Topic: Mortgage Loans
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We hold a first lien on a commercial property in a flood zone, but we failed to require flood insurance because we did not know the property was in a flood zone. As far as we know, the second lien holder (the Small Business Administration) also did not require flood insurance for its loan. Now that we are making a third loan on the property, do we have to cover the second lien lender’s portion of the insurance, too? In other words, what are our responsibilities regarding flood insurance on the second lien loan? How do we calculate the amount of coverage required, and what is the highest deductible permitted under the flood insurance rules?
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You are required to ensure that the property has the minimum amount of required flood insurance, regardless of whether a previous lender failed to require or obtain such a policy. The Interagency Guidance on flood insurance states that when a lender makes a second (or third) mortgage secured by a building in a flood zone,…
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We provide the escrow disclosure required by the Mortgage Escrow Account Act for all mortgage closings, whether purchases or refinances. Are we required to provide this for refinances, or only for purchase transactions?
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We believe that the escrow disclosure required by the Mortgage Escrow Account Act is required only for purchase transactions. The Act’s requirements, including the escrow disclosure requirement, apply only to mortgage lenders that are extending a loan or servicing a loan “for the purpose of enabling another to purchase a residence” (specifically, a “single-family owner…
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Can you clarify whether we can pay referral fees for mortgages to our own employees? Are there any other requirements or caps?
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Yes, you may pay mortgage referral fees to bank employees who refer mortgage business to your bank. RESPA prohibits most referral fees related to mortgages, but that prohibition does not apply when compensating bank employees for mortgage referrals. Any referral fees paid to bank employees who are loan originators for referrals also must comply with…
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If we modify a mortgage loan with escrow, is the 65% Illinois Mortgage Escrow Account Act notice requirement calculated based on the original loan amount, or the loan amount as of the modification?
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The 65% trigger is based on the original loan amount. The Illinois Mortgage Escrow Account Act requires lenders to notify borrowers when the “mortgage is reduced to 65% of its original amount by payments of the borrower . . . .” The fact that the loan has been modified will not change the trigger. For…
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In Indiana (where our main office and most branches are located), a lender may contract for a minimum loan finance charge of up to $30 on certain closed-end consumer loans (other than mortgage transactions). However, the lender cannot impose that charge if it also charges a loan origination fee. Does Illinois have similar restrictions?
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No, Illinois does not impose the same restrictions. The Illinois Banking Act states that “[n]otwithstanding the provisions of any other law in connection with extensions of credit” banks may charge any fees, “subject only to the provisions of [subsection 4(1)] of the Interest Act,” provided that the bank sets fees based on its “prudent business…
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We are taking a mortgage on farm land that includes grain bins. The property is in a flood zone. Is flood insurance required on the bins?
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Yes, the flood insurance requirement applies to grain bins, unless the security agreement for the loan was structured to exclude the grain bins from the property securing the loan. Any loan secured by a “building” is considered a designated loan that is subject to the flood insurance requirements. The Interagency Questions and Answers Regarding Flood…
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Are we required to send out a payment receipts to customers whose loan payments are automatically deducted from their checking or savings account at another financial institution?
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No, we are not aware of any requirement to issue a payment receipt confirmation when you receive an automatic loan payment from a customer’s account at another bank, unless your loan agreement includes such a requirement. For resources related to our guidance, please see: Regulation Z, 12 CFR 1026.41(a) – (d) (Timing, form and content requirements for…
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We have an application for a home equity line of credit (HELOC) from a longstanding customer, whose debt-to-income (DTI) ratio exceeds 40%. We are willing to make the loan, but we want the customer to use the loan proceeds to pay off and close a credit card account to improve his DTI ratio after closing. Can we add a provision to the loan agreement requiring the customer to pay off and close the credit card account? Also, would this answer apply to other types of consumer-purpose loans?
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Yes, we believe you may add a provision to your HELOC agreement that requires the customer to pay off and close a credit card account (we do recommend consulting bank counsel when drafting this change to your agreement). The same answer would apply equally to other types of consumer-purpose loans (including our recommendation to consult…
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Does the predatory lending database program in Cook County apply to a loan secured by investment real estate? What about the Illinois High Risk Home Loan Act (HRHLA)? Also, does the predatory lending database points and fees test include more charges than the HRHLA? The predatory lending database program test for points and fees sets a threshold at 5%; does that rise to 8% for smaller loans, as under the HRHLA?
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No, the predatory lending database program would not apply to a mortgage secured by investment property. The Cook County predatory lending database program was established under the Residential Real Property Disclosure Act, which applies only to mortgages secured by residential real properties, defined as one-to-four family properties, units in residential cooperatives and condominium units. It…
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When a borrower pays off a note, do we send him the original note stamped “paid” or should we keep the original note and send the borrower a copy?
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In our view, it does not matter whether you send the original or a copy of the note, provided both are clearly marked as having been satisfied (for example, as in “paid”). We are not aware of any law or regulation that requires lenders to retain or relinquish the original note after a loan is…