Printable     Lesson Materials     Print these materials as a study guide                                  These printable...
California Real Estate Law                Lesson 13:                Real Estate                Financing                  ...
LiensLien: creditor’s claim against real property that isowned by the debtor  l If debtor fails to pay, creditor can forec...
LiensVoluntary: property owner gives lien voluntarily tocreditor, usually to secure loan  l Example: mortgageInvoluntary: ...
Security InstrumentsIn loan transaction, loan agreement consists of twodocuments:  l promissory note  l security instrumen...
Security InstrumentsHypothecationEarliest form of lending:  l borrower gave lender personal property  l lender held proper...
Security InstrumentsHypothecationHypothecation led to development of securityinstruments.Two ways in which security instru...
Security InstrumentsHypothecationTitle theory vs. lien theory:  l little practical difference between them today  l rights...
Security InstrumentsMortgages vs. deeds of trustDeed of trust: three-party security instrument  l borrower (grantor or tru...
Security InstrumentsMortgages vs. deeds of trustPower of sale clause:  l authorizes trustee to sell property if borrower  ...
Key Provisions in a Loan AgreementTerms of loan agreement are contained in:  l promissory note (amount borrowed, interest ...
Key Provisions in a Loan AgreementAcceleration clauseAcceleration clause: provision in loan agreementthat allows lender to...
Key Provisions in a Loan AgreementAlienation clauseLender may allow buyer to assume loan.Assumption: new owner agrees to t...
Key Provisions in a Loan AgreementPrepayment provisionPrepayment: when borrower repays all or portion ofloan before paymen...
Key Provisions in a Loan AgreementDefeasance clauseDefeasance clause: requires lender to releaseproperty from lien when de...
ForeclosureMain difference between mortgage and deed oftrust is foreclosure procedure.  l mortgage: judicial foreclosure  ...
ForeclosureJudicial foreclosureParties to lawsuit include:  l borrower (mortgagor)  l junior lienholdersJunior lienholders...
Judicial ForeclosureCure and reinstatementCalifornia has replaced equitable right ofredemption with:  l right to cure defa...
Judicial ForeclosureCure and reinstatementDefault can be cured at any time:  l while judicial foreclosure action is pendin...
Judicial ForeclosureDecree and saleSheriff’s sale: public auction (sometimes calledexecution sale)  l usually held at coun...
Judicial ForeclosurePost-sale redemptionDuring post-sale redemption period, mortgagor isstill entitled to possession.  l m...
Deficiency JudgmentsAnti-deficiency rulesAnti-deficiency rules: California rules prohibitdeficiency judgments in certain t...
SummaryJudicial Foreclosure    l Foreclosure action    l Lis pendens    l Equitable right of redemption    l Cure and rein...
ForeclosureNonjudicial foreclosureNonjudicial foreclosure:     l less expensive     l faster     l only permitted if secur...
Nonjudicial ForeclosureReinstatementBorrower has right to cure default and reinstateloan, up to 5 days before trustee’s sa...
ForeclosureChoosing between judicial/nonjudicialLenders usually only choose judicial foreclosurewhen:  l lender thinks sal...
Protecting the BorrowerTruth in Lending ActTruth in Lending Act (TILA): federal law that wentinto effect in 1969, designed...
Truth in Lending ActDisclosure statementTILA requires lenders to provide residentialmortgage loan applicants with disclosu...
Truth in Lending ActDisclosure statementTILA disclosure statement must also include:  l identity of lender  l amount finan...
Truth in Lending ActRight of rescissionRight of rescission doesn’t apply:  l when proceeds are for purchase or    construc...
Protecting the BorrowerCalifornia financing disclosure lawsCalifornia financing disclosure laws include:  l Mortgage Loan ...
Mortgage Loan Broker LawDisclosure statementMust be delivered to borrower no later than threedays after (whichever comes f...
Mortgage Loan Broker LawCommissions and costsCommission limits are tiered.For loans in first lien position:  l loan term u...
Mortgage Loan Broker LawBalloon paymentsBalloon payment: loan payment that is significantlylarger than regular loan paymen...
California Financing Disclosure LawsSeller financing disclosure lawArranger of credit is responsible for making surebuyer ...
Predatory PracticesPredatory steeringPredatory steering: steering buyer to moreexpensive loan when buyer could qualify for...
Predatory PracticesProperty flippingProperty flipping: not automatically illegal, butconsidered predatory when agent, appr...
Predatory PracticesImpound waiversImpound waiver: not requiring borrower to makemonthly deposits for property taxes/insura...
Predatory LendingPredatory lending lawsPredatory lending laws include:  l federal law (HOEPA)  l state law                ...
Predatory Lending LawsState lawCalifornia’s predatory lending law is broader thanfederal version.  l applies to purchase l...
Predatory Lending LawsState lawPredatory lending laws enforced by:  l Department of Financial Institutions (certain    len...
Legal Aspects of Real Estate                                    Lesson 13 Cumulative Quiz1. A lien is:    A.   a financial...
7. A construction loan receives higher priority than the deed of trust used to purchase the land where thehouse will be co...
13. Which type of loan would be covered by the Truth in Lending Act?    A.   Home equity loan    B.   Loan for business pu...
