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. 

Selected Federal and Maine Consumer Credit Protection Laws and Regulations



SELECTED FEDERAL REGULATIONS


- Regulation B: Equal Credit Opportunity Act (ECOA) -
Lenders are prohibited from discriminating against borrowers based on age, sex, marital status, religion, race, color, national origin, or receipt of public assistance. Regulation B also prohibits discrimination if consumers make a good faith exercise of any of their rights under any federal consumer credit laws. Regulation B additionally requires that a lender provide an applicant with a written denial notice (adverse action) within 30 days of their loan application date. 

- Federal Reserve Board Regulation M: Truth in Leasing Act -
“The Truth in Leasing Act” governs consumer lease transactions such as auto leases. For any consumer leases of $25,000 or less, and for leases longer than four months, the consumer must receive the following disclosure:
•    The amount ($) due at lease signing
•    The monthly payment amount
•    Other charges such as: early termination fees, charges for excessive vehicle wear/mileage, reconditioning charges, and purchase option at the end of the lease

As is the case with renting, consumers who lease a vehicle don't actually own the car or truck in question. Unlike renting, the consumer (called the lessee) must insure the vehicle during the entire term of the lease.  Auto leasing is not for everyone. Some consumers who put relatively few (10,000/year or less) miles on their vehicles could be potential lease customers, oftentimes electing to swap their vehicle and lease another brand new car or truck at the end of their 2-3 year lease term. Our agency has also heard multiple stories from lessees who have paid substantial penalties for exceeding the maximum mileage allotments allowed in their lease agreement. 

Ask the lessor questions before committing to a lease, and get promises in writing. Attempt to negotiate (down) the initial capitalized cost of the vehicle in question. Remember, the lower the price, the lower your monthly payments!

- Regulation Z: The Truth in Lending Act -
Shoppers for consumer credit are provided with a "measuring stick" to compare loan rates/fees from one creditor or lender to another: the Annual Percentage Rate (APR).  This important provision of REGULATION Z allows consumers to shop for credit by simply comparing APRs from one lender to another. For mortgage borrowers, the APR must include certain prepaid finance charges like points and other fees which are added to the percentage. For example, with a mortgage loan, the note rate could be 6.50% and the APR 6.98%. For other loans (auto, boat, personal, etc.) the note rate and APR are almost always identical (example: auto loan interest rate 9.99%, APR 9.99%).  REG Z also allows some mortgage borrowers to rescind or cancel a transaction (home equity loans/lines of credit most frequently have this protection since consumers are putting their homes "on the line" as collateral). REG Z also requires specific disclosures to the consumer at closing so that costs such as the finance charge, total of loan payments, and monthly payment amount are clearly understood by the consumer before he/she becomes indebted by signing the loan documents. 

•       REMEMBER: take the time to shop for the lowest APR when applying for a credit sale or loan!


SELECTED MAINE LAWS

- Credit Card Restrictions: Title 9-A M.R.S.A §8-303 -
"No seller in any sales transaction may impose a surcharge on a cardholder who elects to use a credit card in lieu of payment by cash, check or similar means."  Essentially, this law prohibits store owners from adding an extra fee to consumers who choose to utilize credit cards when making purchases. Each year, the Bureau of Consumer Credit Protection receives several consumer inquiries alleging the illegal imposition of a surcharge by a Maine merchant. (Note: The law does not prohibit the merchant from offering a discount for cash purchases). 

- Maine Funded Settlement Act: Title 33 M.R.S.A, Chapter 9 - Subchapter 1-A -
This Act governs the funding of mortgage loans at or around their closing date. Lenders must provide funds to the settlement agents at or before the mortgage's closing. In the case of a mortgage loan that has a rescission period, funds must be made available prior to noon on the first business day after the rescission period (3 days after the closing date; Sundays do not count).

This Act was created due to the Bureau of Consumer Credit Protection's experience with of lenders that failed to provide loan proceed checks in a timely manner. Violation of this act can result in a court award of between $250 and $1,000, plus court costs and reasonable attorney's fees. 

- Mortgage Discharge Time Limits: Title 33 M.R.S.A, Chapter 9, §551 -
Within 60 days of a mortgage payoff, lenders must record a valid and complete release of the paid mortgage to establish their former borrower's record of ownership. After the expiration of 60 days, damages for failure to follow this Act can result in penalties of $200/week up to an aggregate amount of $5,000. 

