Mortgage Banking Commentary

Transcription

1 Mortgage Banking Commentary January 2003 New York, New York, New York: The Three Faces of Anti-Predatory Lending Laws in New York We have attached a Chart depicting the three various New York laws on predatory lending: the Part 41 Regulations applicable to licensed lenders, the New York State law that takes effect on April 1, 2003 and the New York City law that takes effect on February 18, 2003 Our colleagues, Nanci Weissgold and Suzanne Garwood, prepared the Chart As you will see, a single loan in New York City will be subject to three separate sets of legal requirements, addressing similar issues in different ways One does not typically associate multiple personality disorders with residential mortgage lending laws, but the governmental response to predatory lending in New York clearly is schizophrenic The goal of any lender likely will be to try to stay below the triggers of the three laws to avoid their application; trying to comply with the conflicting requirements of the three laws will be a tall task As the Chart shows, only the new state law provides explicit assignee liability This law is modeled in part on the Georgia Fair Lending Act While it does not include the concept of covered loans, the New York State law contains assignee liability provisions that already have rattled the capital markets Both laws are based on the model Home Loan Protection Act prepared and recommended by the the Public Policy Institute (the Institute ) of the American Association of Retired Persons ( AARP ) (see: aarp org/ppi) The New Jersey law also is based on this model The AARP, through the Institute, vigorously has fought and is fighting for the enactment of its model law around the country It is an aggressive advocate of its model law, and it was one of the leading voices, if not the leading voice, behind the new New York State law At the same time, one must begin to wonder whether the senior officers and Board of Directors of the venerable AARP have ceded too much authority to the Institute on this issue The principal authors of AARP s model law include well known lawyers from the National Consumer Law Center ( NCLC ), which is the intellectual engine for the class action plaintiffs bar The model law contains a disclaimer from the Institute that: The views expressed herein do not necessarily represent official policies of AARP The AARP s model law, as enacted in Georgia and New York, is causing consternation in the capital markets in a way that will impact the availability and price of home loans to the members of AARP It may be time for the lending industry to seek to meet with the senior leadership of the AARP to make sure they understand the effect of the Institute s actions on the residential lending industry One must wonder if it is the official policy of the AARP to promote state laws that have the effect on the market as does the Georgia version of the AARP model act For more information, please contact any member of our Mortgage Banking and Consumer Finance Group, listed on the following page Kirkpatrick & Lockhart LLP

2 MORTGAGE BANKING/CONSUMER FINANCE GROUP Kirkpatrick & Lockhart LLP was founded in 1946, and, with more than 650 lawyers, is one of the 50 largest law firms in the United States K&L attorneys are based in ten offices in key U S cities Boston, Dallas, Harrisburg, Los Angeles, Miami, Newark, New York, Pittsburgh, San Francisco, and Washington Our firm represents a broad range of clients in a wide variety of matters, including corporate and securities, e-commerce, investment management, insurance coverage, financial institutions, mortgage banking and consumer finance, creditors rights, intellectual property, tax, labor, environmental, antitrust, health care, and government contracts More than half our attorneys are litigators We litigate class actions on a range of financial issues, generally defending financial institutions, brokerdealers, public companies, and investment companies and their officers and directors against claims of violations of securities laws, consumer credit laws, and common law tort and contract claims You can learn more about our firm by visiting our Internet website at www kl com The Mortgage Banking/Consumer Finance Group provides legal advice and licensing services to the consumer lending industry We counsel clients engaged in the full range of mortgage banking activities, including the origination, processing, underwriting, closing, funding, insuring, selling, and servicing of residential mortgage loans and consumer loans, from both a transactional and regulatory compliance perspective Our focus includes both first- and subordinatelien residential mortgage loans, as well as open-end home equity, property improvement loans and other forms of consumer loans We also have experience in multi-family and commercial mortgage loans Our clients include mortgage companies, depository institutions, consumer finance companies, investment bankers, insurance companies, real estate agencies, homebuilders, and venture capital funds Members of the Mortgage Banking/Consumer Finance Group and their telephone numbers and addresses are listed below: ATTORNEYS Laurence E Platt lplatt@kl com Phillip L Schulman pschulman@kl com Costas A Avrakotos cavrakotos@kl com Melanie Hibbs Brody mbrody@kl com Steven M Kaplan skaplan@kl com Irene C Freidel ifreidel@kl com Jonathan Jaffe jjaffe@kl com R Bruce Allensworth ballensworth@kl com Daniel J Tobin dtobin@kl com Anthony P La Rocco alarocco@kl com David L Beam dbeam@kl com Emily J Booth ebooth@kl com Eric J Edwardson eedwardson@kl com Suzanne F Garwood sgarwood@kl com Tara L Goebel tgoebel@kl com Laura A Johnson laura johnson@kl com Kristie D Kully kkully@kl com Krista Patterson kpatterson@kl com Carol M Tomaszczuk ctomaszczuk@kl com Nanci L Weissgold nweissgold@kl com DIRECTOR OF LICENSING Stacey L Riggin sriggin@kl com REGULATORY COMPLIANCE ANALYSTS Dana L Lopez dlopez@kl com Nancy J Butler nbutler@kl com Susan C Curtin scurtin@kl com Joelle Myers jmyers@kl com Marguerite T Frampton mframpton@kl com Jeffrey Prost jprost@kl com Patricia E Mesa pmesa@kl com Kenasha C Scott kscott@kl com LEGAL ASSISTANTS Carol A Carson ccarson@kl com Mera C Choi mchoi@kl com BOSTON... n DALLAS n HARRISBURG n LOS ANGELES n MIAMI n NEWARK n NEW YORK n PITTSBURGH n SAN FRANCISCO n WASHINGTON This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer KIRKPATRICK & LOCKHART LLP. ALL RIGHTS RESERVED. Kirkpatrick & Lockhart LLP Challenge us.

