction period. - Requires the loan to be paid at the end of the construction period - Permanent financing involves a much longer term typically 15 or 30 years - Like a line of credit, the money is not owed until it is used - Payments made to the builder when each phase of a project is completed are draw payments - Only the interest is due during the construction loan period - In summary, a construction loan is characterized by rising principal, draw payments and interest only payments.

Jumbo Loan

A home loan for an amount that exceeds conforming loan limits established by regulations. The conforming loan limit in most areas is $453,100. This amount is subject to change annually.

Index

A market instrument that varies with market conditions. Rates tied to a _______ can adjust based on the changes in the ________.

What is the difference between a loan processor and a loan underwriter?

A mortgage loan processor's role is to verify the accuracy of the information submitted. The underwriters role is to ensure the borrower meets the conditions of the loan program.

Active Duty Alert

A notification in a consumer's credit file to alert the user of a credit report that the consumer is active in the military and most likely deployed. Is part of the Red Flag Identity Theft Program. What is this called?

Credit Score

A numerical value derived from a statistical tool used as a part of the determination as to a consumer's likelihood or certain credit behaviors. This is also referred to as a risk predictor or risk score.

Steering

A potential customer is either encouraged or discouraged from purchasing housing in a particular area or community because of the agent's actions or lender's actions. This is a violation of the FH Act because the customer has the right to full access and this right should not be interfered with based on a prohibited basis

Familiar Status

A protected class added to the FH Act in 1988. This protection against housing discrimination applies to any person who is pregnant or in the process of securing legal custody of any individual who is under the age of 18 including the person under the age of 18. Discrimination of this nature applies to refusing housing opportunities because of the existence or likely existence of children occupying the premises.

Red Flag

A red flag is a pattern, practice or specific activity that indicates the possible existence of identity theft. The Federal Trade Commission requires financial institutions to develop a written "Identity Theft Prevention Program" that is designed to detect, mitigate, and prevent identity theft.

ARM Reset

Adjustable-rate mortgages periodically adjust based on the index at the end of a fixed-rate period (in the case of a Hybrid ARM). The change in the rate is known as an ARM 'reset'.

Interest-only

Allows the borrower to pay only the interest during a portion of the loan. - No reduction of principal is made during the interest only (I/O) period. - Product referred to as a "non-moving loan" because the principal is not moving during the interest only period. - Although payments during the I/O period are very affordable, the borrower will be required to make a higher payment including contribution to principle once the interest only period ends.

Gramm-Leach-Bliley Act (GLBA)

Also, known as the "Financial Services Modernization Act" provides rules and regulations associated with the dissemination and protection of non-public consumer information. GLBA is regulation "p" and is enforced by the Consumer Finance Protection Bureau (CFPB).

Correspondent Mortgage Lender

An entity that originates loans, funds loans with a line of credit called a warehouse line of credit, and generally sells the loans along with the servicing rights on the loans it originates.

Mortgage Broker

An entity that originates loans. Must have at least one loan originator to originate loans. Unlike an individual mortgage originator (limited to originating for one lender), the mortgage broker can originate for multiple lenders.

Mortgage Lender

An entity with funding capacity that originates loans, funds loans with its own money, services loans, and purchases loans. Must have at least one loan originator to originate a loan.

Fully Indexed Rate

An interest rate based on the index and the margin.

What is an involuntary lien?

An involuntary lien is a claim placed against the property generally by a judicial or statutory authority. Many times, unpaid taxes or assessments by the borrower create the need for the involuntary lien.

Non-traditional

Another form of non-conforming loans are non-traditional loans. - Designed for high risk borrowers - May include risky features and high interest rates - Generally purchased by private investors.

Handicap

Another protected class added to the FH Act in 1988. A person with a physical or mental impairment which substantially limits the capacity of that individual to navigate one or more major life activities. Handicap does not include a person addicted to a controlled substance such as a heroin addict.

Consumer Report/Credit Report

Any written or oral or other form of communication of any information from a consumer reporting agency bearing on a consumer's creditworthiness, credit standing, credit capacity, character and general reputation which is used or expected to be used as part of a decision to extend credit.

