HB1478 95TH GENERAL ASSEMBLY

LRB095 06755 MJR 26869 b

95TH GENERAL ASSEMBLY
State of Illinois
2007 and 2008
HB1478

Introduced 2/21/2007, by Rep. Daniel J. Burke

SYNOPSIS AS INTRODUCED:

New Act

Creates the Predatory Home Loan Practices Act. Prohibits various practices and charges in connection with home loans made to persons with respect to their primary residence. Prohibits the imposition of prepayment penalties, flipping of loans, and lender financing of credit insurance. Imposes limitations on high-cost loans. Prohibits loans unless the lender reasonably believes that the borrower is able to make scheduled payments to repay the loan without respect to the borrower's equity in the property. Authorizes a borrower to obtain damages for violations of the Act.

FISCAL NOTE ACT MAY APPLY

A BILL FOR

AN ACT concerning regulation.

Be it enacted by the People of the State of Illinois, represented in the General Assembly:

Section 1. Short title. This Act may be cited as the Predatory Home Loan Practices Act.

Section 5. Definitions. As used in this Act:

"Affiliate" means any company that controls, is controlled by, or is under common control with another company, as determined under the Federal Bank Holding Company Act of 1956 (12 U.S.C. 1841 et seq.).

"Annual percentage rate" means the annual percentage rate for the loan calculated according to the provisions of the federal Truth-in-Lending Act (15 U.S.C. 1601, et seq.) and the regulations promulgated thereunder by the Federal Reserve Board.

"Bona fide loan discount points" means loan discount points knowingly paid by the borrower 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 the amount of the interest rate reduction purchased by the discount points is reasonably consistent with established industry norms and practices for secondary mortgage market transactions.

"High-cost home loan" means a home loan for which the annual percentage rate of the home loan at consummation will exceed by more than 6 percentage points the weekly average yield on United States Treasury securities adjusted to a constant maturity of one year (as made available by the Federal Reserve Board) as of the week immediately preceding the week in which the interest rate for the loan is established.

"Home loan" means a loan, other than an open-end credit plan or a reverse mortgage transaction, in which: (i) the principal amount of the loan does not exceed the conforming loan size limit for a single-family dwelling as established from time to time by the Federal National Mortgage Association, (ii) the borrower is a natural person, (iii) the debt is incurred by the borrower primarily for personal, family, or household purposes, and (iv) the loan is secured by a mortgage or deed of trust on real estate upon which there is located or there is to be located a structure or structures, designed principally for occupancy of from one to 4 families, that is or will be occupied by the borrower as the borrower's principal dwelling.

"Points and fees" means:

(1) all items required to be disclosed under Sections 226.4(a) and 226.4(b) of Title 12 of the Code of Federal Regulations, as amended from time to time, except interest or the time-price differential;

(2) all charges for items listed under Section 226.4(c)(7) of Title 12 of the Code of Federal Regulations, but only if the lender receives direct or indirect compensation in connection with the charge or the charge is paid to an affiliate of the lender; otherwise, the charges are not included within the meaning of the phrase "points and fees";

(3) all compensation paid directly or indirectly to a mortgage broker, including a broker that originates a loan in its own name in a tablefunded transaction, not otherwise included under item (1) or (2);

(4) "Points and fees" does not include (i) taxes, filing fees, recording, and other charges and fees paid or to be paid to public officials for determining the existence of or for perfecting, releasing, or satisfying a security interest and (ii) bona fide and reasonable fees paid to a person other than a lender or an affiliate of the lender or to the mortgage broker or an affiliate of the mortgage broker for any of the following: fees for flood certification; fees for pest infestation and flood determinations; appraisal fees; fees for home inspections performed prior to closing; credit reports; surveys; attorneys' fees (if the borrower has the right to select the attorney from an approved list or otherwise); notary fees; escrow charges, so long as not otherwise included under item (1); title insurance premiums; and fire insurance and flood insurance premiums, provided that the conditions in Section 226.4(d)(2) of Title 12 of the Code of Federal Regulations are met.

