Chapter 16a Legal harbor Bay Bank Has Made Mortgage Loans

Document Type
Test Prep
Book Title
The Legal Environment of Business: Text and Cases: Ethical-- Regulatory-- Global-- and Corporate Issues 8th Edition
Frank B. Cross, Roger LeRoy Miller
1. The loan that a lender provides to enable a borrower to purchase real
property is a mortgage.
1. The initial interest rate is the part of a purchase price that is
paid up front in cash.
1. A fixed-rate mortgage is a standard mortgage with a rate of
interest that changes periodically.
1. With an adjustable-rate mortgage, the rate of interest paid by the
borrower changes periodically.
1. Due to a lower default rate, lenders charge a lower interest rate for
subprime loans.
1. A reverse mortgage starts as a fixed-rate mortgage and then
converts into an adjustable-rate mortgage.
1. Home equity is the portion of a home’s value that is “paid off.”
1. Steering and targeting occur when a lender manipulates a
borrower into accepting a loan product that benefits the lender but is
not the best loan for the borrower.
1. Borrowers are required to recite the terms of their loans in clear,
readily understandable language so that lenders can make rational
1. A borrower has a right to rescind a mortgage within three business
1. Federal mortgage disclosure requirements apply to the written materials
that a lender provides and to any oral representations.
1. Lenders can require balloon payments for loans with terms of five years
or less.
1. A lender’s failure to comply with federal mortgage disclosure
requirements extends the borrower’s right to rescind the loan to no
more than seven days.
1. A lender can make a higher-priced mortgage loan based on the value
of the consumer’s home without verifying the consumer’s other credit
1. There are additional disclosure requirements for a higher-priced
mortgage loan.
1. If a homeowner defaults, the lender has the right to foreclose on the
mortgaged property.
1. Foreclosure is the postponement, for a limited time, of part or all of
the payments on a loan in jeopardy of repossession and sale.
1. Federal law encourages private lenders to modify mortgages so as to
lower the monthly payments of borrowers who are in default.
1. In a judicial foreclosure, the lender is allowed to foreclose on and sell
the property without judicial supervision.
1. A deficiency judgment requires a borrower to pay the amount of debt
remaining after the collateral is sold.
1. Great Plains Bank provides a loan to enable Helene to buy real
property. This loan is
a. a down payment.
b. a mortgage.
c. a short sale.
d. a workout agreement.
1. Jaime buys a home by paying part of the purchase price up front in
cash and borrowing the rest of the funds from Valley Credit Union. The
part of the price paid up front in cash is
a. a down payment.
b. a home equity loan.
c. a reverse mortgage.
d. the average prime offer rate.
1. Ridgeline Bank provides Stanley with a mortgage to buy a home. The
rate of interest is fixed for three years and then adjusts annually. This
a. a fixed-rate mortgage.
b. an adjustable-rate mortgage.
c. an interest-only mortgage.
d. a violation of the law.
1. Consumer Mortgage Loans provides Demi with a mortgage to buy a
home. Under the terms, Demi can choose to pay only the interest
portion of the monthly payments and forgo paying of the principal for
five years. This is
a. a fixed-rate mortgage.
b. an adjustable-rate mortgage.
c. an interest-only mortgage.
d. a violation of the law.
1. Rita borrows $30,000 from South State Credit Union. South State
accepts Rita’s equity in her home as collateral, which can be seized if
the loan is not repaid on time. This is
a. a home equity loan.
b. a hybrid mortgage.
c. a reverse mortgage.
d. a violation of the law.
1. Milo borrows $125,000 from North State Bank to buy a home. To
comply with the Statute of Frauds, the mortgage must be
a. a highly formal document.
b. a particular form.
c. in the same format as the lender’s other loans.
d. in writing.
1. Hubert borrows $100,000 from Integrity Mortgage Mart to buy a home.
Soon after obtaining the mortgage, Integrity convinces Hubert to
refinance. This is
a. a short sale.
b a subprime mortgage.
c. loan flipping.
d. steering and targeting.
1. Lorna borrows $175,000 from Mountainside Credit Union to buy a
home. Among the terms that must be disclosed under federal law is
the annual percentage rate. This is
a. the actual cost of the loan on a yearly basis.
b. the average prime offer rate.
c. the interest rate at which the loan is made.
d. the loan principal.
1. Kenton borrows $150,000 from Liberty Home Finance Corporation to
buy a home. Federal law concerns primarily
a. borrowers’ ability to avoid clear terms in financing documents
when the effect may be harsh.
b. how many loans a specific lender can make.
c. the highest prices for which real property can be sold.
d. what must be disclosed with respect to a mortgage.
1. Main Street Lenders, Inc., attempts to coerce Nolanwho specializes in
determining the value of real and personal propertyinto misstating the
value of a property on which a loan is to be issued. This is
a. a legal and ethicalbut morally arguablefinancial ploy.
b. a legalbut unethicalbusiness practice.
c. a necessary tactic to generate a profitable loan in today’s market.
d. a violation of the law.
