Glossary for Professionals and Advocates
This a glossary of terms that might arise in the process of analyzing whether or not a borrower has entered into a predatory loan. It may be helpful to refer to this glossary when reading through the rest of the information on this site.
Adjustable Rate Mortgage (ARM): A mortgage in which the interest rate can be adjusted at specified intervals by a given formula using an index and margin.
Amortize: Pay off a loan with regular payments. Part of each payment is applied to principal and to interest. At the end of the term, the loan is paid in full. There is no balloon payment.
Amount financed: The amount of credit provided to or on behalf of the borrower, calculated under the Truth in Lending Act. This is the principal minus certain loan charges that the Truth in Lending Act defines as finance charges.
Annual Percentage Rate (APR): The interest rate that reflects the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it takes into account points and other credit costs. The APR allows homebuyers to compare different types of mortgages based on the annual cost for each loan.
Balloon mortgage: A mortgage that has level monthly payments that are insufficient to amortize the loan so that a "balloon" or lump sum payment is due at the end of the term. Balloon mortgages frequently contain a provision to refinance when the balloon payment is due.
Beneficiary: The holder of the instrument or document evidencing the obligations secured by the deed of trust, excluding persons holding the same as security for a different obligation. RCW 61.24.005(2).
Closing costs: Costs related to the financing and title transfer of real estate. They include expenses such as points, taxes, title insurance, mortgage insurance, commissions, and fees.
Collateral: Property put up to secure a loan.
Conventional loan: A mortgage not insured by the federal government. Federally backed loans include Federal Housing Administration (FHA), Veterans Administration (VA) and U.S. Department of Agriculture Rural Development loans (formerly Farmers Home Administration or "FmHA" loans).
Credit report: A report documenting the credit history and current status of a borrower's monthly payment obligation on long-term debts. Can also contain public information such as bankruptcies, court judgments, and tax liens.
Debt-to-income ratio: The relationship between the consumer's monthly debt payments and monthly income, expressed as a ratio. Lenders will often set a maximum debt-to-income ratio and usually do not make loans to consumers whose ratios exceed the lender's standard.
Deed of trust or mortgage: This is the legal document that creates a security interest in the borrower's home. This document gives the lender (or its agent, the Trustee) a right to foreclose/take the borrower's home for defaults such as nonpayment of principal and interest, nonpayment of real estate taxes, failure to maintain the property ("waste"), or failure to maintain property insurance.
Default rate: The interest rate the creditor will charge once the borrower defaults on the loan. This rate is always higher than the contract interest rate.
Down payment: Money paid to make up the difference between the purchase price and the mortgage amount. The amount of down payment required can vary from as little as 3% of the purchase price up to as much as 20% of the purchase price on conventional loans.
Equity: The difference between the market value of a property and the homeowner's outstanding mortgage balance plus all other liens on the property.
Escrow: The holding of documents and money by a neutral third party prior to or following the closing. Also an account held by a lender into which a homeowner pays money for taxes and insurance over the life of the loan.
Escrow closing (settlement): The occasion where sale of a home is finalized, the buyer pays the mortgage, and closing costs are paid.
Federal Housing Administration (FHA): One of the agencies of the federal government that insures first mortgage lenders against loss when a loan is made following FHA regulations. The FHA does not lend money; it only insures the loan.
Fee: Any charge assessed on or added to a loan.
Finance charge: The amount of money the loan will cost expressed as a dollar amount. The finance charge includes the interest together with certain other loan charges or fees specified by the Truth in Lending Act.
Fixed-rate mortgage: A mortgage on which the interest rate is set for the term of the loan.
Foreclosure: The legal process to terminate the homeowner's interest in the real property that is the collateral for the mortgage. In some states, foreclosure involves a court proceeding ("judicial foreclosure"), while in others, foreclosure occurs by creditor action alone ("non-judicial foreclosure"). In Washington, creditors have the option of using either the judicial foreclosure process (for mortgages or deeds of trust) or the non-judicial foreclosure process (for deeds of trust only).
Good Faith Estimate (GFE): An itemization of the estimated closing costs. Lenders or brokers must provide this list to the loan applicant for a mortgage loan within 3 business days after receipt of the application. The GFE is intended to assure that consumers have adequate information about closing costs early on to enable them to comparison shop. This disclosure is required by the Real Estate Settlement Procedures Act.
