Glossary Of Terms
1. RESPA 2. REG Z 3. GFE
4. Reverse Engineering 5. Misleading Disclosures 6. Over Stated Values
7. Over Stated Income 8. Misrepresentation 9. Inaccurate Arm Adjustments
10. Usury Violations 11. Lis Pendens 12. Short Sale
13. Deed-In-Lieu 14. Due-On-Sale Provision 15. Discount Points
16. Loan Rescission 17. Loss Mitigation 18. Packing
19. Forbearance Agreement
RESPA- "Real Estate Settlement And Procedures Act" is a consumer protection statute, first passed in 1974. One of its purposes is to help consumers become better shoppers for settlement services. Another purpose is to eliminate kickbacks and referral fees that increase unnecessarily the costs of certain settlement services. RESPA requires that borrowers receive disclosures at various times. Some disclosures spell out the costs associated with the settlement, outline lender servicing and escrow account practices and describe business relationships between settlement service providers. RESPA also prohibits certain practices that increase the cost of settlement services. Section 8 of RESPA prohibits a person from giving or accepting any thing of value for referrals of settlement service business related to a federally related mortgage loan. It also prohibits a person from giving or accepting any part of a charge for services that are not performed. Section 9 of RESPA prohibits home sellers from requiring home buyers to purchase title insurance from a particular company. Generally, RESPA covers loans secured with a mortgage placed on a one-to-four family residential property. These include most purchase loans, assumptions, refinances, property improvement loans, and equity lines of credit. HUD's Office of Consumer and Regulatory Affairs, Interstate Land Sales/RESPA Division is responsible for enforcing RESPA. (Top)
Regulation Z (TILA)- "The Truth in Lending Act" , also known as Title I of the Consumer Credit Protection Act, was enacted to assist consumers in shopping for credit. The purpose of TILA is to promote the informed use of consumer credit by requiring disclosures about its terms and cost. TILA also gives consumers the right to cancel certain credit transactions that involve a lien on a consumer's principal dwelling, regulates certain credit card practices, and provides a means for fair and timely resolution of credit billing disputes. With the exception of certain high-cost mortgage loans, TILA does not regulate the charges that may be imposed for consumer credit. Rather, it requires a maximum interest rate to be stated in variable-rate contracts secured by the consumer's dwelling. It also imposes limitations on home equity plans that are subject to the requirements of Sec. 226.5b and mortgages that are subject to the requirements of Sec. 226.32. The regulation prohibits certain acts or practices in connection with credit secured by a consumer's principal dwelling. (Top)
GFE- "Good Faith Estimate" A good faith estimate must be provided by a mortgage lender or broker in the United States to a customer, as required by the Real Estate Settlement Procedures Act (RESPA). The estimate must include an itemized list of fees and costs associated with your loan and must be provided within three business days of applying for a loan. These mortgage fees, also called settlement costs or closing costs, cover every expense associated with a home loan, including inspections, title insurance, taxes and other charges. A good faith estimate is a standard form which is intended to be used to compare different offers (or quotes) from different lenders or brokers. The good faith estimate is only an estimate. The final closing costs may be different - sometimes very different. (Top)
Reverse Engineering- The act of computer alterations of a document or documents after the documents have been executed by the parties to a contract. Example: Your loan originator has you sign the final loan documents bearing terms and conditions you have agreed to. After funding, the originator sells that loan to a wholesale pool who alters the terms and conditions to increase the Note's value then sells it on the secondary market for a higher premium. This could go unnoticed by the borrower for years if not forever. On an adjustable rate mortgage, a simple change in the rate's margin would reap a substantial profit when the note is sold to a secondary market investor. (Top)
Misleading Disclosures- The act of creating a disclosure document in such a language as to intentionally confuse the client in regards to the terms and conditions of a contract when more concise language is an option as in layman terms. Example: Borrower A thought he was getting a 30 year fixed rate mortgage. The language on the loan documents read this; "this loan is to amortized over a 360 month period at the rate of 6.5% subject to the index published in the Wall Street Journal in the 13th month following the first year in which hence the margin of 2.25% shall apply to said index" In other words, Borrower A was duped into signing loan documents agreeing to a 2 year fixed rate mortgage at 6.5%. It took 2 years for this borrower to find out that he didn't have a 30 year fixed rate mortgage. Clear and comprehensible language was clearly not the intent of the documents originator in this example. Plain and simple: "this loan is a 24 month fixed rate at 6.5% and the rate thereafter shall be adjusted annually based on the margin of 2.25% plus the Index as published in the Wall Street Journal on the date of the adjustment for a period of 336 months." (Top)
