FINANCE LAWS

The main advantage of a home equity loan or line of credit is that the interest paid on a loan of up to $100,000 is tax deductible, regardless of the purpose of the loan.

A home equity line of credit (HELOC) is a form of revolving credit in which a person's home serves as collateral. By using his equity in the home, a borrower may qualify for a sizable amount of credit at an interest rate that is relatively low. The borrower is approved for a specific credit limit based on a percentage (e.g., 75 %) of the appraised value of the home less the balance owed on the existing mortgage.

A chattel mortgage is a mortgage lien encumbering only personal property (i.e., chattel). The chattel mortgage has been replaced in many areas of the country by a security agreement regulated by the Uniform Commercial Code.

A security agreement between the debtor (borrower) and the secured party (seller or lender) must be in writing unless the secured party is holding the collateral. It describes the rights and obligations of the parties, the property pledged as collateral, and if the collateral relates to fixtures, the real estate. It ensures that, if the debtor fails to pay the debt, the secured party will become the owner of the property pledged as collateral or will have the right to have the property sold to pay the debt.

The Equal Credit Opportunity Act (ECOA) prohibits creditors from discriminating against a loan applicant on the basis of: race, religion, national origin, sex, marital status, or age. receipt of income from public assistance programs. good faith exercise of rights under the Consumer Credit Protection Act.

As a result, creditors may not: on the basis of race, religion, national origin, sex, marital status, or age, make statements discouraging applicants or refuse to grant an account to a creditworthy applicant. use sex or marital status in credit-scoring systems. ask the marital status of an applicant applying for an unsecured separate account, except in a community property state or as required to comply with state laws. inquire into child-bearing intentions or capability or birth control practices, or assume from an applicant's age that the applicant or applicant's spouse may drop out of the labor force and have an interruption of income due to childbearing. use unfavorable information about a spouse or former spouse when an applicant applies for credit independently and can demonstrate that the unfavorable history should not be applied. discount part-time income (but may examine probable job continuity). with certain exceptions, terminate credit on an existing account because of a change in an applicant's marital status without evidence that the applicant is unwilling or unable to pay.

Title Subject To vs. Assumption When a borrower sells his property, unless the alienation clause requires that the loan be paid in full, the purchaser may take title to the property with the lien remaining against the property. In doing so, he may either assume responsibility for payment or not assume such responsibility: If the buyer were not to be responsible for making the payments to the lender, he would take title subject to the existing loan. If he is to be responsible for making payments to the lender he would assume and agree to pay the loan.

Basil is willing to sell Rosemary a property for $200,000. There is an existing loan outstanding, which by the time the sale closes will have a balance of $150,000. Basil agrees to take a $30,000 down payment and a purchase money mortgage and note for $170,000. Rosemary will make payments to Basil on the $170,000 note out of which payments Basil will continue to pay on the existing $150,000 debt. In this case, Rosemary is taking title that is subject to a loan and is not responsible for the payments on that loan.

There are three principal areas covered by the law: (truth in lending)

Disclosure Rescission Advertising

However this priority may be changed with a subordination clause. Subordination is an agreement to waive some rights in favor of another. The word "subordination" means to place in a lower position. So, a subordination clause puts a loan in an inferior priority by allowing another lien to take precedence.

Guy and Barb Dwyer purchased a piece of vacant property for $200,000. They put $50,000 down, and the seller carried back a mortgage for $150,000 for a term of 10 years. They plan to build on the property in five years, prior to paying off the existing mortgage. Without a subordination clause in their mortgage, they will have problems when they try to get financing to build their home. With a subordination clause in the first mortgage giving a new construction loan first priority, they can get their loan.

If the seller does not pay off the existing loan upon sale but does not wish to be primarily responsible for the existing loan after the sale, he would have the buyer assume and agree to pay the loan, if the lending institution permits it. A buyer who assumes and agrees to pay an existing mortgage is assuming primary responsibility for the payments and agreeing to make the payments as per the terms of the note directly to the lender.

However, the seller still has secondary liability for the loan. This means: if the buyer were to default and the lender were to sue on the note, or if there were a foreclosure sale and a deficiency, the buyer would be subject to a judgment. if the buyer could not satisfy the judgment, the lender could sue the seller for payment, even if the lender had approved the buyer and collected an assumption fee.