Grantor: A person, or its successors, who executes a deed of trust to encumber the person's interest in property as security for the performance of all or part of the borrower's obligations. RCW 61.24.005(1).
Home equity loan: Describes any mortgage loan that is not used to finance the purchase of the home. Can be used to turn credit card debt, which is unsecured, into debt secured by the borrower's home. Depending on the terms of the borrower's contract, the borrower's home is in jeopardy if the borrower fails to make payments.
Index: The market interest rate to which an adjustable rate loan is pegged, e.g., a 10-year Treasury bill rate.
Interest: A charge that is paid to borrow money and is a percentage of the total borrowed.
Investor: A company that invests in mortgages that other companies have originated. They purchase the mortgage for a set amount and collect the payments. Ultimately, a borrower's loan may be sold to an investor.
Lien: A legal interest taken by creditors in the consumer's property to secure payments of a debt. A lien can be created voluntarily, such as when the consumer pledges real estate by giving the creditor a mortgage or deed of trust. A lien can also be created without the consumer's consent, such as when delinquent property taxes become a lien on the property.
Loan to value ratio (LTV): The relationship, expressed as a percentage, between the loan amount and the value of the property securing the loan. The more equity in the property, the lower the percentage. Conventional lenders sometimes require an LTV of 80%, though there are conventional loan programs that go as high as 97%. Subprime lenders, on average, require LTVs of 70-75%.
Lock: Rates and costs change frequently. The borrower may select a particular rate at certain times during the loan process, and it will be guaranteed by the lender for a specific number of days. This is called "locking" the rate. However, this is a "best efforts" lock, because there is no legal obligation on the part of the lender to be locked into this rate unless the borrower has paid for the lock. In times of rapid rate changes, lenders have been known to renege on locks.
Margin: The number added to the index to determine the interest rate on an adjustable rate mortgage. For example, if the index rate is 6%, and the fully indexed rate is 8.75%, the margin is 2.75%.
Mortgage broker: Any person who for compensation or gain, or in the expectation of compensation or gain (a) makes a residential mortgage loan or assists a person in obtaining or applying to obtain a residential mortgage loan or (b) holds himself or herself out as being able to make a residential mortgage loan or assist a person in obtaining or applying to obtain a residential mortgage loan. RCW 19.146.010(12). Mortgage brokers are involved in a high percentage of high-cost loans, and sometimes receive a payment from the lender for steering the client to a higher-cost loan (otherwise known as a "yield spread premium") or for the volume of loans the brokers steer towards the lender (otherwise known as "volume-based compensation").
Negative amortization: Occurs when the monthly payments are not large enough to pay all the interest due on the loan that month. This unpaid interest is added to the balance of the loan. The danger of the negative amortization is that the borrower ends up owing more than the original loan amount. The benefit is that the initial payments are lower.
Note: A contract involving a loan of money.
Origination fee: A fee paid to a lender or mortgage broker for originating a loan application. It may be stated as a percentage of the mortgage amount, or "points", or as a fixed dollar amount.
PITI: Principal + Interest + Taxes + Insurance. This figure represents the total monthly housing expense (but does not include condominium or homeowner's association dues and assessments).
Points (Loan Discount Points): Prepaid interest to lower the loan's interest rate. Can also be financed as part of the loan principal. Each point is equal to 1% of the loan amount (e.g., two points on a $100,000 mortgage would cost $2,000).
Pre-approval: Where the consumer actually applies for a loan before s/he has found the house s/he wants to buy. The lender guarantees the consumer a fixed loan amount as long as s/he buys within a certain time period. This is much more convincing to a seller than a Pre-qualification.
Predatory lender: A lender or mortgage broker that practices mortgage fraud against consumers. For example, it can be a type of subprime lender (not all subprime lenders are predatory) that charges higher interest rates that include unnecessary fees and charges, and/or does not fully disclose the loan terms, or writes the terms in such a way that ensures an unreasonable amount of profit for the lender.
Prepayment: Paying on principal, or paying above the minimum payment required by the lender. In the beginning years of the loan, the minimum payment is usually all interest. Anything added to that payment will go to paying off the principal. The more the borrower prepays, the shorter the term of the loan will be. Sometimes there are Prepayment Penalties.
Prepayment penalty: A fee charged by a lender if the borrower pays the loan off early, generally to make up for interest the lender anticipated earning but will not earn as a result of the payoff. Not all loans have a prepayment penalty. Sometimes a loan will have an optional prepayment penalty in exchange for a lower rate or fee.
