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2/28 Loans

See: exploding ARM


Ability to repay

A borrower's ability to make timely loan payments as required, both short-term and long-term. Projected ability to repay is based on factors such as income, existing debt, and the length of the loan period. Legitimate lenders assess the ability of borrowers to repay their loans; predatory lenders often do not. In fact, payday lenders cultivate a base of borrowers who will have difficulty repaying, as these borrowers are easily flipped into new loans.

ACH debit authorization

See: debit authorization

Adjustable rate mortgage (ARM)

A mortgage with an interest rate that can change periodically based on a specified index, such as interest rates published by the U.S. Treasury Department or the Federal Home Loan Bank. ARMs (also called variable rate mortgages) make consumers vulnerable to payment shock as their rate increases, and as a result ARMs generally have a higher rate of delinquency and foreclosure than fixed-rate mortgages.

See also: index, payment shock, foreclosure


The gradual repayment of a mortgage loan by making regular payments over time. To be "fully amortizing," payments must cover both the principal amount and interest due on the loan for the given period. An amortization schedule is an established timetable for making payments.

See also: negative amortization

Annual percentage rate (APR)

The percentage of a loan's principal that would be paid in finance charges if the loan were carried for one year. APR includes both interest costs and fees charged on a loan. When lenders disclose the APR of loans, borrowers can better understand the cost of the credit.

See also: principal, finance charge, interest


See: rent-a-charter


See: annual percentage rate


A method of settling legal disputes outside of court by appointing a third party to act as a judge. Arbitration is often used as an alternative to court hearings or trials.

See also: mandatory arbitration


See: adjustable rate mortgage


When a mortgage is transferred from one party to another (usually because the loan is purchased for investment purposes), the party that assumes ownership of the mortgage, as well as the rights and responsibilities attached to that mortgage, is known as the "assignee." An assignee may receive all or part of a security interest.

See also: assignee liability, security

Assignee liability

A legal term that means that the purchaser of a home loan may be held liable for legal claims against the original lender. Typically, mortgage originators sell mortgage loans in the secondary market after the loan closes. If a predatory lending claim arises, assignee liability ensures that the borrower can pursue legal action. Assignee liability also encourages loan purchasers to conduct thorough due diligence.

See also: assignee, due diligence, secondary market

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Back-to-back transaction

See: renewal

Balloon mortgage

A loan in which the total of monthly installments does not cover the entire loan balance. As a result, the homeowner must refinance the loan or make a large lump-sum payment at the end of the designated period -- typically in three to seven years. Mortgages with balloon payments are associated with high rates of foreclosure.

See also: refinance, foreclosure

Basis points

See: points and fees

Bounce protection

See: overdraft loan


See: mortgage broker

Broker kickbacks

See: yield spread premiums


See: rent-a-charter

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Car title loan

A short term loan secured by a borrower's car title. A typical car title loan has a triple-digit annual interest rate, requires repayment within one month, and is made for much less than the value of the car. Many borrowers who cannot afford to pay off their loans repeatedly extend them for additional fees. In some states, lenders are allowed to keep the surplus from the sale of the car if the borrower defaults on payment.

See also: collateral, short-term credit, triple-digit interest

Carrying charge

See: finance charge

Cash advance

See: payday loan

Check cashing

Service offered by alternative financial institutions to people who do not have access to mainstream banking services. Although the fees can be high (typically 3% of the check value), unlike predatory payday lending, the practice generally does not encourage a cycle of debt.

See also: payday loan


Means used by payday lenders to evade consumer protection laws. Their strategies include disguising a payday loan as another product and, most successfully, renting the charter of out-of-state banks to avoid restrictions on payday lending in the states where they operate.

See also: rent-a-charter


An item of value that a lender can take as compensation if a borrower fails to repay a loan. Borrowers generally are required to secure a loan with personal property as collateral. On mortgage loans, the property serves as collateral. Payday loans are "secured" by a borrower's personal check, which puts considerable pressure on the borrower to avoid default by renewing the loan and paying another high fee.

Cooling-off period

A cooling-off period is purported to give payday borrowers a chance to break their dependence on payday loans by enforcing a period of time during which they cannot take out or renew a loan. But cooling-off periods instituted by payday lenders have been too short to be effective, and when imposed, have forced borrowers to respond to the cash shortfall by taking out a payday loan from another lender.

