Here are definitions for some of the most commonly used terms within the financial lending industry, as well as links and summaries for key industry websites.
Adjustable Rate. This rate is the amount of interest added onto a loan payment that adjusts based upon current market fluctuations.
Amortization. Over a specified period of time, this is the gradual elimination of a debt achieved through regular payments (sufficient enough to cover both the principal and the interest).
Back End Compensation. These are moneys paid by the funding lender that revert back to the loan officer and the lending institution with which the officer is affiliated.
Default. While the specifics differ from loan to loan, the basic tenet is that the borrower has been delinquent in making a payment on their loan (default) for a certain number of days or has failed to comply with one or more of the other terms of the promissory note.
Note: The missing of one payment is usually not grounds for default. However, repeated missed payments may cause the borrower to be in default.
Delinquency. This is a term used in reference to the loan status whereby payments are made late. Differing from being in default, delinquency status occurs with the very first missed payment.
Fees. Contributing to the underlying ROA of each loan package, the majority of financial lending institutions reward loan officers incentives (fees) obtained through costs passed on to the borrower.
Fixed Rate. This is a fixed amount of interest added onto a loan payment that remains the same over the life of the loan.
Front End Compensation. This compensation is moneys charged to the borrower that revert back to the loan officer and the lending institution with which the officer is affiliated.
Index. An index is the interest rate fluctuation timetable for the adjustable rate mortgage.
Initial Adjustment Cap. This is the limit on how much the interest or payment rate can go up or down at the first adjustment period.
Interest. Interest is the amount paid to borrow money (principal).
Interest Rate. The interest rate is the percentage of the loan amount charged for borrowing the principal. It is a re-occurring fee the borrower must pay, in addition to the principal. The rate at which interest is charged is always recorded in the promissory note.
Life Cap. This cap is the limit as to the degree to which the payment rate can change over the life of the loan.
Negative Amortization. This is the gradual increase in mortgage debt due to the failure of monthly loan payments to sufficiently cover the interest due which, in turn, causes the balance owed to continuously increase.
Payment Type. At the time of the loan's origination, the borrower establishes a method of payment that could involve principal and interest, principal first and then interest, or interest and then a combination of principal and interest.
Principal. Principal is the amount of money that the loan applicant requests to borrow.
Rate. The payment or interest level used to determine a borrower's monthly payment is called the rate.
Return on assets (ROA, also return on equity). ROA is the financial institution's method for setting fees on loans through the use of a loan pricing model (income statement format); the summary takes into the overall account of loan volume, rate, fees, risk rating, repricing terms, and deposits.
Term. The term is the maturity or length of time over which a loan extends, for instance one year, five years, or more.
APR. APR is the annual percentage rate, under the Truth in Lending Act that is required to be provided to consumers outlining the total cost of credit, including the stated interest rate and certain specified finance and service charges.
LO loan officer. LO is the abbreviation used for loan officers in documents and correspondence.
P&I. The principal and interest, two figures used by loan officers to calculate the amount of a borrower's regularly scheduled loan payments.
TILA. Truth in Lending Act, is a reference to the disclosures and transparency of terms and conditions that must be included as part of each and every loan agreement.
American Bankers Association (ABA) www.aba.com, represents financial services institutions, and their aim is to ensure that providers of financial services have the support and resources that they need to productively maintain their position within the industry. This encompasses governmental relations and professional developments inclusive of federal legislative and regulatory updates, information affecting professionals and consumers, research, and products and services that promote, educate, train, inform, and support industry members.
Banking Administration Institution (BAI) www.bai.org, a professional organization within the financial services industry where financial professionals can learn about issues affecting their industry, as well as, hone their critical business skills.
Federal Reserve System ("The Fed") www.federalreserve.gov, the centrally banking system of the United States implements monetary policy based in part on the theory that it is best to expand or contract the money supply in relation to changing economic conditions.
National Association of Ethical Loan Officers (NAELO) www.naelo.com, is committed to a code of ethics. Members of NAELO are willing to submit themselves to client reviews in order to receive accreditations and improve their service. A sampling of the codes that Ethical Loan Officers commit to includes:
Act with personal integrity, best judgment, and honest intentions.
Disclose any financial interest they may have in the loan transaction.
Will not disclose unauthorized confidential information.
Respect the privacy of their clients.
Follow all applicable laws and regulations in the city and state in which they operate.
Practice Truth in Advertising.
Seek the best product for the client's situation regardless of compensation.
Discuss lock procedures and options upfront.
Explain all loan documents.
Explain fees associated with the loan transaction.
Disclose all upfront fees and their appropriation.
Complete Guide to Credit and Collection Law 2005 (Guide to Credit & Collection Law) by Arthur Winston, 2005 Edition, Aspen Publishers, provides very clear and distinct explanations of the key laws that affect the credit and collection industries.
Senior Loan Officer's Desk Reference by Ed Pace, 2011 Sheshunoff Publications provides the aspiring loan officer with a valuable resource tool with such sections as: structuring and pricing loans, steps to take when a loan deal goes into default, procedures for handling loan approvals, and formats for producing loan commitments, and more.