Chapter 16 Review Questions

BUS – 101

Chapter 16 Homework

1. What is a subprime mortgage? How does it differ from a standard fixed-rate mortgage? What

is a home equity loan?

A subprime mortgage is a loan made to a borrower who does not qualify for a standard

mortgage. Often, such borrowers have poor credit scores or a high current debt-to-income

ratio (the total amount owed as a percentage of current after-tax income). Subprime

mortgages are riskier than traditional mortgages and have a higher default rate. Consequently,

lenders charge a higher interest rate for subprime loans. Subprime mortgages can be fixed-

rate, adjustable-rate, or IO loans. A home equity loan is a loan for which the borrower’s home

equity (the portion of the home’s value that is paid off) is the collateral.

(Page 472)

2. When is a private mortgage insurance required? Which party does it protect?

A creditor may require private mortgage insurance if a mortgagor does not make a down

payment of at least 20 percent of the purchase price for residential real property. The creditor

is protected if the borrower defaults because in that event the insurer reimburses the creditor

for a portion of the loan.

(Pages 473)

3. Does the Truth-in-Lending Act (TILA) apply to all mortgages? How do the TILA provisions

protect borrowers and curb abusive practices by mortgage lenders?

The TILA applies only to residential loans. To protect borrowers and curb abusive practices

by mortgage lenders, the TILA requires lenders to disclose the terms of a loan in clear, readily

understandable language so that borrowers can make rational choices. The major terms that

must be disclosed under the TILA include the loan principal, the interest rate at which the

loan is made, the annual percentage rate (APR), and all fees and costs associated with the

loan. The TILA requires that these disclosures be...