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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...