Tennessee Home Loan Protection Act

Transcription

1 Tennessee Home Loan Protection Act By: Richard A. Vance and Ronald G. Steen I. Introduction After years of contentious debate and numerous attempts, in 2006 Tennessee passed the Tennessee Home Loan Protection Act (the Act) 1, which is intended to address predatory actions by lenders and loan brokers against consumers. The Act was sponsored by Tennessee State Senator Roy Herron and State Representatives Larry Turner and Chris Fitzhugh. It reflects years of work and negotiations between numerous consumer advocate and industry groups, including the Memphis/Shelby County Anti-Predatory Lending Coalition, the Memphis Debt Collaborative, the Tennessee Bankers and Mortgage Brokers Associations, and the Tennessee Association of Realtors. Although multiple versions of anti-predatory bills had been filed with the Tennessee General Assembly beginning in 2001, it was not until 2005 that the issue was brought to the forefront due to a wave of bad press on the harmful effects of predatory lending. In response to news stories and increasing public awareness, State Senator Roscoe Dixon requested that leading consumer advocates form a consumer lobbying group. More than forty organizations came together to form the Memphis/Shelby County Anti-Predatory Lending Coalition (the Coalition). The Coalition included the National Association for the Advancement of Colored People and the American Association of Retired People. Throughout 2005 and early 2006, the Coalition hosted numerous town hall meetings and supplied the Tennessee General Assembly with testimonials from predatory lending victims. When the bill was re-filed in 2006, opposing lobbyists said that it was dead on arrival. But after months of compromises and negotiations, it passed unanimously in the House and Senate and was signed by Governor Phil Bredsen on May 26, When the Act became effective on January 1, 2007, Tennessee joined an ever-increasing number of states that are attempting to rein in abusive and predatory lending practices in the mortgage lending market. 2 The Act has four main components. First, the Act designates the class of loans to which it will apply. 3 Second, the Act sets forth both prohibited actions and the required duties of a lender. Third, the Act establishes certain rights of the borrower, including the damages that are available to a borrower when a violation occurs. Finally, it grants regulatory powers to the Commissioner of the Tennessee Department of Financial Institutions (Commissioner) and preempts local government ordinances on the Act s subject matter T.C.A et seq. (2007). Approximately two-thirds of the states in the country have passed similar laws. The Act is modeled from North Carolina s anti-predatory lending law (not Arkansas, as the statute s notes incorrectly indicate) but is thought by proponents to be a more reasonable compromise between consumers and industry than that reached by North Carolina s legislature. Paradoxically, the drafters placed the Act s applicability provision, Tennessee Code Annotated section , at the end of the statute. 1

2 II. Local Option Preemption In an important victory for the lending industry, section of the Act prohibits cities and other local governments from imposing their own regulatory schemes on the mortgage lending business, thereby avoiding the effects of local crazy quilt regulatory frameworks, like those in Ohio and New York. This portion of the Act prohibits local authorities from doing various things, i.e. prohibits all counties, municipalities and political subdivisions from enacting and enforcing ordinances and regulations affecting those who: (1) are subject to regulation by the Tennessee Department of Financial Institutions; (2) are subject to regulation by the federal banking agencies, such as the Office of Thrift Supervision, the Office of Comptroller of the Currency, the National Credit Union Administration, the Federal Deposit Insurance Corporation, the Federal Trade Commission or the Department of Housing and Urban Development; (3) originate, purchase, sell, buy or service interests or obligations created by loans made or executed by the foregoing persons; or (4) are chartered by Congress to engage in secondary mortgage market transactions. III. Scope While the Act seems ambitious in its scope, its applicability is actually quite narrow. First, the Act itself recognizes that it does not apply to the extent that its provisions are preempted by, in conflict with, or inconsistent with the National Bank Act, the Homeowner s Loan Act, the Federal Credit Union Act, or regulations issued by the office of the comptroller of the currency, the office of thrift supervision, the federal deposit insurance corporation or the federal credit union administration, and as interpreted by the federal courts, to national or state banks or trust companies, federal or state savings institutions, federal or state credit unions, or the operating subsidiaries of any of those. 4 Thus, as a practical matter, many significant mortgage lenders in Tennessee, including national banks, state-chartered banks, credit unions, and savings banks, are excluded from coverage. Other private mortgage lenders are, however, subject to the Act. 5 The Act covers only those transactions not listed in Tennessee Code Annotated section (9)(D). This subsection removes certain transactions from the definition of home loan and therefore excludes these transactions from the rest of the Act. Specifically, the Act does not apply to: purchase money home acquisition transactions where a mortgage or deed of trust is used to acquire an existing or newly constructed home; 6 an open-end credit loan, 7 except as provided in Tenn. Code Ann. section ; 8 a reverse mortgage; a construction loan; or any loan that is insured or guaranteed by, securitized for, or sold to a government agency, T.C.A See T.C.A (defining mortgage loan broker ); 24 CFR (2007) (defining lender ). 12 CFR 226.2(a)(24) (2007). See Truth In Lending Act, 15 U.S.C et seq. (2004). 12 CFR 226.2(a)(20).