"Total loan amount" means the same as the term "total loan amount" as used in Section 226.32 of Title 12 of the Code of Federal Regulations, and shall be calculated in accordance with the Federal Reserve Board's Official Staff Commentary to that provision.

Section 10. Prohibited acts and practices regarding home loans.

(a) No prepayment fees or penalties shall be contracted by the borrower and lender with respect to any home loan.

(b) It shall be unlawful for any lender in a home loan to finance, directly or indirectly, any credit life, credit disability, or credit unemployment insurance or any other life or health insurance premiums, however, insurance premiums calculated and paid on a monthly basis shall not be considered to be financed by the lender.

(c) No lender may knowingly or intentionally engage in the unfair act or practice of "flipping" a consumer home loan. "Flipping" a loan is the making of a home loan to a borrower that refinances an existing home loan when the new loan does not have reasonable, tangible net benefit to the borrower considering all of the circumstances, including the terms of both the new and refinanced loans, the cost of the new loan, and the borrower's circumstances. This provision shall apply regardless of whether the loan is a high-cost home loan.

(d) When there is a charge in addition to the stated rate of interest payable directly or indirectly by the borrower and imposed directly or indirectly by the lender as consideration for the loan, whether paid by the borrower or the seller to a third party in connection with the loan, the charge may not exceed 3% of the total loan amount.

(e) No lender shall recommend or encourage default on an existing loan or other debt prior to and in connection with the closing or planned closing of a consumer home loan that refinances all or any portion of the existing loan or debt.

(f) As used in this Section, the term "obligor" refers to each borrower, co-borrower, cosigner, or guarantor obligated to repay a loan. A lender may not make a home loan unless the lender reasonably believes at the time the loan is consummated that one or more of the obligors, when considered individually or collectively, will be able to make 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 dwelling which secures repayment of the loan). An obligor shall be presumed to be able to make the scheduled payments to repay the obligation if, at the time the loan is consummated, the obligor's total monthly debts, including amounts owed under the loan, do not exceed 45% 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.

Section 15. Limitations and prohibited practices for high-cost home loans.

(a) A high-cost home loan is subject to the following limitations and prohibited practices:

(1) No call provision. No high-cost home loan may contain a provision that permits the lender, in its sole discretion, to accelerate the indebtedness. This provision does not apply when repayment of the loan has been accelerated by default, pursuant to a due-on-sale provision, or pursuant to some other provision of the loan documents unrelated to the payment schedule.

(2) No balloon payment. No high-cost home loan may contain a scheduled payment that is more than twice as large as the average of earlier scheduled payments. This provision does not apply when the payment schedule is adjusted to the seasonal or irregular income of the borrower.

(3) No negative amortization. No high-cost home loan may contain a payment schedule with regular periodic payments that cause the principal balance to increase.

(4) No increased interest rate. No high-cost home loan may contain a provision that increases the interest rate after default. This provision does not apply to interest rate changes in a variable rate loan otherwise consistent with the provisions of the loan documents, provided the change in the interest rate is not triggered by the event of default or the acceleration of the indebtedness.

(5) No advance payments. No high cost home loan may include terms under which more than 2 periodic payments required under the loan are consolidated and paid in advance from the loan proceeds provided to the borrower.

(6) No modification or deferral fees. A lender may not charge a borrower any fees or other charges to modify, renew, extend, or amend a high-cost home loan or to defer any payment due under the terms of a high cost home loan.

(7) No mandatory arbitration clause. No high cost loan may be subject to a mandatory arbitration clause that limits in any way the right of the borrower to seek relief through the judicial process.

(8) No lending without home-ownership counseling or advice from an attorney. A lender may not make a high-cost home loan without first receiving certification from a counselor approved by the United States Department of Housing and Urban Development, a state housing financing agency, or the National Credit Union Administration that the borrower has received counseling on the advisability of the loan transaction and the appropriate loan for the borrower.

(9) No lending without attorney representation. A lender may not make a high cost home loan unless the borrower is represented by an attorney at the closing. The attorney shall represent the borrower's interests at the closing and may be paid from the proceeds of the loan.

