WO2004001649A1

WO2004001649A1 - Insured borrowing

Info

Publication number: WO2004001649A1
Application number: PCT/US2002/031449
Authority: WO
Inventors: Ethan Jacobs
Original assignee: Ethan Jacobs
Priority date: 2001-10-02
Filing date: 2002-10-02
Publication date: 2003-12-31
Also published as: AU2002343473A1

Abstract

The system for creating and administering a policy of a borrower insurance. The borrower insurance protects a lender against losses caused by a borrower's failure to maintain obligations which are covered by a borrower insurance policy. The policy is negotiated between the borrower and an insurer. The negotiations concern the terms, payments, insurance liability, coverage and other factors. The borrower provides to the lender a proof of the borrower insurance policy in order to negotiate and obtain a loan.

Description

TITLE

Insured borrowing.

ABSTRACT

Background

Prior art loans are not arranged in the best manner. Greater opportunities for lender profits, less risk, better use of borrower funds, and lower costs to borrowers, in addition to other benefits, are possible. Property is often obtained with borrowed money. Lenders determine loan to value ratios for properties and borrower credit ratings. Borrowers are required to provide from personal funds portions of sale prices as downpayments which are not funded from loan proceeds. Appropriate interest rates are chosen. Lenders provide funds to sellers and place liens on collateral properties. Buyers / borrowers obtain title to properties. In certain instances, borrowers do not provide the traditional 1 5% - 20% downpayment; Prior art teaches borrowers be required to purchase third party insurance from private companies, or government agencies, when lenders provide greater loan to value ratio loans. The purpose of the insurance is to minimize the lender's risk. Mortgage insurance replaces smaller downpayments in alleviating some of the risk but can not replace borrowers^' incentive to protect their personal investment. Mortgage insurance may make it possible for less credit worthy borrowers to obtain loans but it is not designed, used, or conceived of as beneficial, for more credit worthy borrowers who do possess sufficient personal funds. The amount earned on a loan is dependent upon both the interest rate and the size of the loan. For any given interest rate / loan amount combination there are other lower interest rate / higher loan amount combinations which yield the same amount of interest. Simplistically, 5% of 200 is the same as 10% of 100, both of which equal 10. There are combinations of larger loan to value ratios with lower interest rates which would yield the same amount of interest to lenders as traditional loans with 80% loan to value ratios. The primary obstacles to offering such loans to borrowers are the increased risks to the lenders and the prior art teachings and practices. Profits are income less costs. Risks are translated into costs. If risks can be reduced than an equal, or greater, profit can be earned on an equal ,or lower, income. Reducing risks to levels below those found in traditional loans allows for loans with larger loan to value ratios, lower interest rates and a lower total amount of interest, while maintaning or increasing profits. A larger loan at a lower interest rate over a sufficient time period will cost less to a borrower. This can be true for both the total cost as well as the month to month payments. For the majority of borrowers, prior art teaches smaller loans are better. There is general lack of awareness of comparing the opportunity costs associated with using ones own capital versus borrowed funds. There is also a general lack of awareness of leveraging money to best take advantage of its value. Property sellers do not care whether buyers' funds are borrowed or are the buyers' own - so long as sales prices are paid. Prior art practices, and teachings, prevent buyers/borrowers from utilizing their assets in other ways. One way would be for borrowers to reduce lenders' risks and consequently lower their own borrowing costs. Inventions disclosed herein provide processes, machines and manufactures for new, and useful, loan structuring. The inventions identify alternative loan arrangements with different loan amount/ interest rate combinations and equivalent, or lower, re-payments. The invention also creates a process for leveraging borrowers' personal funds and lowering lenders' risks. The disclosed invention is distinct from traditional federal agency and private mortgage insurance (pmi) for several reasons: Traditional insurance: covers loans with loan to value ratios of 95% or more; is conceptually, and in practice, paid for separately from downpayments and to a different entity; is conceived of as being, and in practice used, for a class of borrowers who are unable to raise sufficient funds, less credit worthy and/or, higher risks; attempts to bring higher risk loans in line with the risk of more conventional loans; serves the interests of the lenders more than the borrowers by operating in the event of foreclosure. The inventions: aim to reduce the risks of loans even further than conventional loans. Cover loans which would traditionally have loan to value ratios less than 95%; are envisioned in a best mode as creating the possibility for loan to value ratios of 100%; are envisioned in a best mode as replacing downpayments with one payment to an insurer; are conceived of as being for a class of borrowers who are able to raise sufficient funds, are credit worthy and/or, are average or lower risks; operate to prevent foreclosures and delinquencies; leverage boi rowers' assets; protect borrowers' credit ratings; earn interest for borrowers while lowering the burden of their borrowing costs.