3 including the department of housing and urban development, the department of veteran affairs, the Tennessee housing development agency, or the United States department of agriculture. IV. Thresholds A. Foundational Threshold With regard to scope, Tennessee did not follow the example of some states, which have adopted the federal HOEPA 9 thresholds with only minor adjustments. 10 While these separate state thresholds mean that Tennessee independently controls the scope of its law, rather than being tied to future changes in federal law, it also requires some additional calculations. Instead of simply applying HOEPA s thresholds, Tennessee s lenders will need to do a separate calculation to determine whether the Act will apply to a particular loan. By its terms, the Act applies only to high-cost home loans, as defined in the Act, and lenders will have to become familiar with the term home loan to determine if the Act applies. The Act defines a home loan as a loan in which: the principal amount of the loan does not exceed the lesser of the conforming loan size limit for a single-family dwelling as established by Fannie Mae or $350,000; the debt is incurred primarily for consumer purposes; and the loan is secured by a mortgage or deed of trust on real estate with a structure or where a structure will be located. 11 Under this definition, only those home loans that do not exceed either $350,000 or Fannie Mae s conforming loan size, are consumer loans, and have or will have a structure on the real property will qualify. For 2006, Fannie Mae s conforming loan size was $417,000 for first mortgages. Therefore, unless Fannie Mae decreases the conforming loan size, the $350,000 limitation will govern first mortgages. However, Fannie Mae also provides a conforming loan size for subordinate-lien loans, which was $208,500 for If the loan is a subordinate-lien loan, then the ceiling in the Act shrinks from $350,000 to this lower level. B. Interest Rate Threshold In addition to determining if a loan is a home loan, a lender will also need to determine if it is high-cost. A high-cost home loan is a home loan that exceeds either the Rate threshold or the Total points and fees threshold promulgated by the Act. A transaction will qualify as high-cost if it exceeds the rate threshold as set forth under HOEPA, which equals See, the Home Ownership and Equity Protection Act, (HOEPA) 15 U.S.C. 1602(aa)(1), See, e.g., KRS Determining whether or not a transaction falls within the ambit of HOEPA, although not a simple analysis, is at least widely understood in the industry. T.C.A (9).