Over Stated Values- The over evaluation of a property's true market value by an appraiser who is an employee of the lender, or is a fee appraiser influenced by future business from a lender. Appraisers who uses unrealistic comparable sales when exact model matches were available, or nonexistent amenities to justify a value has essentially "over stated the value." This action could cause you to pay much more for a home in the beginning than what it was actually worth. Thus, you were backwards in value before the receding market began. Because the appraiser was influenced by his/her employer, or by the needs of a listing agent or lender from whom they get business, you paid much more for the house than you should have. Nobody can say it's your fault because nobody offered you an option to choose your own appraiser. (Top)
Over Stated Income- The over stating of income on a "Stated Income" loan that grossly exceeds the reasonable income of the applicant's job description as posted on Salaries.com. Often times the income as stated on the original loan application that the borrower signs is within reasonable limits. Then, when the borrower signs the final loan documents, a revised loan application with unreasonable income is presented for the applicant's signature. This is evidence that the applicant could not afford any future mortgage payments when the loan recasts because the reasonable income could not be used for qualifying debt to income ratios. In other words, you obviously couldn't afford that particular mortgage product from the get go and yet the lender put you into it anyway for the likely purpose of a higher commission. (Top)
Misrepresentation- The revision of any terms of agreement on a contract without your consent. Example: Your original Purchase agreement states that "Buyer shall apply and qualify for a 30 year fixed rate mortgage bearing interest at 6.00%" You have determined that under those terms, the payments would be affordable. You then apply for a loan under those terms and your initial loan application reflects these terms accordingly. You then receive all the compliance disclosures in the mail which appears to be a little different then what you applied for. You are told that you do not need to sign those disclosures because they are simply "Compliance Disclosures." As time goes on, the lender modifies the loan terms even more and fails to notify you in writing, or require you to execute (sign) a modification agreement. Then at closing, you are presented with a "take it or leave it" set of loan documents that grossly changes your original intent. All the while, you have paid for an appraisal, an earnest money deposit, given a 30 day notice to your landlord, did your packing, and made utility arrangements for your new home. Simply put, you were taken advantage of and put into a loan that sounded good and were told that it was the only loan you could get. (Top)
Inaccurate Arm Adjustments- Exceeding the Promissory Note's maximum adjustment cap on an adjustable rate mortgage. The maximum adjustment cap as set by the Promissory Note is often times violated with out the borrower's knowledge thereby causing the payment to be higher than expected. In addition, periodic adjustments seem to always go up when indeed the index has dropped. Your Note should explain that the adjustment shall be based on a certain margin which is fixed plus an index which is not fixed. Index's go up and down daily. Usually the Index plus the fixed margin as of the day of the scheduled adjustment is the bases used to determine your new interest rate. Example: You are currently paying 6% interest because the fixed margin according to your Note is 2.25%. The Index on the day of your last adjustment was 3.75% (2.25% + 3.75% = 6%) Now, you receive notice that your new interest rate will be 7% because the Index, they claim, is 4.75% (4.75% + 2.25% = 7%). Now, who ever validates the accuracy of that? Hardly anyone does and the lenders know that. What if the Index had actually dropped? Lets say the real index on that day was 3.375%. Your new interest rate should be 5.625%. We love to catch lenders pulling this one. (Top)
Usury Violations Of Prepayment Penalty - California's Usury Laws dictate a formula to govern just how much interest a lender can lawfully charge on their loans. Though the Usury Laws might have exceptions, exclusions, or specific rules for various types of loans and various categories of lenders. One type of loan that receives special, attention under the Usury Laws is a loan secured by real property. It is possible that the Prepayment Penalty combined with the interest rate can exceed the maximum amount as set by California's Usury Limit. Since Prepayment Penalty laws differ in each State, it's not uncommon to find a Prepayment Rider attached to a Promissory Note that incorporates the laws of the state in which the lender is located. East coast States for example have a totally different formula for calculating a Prepayment Penalty that grossly exceeds that of California. Although no serious lender will ever intentionally violate the usury laws, a violation none the less, intentional or otherwise could entitle the borrower to avoid paying any interest at all on the loan, and indeed receive a refund of all interest paid. An attorney would need to be retained to determine if there was a Usury violation in the Note. We can only examine for evidence. (Top)
