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Mortgage Lending: 2.3.3.6.3 Daily accrual accounting without compounding

The daily accrual method calculates the amount of interest due after receipt of each mortgage payment based on the actual date the payment is received, rather than using the due date scheduled at the time the loan is originated. Some lenders calculate a daily interest rate by dividing the annual rate by 365.160 These lenders usually then count the actual number of days between payments in order to determine the number of days by which to multiply the daily rate. Others calculate the daily interest rate by dividing the annual rate by 360.

Mortgage Lending: 2.1.3.1 Overview

The term “conventional mortgage” is defined in a variety of statutes and regulations as a mortgage that is not insured or guaranteed by a government program (such as the Federal Housing Administration or the Department of Veterans Affairs).8 Conventional mortgages may also be called “non-agency” loans, indicating that they are not guaranteed or insured by a government agency.

Mortgage Lending: 2.3.4 Calculating the Loan Payment for a Typical Mortgage

Normally the periodic payment due on a mortgage loan is written into the promissory note. But the payment may change if the loan has an adjustable rate or if the parties negotiate a loan modification. Practitioners may also want to verify that the contractual loan payment will properly amortize the loan. For these reasons, it is useful to know how to calculate the correct loan payment.

Mortgage Lending: 2.3.1 Introduction

This section describes how to check the numbers that a mortgage is based on. Math is a critical component of being able to understand, challenge, and litigate problems with consumer mortgages. Often the most dangerous aspects of these complex financial instruments are best appreciated only after a close analysis of how the numbers work.

Mortgage Lending: 2.4.1.2.1 In general

The interest rates charged under adjustable rate loans normally do not fluctuate arbitrarily. Rather, they vary according to a formula that is specified in the credit contract. Typically, the formula ties the contract rate to an external interest rate or “index”227 such as the Secured Overnight Financing Rate (SOFR), the federal discount rate,228 a Treasury bill rate, or sometimes a rate which represents the creditor’s cost of funds.

Mortgage Lending: 2.4.1.2.3 Caps and floors

A loan with an unlimited adjustable rate can be quite risky for a borrower, especially if the loan already consumes a high percentage of the borrower’s income. Even relatively small increases in the interest rate can significantly raise the monthly payment,234 and larger rate increases can force borrowers to default or to sell their homes. In order to allay these risks, which many potential borrowers are unwilling to accept, creditors frequently offer adjustable rate loans with “caps” of different kinds.

Mortgage Lending: 2.4.4 Interest-Only Loans

An interest-only mortgage loan requires monthly payments that only cover the interest accruing on the loan each month. The payments do not reduce the principal or help build equity in the home. The lower monthly mortgage payments (compared to fully amortizing payments) make this scenario seem attractive. Monthly payments on a loan for $350,000 at 6% interest would be $2098.42 (for a 30-year amortization), $2953.50 (for a 15-year amortization), or $1750 (on an interest-only loan).

Mortgage Lending: 2.4.3 End of the LIBOR, Beginning of the SOFR

Until recently, the LIBOR, or London Interbank Offered Rate, was the most commonly used index for adjustable rate mortgages. On June 30, 2023, however, the LIBOR’s administrator ceased publishing the index. Most lenders have switched to using the SOFR, or Secured Overnight Financing Rate, as the index for new loans. The LIBOR was intended to measure the rate that banks expect to pay in the future for unsecured loans from other banks and the capital markets.

Mortgage Lending: 3.2.2 Document Sources

The documents you receive from the borrower only tell part of the story. But they are the documents that you must use to build your initial case. To properly prepare and litigate your case you will need to obtain documents from all the different players in the loan:

Mortgage Lending: 9.9.1 Introduction

When the monthly payment on a loan is set so low that it is insufficient to pay the interest that accrues on the loan, the loan balance is said to negatively amortize. In other words, the unpaid balance grows each month. The math of negative amortization is discussed in § 2.4.5.1, supra.

