Test Bank Answer Key
Chapter 10 Legal Aspects of Real Estate Finance
TRUE/FALSE
1. Only a negotiable note can be transferred to a holder in due course.
2. A nonnegotiable note is not capable of being transferred.
3. Only a nonnegotiable note can be transferred to a holder in due course.
4. Nonnegotiable notes are not enforceable.
5. A nonnegotiable note may be enforceable.
6. Forgery of a maker’s signature is a defense to a holder in due course.
7. Incapacity of the maker is not a defense to a holder in due course.
8. The method of transferring a note is by endorsement.
9. Notes are often transferred by their makers.
10. An unqualified endorsement contains no warranties.
11. An endorser who endorses a note without recourse warrants that all signatures on the note are
genuine and authorized.
12. An unqualified endorsement imposes upon the endorser the obligation to pay the note in the
event the maker does not.
13. An endorsement without recourse negates any obligation on the part of the endorser to pay
the note.
14. A maker of a note is not released by the sale of the collateral securing the note.
15. A maker of a note is released by the sale of the collateral securing the note.
16. Each comaker of a note is fully responsible for the payment of the note.
17. A note signed by both A and B on which they have joint and several liability is one on which A
is responsible for one-half of the note and B is responsible for one-half of the note.
18. Generally, a note cannot be prepaid before the date established in the note for payment.
19. A state statute that establishes a ceiling or maximum rate of interest to be charged on a loan is
called a usury statute.
20. Usury statutes establish a minimum rate of interest that can be charged on the loan.
21. The penalty for usury in some states may be forfeiture of the entire loan amount.
22. Most notes are witnessed and notarized.
23. Notes are rarely witnessed and notarized.
24. A promise to pay the debt of another person is called a guaranty.
25. An oral guaranty is enforceable.
26. A guaranty of a note must be written.
27. A change in the terms of a guaranteed note made without the guarantor’s consent generally
releases the guarantor.
28. The mortgagee of a mortgage is the owner of the property.
29. The mortgagor of a mortgage is the lender or creditor.
30. To have a valid mortgage, a valid debt must exist.
31. A mortgage cannot be given to secure a future debt.
32. A mortgage securing a note can be transferred separately from the note.
33. If property is sold subject to a debt, it means that the purchaser does not have personal liability
to pay the debt.
34. Property sold with a mortgage assumption means that the purchaser does not have personal
liability to pay the debt.
35. A foreclosure of a first mortgage will generally terminate a second mortgage lien on the secured
property.
36. The legal means of requiring that real property conveyed in a mortgage be sold and the
proceeds used to pay the debt is called foreclosure.
37. All foreclosures must take place through judicial proceedings.
38. Foreclosures may take place either judicially or nonjudicially.
39. Power of sale foreclosure is generally a nonjudicial foreclosure proceeding.
40. Power of sale foreclosure is generally a judicial foreclosure proceeding.
41. A foreclosure sale generally has the effect of divesting and terminating all junior encumbrances
on the real property.
42. A debtor always has the right to pay off the debt and redeem the real property from foreclosure
prior to the sale.
43. Anti-deficiency laws generally provide that a mortgage creditor cannot sue a mortgage debtor
for a deficiency owed on the debt unless the creditor can establish that the property sold for fair
market value at the foreclosure sale.
44. Post-foreclosure redemption is permitted in all states.
MULTIPLE CHOICE
1. Which of the following is not a defense to a holder in due course?
A. Fraud in the inducement
B. Forgery of the maker’s signature
C. Payment to the wrong person
D. Duress of the maker in signing the note
2. An endorser of a note who endorses without recourse warrants the following:
A. The endorser will pay the note.
B. The note has not been materially altered.
C. The note can be collected in full from the maker.
D. The endorser has good title to the note.
E. (a) and (c) above
F. (b) and (d) above
3. A state statute that establishes the ceiling or maximum rate of interest to be charged on a
loan is a(n):
A. usury statute.
B. foreclosure statute,
C. redemption statute,
D. endorsement statute,
4. A person other than the debtor or maker of a note who promises the payee of the note that the
debtor’s note will be paid is called:
A. endorser.
B. receiver.
C. guarantor.
D. comaker.
5. Which of the following is/are requirements for a valid mortgage?
A. Names of the parties
B. A valid description of the property
C. Effective delivery to the lender
D. All of the above
E. (a) and (b)
6. A mortgage given to secure any and all debt between the mortgagor and the mortgagee
is called a()
A. deed of trust.
B. wrap mortgage.
C. open-end mortgage.
D. installment mortgage.
7. A borrows $50,000 from Bank and pledges real property as security. After the loan, A sells the
property to B, who buys subject to the mortgage. B then defaults on the mortgage loan. Under
the following example, which of the following statements is/are true?
A. Bank may foreclose on property.
B. Bank can sue A to recover debt.
C. Bank cannot sue B to recover debt.
D. A cannot sue B for reimbursement if A pays bank.
E. All of the above
F. None of the above
8. Which of the following is not a mortgagee’s remedy for a debtor’s default on a mortgage?
A. Judicial foreclosure
B. Nonjudicial foreclosure
C. Appointment of a receiver
D. Injunction
9. Which of the following is/are true about a bankrupt debtor?
A. Bankruptcy enjoins all foreclosure proceedings against the debtor.
B. A bankrupt debtor can terminate executory contracts to purchase real property.
C. A bankrupt debtor can terminate unexpired leases.
D. All of the above
E. (a) and (c)
10. A debtor’s rights in bankruptcy are determined by:
A. the law of the state where the debtor resides.
B. the law of the state where the creditor resides.
C. federal law.
D. the law of the state where the property is located.
SHORT ANSWER
1. Acme Bank is the payee on a negotiable note made by Taylor Reed. Acme Bank sells the note
to XYZ Investment Company. The note is endorsed by Acme “ without recourse” to XYZ.
After the sale, XYZ discovers that the signature of Taylor Reed on the note is a forgery. Taylor
refuses to pay the note. Can XYZ recover its loss from Acme Bank?
2. Josie Cohen borrowed money from Second Bank and Trust to buy her home. She gave Second
Bank a mortgage on the home. Josie loses her job and is unable to make the payments on the
mortgage. Second Bank gives Josie notice that the delinquent payments must be paid by July 1
or the home will be foreclosed. Josie does not make the payments and Second Bank starts
foreclosure proceedings. Josie obtains a loan from her aunt in an amount sufficient to pay off
entirely the debt owed to Second Bank. Josie tenders the full amount to Second Bank, but
Second Bank refuses to accept the money. Second Bank says that Josie was too late to stop the
foreclosure. Can Josie require Second Bank to accept payment of its loan in full?
3. Great Land Investment Company owned vacant land that it intended to develop into a
residential subdivision. Great Land had borrowed money to buy the land from Big Town Bank
and given Big Town Bank a mortgage on the land. Great Land sells the property to Quality
Homes who intends to develop the land. The land is transferred to Quality Homes “subject to”
the Big Town Bank Mortgage. Quality gets into financial trouble and cannot pay the loan. Big
Town Bank wants to sue Quality Homes for the full amount of the unpaid debt. Will Big Town
Bank be successful in this action?