Safe Harbor

As it relates to this section (of the study guide) it means if the lender meets certain conditions the lender is protected from potential liability. Non-Safe Harbor means the lender is open to liability and the courts will decide the outcome.

BSA/AML

Bank Secrecy Act and Anti Money Laundering. The law requires financial institutions to assist U.S. government agencies with detecting and preventing money laundering activities. Specifically, the Act requires financial institutions to: - Keep records of cash purchases of negotiable instruments. - File reports of cash transactions exceeding $10,000, (daily aggregate amount). - Report suspicious activity that might signifiy money laundering, tax evasion, or other criminal activities.

Servicer

Collects the monthly mortgage payments, makes distributions to tax authorities and reports the payment history to the credit bureaus.

Mortgage Insurance

Designed to protect the lender in the event a borrower defaults. A borrower will be required to purchase mortgage insurance if the loan is considered risky.

Security Instrument

Documents that are signed by the borrower and then recorded in the county courthouse records so that the public is aware that the real estate has claim against it by the lender.

Mortgage Deed and Trust

Each state determines the type of security instrument. Even if a state uses a deed of trust or other security instrument, the industry refers to the loan associated with the document as a mortgage. Whenever you see the term mortgage and it is not referring to the actual security document... think "real estate loan".

National Flood Insurance Program (NFIP)

Ensures the requirement to carry flood insurance when a consumer's structure is in an area that has 1% chance of being inundated by flood waters in any given year

Federal Housing Administration (FHA)

FHA loans were created in 1934 to provide affordable financing. - Program under the Housing and Urban Development (HUD) a government entity that ensures fairness in any aspect of housing. - Insures loans against default by borrower as an incentive for lenders to loan money to borrowers. - Underwriting standards are more liberal than conventional loans. - FHA does not purchase loans, just insures them.

FACTA

Fair Accurate Credit Transaction Act. Back in 2003 when provisions of the Fair Credit Report Act (FCRA) were about to expire, Congress acted and extended the FCRA provisions. This became known as FACTA.

Points (Discount Points)

Fees paid directly to the lender at closing in exchange for a reduced interest rate. This act of paying the fees is also known as 'buying down the rate'. Lower rates can equal lower monthly payments. A point is equal to 1% of your loan amount (or $1,000 for every $100,000).

FinCen

Financial Crimes Enforcement Network.

Consumer

For this section, the term 'consumer' refers to an individual who obtains or has obtained a financial product or service from a financial institution for personal, family or household reasons.

National Fraud Alert System

Part of FACTA. Established the following: > A consumer who believes they may be the victim of identity theft may call any of the three national Consumer Reporting Agencies (CRAs) to report the fact. The CRA receiving the call must put a 90-day fraud alert on the consumer's credit file and notify the other two CRAs if the consumer has a file with them. They also will add an alert to the file. > If a consumer is a victim of identity theft and files a police report, a copy of that report provided to the CRAs will generate a seven-year alert. > Pre-screening, the practice of CRAS selling a consumer's information to companies that solict the consumer with credit offers, is stopped for five years.

Mortgage Loan Originator (MLO)

Person originating the loan. They will advise the applicant on a suitable loan program and product, take the application and negotiate the rates and terms. May only originate for one entity.

Appraiser

Provides a professional objective opinion of value. Must adhere to strict independence and integrity guidelines.

Non-Qualified Mortgages

These are mortgages that meet the Ability to Repay requirement; however, they are allowed to have risky features, such as negative amortization, interest only, terms greater than 30 years and fees that exceed the QM threshold. Due to the risk involved, _______________ _______________ loans typically carry higher interest rates and less favorable terms.

Secure and Fair Enforcement for Mortgage Licensing Act (SAFE ACT)

This Act requires MLO's, employed by a non-depository institution, to be state licensed, complete pre-license education, pass a national exam and on annual basis complete ongoing continuing education

Equity

The value that is accrued in a property less the amount that the borrower owes is equity. Value comes from funds contributed to the loan balance as well as environmental factors. The equity built up in a property can be used to secure another loan.