3 Comparative Analysis by Kirkpatrick & Lockhart LLP of Regulation Z of the federal Truth in Lending Act to New York State Part 41, New York A and New York City Predatory Lending Ordinance WHO MUST COMPLY WITH THE PREDATORY LENDING REGULATION Section 32 of Regulation Z (12 C.F.R ) applies to a creditor which term is defined as a person (i) who regularly extends consumer credit (credit offered or extended to a consumer primarily for personal, family, or household purposes) that is subject to a finance charge or is payable by written agreement in more than 4 installments (not including a down payment), and (ii) to whom the obligation is initially payable, either on the face of the note or contract, or by agreement when there is no note or contract. See id (17) and (12). A person regularly extends consumer credit under Section 32 if in any 12- month period, the person originates more than one credit extension that is subject to the requirements of Section 32 or one or more such credit extensions through a mortgage broker. See id , fn.3. Part 41 of the General Regulations of the Banking Board, entitled Restrictions and Limitations on High Cost Home Loans (N.Y. Comp. Codes R. & Regs. tit. 41, 41.1 et seq.) (the Regulations ), applies to high cost home loans. Although the regulation contains provisions that apply to lenders, mortgage brokers and, for certain provisions, assignees and servicers of high cost home loans, the Department of Banking has indicated that the Regulation applies only to originators of high cost home loans and mortgage brokers and does not include mere purchasers or servicers of high cost home loans. The term lender is any individual or entity that in any twelve-month period originates more than one high cost home loan. See id. 41.1(a). Thus, there is a de minimis of only one high cost home loan. The individual or entity to whom the obligation is initially A applies to lenders. The term lenders means a mortgage banker or an exempt entity as defined under Sections 590(f) and 590(e) of the Banking Law. Section 590(f) of the Banking Law defines a mortgage banker as a person or entity who or which is licensed pursuant to Section 591 of the Licensed Mortgage Banker Act to engage in the business of making mortgage loans in New York. An exempt entity is any insurance company, banking organization, foreign banking corporation licensed by the superintendent or the Office of the Comptroller of the Currency to transact business in New York, national bank, federal savings bank, federal savings and loan association, federal credit union, or any bank, trust company, savings bank, savings and loan association, or credit Unlike a typical anti-predatory lending law, No. 36 does not outlaw a financial institution from making of predatory loans. Rather, No. 36 prohibits a financial institution from (i) acting as a depository for City business, (ii) receiving any financial assistance from the City; (iii) contracting with the City to provide goods and services; or (iv) having the City invest in its stock, securities or other obligations, if the financial institution or any of its affiliates is classified as a predatory lender. A financial institution is a bank, savings and loan association, thrift, credit union, investment company, mortgage banker, mortgage broker, trust company, savings bank, securities broker, municipal securities broker, securities dealer, municipal securities dealer, securities underwriter, municipal securities underwriter, investment trust, bank holding company, finance company, or financial services holding company. An affiliate is any person that DC v

4 payable, either on the face of the note or contract, or by agreement when there is no note or contract, is deemed to be the lender in the loan transaction. Id. The term mortgage broker is not defined. union organized under the laws of any other state, or any instrumentality created by the United States or any state with the power to make mortgage loans. Subject to such regulations as may be promulgated by the banking board, "exempt organization" may also include any subsidiary of such entities. controls, is controlled by, or is under common control with another person, including any successors in interest. Control means ownership of ten percent or more of any class of outstanding stock of a company or the power to direct or cause the direction of the management and policies of a person. A predatory lender is a lender that, in the aggregate for such lender and its affiliates, extends, purchases or invests in, during a twelve-month period the lesser of ten individual predatory loans or any number of predatory loans constituting 5% of the total number of home loans made, purchased or invested in during such 12-month period. (For purposes of this calculation, one must aggregate the loans of a lender and any of its affiliates.) A lender will not be classified as a predatory lender if, among other reasons, when directly or indirectly purchasing or investing in high cost home loans, or arranging for the purchase or investment in high cost home loans by collective investment or securitization, the lender reasonably believes, after reasonable investigation, conducted by or on behalf of such lender, based upon reasonable procedures consistent with industry practice -2-