19. The Home Ownership and Equity Protection Act is limited to high-cost:    A.   business and agricultural loans    B.   ...
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Rockwell publishing real estate law chapter 13

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Rockwell publishing real estate law chapter 13

  1. 1. Printable Lesson Materials Print these materials as a study guide These printable materials allow you to study away from your computer, which many students find beneficial. These materials consist of two parts: graphic summaries of the content and a multiple choice quiz. Graphic Summaries This portion of your printable materials consists of dozens of frames that summarize the content in this lesson. The frames are arranged on the page to make it easy for you to study the material and add your own notes from your textbook or the online course. Quizzes Many students learn best from sets of questions, and this multiple choice quiz allows you to focus your review of the material to important topics. 13218 NE 20th Street Bellevue, WA 98005 425-747-7272 800-221-9347 www.rockwellinstitute.com© 2009 Rockwell Institute
  2. 2. California Real Estate Law Lesson 13: Real Estate Financing © Copyright 2007 Rockwell Publishing, Inc.IntroductionThis lesson will discuss: l liens l security instruments l key provisions in loan agreements l foreclosure l protecting the borrower © Copyright 2007 Rockwell Publishing, Inc.LiensEncumbrance: an interest held by someone otherthan property owner or tenant l nonpossessory interest l may be financial or nonfinancialFinancial encumbrance also known as lien. © Copyright 2007 Rockwell Publishing, Inc. 1
  3. 3. LiensLien: creditor’s claim against real property that isowned by the debtor l If debtor fails to pay, creditor can foreclose.Secured creditor: creditor who holds a lien © Copyright 2007 Rockwell Publishing, Inc.LiensLiens don’t prevent owner from selling ortransferring property. l However, new owner takes title subject to liens. l Creditors still have right to foreclose. © Copyright 2007 Rockwell Publishing, Inc.LiensLiens classified as: l general or specific l voluntary or involuntary © Copyright 2007 Rockwell Publishing, Inc. 2
  4. 4. LiensVoluntary: property owner gives lien voluntarily tocreditor, usually to secure loan l Example: mortgageInvoluntary: also called statutory lien; attacheswithout owner’s consent l Example: property taxes © Copyright 2007 Rockwell Publishing, Inc.LiensGeneral: lien attaches to all debtor’s property, realand personalSpecific: lien attaches only to particular piece ofpropertyMortgages and deeds of trust are voluntary, specificliens. © Copyright 2007 Rockwell Publishing, Inc.SummaryLiens l Financial encumbrance l Secured creditor l General lien l Specific lien l Voluntary lien l Involuntary lien © Copyright 2007 Rockwell Publishing, Inc. 3
  5. 5. Security InstrumentsIn loan transaction, loan agreement consists of twodocuments: l promissory note l security instrumentPromissory note establishes borrower’s obligationto pay; security instrument makes real propertycollateral for the debt. © Copyright 2007 Rockwell Publishing, Inc.Security InstrumentsPromissory note: written promise to pay money l basic evidence of debt l shows who owes money to whomSecurity instrument: mortgage or deed of trust l turns real property into collateral (security) for the loan © Copyright 2007 Rockwell Publishing, Inc.Security InstrumentsSecurity property can be: l property borrower already owns l property borrower plans to purchase with loan funds © Copyright 2007 Rockwell Publishing, Inc. 4
  6. 6. Security InstrumentsHypothecationEarliest form of lending: l borrower gave lender personal property l lender held property until loan repaidExample still exists today: pawnshop © Copyright 2007 Rockwell Publishing, Inc.Security InstrumentsHypothecationHowever, when land is used as collateral,transferring possession is: l complicated and inconvenient l unnecessary, since borrower can’t hide collateral (the land) © Copyright 2007 Rockwell Publishing, Inc.Security InstrumentsHypothecationHypothecation: offering property as collateralwithout giving up possession l borrower transfers title l lender holds title until debt repaid l borrower remains in possession of land © Copyright 2007 Rockwell Publishing, Inc. 5
  7. 7. Security InstrumentsHypothecationHypothecation led to development of securityinstruments.Two ways in which security instruments work: l title theory l lien theory © Copyright 2007 Rockwell Publishing, Inc.Security InstrumentsHypothecationTitle theory: security instrument transfers legal titleto lender or trustee l borrower keeps possession and equitable title l generally associated with deed of trust © Copyright 2007 Rockwell Publishing, Inc.Security InstrumentsHypothecationLien theory: security instrument only gives lenderlien against property l until loan is paid off, borrower keeps both possession and legal title l generally associated with mortgage © Copyright 2007 Rockwell Publishing, Inc. 6
  8. 8. Security InstrumentsHypothecationTitle theory vs. lien theory: l little practical difference between them today l rights of borrower/lender depend on type of security instrument used © Copyright 2007 Rockwell Publishing, Inc.Security InstrumentsMortgages vs. deeds of trustMortgages and deeds of trust serve same basicpurpose: to secure debtor’s obligation to repay loan. l difference is foreclosure procedure © Copyright 2007 Rockwell Publishing, Inc.Security InstrumentsMortgages vs. deeds of trustMortgage: two-party security instrument l borrower (mortgagor) l lender ( mortgagee) © Copyright 2007 Rockwell Publishing, Inc. 7