Pre-qualification: A meeting with a lender or mortgage broker to determine how much money the lender would probably be willing to lend to the borrower and how much the monthly payments would be. This is usually a free service with no guarantees.
Principal: The amount borrowed. After the closing or when the borrower pays off the loan, the principal may be more or less than the amount originally borrowed, depending on how much has been added to the loan in fees and costs or how much of the loan has been paid off.
Private mortgage insurance (PMI): Insurance provided by non-government insurers that protects lenders against loss if a borrower defaults. This insurance is usually required when a borrower makes less than a 20% down payment. When the borrower's equity in the property equals 20%, s/he may request the insurance to be cancelled.
Promissory note (loan note): This document represents the legal, contractual obligation of the debtor. The principal, interest rate, term and payment schedule, and default and delinquency provisions are reflected in this document.
Purchase money mortgage: The mortgage loan obtained to purchase a home.
Quitclaim deed: A type of deed in which the grantor transfers to the grantee all interest in the subject property that a grantor may have. The grantor makes no warranties of title whatsoever.
Refinancing: The process of paying off one loan with the proceeds from a new loan secured by the same property.
Secured debt: This type of debt is the result of money loaned on collateral, which might come in the form of the home or other valuable possessions. If the borrower neglects to pay off according to the terms agreed, the lender can acquire that collateral from the borrower.
Settlement Statement ("the HUD-1"): The Real Estate Settlement Procedures Act requires lenders to give this disclosure at closing, or one day in advance of closing if the consumer requests it. It should be the final statement of settlement costs. The RESPA disclosure focuses on closing costs as a dollar amount.
Single premium life insurance: A life insurance policy requiring one premium payment. Money for the premium is usually borrowed as part of a larger loan with the borrower paying interest on that amount over the term of the loan. This type of insurance is often high-cost insurance that could be obtained elsewhere for a lower cost.
Subprime lender: A lender that charges a finance rate that is higher than the "prime" rate offered by conventional lenders. Typically, it is a lender who approves loans for individuals who may have poor credit history or no credit history, or who have other characteristics (e.g. high LTV, property type, job) that justify a higher rate.
Three-day right of rescission: The three-day period that a borrower has to change his/her mind and cancel a refinance transaction on the home that s/he occupies.
Title: A legal document establishing the right of ownership.
Title insurance: Insurance to protect the lender (lender's policy) or the buyer (buyer's policy) against loss arising from disputes over ownership of a property.
Title search: A check of the title records to ensure that the seller is the legal owner of the property and that there are no outstanding liens or other claims on the property.
Trustee: The person designated as the trustee in the deed of trust or appointed under RCW 61.24.010(2) who holds legal title to property "in trust" for the benefit of another person (beneficiary). This person must carry out specific duties with regard to the property.
Truth in lending disclosure: A document that is required to be provided to the borrower before the mortgage transaction is signed. In a purchase transaction, it is required to be provided to the borrower within three days of the date of application. In other types of loans (e.g. refinances, second mortgages, etc.), it is ordinarily provided to the borrower at the loan closing. This document is intended to translate the legalese of the Note and Deed of Trust into understandable terms for comparison shopping, to understand loan costs, and to understand the type of loan, length of loan, and payment schedule.
Unsecured debt: A debt that does not involve collateral. This type of debt is the result of money owed, for example, to a credit card company, who cannot seize any of the consumer's possessions if s/he does not pay off the balance. In a situation of delinquent payment, the credit card company will usually turn the matter over to a collection agency.
Usury: Interest rate charged in excess of the legal rate established by law.
Variable Rate: Interest rate that changes periodically in relation to an index.
Yield spread premiums (YSP): A fee from a lender to a loan broker paid when the broker arranges a loan where the interest rate on the loan is inflated to an amount higher than the "par" rate. The par rate is the base rate at which the lender will make a loan to a borrower on a given day without additional cost or YSP.
Excerpted with permission from
Stop Predatory Lending - A Guide for Legal Advocates, Elizabeth Renuart (Principal Author), National Consumer Law Center;
Predatory Lenders and Other Sharks in the Financial Waters, Anthony Butler, Deborah Campbell & William Dennis, Salisbury Neighborhood Housing Services;
and Predatory Lending Litigation From Around the Country: A Broad Range of Tools, Nina F. Simon (Principal Author), AARP Foundation Litigation.