See also: debt trap

Courtesy overdraft protection

See: overdraft loan

Credit history

A borrower's record of various debts (including credit cards and other consumer debt) and whether payments were timely. Mortgage lenders examine borrowers' credit histories to help determine their loan qualifications and the terms of the loan.

See also: credit score

Credit insurance

Insurance designed to pay off a borrower's mortgage debt if the borrower dies or is otherwise incapable of meeting the loan obligation. When sold in a "single premium" or "lump sum," all premiums are charged in advance and typically added to the loan balance, increasing the overall cost by requiring the borrower to pay interest on the premiums over the life of the loan. Since single-premium credit insurance has fallen into disfavor, lenders have introduced analogous products such as "debt cancellation" contracts.

Credit rating

See: credit score

Credit score

A credit score (sometimes called a FICO score) is a number that rates a borrower's credit record. The score is based on a number of factors, including how well debts have been paid off, current levels of debt, types of credit, and length of credit history. Lenders use credit scores to decide who qualifies for a loan and how much the loan should cost. Scores generally range from 350 to 900; most lenders consider a score over 660 to be very good.

See also: credit history

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Debit authorization

Permission given to an institution to debit an account-holder's checking account for payment. In the context of payday lending, this collection method, which is standard for Internet lending, has allowed lenders to collect repeat fees efficiently, often without the borrower's full awareness.

Debt ratio

Calculations that measure how much debt borrowers carry compared to their income, typically calculated on both a borrower's housing debt and total debt. Lenders calculate these ratios during the loan underwriting process and use the results as one major factor in determining whether a borrower qualifies for a loan. Higher ratios generally indicate a greater risk of default.

Debt trap

Payday loans are designed to trap borrowers in debt by holding the borrower's signed personal check as collateral, and requiring either full payment in a very short time period or a high fee for renewing the loan. Payday borrowers are routinely unable to pay off the loan and so compelled to renew it repeatedly; payday lenders make most of their profits from repeat borrowing. Although payday loans are marketed as short-term emergency relief, only one percent of payday loans go to one-time borrowers. Ninety-one percent of all payday loans are made to borrowers with five or more payday loans per year.

See also: rollover


A loan is in "default" when payments have been made late or otherwise not as agreed.

Deferred check

See: payday loan

Deferred deposit

See: payday loan

Department of Housing and Urban Development (HUD)

Created in 1937, HUD is a cabinet-level government agency charged with facilitating homeownership, affordable housing and community development.


The Truth-in-Lending Act (TILA) requires accurate, uniform disclosure of annual percentage interest rates and other consumer credit loan terms. The Federal Reserve Board has exempted overdraft loans from TILA's disclosure requirements, allowing banks to charge high interest rates for overdraft loans while masking the cost.

See also: Truth in Lending Act (TILA)

Discretionary program

If banks reserve the right not to cover a customer's overdraft, then overdraft protection may be considered a discretionary program. The Federal Reserve Board exempts overdraft loans from TILA disclosure requirements with this justification, but in fact, some banks with so-called discretionary programs actually establish parameters for paying overdrafts without discretion.

See also: Truth in Lending Act (TILA)

Due diligence

The process of assessing financial risks involved in an investment before purchasing or funding that investment. Responsible loan purchasers conduct thorough due diligence to avoid funding mortgages or mortgage investments that include predatory mortgages.

See also: assignee liability

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In mortgage lending, the market value of a home minus the amount owed on the mortgage. In other words, equity is the portion of a home's value that the homeowner owns free of debt. As a simple example, if a homeowner owes $75,000 on a house that could be sold for $100,000, the homeowner has equity of $25,000. Particularly for lower-wealth families, equity is an important source of savings and credit.

Equity stripping

Loan terms on mortgages (usually refinances) designed to maximize the lender's revenues by increasing the borrower's loan balance; this practice reduces the borrower's equity in the home. Equity stripping may occur in various ways, but the most common is charging excessive fees that are financed as part of the new loan.

See also: points and fees, flipping


Funds held by a third party to pay for specific expenses at the appropriate time. For example, lenders often collect escrow funds from borrowers to cover property taxes or insurance.


See: disclosure

Exploding ARM (adjustable rate mortgage)

A common type of "hybrid" ARM in the subprime market that includes both a fixed- and adjustable-interest rate component. A "2/28" hybrid ARM comes with an initial short-term fixed interest rate for two years, followed by rate adjustments, generally in six-month increments for the remainder of the loan's term. Typically the introductory rate is artificially low, giving homeowners a dramatic increase in housing costs after the introductory period expires.


See: rollover

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Fannie Mae

A private company that supports home lending by purchasing loans from participating mortgage lenders and issuing mortgage-backed securities. Based in Washington, D.C., Fannie Mae is the nation's largest mortgage investor. Fannie Mae was originally created by the government in 1938 to purchase government-insured mortgages, and still retains its federal charter as a "government sponsored enterprise" (GSE).

Federal Deposit Insurance Corporation (FDIC)

An independent agency created by Congress in 1933 to maintain financial stability and public confidence in the nation's banking system. The FDIC insures deposits in banks and thrift institutions for up to $100,000. The agency also directly examines and supervises about 5,300 banks and savings banks, more than half of the institutions in the U.S. banking system.

Federal Reserve Board (Fed)

The central bank of the United States. It was created by Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system. Its central agency conducts US monetary policy, and its 12 regional banks support and regulate commercial banks and thrifts.

FICO Score

See: credit score

Finance charge

A finance charge is the fee charged for receiving credit, usually in the form of interest.

See also: interest

Finance company

A company engaged in making loans to inpiduals or businesses. Unlike a bank, it does not receive deposits from the public.


The practice of refinancing a loan without providing a net benefit to the homeowner. Although some borrowers may receive cash as a result of flipped loans, the benefit of this compensation may be outweighed by the costs of losing equity or taking on unaffordable debt.

See also: equity stripping, refinance, rollover


A legal action that removes property from a homeowner, usually because of failure to make payments or seriously delinquent payments. In the context of predatory lending, foreclosure may result when borrowers receive abusive loan terms or when lenders make loans without considering a borrower's ability to repay the loan.

Freddie Mac

Created by Congress in 1970, Freddie Mac is a private company based in Washington, D.C. that facilitates home lending by providing funds to participating mortgage lenders through loan purchase and securitization programs. Although Fannie Mae and Freddie Mac have distinct histories and were formed for slightly different purposes, these government-sponsored enterprises (GSEs) function in a similar manner and both support the same types of lenders in the mortgage market.

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Hazard insurance

Insurance that covers property loss or damage, usually paid for by borrowers and required when obtaining a mortgage.

High-cost loans

Mortgage loans with interest rates and/or points and fees that are significantly above competitively priced loans, as defined by law. Federal and state predatory lending laws do not ban high-cost loans, but instead prohibit certain products or practices when these loans are made. As lawmakers update predatory lending legislation, a key issue is ensuring the definition of "high cost" includes all points and fees without clear loopholes.

See also: points and fees

Home Owners Equity Protection Act (HOEPA)

A 1994 federal law designed to protect consumers by placing certain restrictions on high-cost home equity loans, as defined in the law. While HOEPA provided a good starting point in addressing predatory mortgage lending, today there is widespread agreement that the law's protections are outdated and insufficient.


See: settlement statement

Hybrid ARM

See: exploding ARM

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A published rate often used to establish the interest rate charged on mortgages or to compare investment returns. Examples of commonly used indexes include Treasury bill rates, the prime rate, LIBOR (the London Interbank Offered Rate), and the 11th District cost-of-funds-index (issued by the San Francisco Federal Home Loan Bank).


The fee charged by lenders for extending credit, usually a percentage of the loan amount. Even a small difference in an interest rate can make a big difference in how much a borrower pays over time. Responsible lenders adjust interest rates according to their level of risk in a loan.

Interest-Only Mortgage

For a specified number of years (often three or five years), the borrower is allowed to pay only interest due on the loan while deferring any payment of the principal loan amount. After the interest-only period, payments include both principal and interest-possibly resulting in payment shock, and leaving the borrower with no home equity after several years of payments. The interest rate may be fixed or adjustable during both periods.

