Glossary of Financial Terms
A-Credit: Borrowers that have the "best" credit fall under this category. High credit scores, low debt-to-income ratios, and high down payments all equate to an A-Credit applicant. These borrowers potentially receive the best loan rates – if they comparison shop for APRs!
Annual Percentage Rate (APR): The APR is the cost of credit expressed as a yearly rate. Determining the APRs from two or more lenders allows consumers to effectively comparison-shop for credit. APR disclosures to consumers are required under federal Truth in Lending statutes and “Regulation Z.”.
Balloon Payment: A balloon payment is a large, final payment due at the end (last payment) of a loan’s term.
Bi-Weekly Mortgage: A bi-weekly mortgage loan requires payments every 14 days. Example: If a borrower's monthly mortgage payment was $1,000, in a bi-weekly format, he or she would pay $500 every two weeks (the equivalent of 26 half-payments or 13 full payments each year.) Because of this, bi-weekly mortgages amortize or "pay off" well before their loan's full term. A 30 year fixed rate bi -weekly mortgage pays off in full in just under 24 years! Consumers should only consider this type of mortgage if they have the financial capacity to fund that extra (13th) full payment each year, and should also determine whether they will pay extra fees for this “service”.
Cash-Out: When refinancing their mortgages, consumers can receive “cash” at closing. In order for borrowers to qualify for this option, they must have equity, meaning their home and land is worth more than the total mortgage amount against their property. While a “cash out” refinance is an attractive option because it puts funds in the borrower's pocket, it also increases the amount borrowed and therefore, the monthly payments.
Charge Card: A charge card is a plastic card with a magnetic stripe that requires payment in full each billing cycle. Like a credit card, funds in the form of a line of credit are provided by the card issuer.
Collateral: Collateral is property the borrower pledges to the creditor in case of loan default (repossession, foreclosure).
Cosigner: A cosigner is a second individual (not necessarily a relative), who signs/guarantees a loan contract and assumes equal responsibility, with the primary borrower, for loan repayment.
Credit Life and Disability Insurance: Insurance offered to loan applicants that pays the monthly payments on their debt if they become disabled, or pays off the balance of their debt if they die before completing the payments. Maine lenders cannot require this coverage as a condition of granting a loan request.
Debit Card: A debit card is a plastic card, which looks similar to a credit card, that consumers may use to make purchases, withdrawals, or other types of electronic fund transfers. Funds are immediately drawn from the consumer’s checking account.
Debt Consolidation Loan: Consumers who are faced with multiple debts frequently seek the assistance of a lender to convert those obligations into one, larger loan. Many consumers who find themselves “swamped” with credit card debt convert multiple high APR cards to a single loan with a lower interest rate. Lenders are increasingly asking potential borrowers to secure these loans with real estate (a first lien "cash-out" refinance or a second mortgage/home equity loan) due to the size of the loan and the risks involved. Consumers who pledge their homes as collateral on consolidation loans face the possibility of losing their homes to foreclosure if they cannot make timely payments.
Debt-to-Income Ratio: Lenders use this ratio to calculate the effect that a new loan payment will have on an applicant's finances. The lender totals the borrower's current monthly debts (mortgage payments, rent, student loan payments, auto loan payments, credit card payments, etc.), adds the potential new loan payment, and divides this amount by the borrower's net or gross monthly income. Items such as utility bills and groceries are not considered monthly debts. When a new payment replaces an old payment, the old payment is not included in the monthly debt calculation. For example, if a consumer currently has a $400 monthly payment on a vehicle, and then trades it in, and the monthly payment for the new car or truck is $500, the lender will only include the new payment amount in the debt-to-income calculation.
Deficiency Balance: When the proceeds of the sale of collateral after a default in a secured loan scenario is not enough to pay off the loan’s principal, a deficiency balance results. The borrower generally remains liable to repay this outstanding dollar amount.
Direct Loan: A loan in which money is loaned directly to a consumer, who uses the funds to purchase an item. (Compare to “indirect loan”.)
Divorce Decree: A divorce decree is a court’s legal ruling that assigns obligations for the payments of various debts. Any debts held jointly may be primarily assigned by the decree to one party. However, despite the judge’s order, both parties remain legally liable to the creditor on joint debts due to the contractual language contained in the signed (original) loan documents.
