MLO Glossary

Question 1

Acceleration clause

Answer 1

A portion of a lending agreement that forces the borrower to repay the entire loan upon the first instance of borrower default.

Question 2

Adjustable-rate mortgage (ARM)

Answer 2

A type of mortgage instrument in which the interest rate periodically adjusts up or down according to a specific index and pre-determined margin. ARM transactions require the creditor to provide borrowers with a special ARM disclosure, as well as a CHARM booklet.

Question 3

Adjustment period:

Answer 3

The amount of time during which a new interest rate will be in effect for an adjustable-rate mortgage. New adjustment periods might occur after several months, every year or every few years.

Question 4

Adverse action:

Answer 4

An unfavorable credit decision rendered against a consumer made on the basis of information contained on the credit application. If a lender takes adverse action against an applicant, the lender must notify the applicant in writing. If the adverse action is taken as a result of information contained on the credit report, the notice must also provide the name, address and toll-free phone number of the credit bureau that supplied the information.

Question 5

Affiliated Business Arrangement Disclosure (AfBA)

Answer 5

A document that informs mortgage applicants of any service providers that may be used in the loan transaction that are affiliated with the lender. It must be provided to the borrower no later than the time the referral to the affiliated business is made and is required when there is greater than a 1% common ownership in the affiliated settlement service business. If the lender requires the use of an affiliated provider (such as for a flood certification), then the disclosure must be given at application.

Question 6

Alienation clause

Answer 6

A portion of a lending agreement that prohibits the borrower from transferring title to the mortgaged property without the consent of the lender.

Question 7

AARMR

Answer 7

American Association of Residential Mortgage Regulators -A national association of individuals who are charged with administering and regulating various aspects of residential mortgage lending. It played a major role in the formation of the NMLS-R and in the drafting of the model licensing law.

Question 8

APR

Answer 8

Annual percentage rate (APR): A measurement of the total cost of the credit, expressed as an annual rate. The APR includes specific costs of financing, both those paid at the time of closing and those paid over the term of the loan. It includes all items that are part of the finance charge, such as interest, discount points, mortgage insurance premiums and administrative fees.

Question 9

Assumable:

Answer 9

: A term used to describe a loan in which a new borrower can take over the payments of an existing borrower.

Question 10

Balloon mortgage

Answer 10

A type of fixed-rate mortgage loan with monthly payments based on a 30-year amortization schedule, setting a maturity date for a shorter period of time – usually five, seven, 10 or 15 years. This allows the borrower to make lower monthly payments for that shorter period of time, with a large payment of the full remaining
principal balance and interest due at the maturity date.

Question 11

BSA

Answer 11

Bank Secrecy Act (BSA): A federal law requiring that financial institutions take steps to prevent and report cases of money laundering.

Question 12

Bridge loan:

Answer 12

A short-term balloon loan that is paid back either through the sale of the current property or through a subsequent mortgage loan. It is commonly used when borrowers are buying a new home but still haven’t sold their current residence.

Question 13

Capital

Answer 13

In mortgage lending, the borrower’s ability to make a down payment, pay for closing costs and fund any escrows or reserves required at closing.

Question 14

CRV

Answer 14

Certificate of Reasonable Value (CRV): A document issued by the VA that establishes the value of a property to be secured with a VA-guaranteed loan.

Question 15

Chapter 7 bankruptcy:

Answer 15

A common kind of bankruptcy in which a borrower might need to liquidate assets in order to satisfy creditors.

Question 16

Chapter 13 bankruptcy:

Answer 16

A common kind of bankruptcy in which a borrower might need to enter into a repayment plan with his or her creditors.

Question 17

Compensating factors:

Answer 17

Positive characteristics about a borrower that might help to offset some negative information on the borrower’s application. For example, a high credit score might be a compensating factor for a borrower who has a high debt-to-
income ratio.

Question 18

Conforming loans:

Answer 18

Loans that can be sold to Fannie Mae and Freddie Mac.

Question 19

Contingent liability:

Answer 19

A liability that may be incurred as the result of a future action. A good example of this in a mortgage transaction is the debt that is produced when a person has co-signed for another person’s debt (like a student loan) but the actual payments are being made by the other person (known as the “primary obligor”). Such
liabilities do NOT have to be taken into consideration when calculating the borrower’s debt ratio if the payments have been made on-time for the previous 12-month period by the primaryobligor.

Question 20

Conventional loan:

Answer 20

Any loan that is not insured or guaranteed by the federal government.