SPECIFICATION

Summary

An insuring entity is created which creates, and/or administers, borrower insurance policies. Borrower insurance policies are created which cover borrower's obligations. A borrower obtains a borrower insurance policy. The borrower provides to a lender proof of the borrower insurance policy. The lender verifies the borrower insurance policy. The lender and borrower negotiate a loan. The borrower borrows from the lender. If the borrower insurance policy is activated by an activating event, the insurer provides coverage.

Detailed Description and Lexicon

A borrower is a participant who, and/or which, borrows. In the context of the invention disclosed herein, a borrower is also a policy holder.

To borrow includes to lease, rent, obtain for use, and/or to use, property belonging to, and/or lent by, a lender. In the context of the invention disclosed herein, all borrowing which creates borrower obligations is covered wholly, or in part, by the borrower's borrower insurance policy. Borrowing may also include: creating and perusing, comparing, analysing various loan structures, arrangements, terms, total amounts paid, interest portions paid, principal portions paid, interest rates, projected costs, and/or periodic payments. Borrowing may be arranged by any method, including direct negotiation between a borrower and a lender. Borrowing may be aranged by auction. Borrowing by auction may take place in a marketplace, and/or forum, designed for the purpose. Auction marketplaces, and/or forums, include websites and computers joined in networks by telecommunication systems. Borrowers can advertise the amount, or item, they want to borrow and/or the interest rates, fees, and/or deposits, they are willing to pay. Borrowers may include in their advertisements the^'insurer providing the borrower's borrower insurance coverage, their borrower insurance identifier and/or their insurance rating. Lenders can use the borrower's policy holder identification number to verify borrower's borrower insurance policy coverage at the time of advertising or after bids are made. Lenders can bid for the right to lend the items and/or money, to the borrowers contingent upon verification of borrower's claimed insurance status. Or, lenders can advertise the amounts, items, fees, deposits, and/or interest rates, they are willing to accept from borrowers with specific insurers, insurance policies, coverage and/or insurance ratings. Borrower insurance policies, and/or insurers, can be rated in a standardized rating system to allow easy comparison and standardized lending.

A new type of loan instrument, loan arrangement, and process for creating a loan are disclosed. Insured loans are loans covered by a borrower's borrower insurance policy. The borrower's obligations to the lender are insured by an insurer who, and/or which, guarantees the borrower's obligations will be satisfied. A larger amount of money can be lent to a borrower at a lower interest rate with an insured loan. The lender faces a much reduced risk of delinquency, and/or default, and therefore much lower costs to lend. A lender may choose to do less extensive credit checks on insured borrowers, or none at all, further reducing their lending costs. The insurer can consolidate borrowers payments, and provide single payment for a multitude of insured borrowers, adding another degree of savings to the lender's lending operations. Given a sufficient amount of time a loan 'with a lower interest rate and a larger principal amount will cost less than a loan with a higher interest rate and a lower principal amount. For example, the principal amount has traditionally been determined by a loan to value ratio of eighty percent in the residential real estate market. Lenders are usually reluctant to increase the loan to value ratio because the higher the ratio the higher their risk in the event of default by the borrower or declining market values. Also, it is believed borrowers have more incentive to satisfy their obligations to the lender when the borrowers have more of their own money invested in a property. With insured loans, the borrower still has an incentive to satisfy their obligations. With the proper borrower insurance policy terms the borrower can have an even stronger incentive. In the residential real estate market, borrowers can use the money they traditionally would have applied towards a downpayment in a manner more to their advantage by using the money to pay for a borrower insurance policy. With a borrower insurance policy providing coverage, a borrower can use a programmed computer to compare a prior art standard loan with the disclosed insured loan.

Policy holders are borrowers who, and/or which, obtain, are covered by, and/or own, a borrower insurance policy. Borrowers become policy holders by negotiating, and/or agreeing to, the terms of a borrower insurance policy with an insurer and paying the policy premium. Negotiating the terms of a borrower insurance policy may include providing information, designating preferences, setting criteria, and/or comparing various policies. Negotiations may be assisted by, take place thru and/or with, programmed computers, networks and telecommunications systems.

Borrower insurance indemnifies lenders against damages, and/or losses, caused by a borrower's failure to uphold borrower obligations which are covered by a borrower insurance policy.

A borrower^'s obligations include any financial obligation a borrower agrees to, takes upon themselves or has imposed upon them. Borrower financial obligations arise from borrowers borrowing property from lenders. Borrower obligations may include: the repayment of all borrowed money; the payment of all the interest on borrowed money; the repayment of the portion of borrowed money due; the payment of the portion of interest on borrowed money due; the payment for the use of property; the payment for damage, loss, replacement, and/or non-return, of borrowed property; the payment of security deposits; the payment of any default, delinquency and/or foreclosure costs; the payment of any fees, penalties, expenses, and/or fines, associated with the above borrower obligations. Property includes: anything which may be borrowed and/or used; anything for which a payment is made for its use; cars, equipment, apartments, real estate; the real, the personal, the tangible and the intangible: rights to property; money; and/or borrowed money which is used to purchase other property.

An insuring entity includes any participant who, and/or which, insures. An insurer may be independent of, or connected to, other participants and roles. Insurer connections to others include as: an affiliate; a licensee or licensor; subsidiary, or owner, in whole or part; party to a joint venture; a client; and/or a vendor. An insurer includes.any prior art insurer who, and/or which, is licensed, authorized to act, or acting, in the new role of insurer disclosed herein. An insurer includes any form, business arrangement, and/or corporate structure, which insures borrowers with borrower insurance. Multiple participants may join to form a mutual insuring entity. An insurer may be connected with a lender. Insurers may handle the processing of borrowers' payments to lenders.

To insure includes to create, and/or administer, borrower insurance [policies] .

Creating borrower insurance includes using any of the methods of the insurance industry, in particular: gathering, organizing, analyzing, calculating, and creating, the necessary data and information; using actuarial methods to assess risks, classify insurable liabilities, establish categories and develop policies. Creating borrower insurance policies includes: interacting with potential policy holders to educate them in how the policies function, assess their needs, determine the insurance coverage they want, determine what they can afford, compare various policies, compare the costs and benefits of a policy versus the lack of a policy, negotiate the policy.

Negotiating the policy includes establishing the: premium amount, premium payment frequency, return or retention of the premium, method and frequency of premium return, draws on the premium due to payout for insurance liabilities, effects on premium return due to borrower failing to maintain borrower obligations, interest rate on the premium, calculation method for the premium, payment of interest on premium payment, non-payment of interest on premium payment, allocation of interest on premium to borrower or others, interest payment frequency, draws on the interest on the premium due to payout for insurance liabilities, effects on interest on the premium return due to borrower failing to maintain borrower obligations, liabilities and coverage provided by the insurance policy, method for calculating the insurance liability and coverage, insurance activating events, insurance payment methods, timeliness and frequency, terms.

Negotiation also includes establishing the responsibilities, and obligations, of: the insurer to the insured, the insured to the insurer, the insured to the lender and the insurer to the lender. Creation includes manufacture of documents, cards or other means of representing, and/or indicating, a policy. Including a number which identifies a policy, policy holder and/or both. The number may be printed and/or displayed, on a card.

Administering borrower insurance includes: marketing, selling an/or issuing policies; classifying potential policy holders / borrowers; establishing accounts for policy holders; receiving, recording, and depositing, premiums to policy holders accounts; monitoring borrowers obligations; repaying premiums, and/or interest on premium; paying out coverage of borrowers obligations; investing premiums; and/or interacting with lenders and borrowers.

A borrower insurance policy is a manufactured record containing the terms of the borrower insurance to which the insurer, and the insured, agree and are bound. The policy may be in the form of a written, typed, computer record and/or printed document. A borrower insurance policy may be used as proof of insurance coverage for the insured policy holder.

Borrower insurance coverage includes activation by any delinquency, and/or default, in a borrower's obligations as specified in the borrower insurance policy. The borrower insurance policy may specify the activating events, and/or circumstances, which may cause delinquency, and/or default, including: unemployment, illness, salary reductions, and/or unforeseen and/or extraordinary expenses.