This Act was created in response to consumer complaints fielded by Bureau of Consumer Credit Protection staff from frustrated consumers whose mortgage loans were not discharged in a timely manner. 

-Protection of Social Security Numbers: Title 10 M.R.S.A, Chapter 208-
"Except as otherwise provided in federal or state law, a person, a corporation or other entity may not deny goods or services to an individual because the individual refuses to provide a Social Security number." However, the law contains several exceptions, including lenders, landlords, insurance companies, healthcare providers, and employers conducting background checks, who have the right in certain situations to request the Social Security number from an individual. 

- Budget Planning Companies: Title 17 M.R.S.A, Chapter 29 -
&
- Debt Management Services: Title 32 M.R.S.A, Chapter 8-A -
Any company that makes contracts with debtors to accept and then distribute funds to a debtor’s creditors must be licensed as a debt management service provider (credit counselor) with the Bureau of Consumer Credit Protection. Maine lawyers, banks, and supervised lenders such as mortgage companies are exempt from this rule.

Warning: Licensed companies must post a $50,000 bond; and are examined by the Bureau of Consumer Credit Protection on a regular basis. Our agency deals with many consumer complaints that result when Maine citizens enter into contracts with unlicensed debt settlement or credit counseling companies that they have found on the Internet. Be a safe and smart consumer and visit the “Roster” section of the Bureau of Consumer Credit Protection’s website (www.Credit.Maine.Gov) to see if the Debt Management Service Provider (credit counseling company) you are considering is licensed!

- Pawnbroker Act: Title 30-A M.R.S.A, Chapter 183 -
A pawnbroker may not directly or indirectly receive a finance charge of greater than 25% per month on the part of a loan that is $500 or less, nor more than 20% per month on the part of a loan that is more than $500, made on property pawned. Pawnbrokers may contract for and receive a minimum charge of not more than $2.50, notwithstanding the fees in the previous sentence. No additional fees, other than those mentioned above, are allowed. 



Debt Collection, Repossession, Foreclosures, and Bankruptcy


Debt Collection


Although the vast majority of consumers intend to pay their bills in a timely fashion, there comes a time for many individuals when circumstances beyond their control leads to the debt collection process. Collections can either be performed directly by the creditor, or through a third-party debt collection agency (a separate company trained and licensed in the business of collecting debts). Varying rules apply to creditors and debt collectors. The Maine Bureau of Consumer Credit Protection administers the Maine and federal Fair Debt Collection Practices Act (FDCPA), which creates guidelines under which debt collectors may conduct business. This Act helps ensure that Maine consumers are treated fairly, and provides consumers with an avenue for disputing inaccurate debt information.  Our agency also licenses debt collectors.

A debt collector is prohibited from:


•    Calling at unusual hours (before 8:00 a.m. or after 9:00 p.m.), although collectors can call 7 days a week
•    Continuing to call a place of employment after receiving written notification from the debtor that their employer does not permit such contact
•    Making empty threats of legal action (under normal circumstances, a collection agency cannot initiate legal action against a debtor. The most they can do is recommend such action to the creditor).
•    Calling neighbors to discuss the debt (although collectors are allowed to initially contact a neighbor to inquire about a debtor’s whereabouts)
•    Continuing telephone contact after receipt of written notification from the consumer requesting that future telephonic calls cease

What should I do if a collector calls me?

First, determine if you really owe the debt. Within 5 days of the initial contact, the debt collector must send you a letter offering to verify the debt. If you wish to dispute the validity of the debt, write to the collection agency within 30 days, and keep a dated copy of the letter for your records. The collection agency must then halt collection activity until verification is sent to you. If verification is provided, they can resume collection efforts. If the debt is not verified, the collection agency must cease activity. During the time you are disputing the debt, the collector may not disclose any information about the debt to credit reporting agencies without also stating that the debt is disputed.  

How to Deal with Delinquent Payments
   
It is wise for consumers to approach any delinquencies in a positive and upfront manner. Creditors appreciate pro-active consumers who alert them when to expect a late payment. The creditor and the consumer are more likely to engage in constructive dialogue when the consumer honestly and fully explains their difficulties. A possible solution may include a proposal to pay off the debt in full/or in part through a payment plan (settlement agreement). A creditor may be able to offer helpful suggestions concerning repayment. Strive to keep constructive lines of communication open!