  9. 9. Security InstrumentsMortgages vs. deeds of trustDeed of trust: three-party security instrument l borrower (grantor or trustor) l lender (beneficiary) l independent third party (trustee) © Copyright 2007 Rockwell Publishing, Inc.Security InstrumentsMortgages vs. deeds of trustMortgage foreclosure process (judicial foreclosure)involves: l court proceeding l court-supervised auction © Copyright 2007 Rockwell Publishing, Inc.Security InstrumentsMortgages vs. deeds of trustDeed of trust foreclosure process (nonjudicialforeclosure) involves: l trustee’s auction l no court supervisionNonjudicial foreclosure requires power of saleclause in security instrument. © Copyright 2007 Rockwell Publishing, Inc. 8
  10. 10. Security InstrumentsMortgages vs. deeds of trustPower of sale clause: l authorizes trustee to sell property if borrower defaults l standard in deed of trust l can also be used in mortgage (less common) © Copyright 2007 Rockwell Publishing, Inc.Security InstrumentsMortgages vs. deeds of trustDeeds of trust: l more common than mortgages l preferred by lenders © Copyright 2007 Rockwell Publishing, Inc.SummarySecurity Instruments l Promissory note l Security instrument l Hypothecation l Title theory l Lien theory l Power of sale clause © Copyright 2007 Rockwell Publishing, Inc. 9
  11. 11. Key Provisions in a Loan AgreementTerms of loan agreement are contained in: l promissory note (amount borrowed, interest rate, etc.) l security instrument (lender’s rights, borrower’s obligations, etc.) © Copyright 2007 Rockwell Publishing, Inc.Key Provisions in a Loan AgreementKey provisions include: l taxes, insurance, and maintenance clauses l acceleration clause l alienation clause l late payment penalty provision l prepayment provision l subordination clause l defeasance clause © Copyright 2007 Rockwell Publishing, Inc.Key Provisions in a Loan AgreementTaxes, maintenance, and insuranceVarious clauses in security agreement requireborrower to: l pay property taxes (to prevent tax foreclosure) l keep property insured (to prevent uninsured destruction) l perform adequate maintenance (to prevent waste) © Copyright 2007 Rockwell Publishing, Inc. 10
  12. 12. Key Provisions in a Loan AgreementAcceleration clauseAcceleration clause: provision in loan agreementthat allows lender to accelerate loan if borrowerdefaultsAccelerate: to declare entire remaining loan balancedue immediately, including interest and penalties l also referred to as “calling the note” l if borrower doesn’t pay off, lender begins foreclosure © Copyright 2007 Rockwell Publishing, Inc.Key Provisions in a Loan AgreementAlienation clauseAlienation clause: allows lender to demand fullpayment of loan if borrower sells or otherwisetransfers security property (or interest in it) tosomeone else l also known as due-on-sale clauseAlienation: any transfer of an interest in realproperty © Copyright 2007 Rockwell Publishing, Inc.Key Provisions in a Loan AgreementAlienation clauseAlienation clause doesn’t prohibit borrower fromselling property. l but does require payment of loan in full if borrower sells © Copyright 2007 Rockwell Publishing, Inc. 11
  13. 13. Key Provisions in a Loan AgreementAlienation clauseLender may allow buyer to assume loan.Assumption: new owner agrees to take on primaryliability for loan l original borrower remains secondarily liable (unless lender releases the borrower) © Copyright 2007 Rockwell Publishing, Inc.Key Provisions in a Loan AgreementAlienation clauseUnder Civil Code, certain restrictions on alienationclause if security property is 1- to 4-unit residentialproperty: l clause is enforceable only if contained in both promissory note and security instrument l certain transfers can’t trigger alienation clause (example: if borrower’s spouse becomes co-owner) © Copyright 2007 Rockwell Publishing, Inc.Key Provisions in a Loan AgreementLate payment penaltyLender can charge late payment only if loanagreement provides for it.California law limits late penalties on single-family,owner-occupied housing: l 6% of overdue principal and interest, or $5.00, whichever is more l can’t charge unless payment is at least ten days overdue © Copyright 2007 Rockwell Publishing, Inc. 12
  14. 14. Key Provisions in a Loan AgreementPrepayment provisionPrepayment: when borrower repays all or portion ofloan before payment is dueSome loan agreements allow lender to chargeprepayment penalty, to compensate lender forinterest it wasn’t able to collect. © Copyright 2007 Rockwell Publishing, Inc.Key Provisions in a Loan AgreementPrepayment provisionCalifornia law limits prepayment penalty on owner-occupied residential property with up to four units: l allowed only during first 5 years of loan l borrower may prepay 20% of loan amount in any 12- month period without penalty l if prepayment exceeds 20% of loan, penalty only permitted on excess © Copyright 2007 Rockwell Publishing, Inc.Key Provisions in a Loan AgreementSubordination clauseSubordination clause: gives loan agreement lowerpriority than another security instrument that will berecorded later l common with loans to buy vacant land, since lenders often require construction loans to have first lien positionFirst lien position: highest priority © Copyright 2007 Rockwell Publishing, Inc. 13
