What is a Covered Loan? A Comprehensive Legal Overview
Definition & meaning
A covered loan is a type of consumer loan where the original principal balance does not exceed the current conforming loan limit for a single-family first mortgage, as set by the Federal National Mortgage Association (Fannie Mae). To qualify as a covered loan, one of the following conditions must be met:
The annual percentage rate (APR) at the time of closing is more than eight percentage points above the yield on treasury securities.
The total points and fees charged to the consumer at or before closing exceed six percent of the total loan amount.
Table of content
Everything you need for legal paperwork
Access 85,000+ trusted legal forms and simple tools to fill, manage, and organize your documents.
Covered loans are primarily relevant in the context of consumer finance law. They are used to protect borrowers from excessively high-cost loans. Legal professionals often encounter covered loans in mortgage transactions and consumer lending practices. Users can manage related forms and procedures with resources like US Legal Forms, which provides templates drafted by attorneys to ensure compliance with applicable laws.
Key Legal Elements
Real-World Examples
Here are a couple of examples of abatement:
Example 1: A borrower takes out a loan of $200,000 with an APR of 9%. Since this exceeds the treasury yield plus eight percentage points, it qualifies as a covered loan.
Example 2: A mortgage with total points and fees of $12,000 on a $200,000 loan would also be classified as a covered loan, as this exceeds the six percent threshold. (hypothetical example)
Relevant Laws & Statutes
Covered loans are governed by the California Financial Code, specifically under Section 4970. This section outlines the criteria for identifying covered loans and provides consumer protections against high-cost lending.
State-by-State Differences
Examples of state differences (not exhaustive):
State
Covered Loan Limit
APR Threshold
California
Conforming loan limit set by Fannie Mae
More than 8 percentage points above treasury yield
New York
Conforming loan limit set by Fannie Mae
More than 8 percentage points above treasury yield
This is not a complete list. State laws vary and users should consult local rules for specific guidance.
Comparison with Related Terms
Term
Definition
Key Differences
High-cost mortgage
A mortgage with high fees or interest rates.
Covered loans have specific APR and fee thresholds; high-cost mortgages may not.
Conforming loan
A loan that meets Fannie Mae or Freddie Mac guidelines.
Covered loans are a subset of conforming loans with additional criteria.
Common Misunderstandings
What to Do If This Term Applies to You
If you believe you are dealing with a covered loan, it's important to understand your rights and obligations. Consider reviewing your loan documents carefully. You can explore US Legal Forms for ready-to-use templates that can help you navigate the process. If your situation is complex, seeking advice from a legal professional may be necessary.
Quick Facts
Attribute
Details
Typical loan amount
Varies based on conforming loan limits
APR threshold
More than 8 percentage points above treasury yield
