Lecture Notes: Understanding Loan Securitization and Legal Implications

Introduction

• Banks often sell loans shortly after signing, profiting multiple times.
• The lecture covers how banks securitize loans and the relevant laws.
• Disclaimer: Content is for educational purposes only, not legal advice.

Loan Securitization Explained

The Reality of Loans

• Common misconception: Banks hold loans and wait for monthly payments.
• Truth: Loans are sold as promissory notes, a type of financial instrument.
• Promissory notes are unconditional promises to pay a certain amount.

The Securitization Process

• Banks sell promissory notes into trusts or securities pools (e.g., mortgage-backed securities).
• Loans are bundled with others and sold to investors.
• Banks profit multiple times:
  1. Signature creates credit, bank deposits note as an asset.
  2. Bank sells note or creates securities.
  3. Continued monthly payments from borrowers.

Legal Framework

Key Laws and Concepts

• Negotiable Instruments (UCC Article 3):
  • Defines who can enforce an instrument.
  • Holder in due course must meet specific criteria to enforce.
  • Debt collectors often lack proper documentation.
• Secure Transactions (UCC Article 9):
  • Deals with loans backed by collateral.
  • Borrowers can request a full accounting of their loans.

Consumer Rights and Protections

• Truth in Lending Act:
  • Requires meaningful disclosure of credit terms.
  • Failure to disclose loan sales can be a violation.
• Real Estate Settlement Procedures Act (RESPA):
  • Applies to mortgage loans, requires disclosure of ownership changes.

Action Steps for Borrowers

Challenging the System

• Use knowledge of laws to challenge debt claims:
  1. Qualified Written Request (QWR):
     • Request detailed information about the loan servicing.
  2. Debt Validation and Conditional Acceptance:
     • Demand proof of debt collection rights.
• Leverage violations for loan disputes or rescission.

Resources and Further Actions

• Complete Debt Guide available for templates and more detailed actions.
• Consider professional assistance for debt challenges.

Conclusion

• Understanding and utilizing the law can help challenge unfair debt practices.
• Engage in ongoing learning to protect against financial exploitation.

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• Engage in comments to share experiences and learn from others.