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Mortgage Lending: 1.5.6 Mortgage Electronic Registration System (MERS)

The Mortgage Electronic Registration System (MERS) is a privately owned electronic registry and clearinghouse established to track mortgage ownership and servicing rights. For many home loans MERS, as “nominee” for the lender, is the mortgage holder of record or the beneficiary on a deed of trust. MERS typically has no legal or beneficial interest in the promissory note. Nevertheless, as mortgage holder, MERS sometimes initiates foreclosure proceedings.

Mortgage Lending: 1.5.7 Real Estate Agents

Real estate is often sold through real estate agents, real estate brokers (not to be confused with mortgage brokers), or “realtors.”386 They list the property in newspapers, circulars, and computer databases. The agent usually represents the seller of the property. In some circumstances, however, a real estate agent may be the buyer’s agent or may even represent both the seller and buyer. Real estate agents are typically paid a percentage of the sales price. States commonly require agents to be licensed.

Mortgage Lending: 1.5.9 Closing and Settlement Agents or Attorneys

The mortgage loan closing or settlement (the terms are synonymous) is the final meeting at which all the transaction documents are signed. The loan contract is normally consummated at this time. The closing is usually conducted by an agent for the lender.392 The process varies widely by jurisdiction, especially when the transaction includes selling a home.

Mortgage Lending: 1.5.10 Escrow Agents

An escrow agent is an independent third party responsible for holding documents or funds during a transaction. In some states escrow is handled by the closing agent or title agent. If all of the proceeds from a loan transaction are not distributed at the loan closing, the escrow agent is usually responsible for holding the remainder until certain events occur. The lender or escrow agent may have drafted an escrow agreement that governs to whom and when the remaining funds will be paid.

Mortgage Lending: 1.5.11 Private Mortgage Insurance Companies

When a loan’s loan-to-value ratio exceeds eighty percent, lenders usually require that borrowers purchase private mortgage insurance.396 The cost of this insurance is added to the borrower’s monthly payment and held in escrow by the servicer. If the borrower defaults, the mortgage insurer will pay the loan holder some of the monies not recouped in the foreclosure process.

Mortgage Lending: 1.5.12 Government Mortgage Guarantors

A number of government programs insure or guarantee mortgage loans made to homebuyers who meet certain criteria. Loans subject to these programs are sometimes called “agency loans.” These programs are offered by the Federal Housing Administration (FHA), which is part of the Department of Housing and Urban Development; the Rural Housing Service (RHS), which is part of the Department of Agriculture; and the Department of Veterans Affairs (VA). State housing finance agencies also insure home mortgages.

Mortgage Lending: 1.5.13 The Secondary Market

The secondary market is vital to the scale of the modern mortgage lending industry. It is not a place, but instead refers to the resale market for loans. The “primary market” is the market in which loan applicants shop for mortgages from lenders.399 Historically, financial institutions that originated loans would continue to own them until maturity.

Mortgage Lending: 1.5.15 The Regulators

When assisting a consumer or investigating a lender, it is important to determine who regulates and supervises that lender. Regulation means establishing rules for the lender’s operation.428 Supervision involves monitoring and examining a lender’s operations.429 But “regulation” is the catch-all term. Some lenders may have more than one regulator, depending on the nature of their business and the scope of the regulator’s authority.

Mortgage Lending: 1.5.1 Overview

The mortgage lending industry is a sea of confusing terminology that is sometimes duplicative or used inconsistently. This subsection and those that follow explain some of the most commonly used terms and describe some of the most important players in the mortgage market. But when examining a specific transaction, it is always important to be aware of how any relevant statute or regulation defines terms. These definitions do not always match how the mortgage industry—or even other laws—use them, and failure to be aware of such differences can produce embarrassing mistakes.

Mortgage Lending: 1.6.2 How Securitization Works

While the practical details of the modern securitization process vary, it typically involves the pooling of mortgages under the common ownership of an entity whose sole purpose is to hold the loans. This process begins with the lender who originates the loans. In some cases another entity will buy up the loans (sometimes from multiple lenders) and aggregate them.

Mortgage Lending: 1.6.3 Problems for Borrowers Related to Securitization

If there are no problems with the origination of the loan, and the borrower has no difficulty making regular payments according to the loan terms, securitization will not affect the borrower after the loan has been closed. For most borrowers, securitization’s biggest impact is likely to be found in how it influences which loan products lenders decide to market.