Finance Charge: The finance charge is the total dollar amount that the interest associated with a loan will cost the borrower.
Identity Theft (Credit): Identity theft is the unauthorized taking of personal and/or financial information that identifies the consumer, which is used to apply for credit in the victim’s name. For instance, a thief may obtain your name and Social Security number, and then open loan accounts in your name. Consumers who are victims of identity theft have several protections available, including placing a “fraud alert” on their credit reports, or even imposing a “file freeze” preventing any creditor from viewing their credit report. The Federal Trade Commission (FTC) offers an “Identity Theft Hotline” (1-877-438-4338) for consumers to report I.D. theft, and our office has information posted on www.Credit.Maine.gov.
Indirect Loan: A consumer signs a “credit sale” contract, and the contract is then sold (assigned) to a finance company.
Installment (Closed-End) Loan: This type of loan features regular payments (usually monthly), and an established term/end date. Auto loans, personal loans and first mortgages are good examples of closed-end installment loans.
Loan Acceleration Clause: When is a 60-month car loan due in full prior to the due date? When the borrower is severely late making monthly payments! Lenders have the contractual right to accelerate, or move up the date when a loan must be paid in full, if you default on payments. If the delinquent borrower does not “cure” or eliminate a past due amount following receipt of a right-to-cure notice, the lender generally has the right to demand payment of the loan in full (i.e., accelerate and demand the total amount due).
Loan Amortization: This term refers to the amount of time it takes to pay off a loan. For example, assuming regular payments are made, a 30-year mortgage fully amortizes in 360 months.
Loan (Mortgage) Brokers: These individuals/companies serve as liaisons between loan applicants and lenders. Loan (Mortgage) Brokers find financing for applicants through their established lender contacts, and receive fees from the borrower/and or lender for arranging credit. In Maine, the majority of loan brokers are in the residential mortgage field. The Bureau of Consumer Credit Protection licenses and regulates loan brokers in Maine.
Loan Origination Fees: Loan origination fees are charges made by the lender or loan broker for processing a loan application/transaction. These fees are often assessed as points or percentages of the loan amount. (See “Points”)
Loan Term: The loan term is the amount of time that is set for the repayment of an installment loan. The term is usually expressed in months or years. When on-time, full payments are made, the loan's balance should be $0.00 at the end of the term. Auto loan terms range from 12-84 months, construction loans for 6-18 months, and mortgage loans 10-30 years.
Mortgage: A mortgage is a document signed by a borrower when a home loan is closed that gives the lender a right to take possession of the property (by foreclosing) if the borrower becomes severely delinquent and fails to pay off the loan.
Mortgage Company (Supervised Lender): A Supervised Lender is any company authorized to make or take assignments of supervised loans, either under a license issued by the Bureau of Consumer Credit Protection, or as a bank or credit union. Our agency regulates mortgage companies, and they must be licensed with this office. The Maine Bureau of Financial Institutions regulates supervised financial organizations (banks, credit unions, savings and loans and savings banks).
Mortgage Deed: This document shows ownership transfers for a property.
Mortgage Escrow Account: Many lenders require their mortgage borrowers to make monthly payments to this special account for the payment of property taxes and homeowner's insurance. When the borrower makes his/her mortgage payments, a predetermined portion is held in reserve for the payment of taxes and insurance. The lender/servicer is required to pay taxes and insurance from this account to satisfy those obligations, and to pay a small amount of interest on the amounts held in escrow.
Mortgage Grace Period: Most lenders allow their borrowers to make payments up to two weeks after their due date before imposing a late fee. Consumers are advised to read their contracts to learn of any grace periods, and should understand that while their lender may have granted them this period, the interest on the mortgage continues to accrue each day (per diem interest) that the loan carries a principal balance.
Mortgage Rate Locks: Some lenders allow mortgage loan applicants to pay a fee to “lock in” or freeze a specific mortgage interest rate several weeks prior to closing. In a period of rising interest rates, rate locks can be a valuable option. However, rate locks may be a waste of money if rates drop prior to the mortgage closing.