Prioritizing Payments
   
Consumers experiencing financial difficulties should allocate their limited resources in the most productive manner. Payments for housing, food, transportation, and medication should take priority over non-essential items (e.g., cable television, eating out, and personal entertainment). Credit card lenders may insist that you make their overdue payments first. However, no consumer should risk losing a home to foreclosure or a car to repossession because payments on unsecured debt are taking priority over housing, transportation and basic living needs.

Repossession


When you finance or lease a vehicle or other item, your creditor (or, in the case of a lease, the lessor), holds certain rights on the item until the last payment is made on the contract. Until that point, creditors have a right of ownership which can trump consumers’ rights of possession, and allows creditors to take back the property in question. The signed contract legally grants creditors the right to use “self-help” to repossess an item when a consumer becomes late (generally more than 60 days late on an installment payment), or defaults on the contract through the cancellation of automobile insurance.


The Rules of Repossession

   
•    Before a repossession company or the creditor can take your car, you must have first defaulted on the loan. This could include falling behind on payments or defaulting under some other provision of the contract [for example, failing to keep the vehicle (collateral) insured].
•    If your default is for missing a payment, repossession should not occur until after the creditor has mailed a Notice of Right to Cure Default. A Right to Cure Notice is effective for 12 months, so if you become delinquent (10 days or more past due) again in the next 12 months, repossession can occur without a new Right to Cure Default notice being sent.
•    This Notice of Right to Cure Notice grants the consumer 14 days to catch up on back payments. The creditor must only prove that this notice was sent, not that it was actually received; thus, if you, the consumer, refuse to sign for any certified or registered mail or don’t keep the creditor updated on your current mailing address, you may never receive the notice. If you receive a “Notice of Right to Cure Default,” don’t ignore it, because this is the only required notice prior to repossession!
•    The repossession agent cannot enter into a dwelling, nor can they “breach the peace” when repossessing your car. If you confront repossession personnel prior to the removal of the collateral, they are supposed to leave your property if you verbally demand they do so. The consumer should make their statement in a tactful, non-threatening manner. If the repossession agent does not respect your requests, then do not provoke a confrontation. Rather, contact our office right away, and we will take steps to investigate and potentially discipline the state-licensed repossession agent.
















One memorable call received at the Bureau of Consumer Credit Protection came from a woman who had her car repossessed, and to her dismay, realized that her wedding ring was left in the vehicle! This distressed consumer was relieved to learn from our agency that she would be able to retrieve her prized possession. However, consumers should be aware that items attached to the vehicle, including stereos, speakers, rims, and roof racks, can be legally retained. However, items such as fuzzy dice . . . and wedding rings . . . which can be removed without making any holes in the vehicle, must be inventoried and then made available to the consumer for pick-up.




Free Booklet
The Maine Bureau of Consumer Credit Protection offers a free booklet entitled, Downeaster Guide to Debt Collection and Repossession.  This guide provides helpful hints and a listing of specific rights you have in a variety of debt collection situations.  To request your free copy, please call our agency at 1-800-332-8529.


Foreclosures

Foreclosures on real estate occur for a whole host of reasons. Foreclosure can be the unpredictable consequence of a loss of employment, a divorce, a job transfer, an inability to work and make payments due to medical circumstances, or the result of excessive spending, and seemingly insurmountable debt. A foreclosure is a legal proceeding in which a secured creditor repossesses a house and land due to the owner’s failure to make timely loan payments. The process of foreclosure allows the lender to recover the amount owed on a defaulted loan by selling or repossessing the property securing the loan. In a foreclosure, borrowers usually lose title of their property and are evicted from their homes.

There are several ways that homeowners can retain title to their properties. Prior to the filing of the foreclosure action, borrowers could reinstate their loan by taking advantage of the right-to-cure period granted by state law, and pay off the defaulted amount. Additionally, a borrower could sell their property to a third party, pay off the loan, and avoid having a foreclosure on their credit history, or a third party could buy the property at the end of the pre-foreclosure period.

If foreclosure is inevitable, a homeowner may decide to permit the lender to take possession of the property through a written agreement (deed in lieu of foreclosure) with that lender.

Our agency cannot represent consumers in court proceedings.  Therefore, since foreclosure is a legal matter, our agency recommends that you obtain an attorney immediately to protect your legal interests.