Mortgage Lending: 1.6.4 Securitization Players

Securitizations can be structured in many different ways and the parties involved can be given many different names. These different entities are often not unrelated or independent of each other. Instead, a complex web of relationships has been consciously worked out in an attempt to insulate various parties from the conduct of the originating lender. The players and structure also vary depending on whether the loans are securitized on the private-label securities market (in other words, Wall Street) or through one of the government sponsored enterprises.

Mortgage Lending: 1.6.5 Documentation

The primary contractual document underlying a securitization transaction is the pooling and servicing agreement. The pooling and servicing agreement establishes the trust that will hold the securitized loans, and it creates the various classes of bondholders. It defines the servicer’s obligations and the various “representations and warranties” of the parties to the transaction.

Mortgage Lending: 1.7.1 Introduction

This section provides a list of notable subjects which may arise in mortgage lending transactions, pinpointing the subsections where such topics are discussed in this and other NCLC treatises. The digital version of this checklist provides live weblinks to these related subsections, in both this book and the various other NCLC treatises.

Mortgage Lending: 1.2.1 A Quick Overview for Practitioners

The mortgage ecosystem is horribly complex. The government policies, banking practices, and contract terms underlying today’s residential mortgage loans are the product of a century of experience, trial, and plenty of error and misconduct. The knowledge required to represent a mortgagor in disputes over the origination, servicing, and foreclosure of a mortgage is broad enough to fill a book—three books, in fact.13 This one focuses on mortgage origination.

Mortgage Lending: 2.2.1 The Application

Nearly all mainstream lenders require loan applicants to submit a Uniform Residential Loan Application (URLA) form.82 This form, promulgated by the government sponsored entities (GSEs), has been standard in the mortgage industry for approximately two decades.83 The form collects basic demographic information required to process the loan application as well as information that lenders must submit to the federal government under the Home Mortgage Disclosure Act (HMDA).

Mortgage Lending: 2.2.3 The Promissory Note and the Mortgage

Today all mortgage loans are memorialized in two separate documents: a promissory note and a mortgage or deed of trust. The vast majority of mortgage lenders use standardized forms known as the “uniform instruments,” which are jointly promulgated by Fannie Mae and Freddie Mac.95 The uniform instruments are widely used even for loans that will not be sold to the GSEs.96 Any transaction that does not use one of the uniform instruments should be examined closely.

Mortgage Lending: 4.4.5 TILA/RESPA Integrated Disclosures and Creditor Liability for Violations

In 2010, Congress directed the Consumer Financial Protection Bureau (CFPB) to create “a single, integrated disclosure” form combining the existing HUD-1 settlement statement and TILA disclosure form required for most mortgage loan transactions.340 The CFPB finalized the forms and accompanying regulations on December 31, 2013.341 The new regime began October 3, 2015 for applications received on or after that date.342 These disclosures and rela

Mortgage Lending: 2.3.3.4 Day-Count Conventions

All interest-bearing contracts follow a day-count convention. This is a set of standards and assumptions the lender and servicer choose to follow when calculating interest over any period of time.

Truth in Lending: 9.6.2.4.4 Open-end credit before January 10, 2014

For transactions with applications received prior to January 10, 2014,671 open-end credit is excluded from HOEPA.672 This exemption was troubling because of the incentives it created. Some creditors sought to evade the high-rate home equity loan protections discussed in this chapter by structuring abusive loans as open-end credit.

Mortgage Lending: 2.4.2 Teaser Rates

A teaser rate is an initial interest rate set for an adjustable rate mortgage (ARM) that is below the rate that would have applied to the loan if the initial rate had been set using the formula specified in the loan contract. Teaser rates are typically an introductory rate that only applies for a very short period of time, sometimes only for a few payments or even just for one month.

Mortgage Lending: 2.3.3.6.1 Overview

Assuming a loan uses the actuarial method, the lender must also choose between the “scheduled” and “daily accrual” methods of accounting. The method used determines how the lender counts the elapsed time between payments (the t in the Prt formula).

Mortgage Lending: 2.3.3.6.2 Daily accrual (or daily simple interest) loans

Many daily accrual loans are made by finance companies, but banks and other insured financial institutions sometimes use the daily accrual method for junior or second mortgages. The type of accounting method used depends on the terms of the note. Typical language requiring use of the daily accrual method will look like this: