Refers to a quest step that updates automatically when certain conditions are met. Most common usage is to refer to non-inventory "items" that must be obtained from a monster. i.e. kill Orcs until you find 4 Orc badges. The badges are not an examinable item, they just update the quest. When you kill the correct mob and he has the item, you will get a message that you found the item. If he does not have it but he is the correct monster type, you will get a message that you did not find any quest items.
With the LU37, came some major changes to and they way they update. Language quest items still drop as items (each member can roll as loot) but they are auto consumed upon getting them. also with that update was the "lore loot" code update, that if you didnt need something (or couldn't hold it), you couldn't roll on it, so you wont keep getting them as drops after you've finished the quest.