What Happens in a Maine Foreclosure


Before a foreclosure can begin, a borrower must receive a default notice. The borrower then has 30 days in which to pay the full amount in default, plus fees and interest, before the lender may begin foreclosure proceedings. If this amount is not paid within the allotted time, the lender may begin the foreclosure process by filing the appropriate court documents and serving them on the borrower. If the borrower has a legal defense to the court action, the case can go to trial. If the court rules for the lender, the borrower has ninety days to stop foreclosure proceedings by paying the entire unpaid balance on the loan. The pre-foreclosure period can last six or seven months, and the entire foreclosure process can take up to nine months.

What to Do When Facing Foreclosure

Generally, the only action that will end foreclosure proceedings is a repayment of the debt. If you fall behind in mortgage payments and are facing foreclosure, don’t let yourself feel hopeless, and DON’T ignore the lender's letters or phone calls. Ignoring the problem won't make it go away. Contact your lender as soon as you realize your payments are going to be late, and tell them about your circumstances. A consumer may also seek financial counseling or legal assistance. Financial problems rarely resolve themselves, so don’t delay in calling the lender to discuss payment options. Some mortgage lenders are willing to consider forbearance (delay in payments) or a restructuring of the loan, if the lender believes the consumer will be able to resume making timely payments in the near future.


Bankruptcy

Bankruptcy is the legal process through which individuals with an established inability or impairment to pay their creditors can pay off some or all of their debts under the protection of a bankruptcy court. Bankruptcy allows debtors to have many legal obligations discharged through the liquidation and reorganization of their debt. The primary purposes of bankruptcy are to both relieve the debtor of most debts and to repay creditors in an orderly manner by liquidating the consumer’s non-exempt assets, with the bankruptcy court or a trustee distributing the proceeds to creditors.




TYPES OF BANKRUPTCY


Chapter 7:     Basic Liquidation for Individuals and Businesses
Through Chapter 7 Bankruptcy, a debtor surrenders his or her non-exempt property, and the proceeds from this liquidation of property are distributed to creditors. In exchange, the debtor is legally discharged of most debt (excluding certain debts such as child and spousal support, some taxes, etc.) Chapter 7 relief is available only once in any eight-year period.

Chapter 11:  Rehabilitation or Reorganization
Chapter 11 Bankruptcy is a form of reorganization used primarily by business debtors, but sometimes used by individuals with substantial debts and assets. A Chapter 11 filing allows a company to stay in business while the bankruptcy court supervises the reorganization of the business’s contractual obligations. 

Chapter 13:  Rehabilitation with a Payment Plan for Individuals with a Regular Source of Income
In Chapter 13 Bankruptcy, the debtor retains possession of most assets, but devotes a portion of future income to repaying creditors. The debtor is generally allowed 3 to 5 years for repayment, and the amount of payment and period of repayment are unique to each consumer’s circumstances.




Bankruptcy is governed by the federal law found in Title 11 of the United States Code. The bankruptcy court is a federal court. The District of Maine has two court locations where you may file, depending on your county:
   
Portland                        Bangor
(207) 780-3482                     (207) 945-0348
USBC, District of Maine                USBC, District of Maine
537 Congress Street, 2nd Floor            202 Harlow Street, 3rd Floor
Portland, ME 04101                Bangor, ME 04401

* Since bankruptcy is a legal, rather than a regulatory matter, if at all possible, consumers should hire an attorney to represent their interests in the bankruptcy proceeding.

Buying Land: This Land Is (or May Eventually Be) Your Land


Buying and Financing Land is Not “Dirt Cheap!”



Consumers shouldn’t consider buying a parcel of property (raw land) with no building on it unless they are first willing to “get their hands dirty” and learn the basics of financing a land purchase. Obtaining financing for undeveloped land is not as simple as financing the purchase of a finished home and land because many lenders view land loan transactions as moderate to high risk. Because loan rates are based on risk, land with a building on it is much easier to liquidate than an undeveloped housing lot in a new subdivision. Besides charging higher interest rates for land loans, lenders generally require significant down payments from applicants so that, in the event of a loan default, the borrower’s equity position should allow the lender to sell the land and use the sale proceeds to fully pay off the loan.
Loan terms for the financing of land are generally short (usually 1-5 years in length), in anticipation that the borrower will subsequently obtain a construction loan. Buyers purchasing unimproved, “raw” land, with no plans for improvement, will face the most difficult challenge in securing a loan for their property, since it can be considered a speculative investment.
Few buyers want to pay for unbuildable land. Thus, the future homeowner’s top priorities lie with making sure that he or she will be able to obtain a building permit, and determining that the land will legally, geographically, and geologically support the type of house desired. The buyer should evaluate the land’s soil quality (using a soil test) and its topography, consider how the land is zoned, if the lot has road access, and whether there is ready access to utilities such as water, sewer, electricity, and telephone. These factors could influence not only property value, but also one’s ability to get a loan. A real estate broker can provide invaluable assistance during the land purchasing process.

Land Buying Tips (Restrictive Covenants, Title Searches, etc.)


Homeowners in many housing developments are now subject to restrictive covenants that can govern everything from a home’s size to its color.  Buyers should make certain that they are willing and able to abide by those restrictions. The buyer must also determine the location of the property’s boundary lines. Mortgage surveys are typically required by title companies and lending institutions before a loan will be approved.

Additionally, to ensure that they obtain free and clear title to the property, buyers must obtain a title search of the property before purchasing land. A title search will reveal if there are any liens (mortgages, back taxes, mechanic’s liens, etc.) or other encumbrances on the property that may prevent or delay the land purchase. A title report will also show any easements (recorded legal rights) to the property or portions of the property (for example, a previous owner may have legally given a neighbor shared use of a driveway). Some unwary land purchases are surprised to learn, years after the sale has closed, that a right-of-way to a new housing development runs through or abuts their property! As a protective measure, buyers often elect to purchase title insurance, which offers protection against any undiscovered title problems which may arise after the sale.

Closing Costs, Points, and Assorted Fees


Under the Real Estate Settlement Procedures Act (RESPA), lenders must provide loan applicants with a “Good-Faith Estimate” of their mortgage fees, within three business days of receiving a loan application. The Bureau of Consumer Credit Protection recommends that home buyers receive pre-application quotes from a variety of lenders in order to compare costs. Mortgage loans can feature charges ranging from less than $2,000 to over $10,000, and those fees vary according to the size of the loan, the customer’s credit history, and the lender’s fee structure.

Many lenders charge “points” for originating and/or closing a loan. One point equals 1% of the total amount borrowed:
Amount Borrowed = $100,000                                    1 point = $1,000,                                2 points = $2,000, etc.
* Points can be used to pay down the note rate on a mortgage. For example, some lenders may offer a note rate of 6% by paying 2 points, 5.75% by paying 3 points, etc.





As a general rule, the longer you plan on owning your new home, the better off you are “buying down” a lower interest rate by paying points. On the other hand, if you are only planning to stay in your home for a couple of years, it may be best to forego the “buy down” by paying points, and settling for a slightly higher note rate.


CAUTION! Some lenders/loan brokers only charge points as a means of enhancing their profits through fee income! Homebuyers will also pay a variety of other charges including: title search, credit report, application and appraisal fees. Shop around and compare rates!




A number of mortgages (fixed-rate only) feature prepayment penalties, which are fees assessed by the lender (usually a percentage of the loan amount) if the loan is fully repaid within a certain time period (generally during the loan’s first 1-3 years).  These penalties can be substantial, often in the thousands of dollars. When mortgage comparison-shopping, ask the lender “up-front” if they charge this penalty.  Check again at the closing to make sure the terms haven’t changed. Carefully read and understand all closing documents before signing them! Lenders regulated by our agency and the Maine Bureau of Financial Institutions may not assess prepayment penalties on adjustable rate (ARM) mortgages. One Mainer who didn’t know her mortgage contained such a clause was within several weeks of the expiration of her fixed-rate mortgage’s pre-payment penalty period.  She was legally assessed a penalty fee of several thousands dollars as a result of her ill-timed mortgage refinance.

Second Mortgages and Home Equity Lines of Credit (HELOCs)
It is becoming increasingly common for consumers to utilize the equity that they have accumulated in their homes to pay for college tuition, consolidating credit cards, or making home improvements. A traditional second mortgage provides a one-time lump sum of money (loan proceeds) paid back on an installment basis for 5-10 years. Unlike a traditional second mortgage, a home equity line of credit (HELOC) is a revolving loan without a fixed payment term. HELOCs feature a line of credit with an established credit limit. Some consumers like the borrowing flexibility offered by HELOCs, and also enjoy the feature that interest assessed (finance charge) is generally tax deductible (check with a tax expert). One potential disadvantage of HELOCs is that they are generally a variable interest rate loan, so monthly payments can vary (go up or down) in an unpredictable manner.