5 for the review of the terms and other characteristics of home loans in connection with the purchase or securitization of, or investment in, high cost home loans generally, that the home loans purchased or invested in do not constitute predatory loans. For purposes of this paragraph, procedures consistent with industry practice shall include, but not be limited to, a random statistical sample of not less than 10% of the home loans for real property located in the City of New York included in the home loan pool to be securitized or purchased, except that if the lender has an established business relationship with the originator or wholesaler of the home loans being purchased or securitized, as demonstrated by the lender having completed not less than four transactions with said entity during the preceding two years, the lender may conduct a random statistical sample of not less than five percent of the home loans described above. Lender means any person that extends, purchases or invests in, directly or indirectly, including through collective investment or securitization entities, one or more home loans, or any person that arranges, directly or indirectly, including through collective investment or securitization, for the extension, -3-

6 purchase of or investment in one or more home loans, including, but not limited to, the securities trust trustee and underwriter, and any mortgage broker with respect to home loans. However, for purposes of this definition, a lender shall not be deemed to be: (1) collective investment entities, including, without limitation, investment companies as defined under the Investment Company Act of 1940, hedge funds, bank collective trust funds, offshore funds and similar entities that are not created to and do not acquire pools of mortgage loans, or issue securities based on and backed by pools of mortgage loans, and any passive investor in the interests created therein that exercises no discretion regarding such interests other than to buy, hold or sell them; (2) purchasers of mortgage loans or mortgage related securities where the seller is obligated by written agreement and, in fact, intends to repurchase all the loans or securities within 180 days of such sale; (3) lenders whose interest in high-cost home loans is limited to a security interest or -4-

7 who acquire title as a result of the foreclosure of such security interest, except that such lenders shall not extend credit to a person found to be a predatory lender as defined by this section; (4) securities broker dealers that trade in but otherwise are not involved in any material respect in the securitization of the underlying mortgages; or (5) any passive investor in securities or interests in securities based on or backed by a pool of high-cost home loans that exercises no discretion regarding the securities other than to buy, hold or sell them. DEFINITION OF LOANS SUBJECT TO REGULATION A "Section 32 loan" is a consumer credit transaction that is secured by the consumer's principal dwelling and satisfies one of the trigger tests. See 12 C.F.R (a)(1). A "high cost home loan" is a residential mortgage loan in which the application is taken on or after October 1, 2000 and: (1) the principal amount of the loan does not exceed the lesser of (i) the conforming loan size limit for a comparable dwelling as established by FNMA [currently set at $322,700 for a single family dwelling]; or (ii) $300,000; (2) the borrower is a natural person; (3) the debt is incurred by the borrower primarily for personal, family or household purposes; (4) the loan is secured by a mortgage on real estate upon A home loan is a loan where: (1) the principal amount of the loan does not exceed the lesser of (a) the conforming loan size limit for a comparable dwelling as established from time to time by Fannie Mae ($322,700 for a single-family dwelling for 2003), or (b) $300,000; Applies to a home loan, a high cost home loan or a predatory loan. A home loan is a residential mortgage, where: (1) the borrower is a natural person; (2) the loan is secured by a residential mortgage on real estate upon which there is located or there is to be located a -5-

8 which there is located or there is to be located a structure or structures, intended principally for occupancy of from one to four families, which is or will be occupied by the borrower as the borrower's principal dwelling; (5) the property is located in New York; or (6) the terms of the loan exceed one or more of the trigger tests (rate test or points and fees test). See id. 41.1(e). (2) the borrower is a natural person; (3) the debt is incurred by the borrower primarily for personal, family or household purposes; (4) the loan is secured by real estate upon which there is located or will be located a structure or structures intended principally for occupancy from one to four families, which is or will be occupied by the borrower as the borrower s principal dwelling; and (5) the property is located in New York. A high cost home loan is a home loan with an APR or points and fees that exceed certain thresholds. A (D) and (E). structure or structures intended principally for occupancy by from one to four families, or by a residential condominium or by a cooperative unit, or shares issued in respect thereof, which is or will be occupied by the borrower as the borrower s principal residence; (3) the property is located in New York City; (4) the principal amount does not exceed the greater of: (a) the conforming loan size limit for a comparable dwelling as established from time to time by Fannie Mae ($322,700 for a single family dwelling for 2003); or (b) $300,000; (5) the loan is primarily for personal, family or household purposes; and (6) the loan is entered into on or after the date the ordinance goes into effect. NY Mun. Code 6-128(a)(9). A high cost home loan is a home loan that meets or exceeds certain APR and points and -6-

9 fees threshold. Id (a)(8). A predatory loan is a high cost loan that contains certain prohibited terms (including no reasonable and tangible benefit to the borrower, failure to determine ability to repay, financing points and fees that exceed four percent of the total loan amount, etc.) Id (a)(16). -7-

10 LOANS EXCLUDED FROM REGULATION A "Section 32 loan" does not include (i) a loan that is secured by a dwelling which is not the consumer's principal dwelling; (ii) a residential mortgage transaction, which is defined, generally, as a transaction in which a mortgage is created or retained in the consumer's principal dwelling to finance the acquisition or initial construction of that dwelling; (iii) a reverse mortgage transaction; or (iv) a transaction under an open-end credit plan. See id (a)(1). Please note that certain prohibitions listed below contain exceptions and, thus, may further exclude certain loans from applicability. A "high cost home loan" does not include a reverse residential mortgage loan or any product offered as a mortgage loan by an instrumentality of the United States (i.e. VA or FHA, as set forth in the Regulations, even though VA and FHA do not offer any loans) or of any state. See id. 41.1(e) and Unlike a Section 32 loan, New York s regulation does not exclude a purchase money mortgage loan or a construction loan, unless one of the other exclusions applies. A home loan does not include a reverse mortgage loan. A (D). Unlike a Section 32 loan, A does not exclude a purchase money mortgage loan or a construction loan, unless one of the other exclusions applies. A home loan does not include reverse mortgages. N.Y. Mun. Code 6-128(a)(9). Unlike a Section 32 loan, No. 36 does not exclude a purchase money mortgage loan or a construction loan, unless one of the other exclusions applies. Thus, a purchase money mortgage loan or a construction loan is not a Section 32 loan, irrespective of whether one of the trigger tests is met. TRIGGER (RATE TEST) The APR exceeds by more than 8 percentage points for first-lien loans or 10 percentage points for subordinate-lien loans the yield on Treasury securities having periods of maturity comparable to the loan maturity as of the 15th day of the month immediately preceding the month in which the creditor receives the application for the extension of credit. See id (a)(1)(i). APR exceeds by more than 8 percentage points for first-lien loans or 9 percentage points for junior loans the yield on Treasury securities having periods of maturity comparable to the loan maturity measured as of the 15th day of the month immediately preceding the month in which the creditor receives the application for the residential mortgage loan. See id. 41.1(e)(6)(i)-(ii). The annual percentage rate at consummation exceeds by more than 8 percentage points for first-lien loans or 9 percentage points for subordinate-lien loans the yield on Treasury securities having comparable periods of maturity as of the 15 th day of the month immediately preceding the month in which the creditor receives the application for the extension The annual percentage rate at consummation exceeds by more than 6 percentage points for first-lien loans or 8 percentage points for subordinate-lien loans the yield on Treasury securities having comparable periods of maturity as of the 15 th day of the month immediately preceding the month in which the creditor receives the application for the extension of credit. -8-

11 When calculating the APR for adjustable rate loans, the creditor must use the interest rate that would be effective once the introductory rate has expired. Id. In determining the applicable yield on United States Treasury securities, the lender may utilize the yield published by the Banking Department on its website or the yield as determined by reference to Section 12 C.F.R (a) and commentary thereto, provided the lender notes in the loan file which yield is being utilized and uses that yield consistently; Id. 41.1(e)(6)(ii). of credit. Annual percentage rate is defined to mean the annual percentage rate calculated according to the federal Truth in Lending Act, Regulation Z as amended from time to time. With respect to variable rate loans, where the interest rate has a lower introductory period, the APR is the rate that applies after the lower introductory period. A (G) and (B) NY Mun. Code 6-128(a)(8). Generally, the APR is calculated according to the federal Truth in Lending Act, as amended by HOEPA, and its implementing regulations, as amended from time to time. With respect to variable rate loans, if the loan contains an initial or introductory rate that is less than the APR that will apply after the initial or introductory period, then the APR that must be used to calculate the threshold is the APR that is calculated and disclosed on the initial disclosure statement required under Section of Regulation Z for the period after the initial or introductory period. TRIGGER (POINTS AND FEES TEST) Total points and fees exceed the greater of 8% of the total loan amount or $488 (for the year 2003, adjusted annually based on Consumer Price Index). See id (a)(1)(ii). Total points and fees exceed 5% of the total loan amount, provided that bona fide loan discount points (i.e. reduces the interest rate by a minimum of 35 basis points or 3/8 of a point) payable by the borrower in connection with the loan transaction may be excluded from the points and fees test. See id. 41.1(e)(6)(iii). Total points and fees exceed: (i) five percent of the total loan amount if the total loan amount is $50,000 or more; (ii) six percent of the total loan amount if the total loan amount is $50,000 or more and the loan is an FHA-insured or VA-guaranteed purchase money loan; or (iii) the greater of six percent of the total loan amount or $1,500 if the total loan amount is less than $50,000. Lenders may exclude up to and including two bona fide loan discount points payable by the borrower in connection with the The total points and fees on the loan exceed: (i) four percent of the total loan amount if the total loan amount is $50,000 or more; (ii) the greater of five percent of the total loan or $1,500, if the total loan amount is less than $50,000. Lenders can exclude up to four bona fide loan discount points payable by the borrower in connection with the loan transaction if the interest rate from which the loan s interest rate -9-

12 loan transaction, but only if the interest rate from which the loan s interest rate will be discounted does not exceed by more than one percentage point the yield on United States Treasury Securities having comparable periods of maturity to the loan maturity measured as of the fifteenth day of the month immediately preceding the month in which the application is received. Id. 1(G)(1). Lenders also may exclude all bona fide loan discount points funded directly or indirectly through a grant from a federal, state or local government agency or 501(c)(3) organization. Id. Bona fide loan discount points are loan discount points knowingly paid by the borrower funded through any source, for the purpose of reducing, and which in fact result in a bona fide reduction of, the interest rate or time price differential applicable to the loan, provided that the amount of the interest rate reduction purchased by the discount points is reasonably consistent with established industry norms and practices for secondary market transactions. For purposes of the above, a discount point is presumed to be a bona fide loan discount point if it reduces the interest rate by a will be discounted does not exceed by more than two percentage points the required net yield for a 90-day standard mandatory delivery commitment for a reasonably comparable loan from the greater of Fannie Mae or Freddie Mac. NY Mun. Code 6-128(a)(8). Bona fide loan discount points means discount points knowingly paid by the borrower, funded through any source, for the purpose of reducing, and which in fact results in a bona fide reduction of, the interest rate or time-price differential applicable to the loan, provided that the amount of the interest rate reduction purchased by the discount points is reasonably consistent with established industry norms and practices. Id (a)(3). -10-

13 minimum of 25 basis points provided all other terms of the loan remain the same. A (C). DEFINITION OF POINTS AND FEES "Points and fees" are (1) all items to be disclosed under section 226.4(a) [Definition of Finance Charge] and 226.4(b) [Example of Finance Charge], except interest or the timeprice differential; (2) all compensation paid to mortgage brokers; (3) all items required to be disclosed under section 226.4(c)(7) [Charges Excluded from the Finance Charge] (other than amounts held for future payment of taxes) unless the charge is reasonable, the creditor receives no direct or indirect compensation in connection with the charge, and the charge is not paid to an affiliate of the creditor; and (4) premiums or other charges for credit life, accident, health, or loss-of-income, or debtcancellation coverage (whether or not the debtcancellation coverage is insurance under applicable law) that provides for cancellation of all or a part of the consumer s liability in the event of the loss of life, health, or income or in the case of accident, written in connection with the credit transaction. See id (b)(1). Definition of "points and fees" is the same as that under TILA. See id. 41.1(g). Despite New York s apparent attempt to adopt the federal definition of points and fees in its entirety, note that Part 41 defines the term affiliate as any company that controls, is controlled by, or is under the common control of another company. Control means ownership of ten percent or more of any class of outstanding capital stock of the company or the power to direct or cause the direction of management and policies of the company. The definition of affiliate for HOEPA purposes effectively is 25 percent. This difference will affect what types of fees are included for 4(c)(7) charges that are paid to affiliates. Arguably, by incorporating the federal definition by reference, then Part 41 also should adopt the federal 4(c)(7) test, including the 25 percent affiliate threshold. The New York Banking Department, however, does not appear to have adopted this interpretation. We spoke informally with Fred Drexler of the New York State Banking Department who indicated that the affiliate Points and fees means: (i) all items listed in paragraphs 1-4 of 12 USC 1605(A). These fees include: (a) any amount payable under a point, discount or other system of charges except interest or the time price differential; (b) service or carrying charges; (c) a loan fee, finders fee, or similar charge; and (d) fees for investigation of credit reports; (ii) all compensation paid directly or indirectly to a mortgage broker including a broker that originates a loan in its own name in a table-funded transaction not otherwise included above; (iii) all items listed under 12 CFR Section 226.4(c)(7) unless (i) the creditor receives no direct or indirect compensation in connection with the charge, or (ii) the charge is not paid to Points and fees is defined to mean: (i) all items listed in 15 USC Sections 1605(a)(1) through (4), except interest or the time price differential; (ii) all charges for items listed under Section 226.4(c)(7), as amended from time to time, but only if the lender receives direct or indirect compensation with the charge or the charge is paid to an affiliate* of the lender; (iii) all compensation not otherwise specified in the definition of points and fees paid directly or indirectly to a mortgage broker, including a broker that originates a home loan in its own name through an advance of funds and subsequently assigns the home loan to the person advancing the funds; (iv) the premium of any single premium credit life, credit disability, credit property, credit -11-

14 definition of 10 percent, as described above, rather than the federal 25 percent test, is the proper test for affiliation notwithstanding the legislature s apparent attempt to adopt the federal definition of points and fees in its entirety. Nevertheless, we believe that there is some evidence to support an interpretation that the federal test should be used for purposes of calculating points and fees. First, the term affiliate is used throughout Part 41 in the context of certain prohibited practices. Second, the New York legislature expressly adopted the definition of points and fees as set forth under Section 32 and the Official Staff Commentary thereto, which contains a 25 percent affiliate test for 4(c)(7) charges. Thus, if lenders were to follow the direction of the Banking Department, they would apply a definition of points and fees that is different from that adopted under the federal law. In any event, the Part 41 definition of affiliate is a lower threshold than that which applies under Section 32. Thus, by adopting the New York definition of affiliate, lenders are adopting an affiliate* of the creditor; and (iv) the cost of all premiums financed by the lender, directly or indirectly, for any credit life, credit disability, credit unemployment, or credit property insurance, or any other life or health insurance, or any payments financed by the lender directly or indirectly for any debt cancellation or suspension agreement or contract, except that insurance payments calculated and paid on a monthly basis are not considered financed by the lender. *A adopts the definition of affiliate as set forth under the Bank Holding Company Act for purposes of determining those fees that are included as points and fees. unemployment or other life or health insurance, including any payments for debt cancellation or suspension, except that insurance premiums calculated and paid on a monthly basis may not be included; and (v) all prepayment fees or penalties that are charged to the borrower if the loan refinances a prior loan made by the same lender or an affiliate of the lender.* NY Mun. Code 6-128(a)(14). * An affiliate, for purposes of the above is defined as any person that controls, is controlled by, or is under common control with another person, including any successor in interest. Control means ownership of ten percent or more of any class of outstanding stock of a company or the power to direct or cause the direction of the management and policies of a person. Id (a)(1). -12-

15 a more conservative approach to complying with the regulation. APPLICATION-RELATED NOTICES /DISCLOSURES For Section 32 loans, creditors must disclose to the borrower at least three business days prior to consummation of a mortgage transaction the following: (i) a notice that states: "You are not required to complete this agreement merely because you have received these disclosures or have signed a loan application. If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan." (ii) the APR; (iii) amount of regular monthly (or other periodic) payment; and (iv) for variable-rate transactions, a statement that the interest rate and monthly payment may increase, and the amount of the single maximum monthly payment, based on a maximum interest rate to be disclosed under Section See id (c). There are four application-related disclosures required in connection with the origination of a high cost home loan. First, for any high cost home loan, mortgage brokers and lenders must deliver, place in the mail, fax, or electronically transmit to the borrower a statement in substantially the following form at or prior to taking an application: Although your aggregate monthly debt payment may decrease, the high cost home loan may increase both (i) your aggregate number of monthly debt payments and (ii) the aggregate amount paid by you over the term of the high cost home loan if such are likely the case. See id. 41.4(a). Unlike the second required disclosure below, the Regulation is silent as to whether application must occur within a certain time frame (i.e. three days prior to closing) so as to be in compliance with this requirement. This disclosure does not have to be a separate document. See id. Second, mortgage brokers and lenders are required to give the disclosures required pursuant to Part 38 of the General Regulations at the time of application, which application must be at least three days prior to the closing There are two application-related disclosures required in connection with the origination of a high-cost home loan. First, a lender or mortgage broker must deliver, place in the mail, fax or electronically transmit the following notice in at least 12- point type to the borrower at the time of application: You should consider financial counseling prior to executing loan documents. The enclosed list of counselors is provided by the New York State Banking Department. In the event of a telephone application, the disclosures must be made immediately after receipt of the application by telephone. Disclosure must be on a separate form. In order to utilize an electronic transmission, the lender or broker must first obtain either written or electronically transmitted permission from the borrower. A list of approved counselors, available from the New York State Banking Department, must be provided to the borrower by the lender or mortgage broker at the time the disclosure is given. Second a lender or broker may not make or arrange for high cost home loans unless either the lender There are no required disclosures to borrowers or assignees, but a Predatory Loan characteristic under No. 36 includes violations of Part 41, so No. 36 indirectly requires that the same disclosures as those found in Part 41 be made but only for those high-cost home loans under No. 36 that are high cost home loans under Part

16 whether or not funds are then disbursed. See id. 41.4(a). As Part 39 of the Regulations exempts open-end loans from Part 38, it is unclear if an open-end loan deemed a highcost home loan under Part 41 will become subject to the disclosures under Part 38 or if the as applicable language could be interpreted as exempting such open-end loans from the Part 38 disclosures. We raised this issue on an informal basis with state regulators. Regulators strongly suggest providing the Part 38 disclosures on a loan subject to Part 41, even if the loan is in the nature of an open-end product. or the mortgage broker gives the notice entitled Consumer Caution and Home Ownership Counseling Notice, as set forth in the statute, in writing to the borrower within three days after determining that the loan is a high cost home loan, but no less than three days prior to closing. The text of this notice is set forth in the law. A (L)(II). Mortgage brokers and lenders are exempt from providing these disclosures at the time of application if the lender or broker did not know the borrower s application was a high cost home loan application, however, such disclosures must be made as soon as the lender determines that it is a high cost home loan application, and in any event, at least three days prior to the closing. See id. 41.4(a) and 41.4(d). In the event of a telephone application, the disclosure must be made immediately after receipt of the application by telephone, but in any event, at -14-

17 least three days prior to the closing. See id. In order to utilize electronic transmission, the lender or broker must first obtain written or electronically transmitted permission from the borrower. See id. A lender may agree with a broker that the broker shall make the disclosures required; however, it remains the responsibility of the lender to ensure that such disclosures are made. See id. Third, for high cost home loans, the following statement in a minimum of twelve point type must appear directly above the borrower s signature line on the application: The loan which may be offered to you is not necessarily the least expensive loan available to you and you are advised to shop around to determine comparative interest rates, points and other fees and charges. See id. 41.4(d). Fourth, see "Counseling" for disclosure required at time of application. Although not an application-related disclosure, we note that there is a disclosure required in connection with credit life, accident and health, disability or unemployment insurance products, see Packing." -15-

18 DISCLOSURES REQUIRED ON THE NOTE/SECURITY AGREEMENT OR OTHERWISE AT CLOSING No express requirement, but see Assignee Liability for notice requirement that arises when creditor sells or otherwise assigns a high cost home loan. A high cost home loan must include a legend on top of the mortgage in twelve point type stating that the mortgage is a high cost home loan subject to Part 41 of the General Regulations of the Banking Board. See id A high cost home loan must contain a legend on top of the mortgage in 12-point type stating that the mortgage is a high cost home loan subject to N.Y. Banking Laws 6-L. A A(A). No specific requirement but a Predatory Loan characteristic includes violations of Part 41 for those high-cost home loans under the No. 36 that also are high cost home loans under Part 41. ADVERTISING RESTRICTIONS N/A For high cost home loans, it is an unfair, deceptive or unconscionable practice to advertise that refinancing pre-existing debt with such a loan will reduce a borrower s aggregate monthly debt payment without also disclosing, if such are likely to be the case, that the high cost home loan will increase both (i) a borrower s aggregate number of monthly debt payments and (ii) the aggregate amount paid by a borrower over the term of the high cost mortgage loan. See id. 41.5(b)(7). N/A No specific requirement but a Predatory Loan characteristic includes violations of Part 41 for those high-cost home loans under No. 36 that also are high cost home loans under Part

19 COUNSELING N/A Counseling is not required; however, for high cost home loans, lenders and mortgage brokers must deliver, place in the mail, fax or electronically transmit the following notice in at least twelve point type to the borrower at the time of application: You should consider financial counseling prior to executing loan documents. The enclosed list of counselors is provided by the New York State Banking Department. See id. 41.3(a). The Regulation is silent as to whether application must occur within a certain time frame (i.e. three days prior to closing) so as to be in compliance with this requirement; however, in the event the lender or broker does not know whether the borrower s application is a high cost home loan at application, such disclosure must be made as soon as the lender determines that it is a high cost home loan application, but in any event, at least three days prior to the closing whether or not funds are disbursed. See id. A list of approved counselors, available from the New York State Banking Department, shall be provided to the borrower by the lender or the mortgage broker at the time that this disclosure is given. See id. The lender or mortgage broker may provide to the borrower the entire list of counselors or those portions of -17- Counseling is not required; however, for high-cost home loans, lenders and mortgage brokers must deliver, place in the mail, fax or electronically transmit the following notice in at least 12-point type to the borrower at the time of application, accompanied by a list of approved counselors available from the New York State Banking Department: You should consider financial counseling prior to executing loan documents. The enclosed list of counselors is provided by the New York State Banking Department. The disclosure must be on a separate form. If application is taken by telephone, the disclosure must be made immediately after receipt of the application by telephone. Lenders and brokers may make disclosure electronically, provided the lender or broker receives written or electronic permission from the borrower. A high-cost loan is a predatory loan if prior to making the high-cost home loan, a lender does not receive written certification from a HUD- approved independent housing or credit counselor that the borrower either has received counseling on advisability of loan transaction and appropriateness of loan for the borrower or has waived the loan counseling, provided that a borrower may waive the loan counseling by contacting such an independent housing or credit counselor by personal meeting or live telephone conservation at least three days prior to the closing of the home loan and certifying in a notarized written statement to the counselor that he or she has elected to waive the loan counseling. No such waiver is valid if the lender or its affiliates has recommended or advised the borrower to make such waiver. N.Y. Mun. Code 6-128(a)16(d).