Question 21

Debt-to-income ratio:

Answer 21

Monthly principal, interest, taxes and insurance payments plus other debts (such as credit card debt, installment loan payments, alimony and child support payments) divided by the borrower’s gross monthly income. However, the ratio doesn’t include other expenses, such as utility payments, food bills, educational
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expenses (other than student loans), childcare expenses (other than child support payments), medical insurance premiums or entertainment expenses. For most loans, the debt-to- income ratio cannot exceed 36%. It is sometimes known as the “back-end ratio” or the “bottom ratio.”

Question 22

Deed of trust:

Answer 22

An arrangement by which the borrower actually conveys title to the secured property to a third-party trustee for the life of the loan. Upon repayment of the debt, the trustee transfers title back to the borrower.

Question 23

Defeasance clause:

Answer 23

A portion of a lending agreement that requires the lender to execute a release of lien or satisfaction of mortgage document upon full payment of the debt.

Question 24

Discount points:

Answer 24

Amounts charged by a lender to the borrower or seller in order to increase the lender’s effective yield on the loan. One discount point is equal to 1% of the total loan amount. An industry-standard benchmark is that for each discount point paid, the lender increases its yield on the loan by 1/8%. From a borrower’s perspective,
discount points are paid to achieve a lower interest rate; without the payment of the discount points, the interest rate would be higher for the life of the loan.

Question 25

Disparate impact:

Answer 25

A method of identifying discrimination through statistical analysis. Disparate impact claims occur when a seemingly neutral (non-discriminatory) policy is implemented to achieve a neutral result but ends up having a disproportionately negative impact on a protected class.

Question 26

Disparate treatment:

Answer 26

A method of identifying illegal discrimination. Occurs when two people (or groups of people) are treated differently based on membership in a protected class

Question 27

Dodd-Frank Act:

Answer 27

A federal law that addresses several aspects of mortgage lending and other financial regulatory matters. It created the Consumer Financial Protection Bureau (CFPB) and amended many other mortgage-related laws.

Question 28

Easement:

Answer 28

Formal right to traverse or use real property without ownership or possession. Often granted to utility companies so that they may maintain infrastructure located on a property. Recorded with the county in which the property is located, easements will appear on the title report and, in certain limited circumstances, may raise questions from an underwriter or attorney.

Question 29

Equitable right of redemption:

Answer 29

The ability to avoid a foreclosure prior to, or at the time of, a judicial sale of a property.

Question 30

Equity stripping:

Answer 30

A practice whereby the applicant’s equity is taken away by a mortgage lender. Equity stripping can come in many forms, but in all cases, is viewed as predatory lending and must be avoided.

Question 31

Escrow payments:

Answer 31

Funds used by the lender to pay the property tax bill and hazard insurance premiums.

Question 32

FHA loans:

Answer 32

Government-insured loans that are issued by HUD-approved primary lenders. They are for one-to-four-family-unit dwellings and require at least a 3.5% down payment. They also require the payment of mortgage insurance premiums. In general, a maximum housing ratio of 31% and a maximum debt-to-income ratio of 43% are required too.

Question 33

Finance charge:

Answer 33

The total cost of the loan in dollars, including interest, points, mortgage insurance, administrative fees or any other charge paid directly or indirectly by the consumer and imposed directly or indirectly by the lender in connection with making the loan. The finance charge does not include deposits into escrow accounts, appraisal fees or pest inspection fees paid prior to the closing.

Question 34

Financing contingency date

Answer 34

: In real estate transactions, the contractually determined date by which the buyer’s financing must be in place.

Question 35

Floating rate:

Answer 35

: A mortgage interest rate that has not been locked and is being allowed to move (or “float”) with the market. Floating the rate will benefit the borrower if interest rates drop between the time of application and closing and will be a detriment if interest rates increase. The floating rate is ultimately locked in sometime prior to closing.

Question 36

Fully indexed rate:

Answer 36

The amount of interest that is calculated by adding the index to the margin. Unless caps prevent it, the fully indexed rate becomes an ARM’s interest rate at the start of each adjustment period.

Question 37

Gramm-Leach-Bliley Act (GLBA):

Answer 37

A federal law that includes provisions to protect consumers’ personal financial information held by financial institutions. Some of the issues pertaining to GLBA compliance include financial privacy rules, safeguard rules and pretexting rules.