Second Mortgage/HELOC Advisory


Be financially prudent when considering a second mortgage loan secured by your “home sweet home.”  The failure to make timely payments on this debt can result in a home foreclosure.  Think twice before you commit to this sizeable new debt.  Borrowers who “close” (sign loan papers) on a second mortgage must be given a “three day right of rescission” to change their mind and cancel the loan contract.



A Few Words on Predatory Mortgage Lending from the Superintendent of the Bureau of Consumer Credit Protection:


Especially in recent years, state regulators have seen many cases of what could be termed "predatory mortgage lending."  Generally speaking, this refers to a situation in which a lender or loan broker takes unfair advantage of a consumer by charging excessive fees, or by convincing the consumer to take out a mortgage that has disadvantageous terms (such as large prepayment penalties or balloon payments), especially when the consumer would qualify for a less-expensive loan.

Maine consumers have complained that they were given one set of loan terms when they applied for a loan, but when it came time to close, the loan had new, unexpected and expensive features. They tell us that they did not learn about expensive loan terms until they reviewed the paperwork months later.  They additionally explain that loan officers misled them by telling them that 1) they would be able to refinance later to get out of expensive loan terms; or 2) they were not subject to prepayment penalties when in fact their loan contained such features.

− William N. Lund, Superintendent


If you would like to learn more about predatory lending and how to avoid it, please visit the Bureau of Consumer Credit Protection’s website at: www.Credit.Maine.gov, or call our office at: 1-800-332-8529.


Reverse Mortgages


Unlike a traditional mortgage in which the borrower makes payments to a lender each month, a reverse mortgage allows homeowners to receive payments from a lending company, thereby drawing equity from their home. Unlike purchase money mortgages, reverse mortgages allow consumers with a substantial amount of equity in their homes to receive regular monthly checks from a lender. Reverse mortgages are primarily utilized by consumers (62 years of age or older) who wish to stay in their homes, but may lack the financial resources to do so. Reverse mortgages can be used to pay property taxes, fund needed home maintenance projects, or to help homeowners maintain a healthy, desirable lifestyle. For more information about reverse mortgages, contact:

•    The Federal Trade Commission at 1-877-FTC-HELP (382-4357)        
      or
•    The US Department of Housing and Urban Development at 1-800-CALL-FHA (2255-342)

Consumers may order free booklets from these agencies, and they must obtain financial counseling prior to obtaining a reverse mortgage. 

Home Sweet Home: Home Mortgages, Second Mortgages,



Home Equity Lines of Credit, and Reverse Mortgages



Maine is a state with high homeownership rates, and like most Americans, Mainers’ homes are often their most important investments. Many consumers begin their lives as homeowners by purchasing so-called “starter homes.” As their incomes increase, they often move to dwellings more suitable to meet their changing needs.
Financing the Purchase
There are a variety of lending sources that consumers can turn to when interested in financing a home purchase.  These include:
•    Banks
•    Savings Banks
•    Mortgage Companies
•    Mortgage Loan Brokers
•    Credit Unions
•    Savings and Loans
•    Private Lenders
•    Family Members
The term of a conventional mortgage generally runs from 20 to 30 years and requires a minimum 20% down payment. Many established consumers who have recently sold a home are able to apply the equity gained through years of homeownership toward the purchase of a new home. Oftentimes, first-time homebuyers do not have the funds necessary to meet this conventional downpayment requirement. Agencies like the Maine State Housing Authority (MSHA), Federal Housing Administration (FHA), the Department of Veteran Affairs (VA), and Rural Development, offer programs that allow less-established applicants to offer down payments that are less than the traditional 20%. Contact these agencies for more information about their programs:


Private Mortgage Insurance
Private Mortgage Insurance (PMI) is an insurance product that lenders require from most homebuyers who obtain loans that are more than 80% of their new home’s value (thus, buyers with less than a 20% down payment are usually required to pay for PMI coverage). PMI protects the lender in the event that the mortgagor (borrower) is not able to repay the loan, and the lender is not able to pay off the loan’s balance after foreclosing and selling the mortgaged property. The borrower must pay this insurance until the loan-to-value ratio is 80% or less. Under the Home Owner’s Protection Act of 1998, homeowners may request cancellation of PMI when their loan in paid down to 80% of the original purchase price or the appraised value when the loan was obtained, whichever is less. A loan-to-value ratio of 77% or less requires an automatic termination of PMI insurance.  This is a federal law. 