1. Ruth owns a home on which she has two mortgages provided by
Security Bank. Town Refinance Inc. tells Ruth that it can refinance the
loans to reduce her payments. Town Refinance provides all of the
required documents, which accurately state the payments under the
new loan as higher. Ruth does not read the documents. Town
Refinance is most likely liable for
a. fraud.
b. misrepresentation.
c. negative amortization.
d. nothing.
1. Refer to Fact Pattern 16-1A. Under federal law, if 24-Hour Credit fails
to provide certain material disclosures with respect to the loan, Benny’s
right to rescind the loan
a. expires at midnight on the day the loan is finalized.
b. is immediately revoked.
c. is extended for up to three years.
d. is tolled for the duration of the loan payments.
1. Refer to Fact Pattern 16-1A. Under federal law, disclosures with respect
to one of 24-Hour Credit’s loans must be provided
a. a certain number of days after the loan is finalized.
b. a certain number of days before the loan is finalized.
c. at the same time at which the loan is finalized.
d. at whatever time is most rational and appropriate.
1. Property Financial Corporation makes loans that qualify, under a
Federal Reserve Board amendment to Regulation Z, as Higher-Priced
Mortgage Loans (HPMLs). Quinn applies to Property Financial for an
HPML. To make the loan, the lender must
a. convince an appraiser to inflate the value of the property.
b. impose a prepayment penalty for the duration of the loan.
c. structure the loan to specifically evade the HPML protections.
d. verify the borrower’s ability to repay the loan.
1. Money Mortgage Mart makes a short-term loan to Natalie to allow her
to make a down payment on a new home before selling her current
home. This is
a. a bridge loan
b. a home equity loan.
c. an equitable right of redemption.
d. a violation of federal law.
1. Velma borrows $110,000 from Watershed Bank to buy a home. If she
fails to make payments on the mortgage, the bank has the right to
repossess and auction off the property securing the loan. This is
a. a short sale.
b. forbearance.
c. foreclosure.
d. the equitable right of redemption.
1. Harbor Bay Bank has made mortgage loans to consumers that qualify
for the Home Affordable Modification Program (HAMP), which offers
incentives to lenders to change the terms of certain loans. The purpose
of HAMP is to
a. convey property through lenders to consumers who can afford it.
b. force lenders to forgive all high-risk mortgages.
c. reduce monthly payments to levels that homeowners can pay.
d. transfer affordable property to investors to lease to consumers.
1. Darwin borrows $200,000 from Evermore Bank to buy a home. Less
than six months into the term, Darwin stops making payments on the
loan. To initiate the process to repossess and auction off the property
securing the loan, Evermore must
a. issue a notice of sale to the borrower.
b. offer the property for sale in an auction on the courthouse steps.
c. record a notice of default with the appropriate county office.
d. resort to litigation to establish clear ownership of the property.
1. Reed borrows $150,000 from Suburban Credit Union to buy a home,
which secures the loan. Three years later, Reed stops making
payments on the loan. After Suburban Credit repossesses and auctions
off the property to Tyler, equity remains. This amount most likely
belongs to
a. Reed.
b. Suburban Credit Union.
c. Tyler.
d. the county in which the property is located.
1. Seymour borrows $350,000 from Reliable Bank to buy a home.
Seymour stops making payments on the loan ten months later. After
the bank repossesses the property securing the loan but before it is
sold, Seymour wants to buy it. This is
a. a deficiency judgment.
b. a reverse mortgage.
c. a violation of the law.
d. the right of redemption.
1. Kim’s home is valued at $250,000. Kim has paid the mortgageshe has
100 percent equity in the property. She wants to start a new business
with Lloyd. To obtain funds, Kim refinances the loan through Metro
Bank, borrowing $200,000 for fifteen years at an interest rate of 4.85
percent. Before the loan is completed, Metro provides Kim with all of
the required disclosures. On the day of the loan, a fifteen-year Treasury
bond is yielding 2.85 percent. Kim pays $7,500 in fees to the bank.
Less than a month later, she sells her interest in the new business to
Lloyd and wants to rescind the loan. Which federal law covers this
loanTILA, HOEPA, HPML, or HAMP? Can Kim rescind the deal?
1. Brendan borrows $150,000 from Countywide Credit Union to buy a
home. The loan is a fixed-rate mortgage at 5.5 percent with a thirty-
year term secured by Brendan’s home, which is his principal residence.
When Brendan has paid off $10,000 of the mortgagestill owing
$140,000he loses his job and defaults on the loan. The market for
homes has declined since Brendan took out the loan, and the value of
the home at the time of default is $100,000. Despite the default,
Brendan assures Countywide that he has accepted a new position,
which will begin in six months. What are Brendan’s options to recover
the amount still owed on the mortgage? Which option would most
benefit these parties? Why?

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