20 the list which pertain to both the geographic area in which the borrower resides and any adjacent area or areas. Id. This disclosure must be a separate form. See id. In the event of a telephone application, the disclosures must be made immediately after receipt of the application by telephone, but in any event, at least three days prior to the closing whether or not funds are disbursed. See id. In order to utilize electronic transmission, the lender or broker must first obtain either written or electronically transmitted permission from the borrower. See id. REPAYMENT ABILITY For Section 32 loans, a lender is prohibited from engaging in any pattern or practice of extending credit based on the consumer's collateral if, considering the consumer's current and expected income, current obligations, and employment status, the consumer will be unable to make the scheduled payments and repay the obligation. See id (e)(1). When underwriting a high cost loan where the borrower s income (as reported on the loan application) is less than or equal to (i) 120% of the median family income for the Metropolitan Statistical Area ( MSA ) in which the security property is located; or (ii) 120% of the nonmetropolitan median family income for New York for loans secured by properties not within an MSA, the underwriter must reasonably believe that the borrower or borrowers will be able to make the scheduled payments to repay the obligation based upon a consideration of their current and expected income, current -18- A lender or mortgage broker may not make or arrange a high cost home loan without due regard to repayment ability, based upon consideration of the resident borrower or borrowers current and expected income, current obligations, employment status, and other financial resources (other than the borrower s equity in the dwelling that secures repayment of the loan), as verified by detailed documentation of all sources of income and corroborated by independent A Predatory Loan characteristic includes a loan where a lender does not reasonably believe at the time it makes the high-cost home loan that the borrower will be able to make at the time it makes the high cost home loan the scheduled payments to repay the obligation based upon a consideration of their current and expected income, current obligations, employment status, and other financial resources other than the borrower s equity in the security property. A borrower is presumed to be able to make

21 obligations, employment status, and other financial resources other than the borrower s equity in the security property. Id. 41.3(b). For purposes of determining whether monthly income is less than or greater than 120% of median income, only the income of the borrower(s) shall be considered. In determining repayment ability, lenders should consider indications of residual income such as guidelines utilized by the Veterans Administration. Id. An obligor is presumed to be able to make the scheduled payments to repay the obligation if, at the time the loan is consummated, or at the time of the first rate adjustment in the case of a low introductory interest rate, the obligor s scheduled monthly payments do not exceed 50% of the obligor s monthly gross income as verified by the credit application, the obligor s financial statement, a credit report, financial information provided to the lender by or on behalf of the obligor, or any other reasonable means. The Banking Department will furnish and update annually, a list of counties that are located within MSAs, together with the corresponding median income figures for both verification. However, a rebuttable presumption that the loan was made with due regard to repayment ability if the lender demonstrates that at the time the loan is consummated, the resident borrower or borrowers total monthly debts, including amounts owed under the loan do not exceed 50 percent of the resident borrower or borrower s monthly gross income and if the lender follows the residual income guidelines established in 38 C.F.R (E) and VA form the scheduled payments to repay the obligation if, at the time the loan is made: (i) scheduled monthly payments (after giving effect to any index adjustment with respect to the loan) both on the loan (including principal, interest, taxes, insurance, assessments, condominium fees, cooperative maintenance expenses) combined with the scheduled payments for all other debt do not exceed 50% of the obligor s documented and verified monthly gross income; and (ii) the borrower has sufficient residual income under VA guidelines to pay essential monthly expenses after paying scheduled monthly payment and any additional debt; or (iii) if clause (i) or (ii) do not apply, the home loan is a predatory loan unless the lender determines and documents prior to the closing of the loan that the making of the loan is justified based upon specific compensating factors, such as the borrower s excellent long-term credit history, the borrower s demonstrated ability to make payments under -19-

22 MSAs and non-metropolitan areas. Currently, there are 12 MSAs in New York State. Id. Superintendent McCaul has stressed that lenders should consider the residual income when making a high cost home loan in addition to debt to income ratios and has placed the residual income guidelines utilized by VA on its website. comparable or greater debt obligations to income ratios, the conservative use of credit standards, the borrower s significant liquid assets or other reasonable factors. N.Y. Mun. Code 6-128(a) 16(b). It is an unfair, deceptive or unconscionable practice if one brokers or makes a high cost home loan with repayment terms that so exceed the borrower s financial capacity to repay as to be unconscionable. See id. 41.5(b)(3). Evidence that the repayment terms exceed the borrower's reasonable capacity to repay may be rebutted by: (i) a showing that the lender reasonably believed the borrower had the capacity to repay; or (ii) a showing that other compelling circumstances existed that justified the making of the loan. Id. BALLOON PAYMENTS Balloon payments are prohibited on Section 32 loans with a term of less than 5 years (exception: bridge loans of less than one year). See id (d)(1). Balloon payments are prohibited on high cost home loans (exception: (i) bridge loans; (ii) open-end high cost home loans; (iii) if payments are due and payable at least 7 years after the loan's origination, or (iv) if the payment schedule is adjusted to account for -20- A high cost home loan may not contain a scheduled payment that is more than twice as large as the average of earlier scheduled payments. (exception: (i) such balloon payment becomes due and payable at least 15 years after the loan s A Predatory Loan characteristic include loan terms where there is a required scheduled payment that is twice as large as the average of the earlier scheduled payments, unless such increases are justified by a reamortization as a result of a new withdrawal