(10) No benefit from refinancing existing high-cost home loan with new high-cost home loan. A lender may not charge a borrower points, fees, or other charges in connection with a high-cost home loan if the proceeds of the high-cost home loan are used to refinance an existing high-cost home loan unless the annual percentage rate on the new loan is at least 200 basis points below the contract rate on the existing loan.

(11) Restrictions on home-improvement contracts. A lender may not pay a contractor under a home-improvement contract from the proceeds of a high-cost home loan other than (i) by an instrument payable to the borrower or (ii) at the election of the borrower, through a third-party escrow agent in accordance with terms established in a written agreement signed by the borrower, the lender, and the contractor prior to the disbursement.

(b) The provisions of this Section apply to any person who in bad faith attempts to avoid the application of this Section by (i) the structuring of a loan transaction as an open-end credit plan for the purpose and with the intent of evading the provisions of this Section when the loan would have been a high-cost home loan if the loan had been structured as a closed-end loan, (ii) dividing any loan transaction into separate parts for the purpose and with the intent of evading the provisions of this Section, or (iii) any other subterfuge.

(c) Except as provided in subsection (d) of this Section, the making of a home loan that violates any provisions of Sections 10 and 15 of this Act is hereby declared usurious in violation of the provisions of this Act and unlawful as an unfair or deceptive act or practice in or affecting commerce. The provisions of this Section apply to any person who in bad faith attempts to avoid the application of this Section by (i) the structuring of a loan transaction as an open-end credit plan for the purpose and with the intent of evading the provisions of this Section when the loan would have been a high-cost home loan if the loan had been structured as a closed-end loan, (ii) dividing any loan transaction into separate parts for the purpose and with the intent of evading the provisions of this Section, or (iii) any other subterfuge. The Attorney General, the Department of Financial and Professional Regulation, or any party to a high-cost home loan may enforce the provisions of this Section. Any person seeking damages or penalties under the provisions of this Section may recover damages under either this Act or other State law, but not both.

(d) A lender in a high-cost home loan who, when acting in good faith, fails to comply with subsection (a) of this Section, shall not be deemed to have violated this Section if the lender establishes that either: (1) Within 30 days after the loan closing and prior to the institution of any action under this Section, the borrower is notified of the compliance failure, appropriate restitution is made, and whatever adjustments are necessary are made to the loan to either, at the choice of the borrower, (i) make the high-cost home loan satisfy the requirements of subsection (a) of this Section or (ii) change the terms of the loan in a manner beneficial to the borrower so that the loan will no longer be considered a high-cost home loan subject to the provisions of this Section; or (2) the compliance failure was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid errors and within 60 days after the discovery of the compliance failure and prior to the institution of any action under this Section or the receipt of written notice of the compliance failure, the borrower is notified of the compliance failure, appropriate restitution is made, and whatever adjustments are necessary are made to the loan to either, at the choice of the borrower, (i) make the high-cost home loan satisfy the requirements of subsection (a) of this Section or (ii) change the terms of the loan in a manner beneficial to the borrower so that the loan will no longer be considered a high-cost home loan subject to the provisions of this Section.

Section 20. Assignee liability. Any subsequent holder who purchases or is otherwise assigned a mortgage referred to in this Section shall be subject to all claims and defenses, with respect to that mortgage, that the consumer could assert against the original creditor of the mortgage.

Section 25. Damages. If any person, corporation, or other lender knowingly violates either directly or indirectly any of the provisions described in this Act, the borrower may, recover by means of an action or defense, an amount equal to twice the total of all interest, discount, and charges determined by the loan contract or paid by the borrower, whichever is greater, plus such reasonable attorneys' fees and court costs as may be assessed by a court against the lender. Recovery by means of a defense may be had at any time after the loan is transacted. Recovery by means of an action may be had at any time within 2 years after the date on which the total loan amount due under the terms of the loan contract is fully paid.

Section 30. Enforcement. When the Department of Financial and Professional Regulation determines that a violation of this Act has occurred, after due process, it shall withdraw the license of the violator.

Section 35. Applicability. This Act applies to all loans made or entered into after the effective date of this Act.