  15. 15. Key Provisions in a Loan AgreementDefeasance clauseDefeasance clause: requires lender to releaseproperty from lien when debt has been fully repaidOnce mortgage is paid off, lender must recordcertificate of discharge (also called satisfaction ofmortgage) within 30 days. © Copyright 2007 Rockwell Publishing, Inc.Key Provisions in a Loan AgreementDefeasance clauseOnce deed of trust is paid off, beneficiary (lender)must submit request for reconveyance to trusteewithin 30 days. l Trustee then has 21 days to record deed of reconveyance. © Copyright 2007 Rockwell Publishing, Inc.SummaryKey Provisions in a Loan Agreement l Acceleration clause l Alienation clause l Subordination clause l Defeasance clause l Certificate of discharge l Request for reconveyance © Copyright 2007 Rockwell Publishing, Inc. 14
  16. 16. ForeclosureMain difference between mortgage and deed oftrust is foreclosure procedure. l mortgage: judicial foreclosure l deed of trust: nonjudicial foreclosure © Copyright 2007 Rockwell Publishing, Inc.ForeclosureJudicial foreclosureWhen borrower defaults on mortgage: l Step 1: accelerate loan l Step 2: initiate lawsuit called foreclosure action © Copyright 2007 Rockwell Publishing, Inc.ForeclosureJudicial foreclosureForeclosure action: legal proceeding asking judgeto order seizure and sale of property l must be filed in county where property is located © Copyright 2007 Rockwell Publishing, Inc. 15
  17. 17. ForeclosureJudicial foreclosureParties to lawsuit include: l borrower (mortgagor) l junior lienholdersJunior lienholders: creditors who have liens againstthe property with lower priority than the foreclosinglender’s mortgage; junior liens will be eliminated byforeclosure sale © Copyright 2007 Rockwell Publishing, Inc.ForeclosureJudicial foreclosureWhen foreclosure lawsuit is started, mortgagee(lender) also records lis pendens.Lis pendens: document stating that property issubject to foreclosure action l gives constructive notice to potential buyers or lenders © Copyright 2007 Rockwell Publishing, Inc.Judicial ForeclosureCure and reinstatementIn some states, only way borrower can stopforeclosure is through equitable right of redemption.Equitable right of redemption: right to redeemproperty by paying off entire outstanding balance(not just missed payments) plus interest, penalties,and costs l stops foreclosure l satisfies debt l terminates lender’s interest in property © Copyright 2007 Rockwell Publishing, Inc. 16
  18. 18. Judicial ForeclosureCure and reinstatementCalifornia has replaced equitable right ofredemption with: l right to cure default l right to reinstate loan © Copyright 2007 Rockwell Publishing, Inc.Judicial ForeclosureCure and reinstatementTo cure default, borrower must: l pay delinquent amount, plus interest, penalties, and costs l rectify breach of covenants (example: pay taxes, if unpaid) © Copyright 2007 Rockwell Publishing, Inc.Judicial ForeclosureCure and reinstatementOnce default has been cured, foreclosure isterminated: l loan reinstated l parties back to where they were before default © Copyright 2007 Rockwell Publishing, Inc. 17
  19. 19. Judicial ForeclosureCure and reinstatementDefault can be cured at any time: l while judicial foreclosure action is pending l up until court issues decree of foreclosureDecree of foreclosure: court order directing sheriffto seize and sell property l issued by judge if borrower fails to cure and reinstate © Copyright 2007 Rockwell Publishing, Inc.Judicial ForeclosureDecree and saleOnce decree of foreclosure is issued, next step isnotice of levy. l sheriff records notice; serves it on mortgagor and other parties © Copyright 2007 Rockwell Publishing, Inc.Judicial ForeclosureDecree and saleAt least 20 days before sale date, notice of salemust be: l posted on property l posted in public place l published in newspaper of general circulation once a week for three weeks l mailed to the parties l mailed to anyone who has submitted request for notification © Copyright 2007 Rockwell Publishing, Inc. 18
  20. 20. Judicial ForeclosureDecree and saleSheriff’s sale: public auction (sometimes calledexecution sale) l usually held at county courthouse l anyone may bid l highest bidder receives certificate of sale © Copyright 2007 Rockwell Publishing, Inc.Judicial ForeclosurePost-sale redemptionStatutory right of redemption: right to redeemproperty following sheriff’s sale l borrower must pay purchaser amount paid for property, plus interest accrued from time of sale © Copyright 2007 Rockwell Publishing, Inc.Judicial ForeclosurePost-sale redemptionIn California, length of post-sale redemption periodvaries: l three months: if sale proceeds enough to pay off debt, plus interest, costs, and fees l one year: if proceeds weren’t enough to fully pay off amount owed © Copyright 2007 Rockwell Publishing, Inc. 19
  21. 21. Judicial ForeclosurePost-sale redemptionDuring post-sale redemption period, mortgagor isstill entitled to possession. l must pay reasonable rent to holder of certificate of sale © Copyright 2007 Rockwell Publishing, Inc.Judicial ForeclosurePost-sale redemptionAt end of post-sale redemption period, holder ofcertificate of sale receives sheriff’s deed.Sheriff’s deed: transfers title and right of possessionto new owner © Copyright 2007 Rockwell Publishing, Inc.Judicial ForeclosureDeficiency judgmentsDeficiency judgment: personal judgment againstborrower to recover difference between amountowed and foreclosure sale proceedsTo obtain judgment, lender must apply to courtwithin three months after foreclosure sale. l court will determine amount of deficiency and enter judgment © Copyright 2007 Rockwell Publishing, Inc. 20