Fixed vs. Variable Rate Mortgages: Which Rate is Right?

At the time of the publication of this booklet, mortgage rates (see the top of page 33) remain historically low, and thus, many borrowers are opting for fixed-rate mortgages to “lock in” a low rate for the entire term of the loan. During the early-to mid-1980s, and in other times of high interest rates, a greater proportion of borrowers opted for Adjustable Rate Mortgages (ARMs) that are based on current (market) interest rates. Borrowers typically select ARMs when they believe interest rates have peaked, and will subsequently steadily decline. Other borrowers select ARMs because of low “teaser rates” which, while providing lower initial monthly payments, eventually increase to their “fully indexed” rate and, can cause payment difficulties or even foreclosure for the consumer.

Annual and Lifetime Rate Caps

ARMs set annual and lifetime caps/limitations on the upward and downward movement of mortgage interest rates. Traditionally, annual caps are 2% and lifetime caps are 6%.  An ARM that starts at 9% APR can go no higher than 15%, or lower than 3%.




* The National Average Contract Mortgage Rate is derived from the Federal Housing Finance Board's Monthly Interest Rate Survey (MIRS) and is reported by the FHFB on a monthly basis. This index is the weighted average rate of initial mortgage interest rates paid by home buyers reported by a sample of mortgage lenders for loans closed for the last 5 working days of the month. The weights are determined by the type, size and location of the lender. The rate is based on conventional fixed and adjustable rate mortgages on previously occupied non-farm single-family homes.


Mortgage Chart
Monthly Payment Mortgage

All examples are based on a home selling for $125,000 with the buyer making a $25,000 (20%) down payment.  In each example the borrower finances $100,000 at 7% APR (no points loan). All mortgages in the following two charts begin payments in January of 2010.


Monthly Payment*
Total of Payments Principal and Interest

Pay off Date
15 Year Mortgage
$898
$161,792
Oct. 2025
20 Year Mortgage
$776
$186,072
Oct. 2030
25 Year Mortgage
$706
$212,034
Oct. 2035
30 Year Mortgage
$666
$239,509
Oct. 2040

* The National Average Contract Mortgage Rate is derived from the Federal Housing Finance Board's Monthly Interest Rate Survey (MIRS) and is reported by the FHFB on a monthly basis. This index is the weighted average rate of initial mortgage interest rates paid by home buyers reported by a sample of mortgage lenders for loans closed for the last 5 working days of the month. The weights are determined by the type, size and location of the lender. The rate is based on conventional fixed and adjustable rate mortgages on previously occupied non-farm single-family homes.

Mortgage Chart
Bi-Weekly (Every Two Weeks) Mortgage

Bi-Weekly Payment*
Total of Payments Principal and Interest

Pay off Date
15 Year Mortgage
$449
$152,771
August 2023
12 years 11 months
20 Year Mortgage
$388
$170,977
July 2027
16 years 9 months
25 Year Mortgage
$353
$188,592
February 2031
20 years 2 months
30 Year Mortgage
$333
$205,047
April 2034
23 years 7 months


* All monthly payments are rounded to the nearest dollar. The “total of payments” column is based on actual (non-rounded) monthly payments.

The previous two charts clearly demonstrate how a borrower’s choice of loan term (15-30 years) and repayment options (monthly vs. bi-weekly payments) can impact the amount of money a consumer must remit to a lender in order to pay off their mortgage.  From a high of $239,509 (total of payments) on a traditional 30-year monthly payment mortgage to a low of $152, 771 on a 15-year bi-weekly payment scenario, repayment costs vary greatly on a $100,000 mortgage based on length of term and frequency of payments!



Advice from the Bureau


When shopping for mortgage financing, find a loan term that best fits your ability to repay.  While a shorter term mortgage (15-20 years) may save you thousands of dollars over the life of the loan, make sure your budget will allow you to comfortably make those payments and maintain a suitable lifestyle. Bi-weekly mortgages, which save borrowers a substantial amount of interest paid (finance charges), require the borrower to make 26 one-half (1/2) payments per year – the equivalent of one full extra monthly payment during a 12-month period. 
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