Higher Priced Mortgage loans (HPML)

These are loans that allow interest rates to exceed a predetermined threshold based on the Average Prime Offer Rate and a fixed interest rate standard. This allows the borrower to challenge if the Ability to Repay determination was met.

Residential Real Estate Loan

This is a loan for personal, family and household reasons. The loan will require the property being purchased to be used as collateral or security for the loan. A dwelling structure must be on the land or the intent to add the structure on the land is required.

Applicant

This is the person(s) seeking the loan.

Hypothecate

This means that a borrower can pledge the property as collateral for the loan and get the benefit of using the property during the loan terms.

Loan Underwriter

This person determines if the applicant meets the conditions of the loan program and product. Approves or disapproves the loan application.

Closing Agent

This person executes the legal documents at closing, collects and distributes funds and records security documents after closing. Depending on state customs, the __________ _____________ may be an attorney, title company, or escrow agent.

What to do with multiple credit scores

- Generally, lenders won't accept a single score from one of the CRA (Credit Reporting Agencies) - When 2 scores are provided to the lender, the lower score is used (otherwise referred to as the representative score) - When 3 scores are provided to a lender, the middle score is used (otherwise referred to as the representative score) - If multiple borrowers, then the lender uses the lowest of the representative scores

Conventional Conforming Loans

- Loan program not backed by an agency of the federal government - Is the primary loan and meets the loan requirements of Fannie Mae and Freddie Mac - Has a maximum loan limits of $453,100 for a single unit (considered conforming loans) and are available for purchase by Fannie Mae and Freddie Mac.

Fixed Loans

- Lower risk product where the interest rate remains fixed over the life of the loan. - Borrower has certainty with the principal and interest payments each month.

Home Equity Line of Credit (HELOC)

- Open-ended revolving account secured by the equity in a property - Generally, in a secondary position subordinate to the primary loan - Funds are drawn as needed and the required minimum payment terms are interest only payments until a point when the interest only period has ended and the fully amortized payments are required. - Tied to an index and the rates vary based on the index - The prime index is the most popular index for a HELOC - Lenders will often provide borrowers with a credit card or checking account to access funds from the equity line

Home equity loans

- Secured by the equity in a borrower's home. - Generally, in a secondary lien position because there is usually a primary loan - Two types of these loans - fixed rate & term and lines of credit

Dodd Frank Act

- The umbrella authority for most of the residential mortgage related laws - Enacted to provide a broad area of protection for consumers relating to financial services Authorized the creation of the Consumer Financial Protection Bureau (CFPB) which is the rulemaking and enforcement agency for this Act. - Most of the laws that regulate the residential mortgage industry are now under the umbrella of the CFPB

What are the Consumer Reporting Agencies?

1. Equifax 2. Experian 3. Transunion

The 8 Factors used to determine consumer's ability to repay the loan.

1. Income and Assets (exclude value of property securing the loan) 2. Employment status 3. Mortgage payments considering fully indexed rate or introductory rate (whichever is higher) 4. Fully amortized payments Simultaneous loans on same dwelling 5. Monthly payments for taxes, insurance, and homeowner assoc. fees 6. Current debt obligations including alimony, child support and: - Installment debt (i.e., cars, appliances, etc) - Revolving debt (i.e., credit cards, etc.) - Existing mortgages not being paid off -Debt-to-ioncome ratio and residual income 7. Credit history

The Equal Credit Opportunity Act (ECOA) allows lenders to collect what data for monitoring purposes under HMDA?

1. Loan Information 2. Application Information (Race, Ethnicity, Sex, Annual Income) 3. Price-related data. Institutions must report the rate spread between the annual percentage rate (AP/R) and the average prime offer rate for a comparable transaction as of the date the interest rate is set or locked.

Safe Harbor Loans

If a consumer closes on a loan that is a qualified mortgage and is not a Higher Priced Mortgage loan, then the consumer is in the Safe Harbor region. This means there is the presumption that the QM meets ATR requirements and the loan cannot be challenged.

