Deck 12: The Loan and the Consumer

Question 1

Why is a right of rescission important?

Answer 1

The "Right of Rescission" was created to protect consumers from unscrupulous lenders, and allow the borrowers a period of time to change their minds. The right of rescission exists only on home-equity loans, home-equity lines of credit and refinances of existing mortgages in which the refinancing is done with a lender other than the current lender. The right of rescission does not exist on a mortgage for the purchase of a home, a refinance transaction with the existing lender or a mortgage on a second home or on an investment property.

Question 2

Why is the monthly income of a ban applicant more important to a lender than the sheer size of the applicant's assets?

Answer 2

The lender is primarily interested in the ability of a borrower to continuously pay monthly payments over the term of the loan. Monthly net income is considered most important and that continuous stream of funds is available to make the mortgage payments.
An applicant's current assets are available to make the down payment and any improvements but these funds are available only at a specific time and not necessarily available for making long term mortgage payments.

Question 3

What is the basic purpose of the Truth-in-Lending Act?

Answer 3

The Truth in Lending Act of 1968 requires important disclosures concerning the cost of consumer credit. It requires computation of the Annual Percentage Rate (APR) for consumer loans, including home mortgages loans. It also requires disclosures of other aspects of a home mortgage loan such as:
• Does the loan contain a "demand feature"?
• Can the loan be assumed?
• Is the loan a variable rate loan?
• Is there a prepayment penalty?
• What is the amount financed?
• What are the finance charges?
• What are the total payments?
It also allows the borrower to rescind certain types of loans for three days following consummation of the loan. This applies if the loan is not for purchasing or construction a home, not for a business purposes, and is not to refinance through the same lender.

Question 4

Will the annual percentage rate (APR) and interest rate reflected in the note be the same?

Question 5

How does the Fair Credit Reporting Act help a borrower?