mortgage

Financial reform and your mortgage

What lenders have to do
What lenders have to do

Under some circumstances, the legislation mandates lenders say or do certain things. One of these requirements concerns deficiency judgments.

In some states, the lender can sue a borrower after foreclosure to recover the difference between what the borrower owed and the price for which the bank sold the house. The outcome of this lawsuit is called a deficiency judgment, and a state that allows deficiency judgments is called a recourse state.

At least three states -- California, Montana and North Carolina -- are a mix of recourse and nonrecourse. In these states, the lender can't seek a deficiency judgment on the loan the borrower got to buy the house. But if the borrower refinanced the original loan, the lender can seek a deficiency judgment.

The act requires lenders in those states to warn borrowers applying to refi that they will give up protection against deficiency judgments if they refinance.

Another section of the legislation requires mortgage servicers to warn ARM borrowers about rate resets. Six months before the ARM rate resets for the first time, the lender must deliver an estimate of how much the monthly payment will be.

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