4 eight percent (for first mortgages) and ten percent (for subordinate mortgages) over the comparable U.S. Treasury security yield measured from the fifteenth day of the month preceding the month in which the loan application was received. C. Points and Fees Threshold Alternatively, a home loan will also be subject to the Act if it has total points and fees, payable by the borrower at or before closing, that exceed: (1) the greater of five percent of the total loan amount, as defined in HOEPA, or $2,400 for loans exceeding $30,000; or (2) eight percent of the total loan amount for loans of $30,000 or less. Points and Fees are defined by reference to the same phrase as found in Regulation Z, 12 CFR section However, the Act s definition of points and fees also includes a subsection that excludes certain charges 12 included in the Regulation Z calculation. The Regulation Z provisions implementing HOEPA, at 12 CFR section 226.4(c)(7) includes as points and fees Real-estate related fees, which in turn include fees associated with title examinations, document preparation, notaries, credit reports, appraisals, and customary escrows. 13 The Act s definition of points and fees excludes these charges listed in 12 CFR section 226.4(c)(7), as provided in 12 CFR section (b)(1)(iii), 14 and further excludes them from consideration if these charges are paid to an affiliate of the lender and the amount is reasonably consistent with amounts charged for comparable services by a party not affiliated with the lender at the time the loan is made; provided, however, that only the amount of the charge that exceeds the charge for comparable items shall be included within the term points and fees. 15 In other words, if those listed charges are reasonable and are paid at arms length to a party not affiliated with the lender, they are not to be considered points and fees under the Act. Further, if they are paid to an affiliate of the lender, they will only be considered points and fees to the extent that the amount paid exceeds what would have been paid at arms length to a non-affiliated party. D. Discount Points Another of the Act s compromises appears in its exclusion of certain discount points from a calculation of the Act s points and fees threshold. Section 102(12)(B) excludes as many as two bona fide loan discount points from the Act s definition of points and fees. Per section 102(3) of the Act, a bona fide loan discount point is a loan discount point that the borrower pays to cause the lender to reduce a loan s interest rate by at least twenty-five basis points per loan discount point paid. Under this combination of provisions, then, lenders do not exceed the Act s points and fees threshold when T.C.A (12)(C). It should be noted that amounts held for payment of future taxes will never be considered points and fees under the Act because they are specifically excluded from the definition of this phrase in 12 CFR (b)(1)(iii). 12 CFR (b)(1)(iii) provides that the charges listed in 12 CFR 226.4(c)(7) are not considered points and fees if: (1) the charge is reasonable; (2) the creditor receives no direct or indirect benefit; and (3) the charge is not paid to an affiliate of the creditor. T.C.A (12)(C).

5 they charge borrowers as much as two discount points in exchange for as little as a fifty basis point reduction in a loan s interest rate. V. Prohibited Practices A. Introduction After navigating the cluttered path of the Act s applicability provisions, the focus must shift to the lender s duties, responsibilities, and prohibited practices under the Act. Section of the Act identifies and prohibits certain allegedly abusive practices in connection with high-cost home loans. The list is familiar to anyone who has studied these bills in other states. The prohibited practices for high-cost home loans include the following: B. No Recommendation of Default A lender shall not recommend or encourage default or skipping of payment on an existing loan in connection with the closing or planned closing of the high-cost loan that refinances all or a portion of the existing loan. C. No Prepayment Penalties The lender may not charge or collect fees to provide a release upon prepayment of a highcost home loan except for the actual cost of releasing the mortgage. D. Reasonable Benefit A lender may not intentionally make a high-cost home loan that refinances, within 30 months, an existing loan, unless the new loan has a reasonable benefit to the borrower, considering all of the circumstances, including loan terms, economic and non-economic circumstances, or cost of the new loan. Reasonable benefit is not defined. E. Ability to Repay The Act prohibits a lender from making a high-cost home loan unless it reasonably believes that the borrower will be able to make the scheduled payments to repay the obligation, based on a consideration of their current and expected income, current obligations, employment status, and other financial resources, but not considering the borrower s equity in the dwelling which secures the repayment of the loan. The lender is entitled to rely on a presumption that the borrower can make the scheduled payments if, at the time the loan is consummated, the borrower s total monthly debts, as identified on the borrower s credit report and as computed by the lender s underwriting guidelines and methodology, including amounts owed under the loan, do not exceed fifty percent of the borrower s monthly gross income, as verified and as underwritten in accordance with the lender s guidelines.

6 F. Limited Points and Fees A lender is prohibited from financing points and fees in excess of the greater of three percent of the total loan amount or $1,500, if the loan is more than $30,000; or five percent of the loan amount if the loan amount is less than $30,000. Loans that are made pursuant to Tennessee s Industrial Loan and Thrift Company Act, however, are subjected to that act s limitations on points and fees. 16 G. Limited Refinance Fees A lender may not charge a borrower points and fees in connection with the refinance of a high-cost home loan with the same lender. This prohibition does not extend to charging points and fees in connection with additional proceeds received by the borrower in connection with a refinancing. H. Limited Prepayment Penalties No prepayment fees or penalties shall be charged that exceed two percent of the loan payment prepaid in the first two years following the loan closing. Prepayment fees may not be charged if the lender or an affiliate of the lender is the holder of the note being refinanced. Although the statute s language is not a model of clarity, it appears to permit only those refund methods permitted under 12 CFR sections (d)(6) and (7). I. No Balloon Payments A high-cost home loan may not contain a scheduled payment which is more than twice as large as the average of earlier scheduled payments (except when the payment schedule is adjusted to the seasonal or irregular income of the borrower). This prohibits balloon payment loans. J. No Negative Amortization A high-cost home loan may not contain a payment schedule with periodic payments that cause the principal balance to increase. K. No Discretionary Acceleration A high-cost home loan may not authorize the lender to accelerate a high-cost home loan at the lender s sole discretion. However, acceleration for default is permitted. L. Limited Advance Payment A high-cost home loan may not require that more than two periodic payments be consolidated and paid in advance from the loan proceeds. 16 See T.C.A (a)(1)(A).

7 M. No Default Rate A high-cost home loan may not contain provisions causing the interest rate to increase after default. N. Limitation on Late Fees A late payment fee on a high-cost home loan may not exceed the greater of $15 or five percent of the amount of the payment past due, may be assessed only for payments that are ten or more days past due, and may be assessed only once per single late payment. O. No Bait and Switch A lender may not present a borrower with a high-cost home loan at closing with a materially different interest rate, term, type of loan, or settlement charge from the settlement charges disclosed on the last RESPA disclosure, without redisclosure at least one day before closing. Materially different settlement charges means an increase over the previously disclosed settlement charges of fifteen percent or more. P. Closings High-cost home loan closings must be conducted in the office of the lender, an attorney licensed to practice in Tennessee, a title insurance company or title insurance agency licensed in Tennessee, the office of a settlement or closing agent, or the commercial office of a mortgage broker. Q. Credit Reporting The lender or its servicer must report, at least quarterly, both the unfavorable and favorable payment history information of the borrower on payments due on high-cost home loans to a nationally recognized consumer credit reporting agency. R. No Incomplete Documents No lender shall encourage or solicit any person to execute any loan agreement, mortgage, deed, deed of trust, loan application, settlement statement, or other loan or closing document for a high-cost home loan if any material term of the loan or transaction are omitted or incomplete. No person shall modify any loan document, unless the modification is with the consent of the person or persons affected by the change and such consent is in writing or authorized by a valid power of attorney. VI. Disclosures The Act requires a lender making a high-cost loan to furnish several disclosures, as noted below. A. Deed of Trust Disclosure

8 Each deed of trust (i.e., mortgage) securing a high-cost home loan must state on its face: This instrument secures a high-cost home loan, as defined in Tenn. Code Ann., Title 45. B. Note Disclosure Each note evidencing a high-cost home loan must state on its face this instrument is a high-cost home loan, as defined in Tenn. Code Ann. Title 45. C. Notice to Borrower A lender must give the following written notice, in at least 12 point bold type, to the borrower and obtain an acknowledgement signed by the borrower: YOU SHOULD BE AWARE THAT YOU MIGHT BE ABLE TO OBTAIN A LOAN AT A LOWER COST. YOU SHOULD SHOP AROUND AND COMPARE LOAN RATES AND FEES. MORTGAGE LOAN RATES AND CLOSING COSTS AND FEES VARY BASED ON MANY FACTORS, INCLUDING YOUR PARTICULAR CREDIT AND FINANCIAL CIRCUMSTANCES, YOUR EMPLOYMENT HISTORY, THE LOAN-TO-VALUE REQUESTED AND THE TYPE OF PROPERTY THAT WILL SECURE YOUR LOAN. THE LOAN RATE AND FEES COULD ALSO VARY BASED ON WHICH LENDER OR BROKER YOU SELECT. IF YOU ACCEPT THE TERMS OF THIS LOAN, THE LENDER WILL HAVE A MORTGAGE LIEN ON YOUR HOME. YOU COULD LOSE YOUR HOME AND ANY MONEY YOU PUT INTO IT IF YOU DO NOT MEET YOUR PAYMENT OBLIGATIONS UNDER THE LOAN. YOU SHOULD CONSULT A QUALIFIED INDEPENDENT CREDIT COUNSELOR OR OTHER EXPERIENCED FINANCIAL ADVISOR REGARDING THE RATE, FEES AND PROVISIONS OF THIS MORTGAGE LOAN BEFORE YOU PROCEED. THE UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (HUD) MAINTAINS A LIST OF CREDIT COUNSELORS IN YOUR AREA. YOU MAY OBTAIN HUD S LIST OF CREDIT COUNSELORS BY CONTACTING HUD DIRECTLY OR BY CONTACTING THE TENNESSEE DEPARTMENT OF FINANCIAL INSTITUTIONS. YOU ARE NOT REQUIRED TO COMPLETE THIS LOAN AGREEMENT MERELY BECAUSE YOU HAVE RECEIVED THIS DISCLOSURE OR HAVE SIGNED A LOAN APPLICATION. REMEMBER, PROPERTY TAXES

9 AND HOMEOWNER S INSURANCE ARE YOUR RESPONSIBILITY. NOT ALL LENDERS PROVIDE ESCROW SERVICES FOR THESE PAYMENTS. YOU SHOULD ASK YOUR LENDER ABOUT THESE SERVICES. ALSO, YOUR PAYMENTS ON EXISTING DEBTS CONTRIBUTE TO YOUR CREDIT RATINGS. YOU SHOULD NOT ACCEPT ANY ADVICE TO IGNORE YOUR REGULAR PAYMENTS TO YOUR EXISTING LENDERS. D. Notice of Availability of Credit Counseling A lender making a high-cost home loan must first provide to the borrower notice of the availability of credit counselors. Such counselors must be third-party, non-profit organizations approved by the U.S. Department of Housing and Urban Development, the Tennessee Housing Finance Agency, or a regulatory agency with jurisdiction over the lender. Credit counselors must be located in the county of the borrower or the nearest county in which a counselor is available. Alternatively, resource lists may be provided, offering toll-free numbers and website information to reach counselors. The borrower must be afforded the opportunity to seek counseling without penalty. VII. Right to Cure Section 104 of the Act provides a borrower s right to cure upon default. A lender seeking to accelerate the mortgage indebtedness and foreclose must send a notice to the borrower at least thirty days prior to publishing notice of foreclosure or commencing an action for judicial foreclosure. Such notice must inform the borrower of the nature of the default, the amount necessary to cure the default (including daily interest rates and possible late fees), the date by which a borrower may cure the default to avoid acceleration, the name, address and phone number of a person to whom payment shall be made, the name and address of the lender or servicer, and the telephone number of a representative whom the borrower may contact to dispute the default or the correctness of the amount required to cure. Finally, the lender must inform the borrower that, if he or she does not cure the default by the date specified, steps may be taken to terminate the borrower s ownership in the property. The provision makes clear that, during the cure period, the borrower is liable for protective expenses incurred by the lender to preserve, maintain or protect the property or the lender s lien on the property. Also, the Act provides that, after the lender publicly files notice of foreclosure or takes other action to seize or transfer ownership of the home, the borrower will be liable for attorney s fees that are reasonable and actually incurred by the lender in connection with the foreclosure. The borrower may not invoke its right to cure a default under this section more than once in any twelve-month period. VIII. Assignee Liability Section 105 of the Act defines the liability that may stem from an assignment of the mortgage. In general, any person who purchases or takes assignment of a high-cost home loan is

10 subject to all claims and defenses that a borrower could assert against the lender of the high-cost home loan. However, the Act limits this exposure in a number of ways. The purchaser or assignee may avoid liability if it can demonstrate, by a preponderance of the evidence, that it exercised due diligence intended to prevent the purchaser or assignee from purchasing or taking assignment of a high-cost home loan that violates the Act. Section (c) sets forth a compliance regime through which a lender may demonstrate the exercise of the above-mentioned due diligence. The Act also makes clear that the lender is not required to conduct a loan-by-loan review. Standard quality control methodology may be used. Borrowers may sue an assignee only in the borrower s individual capacity, and a cause of action must be brought within three years from the date of the occurrence of the violation. However, raising the defense of recoupment or setoff, a borrower is not barred from asserting a violation of section of the Act in an action to collect a debt that was brought more than one year from the date of the occurrence of the violation. IX. Penalties Section of the Act provides penalties for violations of the Act s provisions. A lender found by a preponderance of the evidence to have violated the Act is subject to liability for actual damages; for willful or intentional violations, statutory damages equal to the amount of all finance charges and fees paid by the borrower, forfeiture of the remaining loan interest, and costs (including reasonable attorneys fees) are available. Punitive damages may be awarded where a court finds that a violation is malicious or reckless. Punitive damages are limited to three times actual damages and the amount of all finance charges and fees paid by the borrower, exclusive of costs and attorneys fees. A court may reform a mortgage loan s terms and provisions to effect the remedies provided in this section. The Act notes that the remedies provided in it are not exclusive but are in addition to other remedies available to a borrower under applicable law. If a court finds that the borrower s action is frivolous or brought for the purpose of harassment, then the court may require the borrower to indemnify the defendant for its reasonable attorneys fees and costs. To assert a claim for fees and costs, the lender must file a motion with the court and provide at least fifteen days after service in which the borrower may respond. X. Compliance Failure Section of the Act provides that a lender may establish a defense to a violation by showing that, within thirty days of a violation s discovery, and prior to the institution of any legal action by the borrower, the borrower has been notified of the compliance failure, the lender has made appropriate restitution, and the lender has made whatever adjustments are necessary to satisfy the Act or to remove the loan from the definition of high-cost. Alternatively, the lender may show that the compliance failure was not intentional and resulted from a bona fide error, notwithstanding the maintenance or procedures reasonably adapted to avoid such errors, and that corrective action was taken within sixty days after the discovery of the compliance failure and prior to the institution of any legal action. The lender

11 must also show that the borrower has been notified of the compliance error, the lender has made appropriate restitution to the borrower, and whatever necessary adjustments to the loan have been made. The Act cites examples of bona fide error, including a clerical calculation, computer malfunction in programming, and printing errors. XI. Rulemaking Section of the Act grants to the Commissioner the power to interpret the provisions of the Act and to enact reasonable substantive and procedural rules as it deems necessary for the administration, enforcement and interpretation of the Act. The Commissioner may order violators to cease and desist, to make restitution, to pay civil penalties up to $10,000 for each violation, and to suspend or revoke licenses. XII. Conclusion The full effects of the Tennessee Home Loan Protection Act have yet to make themselves known, as there are yet no reported cases. Clearly, the preemption of local authorities ability to regulate the same subject matter will reduce the compliance burdens for lenders, who can now focus on one state regulatory scheme for mortgage loans in the State of Tennessee. On the other hand, the Act will create more complex compliance requirements for lenders, due especially to its definition of and restrictions on high-cost home loans, a new term which will likely require judicial interpretation before lenders can be sure if the Act applies to a particular loan. This does not encourage subprime mortgage lending. Also, the limited scope of the Act belies its allencompassing name. It will not apply as broadly as its name suggests. Only experience will resolve the extent to which consumers will benefit from the increased disclosure requirements and the express prohibition of various practices that led to the enactment of the Act. The Act is clearly more balanced, in terms of weighing the need for consumer protection against the impact on credit availability, than most of the other anti-predatory lending initiatives. On the other hand, this statement is largely an indictment of these other initiatives. Though it has largely escaped public notice, it is probably no coincidence that the recent collapse in subprime mortgage lending (and a related housing and foreclosure crisis) has followed on the heels of these greatly expanded state and federal anti-predatory lending rules. While the Tennessee Act may be less damaging than some of the other laws and regulations, it is clearly not cost-free in terms of the cost and availability of mortgage credit. Policy-makers will ignore this impact at their peril. ZZ998:CRED:670644:2:LOUISVILLE