Residential Real Estate

Land with a maximum of 4 dwelling units designed for occupancy. Land with greater than 4 dwelling units would not be considered residential and would be commercial. The 4 types of residential units include: Single - unit designed for single family Duplex - two units Triplex - three units Quadplex - four units

Adjustable rate mortgage (ARM)

Loan products where loan rates can vary over the term of the loan. - Most ARMs have an introductory period where the rate is fixed; these loans are referred to as hybrid arms. - Fixed periods on a typical 30-year ARM loan (hybrid) vary from 3-10 years. - ARM rate changes based on an index (market instrument not under the control of the lender). Lenders add their profit margin to the index to determine rate. Lenders establish caps (limits up and down) to avoid uncontrolled swings in the rate that could put the consumer at risk. -Lenders are required to provide consumers with an ARM handbook along with disclosures about ARM specifics.

Non-conforming loans

Loans that exceed the conforming loan limits are considered non-conforming or jumbo and are NOT eligible for purchase by Fannie and Freddie. - Generally purchased by private investors.

LIBOR

London Interbank Offer Rate - The London Interbank Offer Rate used in the residential mortgage industry for adjustable rate mortgages.

Home Mortgage Disclosure Act (HMDA)

Purpose: Provide the public and public officials with sufficient information to enable them to: - Determine whether institutions are serving the housing needs of the communities and neighborhoods in which they are located - Assist public officials in distributing public sector investments in a manner designed to improve the private investment environment and - Assist in identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes. Patterns of discrimination: - unlike the other lending laws, looks for patterns of discrimination vs against any single person. - Financial institutions collect various types of information from consumers in the course of processing loan applications. Regulation C: - HMDA and Regulation C require financial institutions to compile and report to regulators some of this information and other information obtained or generated concerning the application or loan.

Non Safe harbor Loans

Qualified mortgage loans that are Higher Priced Mortgages Loans (HPML) are open for dispute. The consumer can challenge in court (rebut the presumption) that the qualified mortgage meets the Ability to Repay requirements. The court will decide. What is this called?

What is the difference between a correspondent and regular mortgage lender?

Regular mortgage lenders fund with their own money, but correspondent lenders fund loans with a line of credit called a warehouse line of credit. They generally sell loans and servicing rights on any loans they originate.

Consumer Reporting Agency

Regularly engages in the practice of assembling or evaluating and maintaining for the purpose of furnishing consumer reports to third parties.

TILA-RESPA Integrated Disclosure Rule (TRID)

Regulations and disclosures for lenders that close more than five loans annually

The Home Ownership and Equity Protection Act (HOEPA) and The Higher Priced Mortgage Loan Act (HPML)

Regulations and disclosures for lenders that offer loans which exceed certain thresholds like interest rates and fees

Truth-in-Lending Act (TILA)

Regulations and disclosures relating the cost of financing

Real Estate Settlement Procedures Act (RESPA)

Regulations and disclosures relating to the cost of services

The Ability to Repay/Qualified Mortgage Rule (AR/QM)

Requires lenders to verify a borrower's ability to repay the loan before it closes

Mortgage Acts and Practices (MAP)

Requires non-depository institution lenders avoid deceptive advertising when promoting mortgage loan products

Loan Assumption

Some loan programs are assumable such as; FHA, VA, and USDA loans. - Means borrower may pay a seller for their equity in the property and take over the loan - Lender must agree that the new borrower is qualified

Fair and Accurate Credit Transaction Act (FACTA)

The ACT that protects consumer's information from identity thieves

Fair Credit Reporting Act (FCRA)

The Act that ensures accuracy of credit related information and how it's collected and reported

Homeowners Protection Act (HPA)

The Act that ensures the right to have mortgage insurance automatically terminated or the right to request the cancellation of Private Mortgage Insurance (PMI)

Gramm, Leach, Bliley Act (GLBA)

The Act that protects consumer's non-public information

Promissory Note

The IOU that the borrower signs promising to pay the loan based on the agreed to terms is the promissory note. It includes the interest rate on the loan referred to as the note rate and all agreed to conditions relative to payments. It is evidence of a promise to pay but is not a recorded document.