Mortgage Refinance: This occurs when an existing mortgage borrower “exchanges” their current mortgage for another one. Some borrowers refinance for cash out for lower rates or for a lower monthly payment. Other borrowers refinance for a lower rate, keep essentially the same monthly payments, and elect to shorten their loan term. Smart consumers weigh the costs involved (application and other processing/closing fees) against the savings the lower rate will produce before committing to a refinance.
Points: A loan processing fee that represents a percentage (1 point = 1%, 2 points = 2%, etc.) of the loan proceeds. Two points assessed on a $100,000 mortgage would equal $2,000. Points are generally associated with residential mortgage loans, and because they are a form of interest, lenders must include them in the APR.
Predatory Lending: While there are many definitions for predatory lending, predatory lenders are basically lenders who take advantage of borrowers with less than favorable credit. Predatory loans are characterized by high rates and high fees. Some predatory lenders inflate the income/appraisal figures in order to ensure an applicant’s approval (this can be characterized as mortgage fraud).
Principal Balance: The loan’s current unpaid balance.
Principal & Interest: Most loan payments are distributed between two categories: principal and interest. When borrowers sign closing documents, they agree to pay back the amount borrowed at an established rate of interest. When payment is received, interest is paid first, and the remainder of the funds is applied to the loan's principal, lessening the amount owed.
Property Appraisal: Mortgage lenders require that a third party establish the value of a property prior to making a loan decision. Appraisers must follow professional standards and procedures in arriving at home values. Appraisers in Maine are subject to oversight (licensing and complaint investigations) by the Board of Real Estate Appraisers (1-207-624-8603). Please direct your appraisal/appraiser questions or complaints to this Board.
Rescission: The cancellation, or “tearing-up,” of a contract. Some consumer loans (home equity loans in particular) feature a 3-day right of rescission during which time the borrower can cancel the loan without penalty. Auto credit sales are not subject to rescission, despite a common belief that such a protection exists.
Revolving (Open-End) Loan: These types of loans feature a line of credit that the borrower draws down, and require minimum payments each month. Unlike installment loans, revolving loans have no fixed term/end date. Credit cards and home equity lines of credit (HELOCs) are two good examples of revolving, open-end loans.
Secondary Mortgage Market: Many lenders provide the funds to close a mortgage loan, and then sell the closed loan to a secondary source called the “secondary mortgage market.” Mortgages are turned into investments (securitized) and traded. Lenders that sell their mortgages to the secondary market receive a percentage of their funds back (while keeping the fee income charged to the borrower during the application process), and use those funds to make additional loans.
Security Interest: The creditor’s right to take property or a portion of property offered as security.
Sub-Prime Loans/Lending: Consumers who have poor credit histories or high debt-to-income ratios oftentimes pay above-market interest rates for loans. For more information about loan pricing and risk based lending, consult Chapter One of this booklet.
Telemarketing Fraud: Telemarketing fraud often consists of unsolicited telephone calls from criminals who try to trick consumers into disclosing personal information such as their bank account, credit card, and Social Security numbers. Many fraudulent telemarketing calls (and sometimes newspaper advertisements) are placed by Canadian scammers. These “offers” contain promises of: unclaimed lottery winnings, low-rate loans and other non-existent items, in exchange for the wiring of funds (from $100 to several thousand dollars) to their location. PhoneBusters Canada (1-888-495-8501, www.Phonebusters.com) is a national anti-fraud call center, jointly operated by the Royal Canadian Mounted Police and the Ontario Provincial Police that is charged with combating illegal telemarketing fraud originating from Canada.
Title Search: A title search is the process of examining public records to ensure that the seller is the recognized owner of the real estate and that there are no unpaid liens or other claims against the property.
Unlicensed Companies: If you are a Maine consumer and are uneasy about an initial contact with a mortgage company, non-bank lender, credit repair company, debt consolidator, loan/mortgage broker, Internet lender, debt collector, credit counselor, rent-to-own company, or payday lender, please do not hesitate to contact the Maine Bureau of Consumer Credit Protection (1-800-332-8529), or view our website’s “roster” link at www.Credit.Maine.gov, to verify that the company is licensed.