Topic: Mortgage Loans
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Our loan documentation system produced the following warning: “The IL Banking Act does not authorize the taking of a mortgage on a loan for $5,000 or less.” We are not chartered in Illinois, but we have a branch in Illinois and are extending a mortgage loan secured by an Illinois property. Does this law apply?
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No. The Illinois Interest Act (not the Illinois Banking Act) does contain a provision that generally operates to prohibit lenders from taking a security interest in real property on “a revolving credit arrangement” under $5,000. However, this prohibition does not apply to bank lenders. The Illinois Financial Services Development Act exempts “any financial institution” from…
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We have a customer who received a quitclaim deed for a dwelling from a relative, who had a mortgage loan secured by the dwelling from another bank. After recording his quitclaim deed, the customer obtained a mortgage loan from our bank. He stated that he plans to use the proceeds of his loan to pay off his relative’s existing mortgage. Would this be considered a purchase, refinance, or not reportable under the Home Mortgage Disclosure Act (HMDA)?
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In our view, the loan is not HMDA reportable. From what you have told us, the loan does not fit into any of three HMDA reporting categories — for home purchase loans, home improvement loans or refinancings — and consequently, we do not believe that the HMDA requires you to report this loan. The HMDA…
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We discovered an issue with some of our adjustable rate mortgages (ARMs). For some of our ARMs that closed in 2009 and earlier, we provided early disclosures that omitted a lifetime floor for the interest rate. But the promissory notes for the loans do include a floor, which we have enforced. Is this a UDAAP violation? Do we need to reimburse customers?
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We agree that having omitted the interest rate floor in your ARM disclosures creates a range of risks for your bank. Both the present version of Regulation Z and the version in effect in 2009 require lenders to disclose how the interest rate for a variable rate loan will be calculated, including “an explanation of…
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Can we modify a commercial loan after maturity without entering into a new mortgage and issuing a new note?
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Yes, you may modify a matured commercial loan without issuing a new note or mortgage, provided that you enter into a modification agreement rather than by refinancing the loan. To determine whether a subsequent loan transaction constitutes a modification, which can be affected through a modification agreement, or a refinancing, which generally requires a new…
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We have a mortgage product that we call 80/20 loans. We take two mortgages simultaneously: a first mortgage for 80% of the sales price and a second mortgage for the remaining 20% of the sales price. Our loan policy states that loans with a loan-to-value (LTV) ratio greater than 80% are exception loans. For an 80/20 origination, should we treat both loans as exception loans, or only the second loan?
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Interagency lending guidance strongly suggests that in most cases, the 20% second loans should be treated as exception loans. The Interagency Guidelines for Real Estate Lending require banks to “[e]stablish review and approval procedures for exception loans, including loans with loan-to-value percentages in excess of supervisory limits.” For residential mortgage loans, there is no supervisory…
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If you have a borrower that has no ownership in the property that is being pledged as the collateral for the borrower’s loan, is it best to have that borrower also sign the mortgage along with the person or business pledging the collateral even though the borrower has no ownership in the property?
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We are not aware of any statute or regulation requiring the borrower to sign the mortgage in this situation. Nonetheless, some lenders will require the borrower to sign the mortgage in similar situations in order to commit the borrower to certain representations, warranties and covenants that may appear in the mortgage or deed of trust…
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Which disclosures are required for a loan to purchase a commercial rental property that has one business building and one house on it? The borrower will rent the house out to a third party.
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Since this is a commercial loan, the disclosure requirements under both Regulation Z and Regulation X will not apply provided that the loan is “primarily for a business, commercial or agricultural purpose.” However, even in the context of a commercial loan, as in this case, to the extent that the mortgage covering the dwelling is…
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It is our understanding that the maturity date of the note has to be listed on the mortgage when we record it. For a balloon loan where monthly payments are based on a 20-year amortization schedule, but the note matures after five years, what should we list as the maturity date when recording the mortgage? If we later decide to extend the maturity date, do we have to re-record the mortgage? Or can we file an extension of our recording? We do not want to lose our priority simply by extending the maturity date.
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The note’s maturity date in this case is five years, not the twenty-year amortization period. However, it is not necessary to include the maturity date on the mortgage. Regardless of whether you include the maturity date on the mortgage, you can file an extension of your lien recording and preserve your lien priority, provided that…
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A borrower requested two separate loans secured by a first and a second mortgage to finance the purchase of his primary residence. Are both loans considered a “Purchase” transaction for the purpose of the Loan Estimate? Or would the second mortgage be considered a “Home Equity Loan”?
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In our view, you should list “purchase” as the purpose of both loans. Under Regulation Z’s Loan Estimate provisions, the term “home equity loan” should be used to describe only those loans that are not for a purchase, refinance or construction of the real estate securing the loan. In this case, both mortgages are for…
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Does Illinois law identify which financial institution employees can sign a Release of Mortgage?
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No, Illinois law does not specify which financial institution employees may sign a Release of Mortgage. However, we would recommend that an officer of your bank sign the release, since officers generally have the authority to sign documents on behalf of the bank, including a Release of Mortgage. We also note that, under the Mortgage…