  22. 22. Deficiency JudgmentsAnti-deficiency rulesAnti-deficiency rules: California rules prohibitdeficiency judgments in certain types offoreclosures l purpose: to protect defaulting property owners 1. Deficiency judgments are never allowed in nonjudicial foreclosures. © Copyright 2007 Rockwell Publishing, Inc.Deficiency JudgmentsAnti-deficiency rules 2. In judicial foreclosure, deficiency judgment not allowed when: l property’s fair market value is greater than amount of debt; l security instrument is purchase money mortgage given to seller (seller financing) for all or part of purchase price; or © Copyright 2007 Rockwell Publishing, Inc.Deficiency JudgmentsAnti-deficiency rules l security instrument is mortgage given to third-party lender to finance purchase of owner-occupied residential property with up to four dwelling unitsResult: Lender can’t sue for deficiency judgmentafter foreclosure on a typical home purchase loan. © Copyright 2007 Rockwell Publishing, Inc. 21
  23. 23. SummaryJudicial Foreclosure l Foreclosure action l Lis pendens l Equitable right of redemption l Cure and reinstate l Decree of foreclosure l Statutory right of redemption © Copyright 2007 Rockwell Publishing, Inc.ForeclosureNonjudicial foreclosureWhen trustor (borrower) defaults on deed of trust,foreclosure process is different. l Beneficiary (lender) isn’t required to file lawsuit or obtain court order. © Copyright 2007 Rockwell Publishing, Inc.ForeclosureNonjudicial foreclosureInstead, beneficiary asks trustee appointed in deedof trust to arrange for property to be sold at trustee’ssale.Trustee’s sale: public auction where trustee sellsproperty to highest bidder, on beneficiary’s behalf l sheriff and court not involved © Copyright 2007 Rockwell Publishing, Inc. 22
  24. 24. ForeclosureNonjudicial foreclosureNonjudicial foreclosure: l less expensive l faster l only permitted if security instrument contains power of sale clause © Copyright 2007 Rockwell Publishing, Inc.Nonjudicial ForeclosureNotices of default and saleTo foreclose deed of trust nonjudicially, trusteemust follow certain steps.1. Trustee must: l record notice of default and election to sell l mail copy to trustor, junior lienholders, anyone who requested notification © Copyright 2007 Rockwell Publishing, Inc.Nonjudicial ForeclosureNotices of default and sale2. At least three months after notice of default and at least 20 days before sale, trustee must issue notice of trustee’s sale. Notice must be: l recorded l sent to everyone who received notice of default l posted on property and public place l published in newspaper once a week for three weeks © Copyright 2007 Rockwell Publishing, Inc. 23
  25. 25. Nonjudicial ForeclosureReinstatementBorrower has right to cure default and reinstateloan, up to 5 days before trustee’s sale.During 5 days before trustee’s sale, borrower canredeem by paying whole debt, plus costs, penalties,fees, etc. © Copyright 2007 Rockwell Publishing, Inc.Nonjudicial ForeclosureReinstatementStatutory right of redemption (after sheriff’s sale injudicial foreclosure) doesn’t apply to trustee’s sale. l highest bidder obtains title immediately, through trustee’s deed © Copyright 2007 Rockwell Publishing, Inc.ForeclosureChoosing between judicial/nonjudicialLenders usually choose to foreclose nonjudicially. l saves time l saves money l no statutory redemption period after sale © Copyright 2007 Rockwell Publishing, Inc. 24
  26. 26. ForeclosureChoosing between judicial/nonjudicialLenders usually only choose judicial foreclosurewhen: l lender thinks sale will result in deficiency l deficiency judgment would be allowed © Copyright 2007 Rockwell Publishing, Inc.SummaryNonjudicial Foreclosure l Trustee’s sale l Notice of default and election to sell l Notice of trustee’s sale l Reinstatement l Trustee’s deed © Copyright 2007 Rockwell Publishing, Inc.Protecting the BorrowerLaws intended to help protect borrowers: l Truth in Lending Act l California financing disclosure laws l predatory lending laws © Copyright 2007 Rockwell Publishing, Inc. 25
  27. 27. Protecting the BorrowerTruth in Lending ActTruth in Lending Act (TILA): federal law that wentinto effect in 1969, designed to help consumerscompare financing offers from competing lendersStatute is implemented by Federal Reserve Board’sRegulation Z.Regulation Z: requires disclosure of interest rates orother finance charges to consumer © Copyright 2007 Rockwell Publishing, Inc.Truth in Lending ActTypes of loans coveredConsumer loans: loans used for personal, family, orhousehold purposesTILA applies to consumer loans if they are: l to be repaid in more than four installments; l subject to finance charges; l for $25,000 or less; or l secured by real property © Copyright 2007 Rockwell Publishing, Inc.Truth in Lending ActTypes of loans coveredTILA does not apply to: l loans for business, commercial, or agricultural purposes l seller financing © Copyright 2007 Rockwell Publishing, Inc. 26