Lis Pendens - "Lis pendens" is a document filed in the public records that notifies any prospective purchaser of property that there is litigation pending that could effect title to the property. They are most often seen in mortgage foreclosures, but are used in other actions such as boundary disputes, eminent domain matters, and easement litigation. If sufficient evidence of fraud or "Predatory Lending," is discovered in your documents, a Lis Pendens may be filed by an attorney to stop the foreclosure action until the suit can be settled in court. (Top)
Short Sale - Short Sale is when a bank or mortgage lender agrees to discount a loan balance due to an economic hardship on the part of the mortgagor. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove of a proposed sale. The consequences however are not usually discussed with the homeowner by the agents conducting the sale. For example, the bank will likely report the short sale to the IRS by sending you and them a 1099. That is considered income by the amount you were forgiven. Plus, if you have cash assets, the lender might try to tap those accounts. Doing a short sale is not for the faint of heart. As for your credit history, the effect of a short sale on a seller's credit report is identical to that of a foreclosure. (Top)
Deed-In-Lieu - "Deed In Lieu of Foreclosure," this conveys title to the lender when the borrower is in default and wants to avoid foreclosure. The lender may or may not cease foreclosure activities if a borrower asks to provide a deed-in-lieu. Regardless of whether the lender accepts the deed-in-lieu, the avoidance and non-repayment of debt will most likely show on a credit history just like a foreclosure. And, you may still have the same tax liability as you would in a short sale. (Top)
Due-On-Sale Provision - A provision in a mortgage that allows the lender to demand repayment in full if the borrower sells the property that serves as security for the mortgage. This is were many stressed homeowners fall prey to scammers that trick them into conveying title to the property over to them then renting it back with a promise to sell it back to them at a later date. (Top)
Discount Points - Discount points are paid by the borrower for the purpose of buying down the interest rate of a loan. One discount point equals one percent of the loan amount. Originating lenders will often times charge discount points when indeed the rate the borrower is getting is actually at par pricing. Meaning, the lender does not have to pay any points to get the rate that they charged you for. Failure to disclose these profits could lead to a law suit in favor of the borrower. (Top)
Loan Rescission - A court action that orders the lender to cancel a bad loan. A Loan Rescission basically allows the borrower to cancel the bad loan and replace it with a loan the borrower can actually afford. It may also order the lender to remove all negative credit information that the lender has entered on the borrowers credit report in respect to the bad loan. (Top)
Loss Mitigation - A negotiation between the lender and the borrower, usually conducted by a third party intermediary, to arrive at a work out alternative to a foreclosure. The process includes the same principle as a loan pre-qualification where as the borrower's income, assets, credit, and employment documents are presented to the lender to exhibit just how much the borrower can afford. Often times, the lender will restructure the loan accordingly by reducing the interest rate and apply the arrears to the end of the loan. (Top)
Packing - The lender adds credit life insurance or credit accident or disability insurance to your loan, which you may not need. Such insurance premiums may cost thousands of dollars and you may be charged interest if they are added to the amount of your loan. The lender may tell you that this insurance comes with the loan, making you think you aren't paying for it or that you have to buy it. This insurance often has limitations and time restrictions but is still sold to people who can qualify for the coverage because lenders make a lot of money on the policies. (Top)
Forbearance Agreement - An agreement made between a mortgage lender and delinquent borrower in which the lender agrees not to exercise its legal right to foreclose on a mortgage and the borrower agrees to a mortgage plan that will, over a certain time period, bring the borrower current on his or her payments. A forbearance agreement is not a long-term solution for delinquent borrowers; it is designed for borrowers who have temporary financial problems caused by unforeseen problems such as temporary unemployment or health problems (Top)