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See: yield spread premium

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Loan limit

The cap on the principal amount of a loan is generally set according to a borrower's ability to repay. But in payday lending, the loan limit has been offered by the industry as an empty concession. Loan limits are meaningless when a loan can be flipped repeatedly and borrowers can get loans from multiple lenders.

See also: ability to repay, rollover

Loan term

The loan term is the length of time before the loan is due to be repaid in full. Most mortgage loans have 15 or 30-year terms. Many predatory consumer loans (payday loans, car title loans, refund anticipation loans) have very short loan terms, which increase the APR earned by the lender and/or pressure consumers into extending their loans at additional fees.

See also: short-term credit

Loan-to-value ratio

The loan amount pided by the appraised value or sales price of a property, expressed as a percentage. When homebuyers borrow a high percentage of a property's value, they initially have little or no equity to cushion them against financial hardships.

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Mandatory arbitration

A clause in a loan contract that requires the borrower to use arbitration to resolve any legal disputes that arise from the loan. Mandatory arbitration typically means borrowers lose their right to pursue legal actions, including any appeals, in a court of law. Evidence indicates that arbitration is often costly for borrowers and may reduce their chances of receiving a fair outcome. Borrowers often are unaware that a mandatory arbitration agreement has been included in their home documents.

Minimum loan term

See: loan term

Monoline lender

A monoline lender offers only one type of loan product. Most of the largest payday lending companies limit their services to this one highly profitable loan.

Mortgage broker

A person or company in the business of finding mortgage loans for homebuyers or refinancers. Brokers receive compensation directly from borrowers, frequently a percentage of the total loan amount plus other fees, and do not have a legal obligation to find the best loan available. Brokers also may be paid by the lender/investor based on the profitability of the mortgage loan. Mortgage brokers now originate the majority (by some estimates, two-thirds) of subprime mortgage loans.

Mortgage insurance

Insurance that protects lenders against financial losses resulting from a default on a mortgage loan. Generally, borrowers are required to pay for mortgage insurance unless their down payment is 20% or more of the loan amount.

Mortgage-backed security

A type of investment backed by pools of mortgage loans, with payments on the underlying mortgages generating the return to investors. By selling mortgages in the secondary mortgage market, where they are collected and packaged as investments, lenders are able to generate more funds for future lending.

See also: security

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Negative amortization

When mortgage payments do not cover the full amount of interest due, and the unpaid interest is added to the principal balance of the loan. Under standard amortization, the principal balance decreases with each payment. Negative amortization means that the principal balance of a loan increases, thereby eroding home equity (or resulting in negative equity) and making the homeowner less financially secure.

See also: amortization

Non-contractual privilege

In order to avoid disclosing the finance charges as interest rates, banks that offer overdraft loans claim non-contractual privilege, meaning they reserve the right not to cover an overdraft. If this claim were valid, the customer's financial situation would be in jeopardy.

See also: disclosure

Non-sufficient funds (NSF)

Fees are charged for non-sufficient funds (NSF) when a checking account is overdrawn. The threat of these charges contribute to the pressure payday borrowers are under to renew loans and pay repeated fees. NSF fees differ from overdraft fees, which are charged for the extension of a loan using bank funds to cover the amount you would have overdrawn.

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Office of the Comptroller of the Currency (OCC)

Charters, regulates and supervises all national banks. It also supervises all federal branches and agencies of foreign banks.

Office of Thrift Supervision (OTS)

The successor thrift regulator to the Federal Home Loan Bank Board and a pision within the Treasury Department. The OTS is responsible for the examination and regulation of federally chartered and state chartered savings associations.

Origination points

See: points and fees


A lender; one who offers or "originates" mortgage loans.

See also: mortgage broker

Overdraft loan

Overdraft loans, also called bounce-check protection or courtesy overdraft protection, are a form of high-cost, short-term credit, wherein financial institutions cover their customers' overdrafts when they have a negative balance, and then charge them a fee. These loans have been exempted from interest rate disclosure requirements and can contribute to a devastating cycle of debt.