  28. 28. Truth in Lending ActDisclosure statementTILA requires lenders to provide residentialmortgage loan applicants with disclosure statementcontaining good faith estimate of: l total finance charge l annual percentage rateDisclosure statement must be provided within 3days after written application received. © Copyright 2007 Rockwell Publishing, Inc.Truth in Lending ActDisclosure statementTotal finance charge: sum of all charges borrowerwill pay in connection with loanIncludes interest on loan plus: l origination fee l discount points l finder’s fee l service fees l mortgage broker’s commission l mortgage insurance premiums © Copyright 2007 Rockwell Publishing, Inc.Truth in Lending ActDisclosure statementAnnual percentage rate (APR): yearly cost offinancing expressed as percentage of loan amount l APR usually higher than quoted interest rate © Copyright 2007 Rockwell Publishing, Inc. 27
  29. 29. Truth in Lending ActDisclosure statementTILA disclosure statement must also include: l identity of lender l amount financed l payment schedule (number, amounts, timing) l total of payments l prepayment penalties and late charges (if any) l loan’s assumption policy © Copyright 2007 Rockwell Publishing, Inc.Truth in Lending ActRight of rescissionWhen security property is borrower’s principalresidence, borrower may rescind loan agreementanytime within three days after (whichever happenslast): l signing the loan documents l receiving a disclosure statement l receiving notice of the right of rescission © Copyright 2007 Rockwell Publishing, Inc.Truth in Lending ActRight of rescissionIf borrower doesn’t receive disclosure statement orrescission notice ? right of rescission lasts for threeyears. © Copyright 2007 Rockwell Publishing, Inc. 28
  30. 30. Truth in Lending ActRight of rescissionRight of rescission doesn’t apply: l when proceeds are for purchase or construction of borrower’s principal residence l to refinance of principal residence when lender made original loan © Copyright 2007 Rockwell Publishing, Inc.Truth in Lending ActAdvertising under TILATILA governs advertising by: l lenders l mortgage brokers l anyone else who advertises consumer credit (including real estate brokers) © Copyright 2007 Rockwell Publishing, Inc.Truth in Lending ActAdvertising under TILALegal: l stating cash price or APR in ad l using general terms such as “low interest rate”But if any other particular loan terms are mentioned(downpayment, interest rate, monthly paymentamount, etc.), full disclosure required in ad. © Copyright 2007 Rockwell Publishing, Inc. 29
  31. 31. Protecting the BorrowerCalifornia financing disclosure lawsCalifornia financing disclosure laws include: l Mortgage Loan Broker Law l seller financing disclosure law © Copyright 2007 Rockwell Publishing, Inc.California Financing Disclosure LawsMortgage Loan Broker LawIn California, real estate agent who negotiates loanfor compensation is considered to be acting asmortgage broker and must comply with MortgageLoan Broker Law.Mortgage Loan Broker Law: l requires agents to provide disclosure statement l restricts size of commissions and costs l restricts balloon payments © Copyright 2007 Rockwell Publishing, Inc.Mortgage Loan Broker LawDisclosure statementDisclosure statement contains: l all charges associated with loan l amount of loan proceeds remaining after charges deducted © Copyright 2007 Rockwell Publishing, Inc. 30
  32. 32. Mortgage Loan Broker LawDisclosure statementMust be delivered to borrower no later than threedays after (whichever comes first): l lender’s receipt of loan application l borrower signing loan agreement © Copyright 2007 Rockwell Publishing, Inc.Mortgage Loan Broker LawDisclosure statementReal estate agents must: l use disclosure form whenever negotiating loan or providing other services for borrowers or lenders in connection with financing l keep a copy of statement on file for three yearsDisclosure requirement applies to both residentialand commercial property. © Copyright 2007 Rockwell Publishing, Inc.Mortgage Loan Broker LawCommissions and costsCommission and fee limits apply to loans securedby residential property (up to four units) when lienis: l first position deed of trust (for under $30,000) l junior deed of trust (for under $20,000)No commission limits on larger loans. © Copyright 2007 Rockwell Publishing, Inc. 31
  33. 33. Mortgage Loan Broker LawCommissions and costsCommission limits are tiered.For loans in first lien position: l loan term under three years: commission can’t exceed 5% of principal l loan term over three years: commission can’t exceed 10% © Copyright 2007 Rockwell Publishing, Inc.Mortgage Loan Broker LawCommissions and costsFor loans in junior position: l loan term of two years or less: commission can’t exceed 5% l loan term of more than two years but less than three years: commission can’t exceed 10% l loan term over three years: commission can’t exceed 15% © Copyright 2007 Rockwell Publishing, Inc.Mortgage Loan Broker LawCommissions and costsBorrower’s costs for loans (appraisal fees, escrowfees) cannot exceed $390 or 5% of loan (whicheveris greater) up to maximum of $700. l Charges can’t exceed actual costs incurred. © Copyright 2007 Rockwell Publishing, Inc. 32