As specified in the borrower insurance policy, borrower insurance may cover the full amount, and/or a portion, of a borrower's obligations. Borrower insurance may cover a specific borrower obligation, a limited number of a borrower's obligations or any number of a borrower's obligations. Borrower insurance coverage may be for the entirety of the borrower's obligations, unlimited in the number of activating events, so long as the borrower insurance policy is in effect. Borrower insurance may have limitations on the number of activating events covered, which may include a maximum number of delinquencies, and/or defaults per life of the policy, per lender, per specified time period and/or per specified time periods. A policy may also have limitations based upon the total amount of coverage paid out: per policy, to a specified lender, to a plurality of lenders, per time period and/or time periods. Limitations may be based upon which borrower obligations are to be covered and/or which have been paid out. There may be limitations on the portion of each obligation or obligation type covered by the borrower insurance. There may be limitations on the frequency of insurance payouts. Borrower insurance coverage limitations may be modified by the policy holder. Modifying a borrower insurance policy's coverage limitations may be effected by payment of an increased premium. An increased premium payment may be derived from application of any returnable portion of the premium, and/or payable portion of interest, towards the premium and/or excessive insurance expenses. Borrower insurance coverage may be activated when the insurer is notified of a borrower insurance activating event. The policy holder may be obligated to notify the insurer of any activating events.

A Borrower insurance policyholder's proof of coverage may include their policy records and/or a borrower insurance policyholder card. The policyholder may simply have a policyholder identification number. The policyholder card may be manufactured from paper and/or plastic like a prior art credit card or debit card. The policy holder card may be used to inform lenders that the card holder is insured by a borrower insurance policy. The policyholder card may be used by the lender to interact with the insurer to verify the terms, and coverage, of the policyholder's borrower insurance policy. Interaction, and verification, may be by machines designed, and/or programmed, to convey information from the lender to the insurer and from the insurer to the lender. Communication may be by means of a telecommunications network. By means of the policyholder card, policyholder identification number, telecommunicating machine and network, the insurer is able to confirm to the lender that the lender's transaction with the borrower will be covered by the borrower's borrower insurance policy. The insurer can also inform the lender if the policy does not cover the^'transaction or does so only in part. The lender can base their decision to transact with the borrower and at what amounts, rates, and/or terms, based upon the information provided by the insurer. The information provided by the insurer may be a simple policy classification rating which the lender would understand. Contacting the insurer allows the insurer to prepare for any liabilities to which they may be exposed by the transaction. The lender may also call upon the insurer to handle the processing of the borrowers obligations to the lender arising from the transaction between the lender and the borrower. The functionality of a policyholder card may be integrated into any other type of card. Insured borrowing may be integrated into the functions offered by the company providing the other card or the card may be shared by two companies one of which offers insured borrowing.

The lender and the borrower may conclude their transaction when the property borrowed is returned and any other borrower obligations are satisfied. The borrower may be issued a receipt as proof of the transactions conclusion which releases the insurer from any further liability for the borrowers obligations. The policyholder card, and telecommunications system, may also be used to notify the insurer of the transactions conclusion and satisfaction of the borrowers-obligations. The policyholder card can free up holds on credit lines, and remove the need for deposits, previously the method used to secure borrowed property.