Construction loan lenders Lenders may: advance funds at regular intervals, such as monthly, based on the work completed that month. pay all bills directly, upon receipt from the borrower. disburse funds as stages of work are completed, with final payment withheld until all labor and materials have been paid for (evidenced by lien waivers from the contractors and subcontractors) or until the lien period has expired, to ensure no liens are filed against the property for unpaid work/materials.

Interest is charged on the money only as it is disbursed. The entire loan amount, plus any accumulated interest, is due in full within a short period of time after completion of the project. This allows the builder time to sell the property or refinance the loan with a take- out loan. A take-out loan is a long-term loan taken out after construction is completed and used to pay off the construction loan. Often an interim lender will require a commitment by the permanent lender to agree to provide the take-out financing upon completion of construction before it will provide the interim financing.

Participation Mortgage

One version of this is a shared appreciation (shared equity) mortgage. In return for a relatively low interest rate, the borrower agrees to share with the lender a sizeable percent (e.g., 30% to 50%) of the appreciation in the value of the property, either after a specified number of years or when title is transferred.

The creditor must make a number of disclosures to a credit applicant within three business days after receiving a written application for credit. The most prominent of these are the: amount financed. finance charge. annual percentage rate. total payments.

The amount financed is the amount of credit provided the borrower (the loan amount). The finance charge is the dollar amount the credit will cost the borrower over the term of the loan. It includes: all money the lender will receive and keep (e.g., interest, loan origination fees, loan finder's fee, assumption fees, discount points paid by the borrower, loan service charges). costs incurred by choosing a particular lender that might not be incurred with another lender (such as premiums for credit life insurance or mortgage insurance and fees for inspections required by the lender). The finance charge does not include: closing costs, such as fees for title insurance, recording, property survey, and preparation of deeds, mortgages and other documents to close. notary, appraisal, escrow, legal and credit report services. other amounts paid into escrow which do not go to the creditor (property taxes and property insurance premiums). The annual percentage rate (APR) is the effective interest rate, reflecting the cost of the credit expressed to the nearest 1/8 of 1% as a yearly rate. It includes finance charges as well as the interest, so it is usually higher than the nominal (stated) interest rate. The total of payments is the dollar amount the borrower will have paid when he has made all of the scheduled payments.

A mortgage may contain a number of provisions that are not included in the note. These clauses are not, however, required in order for the mortgage to be legally enforceable.

The borrower may be required to pay all taxes, assessments, liens or encumbrances that could have priority over the mortgage. An insurance clause may require the borrower to keep the property insured against fire loss for at least the amount of the loan balance until the debt is fully paid. The insurance company must be acceptable to the lender and must name the lender as co-payee. The borrower may be required to maintain the property in good condition at all times, making all necessary repairs promptly to assure that the value of the property is being maintained. A defeasance clause states that, 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. If the property is rental property, 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, he may collect and retain the rents. If he defaults and the note is accelerated, or if he abandons 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 due to foreclosure of the other lien.

Where the law applies, within three business days after receiving an application, the lender must give the prospective borrower an informational booklet and a good faith estimate of settlement costs.

The informational booklet, prepared by HUD, explains the borrower's rights and obligations at closing, as well as the settlement charges and the uniform settlement statement (which is used to calculate the amount the borrower needs to close the transaction). The good faith estimate is an estimate of the dollar amount or range of charge for each settlement cost the borrower is likely to incur. Commonly, a copy of the good faith estimate is sent to escrow with the loan documents.

A blanket mortgage is one mortgage that covers more than one parcel of real estate as security. For Example - When an owner of six parcels of real property offers all six parcels as security for a mortgage loan, the mortgage is a blanket mortgage. A borrower with a blanket encumbrance on a subdivision would need a release clause (or partial release clause, parcel release clause, or lot release clause) to allow portions of the property to be released from the mortgage lien before the entire loan is repaid. As a certain amount of the debt is paid off, individual parcels may be released if the blanket mortgage has a release clause, relinquishing the lien on individual lots as they are sold.

To ensure that adequate security remains as the parcels are released, a release schedule will require that a greater percentage of the loan be repaid than the parcels represent. For example, it may require payment of 20% of the loan before releasing 10% of the total number of parcels. In order for the borrower to sell a released parcel with clear title, he needs to record a partial satisfaction of mortgage or partial reconveyance deed, showing that the parcel has been released from the encumbrance.

