Exam 26: Mortgages Foreclosures After the Recession

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Any loan, including a mortgage, can have a fixed term-a time within which the principal and interest must be entirely paid. Under an adjustable-rate mortgage (ARM), the rate of interest paid by the borrower changes periodically. The initial interest rate is fixed for a certain period. After that, the interest rate may be adjusted at specified times, such as annually. An ARM can be described by its initial fixed period and the adjustment period. Thus, the "twenty-year" mortgage in this problem is a loan with a twenty-year term. It is an ARM, which means that its interest rate will periodically change. It is described as "3/1," which means that the interest rate is fixed for three years and then adjusts annually. The limits on the amount of any increase are stated in the facts.
The Truth-in-Lending Act requires lenders to provide borrowers with clear and accurate disclosures of terms such as finance charges, annual percentage rates of interest, and the borrower's rights. When all required disclosures are made, a borrower's right to rescind is limited to three business days (not including Sunday) after a loan is finalized. If a lender fails to provide a borrower with material disclosures when the loan is secured by the borrower's principal dwelling, the right to rescind the deal extends until three years after the date the loan was finalized. In this problem, the loan falls under TILA, and the lender failed to give the borrower all of the disclosures. Thus, the borrower's right to rescind the loan extends to three years, and the borrower, who decided to cancel within that time frame, can rescind this deal.