Borrower insurance premiums are paid to the insurer. A borrower, and/or anyone else, may pay the premiums on the borrower's behalf. Others who, and/or which, may pay the borrower's premiums include: the owner of property which the borrower is trying to acquire by borrowing money from a lender to pay the owner; a mortgage broker attempting to improve the choice of loans available to a client seeking to borrow; a government agency providing assistance to potential homeowners; family members providing a gift to a relative. The borrower insurance policy is issued to the borrower. The borrower becomes the policy holder. The borrower insurance premium may be paid in one lump sum up front at the time of the policy's creation and issuance to the policyholder. The premiums may also be paid periodically over time. A lump sum up front payment may be combined with subsequent periodic payments over time. Premiums may be modified based upon agreed upon criteria and/or the borrower's record of handling their obligations prior to and during the policy period. In the case of borrower insurance insuring borrower obligations to lenders comprising loans used to purchase real estate, the premium amount may be equal to the downpayment the borrower would have to make to the property seller. A traditional standard downpayment is approximately twenty percent of the property's sale price. The premium amount may also be more, or less, than twenty percent. Based upon actuarial methods, the amount of the premium, the premium payment arrangement, and other factors, the insurer calculates the borrower insurance coverage provided to the policyholder. The money which would have gone to the seller as a downpayment may be applied instead to the premium paid to the insurer. In most cases, a premium equal to the traditional standard downpayment is likely to be sufficient to provide full borrower insurance coverage to the policyholder for any loan provided by the lender. In addition, the coverage provided by the insurer to the policyholder should enable the policyholder to borrow the full value of the property they are seeking to acquire and should also qualify the policyholder for interest rates lower than on a traditional standard loan with an eighty percent loan-to-value ratio. Premiums may be non- returnable payments or returnable deposits. Returnable deposit premiums may be returnable in full or in part. Returnable deposit premiums may be apportioned amongst the insurer, the policyholder, and/or any other premium provider. Returnable deposit premiums may be returned at the termination, and/or completion, of the borrower insurance policy or periodically over the life of the policy. Returnable deposit premiums may be returned based upon agreed upon criteria and/or the borrower's record of handling their obligations prior to and during the policy period. Premiums designated for return may instead be applied by the insurer to cover borrower's obligations. Premiums may earn interest while in the possession, and/or under the administration, of the insurer. Interest earned on the premium may be payable in whole, or part, to the policyholder and/or others. Or, interest earned on the premium may be retained by the insurer. Interest earned on the premium may be used to pay the insurer's coverage of the policyholder^'s borrower obligations. Any interest paid out may be provided at the termination of the insurance policy, at its completion, periodically, when accumulated earnings exceed liabilities, and/or in accordance with any other terms in the agreement. Borrower insurance policies may offer: non- returnable premiums combined with paid out interest earned on premiums; returnable premiums and retention by the insurer of the interest earned on the premiums; non-returnable premiums combined with retention by the insurer of the interest earned on the premiums; returnable premiums combined with paid out interest earned on premiums. Borrower insurance may provide coverage of borrower obligations by paying out from: premiums only, the interest earned on premiums only or both premiums and interest earned on premiums.

Insurers may process insured borrowers' payment obligations to lenders. Insured borrowers convey their payments to the insurer. The insurer records the insured borrowers identity, amount paid, date paid and any other relevant information. The payments are consolidated, including consolidation into groups according to the lender to be paid. The insurer processing the payments makes a single payment to the lender comprising all the insured borrowers' payments due that lender. The insurer can compare payments received from insured borrowers with payments expected to be received in accordance with records of the insured borrowers obligations. If a payment has not been received as expected, the insurer examines the insured borrower's borrower insurance policy and determines if the lack of payment is a policy activating event. If the lack of payment is a policy activating event, the insurer may make the payment on the insured borrowers behalf in accordance with the insured borrower's borrower insurance policy and notify the insured borrower of the incident along with any implications or consequences for the insured borrower. The insurer's payment on behalf of the insured borrower would be added to the consolidated payment.

Although the lender may desire, and request, a record of each borrower making payment each pay period, the record keeping, transfer of information and paperwork is not necessary. If the insurer is ensuring all insured borrowers payments are made every time then the lender will know the total consolidated amount due each period. The lender may rely upon the insurer to convey the proper consolidated amount to the lender. Only those payment which are expected, and which are not covered by a borrower insurance policy, need be included in a list of- non-paying borrowers to be conveyed to the lender.

Borrower payments to lenders which are processed by the insurer may be combined with any periodic premiums the borrower pays to the insurer. Incorrect amounts may be allocated according to prior agreed upon rules.

Participants participate by effecting roles, including: insurer, policy holder, borrower and lender. The roles define distinct patterns of behavior composed of process steps. Anyone, and/or anything, effecting, and/or capable of effecting, a role may be a participant, including: people, businesses, machines, manufactures, agencies, individuals, groups, institutions, entities, associations, companies, proxies, and/or governments and their agencies. Participants may utilize proxies to effect a role on their behalf. Multiple participants may, thru their joint, combined, and/or coordinated, actions, effect a single role. Machines include computers programmed to carry out the roles. To effect a role includes to: perform, execute, follow, and/or act in, a role; be defined, and/or bound, by a role; be enabled, authorized, assigned, obligated, and/or appointed, to perform, to execute, to act in, and/or to assume, a role; be recognized, and/or recognizable, as performing, executing, acting in, and/or assuming, a role; and/or be designated for a role. Participants may contract out, assign, and/or delegate, their part in processes in which they participate, if they retain oversight over, control of, responsibility for, authority over, management of, and/or coordination of, contractors, assignees, delegates and/or agents.

Claims

I regard the following subject matter as my inventions, and claim:

1 insured loans

2 borrower insurance