  34. 34. Mortgage Loan Broker LawBalloon paymentsBalloon payment: loan payment that is significantlylarger than regular loan payment (more than twicesize of smallest required loan payment) l illegal in loans of less than 3 years if secured by real property l illegal in loans of less than 6 years if secured by owner-occupied real propertyBalloon payment prohibition doesn’t apply to sellerfinancing. © Copyright 2007 Rockwell Publishing, Inc.California Financing Disclosure LawsSeller financing disclosure lawIf seller finances all or part of purchase price forone- to four-unit residential property, and arrangerof credit is involved in negotiating or setting uptransaction: l borrower entitled to loan disclosures similar to those required in conventional financingArranger of credit: someone who negotiates or setsup financing; includes real estate agents © Copyright 2007 Rockwell Publishing, Inc.California Financing Disclosure LawsSeller financing disclosure lawSeller financing disclosure statement includes: l copy or description of promissory note and security instrument l warning regarding balloon payments (if one is required) l explanation of title insurance l information about buyer’s employment and financial status © Copyright 2007 Rockwell Publishing, Inc. 33
  35. 35. California Financing Disclosure LawsSeller financing disclosure lawArranger of credit is responsible for making surebuyer and seller receive disclosure statementbefore signing offer, acceptance, or other bindingagreement. © Copyright 2007 Rockwell Publishing, Inc.Protecting the BorrowerPredatory lendingPredatory lending: practices used by mortgagelenders and mortgage brokers to profit fromunsophisticated borrowers © Copyright 2007 Rockwell Publishing, Inc.Predatory LendingPredatory practicesPredatory practices may be: l practices that are always abusive l ordinary practices and loan terms used for predatory purposes © Copyright 2007 Rockwell Publishing, Inc. 34
  36. 36. Predatory PracticesPredatory steeringPredatory steering: steering buyer to moreexpensive loan when buyer could qualify for lessexpensive loan © Copyright 2007 Rockwell Publishing, Inc.Predatory PracticesFee packingFee packing: charging interest rates, points, orprocessing fees that far exceed norm and are notjustified © Copyright 2007 Rockwell Publishing, Inc.Predatory PracticesFraudFraud: using fraudulent means to induce borrowerto enter into loan agreement l misrepresenting unfavorable loan terms or fees l concealing unfavorable loan terms or fees l falsifying documents © Copyright 2007 Rockwell Publishing, Inc. 35
  37. 37. Predatory PracticesProperty flippingProperty flipping: not automatically illegal, butconsidered predatory when agent, appraiser, orlender commits fraud in order to make buyer believeproperty is worth more than it is © Copyright 2007 Rockwell Publishing, Inc.Predatory PracticesLoan in excess of valueLoan in excess of value: loaning home buyer morethan appraised value of property l usually involves fraudulent appraisal l may involve collusion between lender and appraiser l may involve collusion between mortgage broker and appraiser © Copyright 2007 Rockwell Publishing, Inc.Predatory PracticesUnaffordable paymentsUnaffordable payments result from: l failure to use appropriate qualifying standards l borrower convinced to commit mortgage fraudMortgage fraud: providing inaccurate information tolender in order to get a larger loan; usually backfireson borrower © Copyright 2007 Rockwell Publishing, Inc. 36
  38. 38. Predatory PracticesImpound waiversImpound waiver: not requiring borrower to makemonthly deposits for property taxes/insurance l encourages home buyers to borrow more than they can afford l result: borrower often unable to pay taxes/insurance when due © Copyright 2007 Rockwell Publishing, Inc.Predatory LendingTargeted victimsPredatory lending targets borrowers who aren’t ableto understand transaction or don’t know of betteralternatives.Includes: l elderly l limited education l speak limited English l low income l poor or no credit history © Copyright 2007 Rockwell Publishing, Inc.Predatory LendingTargeted victimsSubprime lenders: make riskier loans than primelenders l Predatory issues often overlap with fair lending issues. © Copyright 2007 Rockwell Publishing, Inc. 37
  39. 39. Predatory LendingPredatory lending lawsPredatory lending laws include: l federal law (HOEPA) l state law © Copyright 2007 Rockwell Publishing, Inc.Predatory Lending LawsHOEPAHome Ownership and Equity Protection Act(HOEPA): applies to high-cost home equity loans l secured by applicant’s principal residence l high APR or points and fees © Copyright 2007 Rockwell Publishing, Inc.Predatory Lending LawsHOEPAIf a loan is covered by HOEPA: l lender must regard applicant’s ability to repay l disclosure statement must explain that defaulting applicant could lose home l interest rate can’t be raised on default © Copyright 2007 Rockwell Publishing, Inc. 38
  40. 40. Predatory Lending LawsState lawCalifornia’s predatory lending law is broader thanfederal version. l applies to purchase loans as well as home equity loans © Copyright 2007 Rockwell Publishing, Inc.Predatory Lending LawsState lawUnder state predatory lending law: l Loan applicants can’t be steered to subprime loan if they qualify for standard financing. l Loan applicants must be given disclosure statement. l Loan agreement can’t include discretionary acceleration clause (acceleration without default). © Copyright 2007 Rockwell Publishing, Inc.Predatory Lending LawsState law l Lender can’t charge prepayment penalty if loan is accelerated by default. l Refinancing is prohibited unless there’s identifiable benefit to borrower. © Copyright 2007 Rockwell Publishing, Inc. 39
  41. 41. Predatory Lending LawsState lawPredatory lending laws enforced by: l Department of Financial Institutions (certain lenders) l Department of Corporations (other lenders, mortgage brokers) l Department of Real Estate (real estate agents) © Copyright 2007 Rockwell Publishing, Inc.Predatory Lending LawsState lawPenalties for willful and knowing violation of law: l civil penalty up to $25,000 per violation l damages to consumer l disciplinary action l loss of license © Copyright 2007 Rockwell Publishing, Inc.SummaryProtecting the Borrower l Truth in Lending Act (TILA) l Annual percentage rate (APR) l Mortgage Loan Broker Law l Seller Financing Disclosure Law l Predatory lending l HOEPA l California predatory lending law © Copyright 2007 Rockwell Publishing, Inc. 40
  42. 42. Legal Aspects of Real Estate Lesson 13 Cumulative Quiz1. A lien is: A. a financial encumbrance and a nonpossessory interest B. a financial encumbrance and a possessory interest C. a nonfinancial encumbrance and a nonpossessory interest D. a nonfinancial encumbrance and a possessory interest2. Which document makes a property collateral for repayment of a debt? A. Deed of trust B. Mortgage C. Promissory note D. Either A or B3. The lender in a deed of trust is the: A. beneficiary B. mortgagee C. trustee D. trustor4. What type of clause in a security instrument is necessary to be able to foreclose nonjudicially? A. Acceleration B. Alienation C. Power of sale D. Subordination5. A borrower fails to make a monthly payment on a mortgage. The lender demands that the borrowerrepay the entire loan balance immediately, pursuant to the: A. acceleration clause B. alienation clause C. defeasance clause D. prepayment penalty6. A late payment penalty is allowed under state law only if the payment is how many days overdue? A. 6 B. 10 C. 14 D. 30© 2009 Rockwell Publishing 1
  43. 43. 7. A construction loan receives higher priority than the deed of trust used to purchase the land where thehouse will be constructed, despite the fact that the deed of trust was recorded first. The deed of trust mustcontain a/an: A. acceleration clause B. alienation clause C. defeasance clause D. subordination clause8. Which of the following is not related to a judicial foreclosure? A. Lis pendens B. Sheriffs sale C. Statutory redemption period D. Trustees sale9. In California, a borrower has the right to reinstate a: A. deed of trust B. mortgage C. Both A and B D. Neither A nor B10. The statutory redemption period following a sheriffs sale is: A. one year, if the sale proceeds were adequate to pay off the debt plus costs B. six months, if the sale proceeds were adequate to pay off the debt plus costs C. three months, if the sale proceeds were adequate to pay off the debt plus costs D. three months, if the sale proceeds were not adequate to pay off the debt plus costs11. The statutory redemption period following a trustees sale is: A. six months, if the sale proceeds were adequate to pay off the debt plus costs B. three months, if the sale proceeds were adequate to pay off the debt plus costs C. three months, if the sale proceeds were not adequate to pay off the debt plus costs D. There is no statutory redemption period in a nonjudicial foreclosure12. In which scenario would a deficiency judgment be allowed? A. Debt owed on commercial building is greater than its fair market value B. Fair market value of commercial building is greater than the debt owed on it C. Mortgage for purchase of owner-occupied house D. Seller-financed transaction© 2009 Rockwell Publishing 2
  44. 44. 13. Which type of loan would be covered by the Truth in Lending Act? A. Home equity loan B. Loan for business purposes C. Loan for $50,000 to purchase boat D. Seller-financed loan14. Which of the following best describes a loans annual percentage rate? A. Cost of credit expressed as a yearly rate B. Good faith estimate of finance charges associated with loan C. Nominal interest rate for loan D. Sum of all fees and charges borrower will pay over loans life15. Which of the following, if it appeared in an advertisement, would not be a trigger term that requiresdisclosure of all loan terms? A. Annual percentage rate B. Downpayment C. Interest rate D. Monthly payment amount16. Which of the following is a California state law, rather than a federal law? A. Home Ownership and Equity Protection Act B. Mortgage Loan Broker Law C. Real Estate Settlement Procedures Act D. Truth in Lending Act17. What is the absolute maximum amount of costs that may be charged by a real estate agent formortgage brokering services, under the Mortgage Loan Broker Law? A. $390 B. $700 C. $10,000 D. $20,00018. Which of the following is the term for charging interest rates or fees that exceed the norm and are notjustified by the actual cost of services provided? A. Fee packing B. Impound waivers C. Predatory steering D. Property flipping© 2009 Rockwell Publishing 3
  45. 45. 19. The Home Ownership and Equity Protection Act is limited to high-cost: A. business and agricultural loans B. home equity loans C. residential purchase loans D. seller-financed loans20. Which of the following activities concerning high-cost loans is not prohibited under state predatorylending laws? A. Charging a prepayment penalty if the loan is accelerated because of default B. Purchasing a home for more than its fair market value C. Refinancing when there is no identifiable benefit to the consumer D. Steering loan applicants to subprime loans when they could qualify for a standard loan© 2009 Rockwell Publishing 4

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