Mortgage Lending: 13.8.7 Option-ARMs and Other Variable Rate Notes

UCC § 3-104(a) requires that a negotiable instrument contain a promise to pay a fixed amount of money.356 An “option-ARM” note may fail to meet this requirement. An option-ARM is an adjustable rate mortgage that sets an initial monthly payment that may be too low even to pay the interest that accrues on the loan, and provides that any unpaid interest will be added to the principal.357

Mortgage Lending: 2.3.5.2 Building a Spreadsheet to Check the Amortization of a Loan

One effective way to check the application of payments and other aspects of the loan is to use spreadsheet software (for example, Microsoft Excel) to build two different amortization spreadsheets: (1) a spreadsheet detailing how the mortgage loan should have amortized based on the terms of the promissory note (the origination analysis, which assumes that all payments are made on time) and (2) a spreadsheet showing what actually happened (the servicing analysis). The structure of the two spreadsheets are the same, the only difference being the numbers you choose to enter.

Mortgage Lending: 2.3.6 Effect of Extending the Loan Term

A basic understanding of mortgage amortization reveals that extending the length of a loan (without changing the amount borrowed or the interest rate) has two important results: (1) the periodic payment decreases and, thus, becomes more affordable for the borrower on a monthly basis; and (2) the total amount of interest due over the life of the loan increases. For example, a 20-year mortgage for $200,000 at 8% interest will require monthly payments of $1672.88.

Mortgage Lending: 12.3 Home Equity Lines of Credit (HELOCs)

Most home mortgages are closed-end loans, meaning the loan is for a fixed amount and the loan is funded once, at consummation. In contrast, a home equity line of credit, or HELOC, is a mortgage securing a reusable line of credit.3 It is essentially a credit card secured by a house. HELOCs work in a manner similar to credit cards but may be accessed by a card, checkbook, or other method.4

Unfair and Deceptive Acts and Practices: 10.4.3.4 Debit Cards and Electronic Fund Transfers

Payment processers may be involved in payment by debit card or an electronic fund transfer (EFT). Federal law provides a number of rights for consumers paying with a debit card or EFT, although these rights are not as robust as for credit cards and only provide protection for unauthorized charges and errors, not seller-related claims.217 In general, in an individual action, consumers are better off utilizing those rights.

Unfair and Deceptive Acts and Practices: 10.4.4 Those Assisting Telemarketing Fraud

An FTC rule promulgated pursuant to the Telemarketing and Consumer Fraud and Abuse Prevention Act declares it a deceptive act for a person to provide substantial assistance to a telemarketer while knowing or consciously avoiding knowledge that the telemarketer was violating the FTC rule.226 The FTC recognizes the following as examples of substantial assistance: providing lists of contacts to a seller or telemarketer that identify people who are over age fifty-five, have bad credit histories, or have been victimized previously by deceptive tel

Unfair and Deceptive Acts and Practices: 10.4.5 Endorsers and Accrediting Organizations

Those who endorse a product or company may be liable for their deceptive endorsements.240 Other possible defendants are those involved in the accrediting process. The FTC has sued a company for falsely accrediting a lab that tested the energy efficiency of windows and similar products.241 Both the accrediting company and the lab in such a situation could be held liable for consumer injury that resulted from false energy efficiency claims.

Federal Deception Law: 4.3.5.1 General

There is significant consensus that a consumer’s recovery against a creditor for seller-related claims can include attorney fees.151 Ohio UDAP attorney fees are an exception to this rule, based on the fact that UDAP fees are available in Ohio only in the court’s discretion and only against sellers who intentionally violate the statute.152

Unfair and Deceptive Acts and Practices: 10.5.2.1 General

A common form of credit is an installment contract, in which a seller sells goods or services on credit and then assigns the contract to a financing entity. The seller itself is named as the original payee of the installment contract.

Unfair and Deceptive Acts and Practices: 10.5.2.3 Claims That Can Be Raised Derivatively

A consumer can bring all claims against the holder that are available against the seller under state and other applicable law, including those relating to advertising, oral claims, sales, warranties, insurance, service contracts, financing, collection, servicing of warranties, and anything else connected with the transaction.259 Thus, even though the notice mentions claims against the seller, the allowable claims need not relate purely to the sale of the good or service, but include claims involving the seller’s extension of