The Telemarketing Sales Rule (TSR)

The Rule that ensures the right to place a number on a registry to avoid solicitations by marketers and the establishment for times when contact can be made

United States Department of Agriculture (USDA) Loan

The USDA loan program is designed to ensure the development of rural less populated communities. - Referred to as the Rural Housing Service (RHS) program. - Guarantees a significant amount of the loss to the lender if the borrower defaults. No down payment required. Like other government backed loans, USDA does not purchase loans just guarantees them.

APOR (Average Prime Offer Rate)

The average of all Annual Percentage Rates (e.g., interest rates, fees, other terms) for prime borrowers in the US for the previous week, published the next week.

Amortization

The calculation (or formula) a lender uses that outlines the required payments. It includes the monthly principal and interest required to pay off the debt over a predetermined period of time.

Default

The failure of the borrower to meet their legal obligation and the conditions of the loan.

FICO Credit Score Ranges

The higher the score the lower the risk to the lender. > Low score= 300 > High score= 850

Margin

The lender's profit which is added to the index to determine the rate which is referred to as the par rate or the fully indexed rate.

Blockbusting

The practice of realtors using scare methods to get homeowners to sell their properties at a deflated price by telling them that members of a particular class, example race, nationality or color, are moving into their neighborhood and that they should sell before their home values drop. Although lending professionals are typically not directly involved in this scheme, it is important for mortgage loan originators to understand the practice and avoid being beneficiary of the illegal activity.

APR (Annual Percentage Rate)

The true cost of financing. The amount financed and the cost to finance is called?

Reverse Mortgages

This type of loan is the opposite of a forward mortgage (where equity is being created). - Equity is being used or disbursed to the borrower - Product was created to provide seniors over the age of 62 a stream of income in their later years - Home Equity Conversion Mortgage (HECM) Reverse mortgage is most popular; HFA's version has these features: >All borrowers must be at least 62 years old >All borrowers must have counseling from FHA or HUD for the HECM >Borrowers are responsible for their own taxes and insurance >Subject property must be the borrower's primary address >At least one borrower must occupy the home

Veterans Administration (VA)

VA loans resulted from the GI bill after the second world war. - Designed for qualified military borrowers. - Guarantees a lender's loss will be covered by VA in the event of a borrowers default. - Like FHA, VA does not purchase loans, just guarantees them.

Loan Processor

Verifies the information on the application subsequent to the origination of the loan. Can contact applicant for the purposes of gathering additional or missing information. Does not originate loans.

E-Sign Act

What Act allows the use of electronic records to satisfy any statute, regulation, or rule of law requiring that such information be provided in writing.

1. Equal Credit Opportunity Act (ECOA) - ensures fairness in the application process, the extension of credit and the appraisal disclosure requirements 2. Fair Housing Act (FH Act) - ensures fairness in the extension of credit relating to housing and other housing related discrimination practices 3. Home Mortgage Disclosure Act (HMDA) - ensures fairness on a larger scale by looking at patterns of discrimination

What are the 3 Fair Lending Laws

Customer

What term is used to describe a consumer with a continuing relationship with a financial institution?

Refinance

When a borrower wants to replace an existing loan with another loan it is a refinance transaction. - Lender's responsibility to ensure transaction results in a net tangible benefit to the borrower - Primary types of refinance transactions in residential mortgage financing are: > Rate and term refinance - reduce the rate and or reduce the term > Limited cash out refinance - borrower gets some cash back during the refinance either $2000 or 2% of the loan amount whichever is less > Cash Out Refinance - borrower takes cash out of the equity in the property to be used for debts not associated with the mortgage

Redlining

You may not make a geographical decision not to lend in a particular area. A violation of ECOA occurs because the credit may become unavailable to all credit worthy applicants that may reside in that area. Reverse __________ is a violation of ECOA when a geographic area is targeted because it may have a high percentage of credit challenged consumers and the creditor targets the area for purposes of predatory and abusive lending practices.

Debt to Income Ratio

Your _________________ ________ is all your recurring monthly debt payments divided by your gross monthly income. (Example: $2,000 debt ÷ $6,000=33% DTI). This number is one way that lenders measure your ability to manage the payments you make every month to repay the money you have borrowed.