Question 38

High-cost mortgage loan:

Answer 38

A mortgage loan with an annual percentage rate exceeding the Average Prime Offer Rate (APOR) by more than 6.5% for a first-lien transaction or 8.5% for a second-lien transaction, OR a mortgage loan with total points and fees exceeding 5% of the loan amount. ALL high-cost loans must be compliant with the Home Ownership and Equity Protection Act (HOEPA).

Question 39

HELOC

Answer 39

Home equity line of credit (HELOC): A revolving mortgage loan that allows the borrower to take advances at his/her discretion up to an approved limit that represents a percentage of the borrower’s equity in a property.

Question 40

HMDA

Answer 40

Home Mortgage Disclosure Act (HMDA): A federal law written as a response to public concerns that lenders were redlining. Requires creditors to track demographic data on applications and lending activity and report that data to the federal government on an annual basis.

Question 41

HOEPA

Answer 41

Home Ownership and Equity Protection Act (HOEPA): A federal law that sets rules for high-cost loans. A loan that is subject to HOEPA cannot feature a balloon payment, negative amortization or a prepayment penalty and cannot be refinanced within one year by the original creditor (other creditors may refinance the loan) unless doing so is “clearly in the best interests of the borrower.”

Question 42

HPA

Answer 42

Homeowners Protection Act (HPA): A federal law requiring that private mortgage insurance be automatically cancelled when the loan-to value ratio (LTV) on an owner occupied single-family residence reaches 78% or less of the original value of the property. Borrowers have the ability to request cancellation of mortgage insurance when loan-to-value reaches 80% of the appraised value.

Question 43

Housing ratio:

Answer 43

The sum of monthly principal, interest, taxes and insurance divided by the borrower’s gross monthly income. For some loans, such as those sold to Freddie Mac, the housing ratio cannot exceed 28% without compensating factors. The ratio is sometimes called the “front-end ratio” or the “top ratio.”

Question 44

LTV

Answer 44

The loan amount divided by the lesser of the purchase pric or appraised value of the property. The higher the loan-to-value ratio on a given loan, the less investment from the applicant in the form of a down payment is required.

Question 45

Monthly MIP:

Answer 45

The monthly charge for FHA mortgage insurance. It is calculated by multiplying the base loan amount by a factor, then dividing by 12. The borrower pays the MIP as part of the monthly mortgage payment, along with principal, interest, taxes and insurance (PITI).

Question 46

Per-diem interest:

Answer 46

The amount of daily interest payable under a loan. Per-diem interest is determined by first multiplying the principal amount of the loan by the interest rate to determine the annual amount of interest payable under the loan. Next, that annual amount is divided by 360 days to determine the per-diem interest amount. Finally, the per-diem interest amount is multiplied by the number of days remaining in the month of closing, including the date of closing.

Question 47

PITI

Answer 47

PITI: The monthly sum of principal, interest, taxes and insurance owed by the borrower. For some loans, such as those sold to Freddie Mac, the monthly PITI cannot exceed 28% of the borrower’s gross monthly income.

Question 48

PMI

Answer 48

Private mortgage insurance (PMI): Insurance that protects the lender against losses that result from default by the borrower. It is required when the loan-to-value ratio is greater than 80% and must be cancelled when the loan-to-value ratio is equal to or less than 78%. Other kinds of mortgage insurance (not PMI) are used for FHA and VA loans.

Question 49

QM

Answer 49

One type of mortgage loan defined in the Dodd-Frank Act. If a loan is a qualified mortgage, the lender is presumed to have complied with the Dodd Frank’s ability-to-repay requirements.

Question 50

Service release premium:

Answer 50

An amount paid by an investor to a mortgage banker in exchange for the right to service (collect payments on) the loan after closing

Question 51

Servicing Transfer Disclosure:

Answer 51

A document informing the borrower that servicing of a loan has been transferred to another entity. It must be provided to the borrower no later than 15 days before servicing rights are transferred to a new institution.

Question 52

Steering:

Answer 52

Directing a borrower to a given loan or loan product to increase compensation when that loan is not in the consumer’s interest. This is prohibited by the Dodd-Frank Act

Question 53

Subprime loan:

Answer 53

A loan in which the borrower represents too high of a risk for it to be sold to Fannie Mae or Freddie Mac.

Question 54

Trigger terms:

Answer 54

Items in an advertisement that automatically require the disclosure of other items in the same advertisement. Trigger terms are the amount or percentage of down payment, the number of payments or period of repayment, the amount of any payment and the amount of any finance charge.

Question 55

1003

Answer 55

Uniform Residential Loan Application (URLA): The common application form for residential mortgage loans. It is also known as the “1003.