See also: disclosure, short-term credit

Overdraft protection

See: overdraft loan

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Payday loan

A payday loan is marketed as a cash advance on the borrower's next paycheck. The terms are typically as follows: a loan amount of about $300, a two-week term, and a fee of at least $15 per $100 borrowed, which amounts to an annual percentage rate of about 400%. The borrower's personal check or debit authorization is held as collateral. Most payday borrowers get caught in a debt trap, unable to pay off the loan in the two-week term, and so are compelled to avoid default by paying repeated high fees for no new money.

See also: annual percentage rate, debit authorization, debt trap, rollover

Payment Option ARM (adjustable rate mortgage)

A mortgage that allows a number of different payment options each month, including very minimal payments. The minimum payment option can be less than the interest accruing on the loan, resulting in negative amortization.

Payment shock

An unmanageable rise in a consumer's monthly mortgage payment, typically the result of an increase in the interest rate on an ARM loan. For example, a 2% bump in a loan's interest rate increases the consumer's monthly payment 24%.

See also: adjustable rate mortgage

Points and fees

Points and fees are costs to borrowers that are not directly reflected in interest rates. "Points" or "discount points" are fees calculated as a percentage of the loan principal; one point equals one percent of the principal. Fees may include compensation to a broker, charges by the lender, and third-party charges for appraisals, title insurance, etc. High points and fees are frequently the hallmark of a predatory loan, and they can disguise the real cost of credit when they are financed rather than paid outright at a loan closing.

Predatory lending

A term for a variety of lending practices that strip wealth or income from borrowers. Predatory loans typically are much more expensive than justified by the risk associated with the loan. Characteristics of predatory loans may include, but are not limited to, excessive or hidden fees, charges for unnecessary products, high interest rates, terms designed to trap borrowers in debt, and refinances that do not provide any net benefit to the borrower.


A term used when one law or rule directly overrides an existing law or rule. Preemption provisions in a federal law generally displace state laws governing the same topic. In the area of predatory lending, federal preemption would nullify many state protections for homeowners and prevent states from addressing local predatory lending issues as they arise.

Prepayment penalty

A fee charged by a lender when a borrower pays off a mortgage before all payments are due, often to refinance the loan at a more affordable rate. Prepayment penalties vary in size and how long they remain in effect. Some of the most pernicious are effective for three to five years and charge six months' interest. While prepayment penalties are rare in the prime market, up to 80% of subprime mortgages include the penalties.


The original balance of money lent, excluding interest. Also, the remaining balance of a loan, excluding interest.

Program charge

See: finance charge

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Rate exporter

See: rent-a-charter


Arbitrary denial of real estate loan applications in certain geographical areas, without considering an inpidual applicant's qualifications.


The payoff of an existing loan with a new loan using the same property as security. Homeowners often request refinances to get cash drawn from existing home equity or to obtain a new mortgage with a better interest rate and/or payment terms. Most predatory mortgage lending occurs among refinances in the subprime market.

Refund anticipation loan

A short-term loan secured by the taxpayer's expected tax refund, offered at interest rates of up to 700%. A significant percentage of taxpayers using RALS are low-income consumers

See also: short-term credit


In some states, regulations limit the number of times a single payday loan can be extended or "rolled over." Payday lenders accomplish the same effect with loan renewals, also known as "back-to-back transactions." In a renewal transaction, the borrower pays off an existing payday loan in order to open another one (either immediately or after a cooling-off period). The borrower gets no new money, but pays another fee for the new loan.

See also: cooling-off period, rollover


Under rent-a-charter agreements, payday lending companies partner with out-of-state banks to evade legal restrictions on payday lending in the states where they operate. This practice is also known as "brokering." The Federal Deposit Insurance Corporation (FDIC) is the only federal banking regulator that tolerates rent-a-charter. To fight predatory payday lending, state legislative bodies have had to enact specific anti-brokering legislation to prevent the "rent-a-charter" circumvention of state laws.


Rent-to-own companies "rent" merchandise to a consumer for a stated period, after which the consumer owns the merchandise. A consumer would pay over four times the value of the merchandise under a typical contract. The company is not required to disclose interest rates, although the transaction is much like a loan in that the company may levy unlimited finance charges for late payments, and may repossess the merchandise.