One type of open-end mortgage is a construction mortgage. Construction financing is usually designed as a high-interest, short-term loan to finance the cost of labor and materials used during the construction of a new building. It is a form of interim (or temporary) financing, extending from the commencement of the work until the work is completed and the loan is replaced by a more permanent form of financing.

Usually, the lender will not give the full amount of the loan to the borrower up front but will advance funds to the borrower in installments after each inspection of progress on the job. These advances are called obligatory advances or draws. The lender may also require the builder to obtain a sufficient performance bond, guaranteeing that the lender will be indemnified if the contractor fails to complete the job.

A participation mortgage is used most often in loans for development of large commercial real estate projects. The lender conditions the loan commitment upon receiving part ownership interest in the development. He earns interest as well as a percentage of the project's net income or its ownership in return for granting the loan or for granting concessions, such as a higher loan-to-value ratio or a lower interest rate.

When a lender agrees to reduce the interest rate on a loan by ½% in return for a 2% interest in a large commercial complex, this is a participation mortgage.

Trigger terms include the:

amount or percentage of down payment ("5% down," "95% financing," "$6,200 down"). amount of any installment payment ("payments 1% per month," "payment less than $1,400 per month"). number of payments ("360 monthly payments"). period of repayment ("30 year loan"). dollar amount of any finance charge ("total financing costs less than $3,000").

The Servicemembers Civil Relief Act was enacted in 2003 to update the Soldiers and Sailors Civil Relief Act. Its purpose is to ease economic and legal burdens on active duty military members and reservists, or members of the National Guard called to active duty, and, in limited situations, dependents of military members. It does not apply to veterans or to obligations incurred while the servicemember is on active duty. Relief provided by the Act during and after active service includes:

restricting the maximum interest rate that may be charged on an obligation following a call to active military service; providing certain relief related to evictions; requiring court approval for a non-judicial foreclosure unless the servicemember agrees to allow the foreclosure; and providing protection to a servicemember who obtained a mortgage after entering active duty, but who is not readily available (especially due to an overseas assignment) to defend him against judicial proceedings.

The contract encumbers the vendor's title and is a cloud on the title until he delivers a deed to the vendee, receives a quitclaim deed from the vendee releasing the vendee's interest, or takes legal action to remove the vendee's interest from the title. If the vendee defaults on the contract, the vendor may, depending on state law, be able to:

sue for any delinquent payment. accelerate the balance due and sue for payment of the balance. sue for strict foreclosure. sue for specific performance. forfeit the buyer's interest, if the contract contains a forfeiture clause.

If a mortgagor defaults on the promises he makes in the note or mortgage, the mortgagee may, depending on state law, have the right to:

sue on the note to obtain a judgment lien against the borrower. file for a judicial foreclosure and sale. This would result in the property being foreclosed and sold through court action. file for 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. have the property foreclosed through a nonjudicial foreclosure, if the mortgage contains 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.

The Truth in Lending Act and Regulation Z regulate advertising of consumer credit, including flyers, billboards, window displays, direct mail literature, telephone solicitation, etc. These regulations apply regardless of who the advertiser is, including real estate brokers and homeowners advertising assumptions of their loans. The law allows advertisements to show general terms ("low down payment," "reasonable monthly terms," "FHA financing available," or "low interest rates") or to show the annual percentage rate without showing any other credit terms. However, when any specific credit terms (called trigger terms) are used in an ad, they must be credit terms usually accepted by the lender, and the ad must provide other details of the loan, including:

the loan amount. the annual percentage rate. the amount or percentage of down payment. the number, amount and frequency of payments. the fact that the rate may be increased, if that is s

The Truth in Lending Act only applies to consumer loans; that is, loans for personal, family and household purposes. It does not apply to credit extended primarily for business, commercial, or agricultural purposes. Consumer loans are loans payable in four or more installments from creditors (those who extend credit more than 25 times in a year, or five times on loans secured by dwellings). They include loans:

to acquire owner-occupied real estate containing one or two units. to improve or maintain owner-occupied real estate containing one to four units. of up to $25,000 secured by personal property.

A promissory note establishes

who is the lender who is the borrower. the amount of the debt. the interest rate. the terms of repayment. The mortgage or deed of trust provides security for the loan.