See also: disclosure

Repeat borrowing

See: debt trap

Rest period

See: cooling-off period


Rollovers are common practice in payday lending. Payday loan terms are typically two weeks, but borrowers are flipped into rollovers: they pay another fee to keep the loan outstanding in an extension. Many borrowers pay a high fee every payday without ever paying down the principal or receiving new money, and end up paying many times the original loan amount in fees.

See also: renewal

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An early form of payday lending circumvention, in which a payday lender avoids legal restrictions by claiming the loan they make is payment for an item the borrower owns, but pretends to "sell" to the lender, who then "leases" it back to the borrower for a fee. The "sale" proceeds are the loan, and the fee is the interest. Commonly used in car title lending.

See also: circumvention, car title loan

Second mortgage

A mortgage that has rights subordinate to a first mortgage.

Secondary market

The market where lenders and investors buy and sell existing mortgages or mortgage-backed securities, thereby providing additional funds for mortgage lending.

See also: security, assignee


A generic term for a wide variety of investment instruments. Securities may represent ownership of equity (such as common stocks); indebtedness (such as debt securities); a financial interest in a group of mortgages (such as mortgage-backed securities); or potential ownership (such as an option).

Service charge

See: finance charge


The closing of a mortgage loan. Also, the delivery of a loan or security to a buyer.

See also: security

Settlement statement

A financial disclosure form that provides an account of all funds charged and received at closing, including escrow deposits for taxes, hazard insurance and mortgage insurance. Most types of mortgages use a uniform settlement statement called the "HUD-1."

See also: disclosure, escrow

Short-term credit

Payday lenders and purveyors of overdraft loans, car title loans and refund anticipation loans offer extremely short-term credit, typically a few days to one month, and charge interest rates in the triple digits. The excessive charges far outweigh the risks associated with these loans.

See also: loan term

Single premium credit insurance

See: credit insurance


The practice of encouraging borrowers to accept higher-cost subprime loans even when they qualify for a more affordable prime loan. Vulnerable borrowers may be subjected to aggressive sales tactics and sometimes outright fraud. Fannie Mae has estimated that up to half of borrowers with subprime mortgages could have qualified for loans with better terms.

See also: predatory lending

Subprime lending

A type of mortgage lending intended to serve borrowers who do not qualify for prime loans because of credit problems or a limited credit history. Virtually all predatory mortgage lending occurs in the subprime market.

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A practice in which lenders specifically market high-cost or predatory loans to potential customers based on factors such as race, ethnicity, or age. Targeting is a form of discrimination?not because it excludes minorities and other vulnerable populations, but because it targets and exploits them by offering loans with abusive terms and conditions.

See also: predatory lending

Title loan

See: car title loan

Triple-digit interest

Payday and overdraft loans typically carry triple digit interest rates. The annual percentage rate (APR) for payday and other predatory consumer loans generally exceeds 400%.

See also: annual percentage rate (APR)

Truth in Lending Act (TILA)

Congress enacted the Truth-in-Lending Act (TILA) to allow consumers to assess the true cost of credit, and encourage free competition between lenders. One of the key provisions of TILA is the requirement to disclose a loan's annual percent rate. Overdraft loans have been exempted from this requirement, allowing financial institutions to charge high interest rates without disclosing them.

Truth-in-Savings Act (TISA)

A law requiring depository institutions to disclose information on savings-related accounts, specifically account rates and terms. The Federal Reserve Board's ruling that overdraft loans are subject to TISA, rather than the Truth-in-Lending Act, means that financial institutions are not required to disclose the exorbitant interest rates charged for overdraft loans..

See also: Truth in Lending Act (TILA)

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A lender's process for assessing the risk involved in making a mortgage loan to determine whether the risk is acceptable. Underwriting involves an evaluation of the value of the property and the borrower's willingness and ability to repay the loan.

See also: ability to repay


The practice of charging exorbitant, sometimes illegal interest rates for consumer credit. Payday and overdraft loans typically carry an annual percentage rate (APR) of over 400%, sometimes exceeding 1000%.

See also: annual percentage rate (APR)

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Yield spread premium

A payment a mortgage broker receives from a lender for delivering a loan with an interest rate higher than the minimum rate the lender would accept for that particular loan. Yield spread premiums provide incentives for mortgage brokers to steer borrowers into higher-cost loans.

See also: interest

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