Report Title:
Home loan protection
Description:
Creates the Hawaii home loan protection act to protect the homes and equity of individual borrowers.
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HOUSE OF REPRESENTATIVES |
H.B. NO. |
2642 |
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TWENTY-FIRST LEGISLATURE, 2002 |
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STATE OF HAWAII |
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A BILL FOR AN ACT
relating to the hawaii home loan protection act.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:
SECTION 1. The legislature finds that abusive mortgage lending has become an increasing problem in this State, exacerbating the loss of equity in homes and causing the number of foreclosures to increase in recent years.
One of the most common forms of abusive lending is the making of loans that are equity-based, rather than income-based. The financing of points and fees in these loans provides immediate income to the originator and encourages lenders to repeatedly refinance home loans. The lender's ability to sell loans reduces the incentive to ensure that the homeowner can afford the payments of the loan. As long as there is sufficient equity in the home, an abusive lender or mortgage broker benefits even if the borrower is unable to make the payments and is forced to refinance. The financing of high points and fees causes the loss of precious equity in each refinancing and often leads to foreclosure.
The legislature further finds that abusive lending has threatened the viability of many communities and caused decreases in homeownership. While the marketplace appears to operate effectively for conventional mortgages, too many homeowners find themselves victims of overreaching lenders who provide loans with unnecessarily high costs and terms that are unnecessary to secure repayment of the loan. The legislature finds that as competition and self-regulation have not eliminated the abusive terms from home-secured loans, the consumer protection provisions of this chapter are necessary to encourage lending at reasonable rates with reasonable terms.
The purpose of this Act is to protect the homes and the equity of individual borrowers through the creation of the Hawaii home loan protection act.
SECTION 2. The Hawaii Revised Statutes is amended by adding a new chapter to be appropriately designated and to read as follows:
"Chapter
HAWAII HOME LOAN PROTECTION ACT
§ -1 Definitions. As used in this chapter:
"Benchmark rate" means the interest rate, which the borrower can reduce by paying bona fide discount points. This rate shall not exceed the weekly average yield of United States Treasury securities having a maturity of five years, as of the 15th day of the month immediately preceding the month in which the loan closes, plus four percentage points.
"Bona fide discount points" means loan discount points that are:
(1) Knowingly paid by the borrower;
(2) Paid for the express purpose of lowering the benchmark rate;
(3) Reducing the interest rate or time-price differential applicable to the loan from an interest rate that does not exceed the benchmark rate; and
(4) Recouped within the first four years of the scheduled loan payments.
For purposes of assessing compliance, loan discount points will be considered to be recouped within the first four years of the scheduled loan payments if the reduction in the interest rate that is achieved by the payment of the loan discount points reduces the interest charged on the scheduled payments such that the borrower’s dollar amount of savings in interest over the first four years is equal to or exceeds the dollar amount of loan discount points paid by the borrower.
"Borrower" means any natural person obligated to repay the loan, including a co-borrower, cosigner, or guarantor.
"Creditor" means a person who extends home loan credit that is subject to a finance charge or is payable by written agreement in more than four installments, and to whom the obligation is payable at any time. This term also includes any person who:
(1) Arranges for the extension of such credit;
(2) Acts in concert with any named person; or
(3) Formulates or controls the practices of a named person.
"Flipping" means making a home loan to a borrower that refinances an existing home loan when the new loan does not have a 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. The following home loan refinance transactions shall be presumed to involve flipping if:
(1) The primary tangible benefit to the borrower is an interest rate lower than the interest rate or rates on debts satisfied or refinanced in connection with the home loan, and it will take more than four years for the borrower to recoup the costs of the points and fees and other closing costs through savings resulting from the lower interest rate; or
(2) The new loan refinances an existing home loan that is a special mortgage originated, subsidized, or guaranteed by or through a state or local government or nonprofit organization, that either:
(A) Bears a below-market interest rate at the time the loan was originated; or
(B) Has nonstandard payment terms beneficial to the borrower, such as payments that vary with income, are limited to a percentage of income, or where no payments are required under specified conditions, and where, as a result of the refinancing, the borrower will lose one or more of the benefits of the special mortgage.
"High-cost home loan" means a home loan in which the terms of the loan meet or exceed one or more thresholds.
"Home loan" means a loan, including an open-end credit plan, other than a reverse mortgage transaction, where the loan is secured by:
(1) A mortgage or deed of trust on real property in this State upon which there is located or there is to be located a residential structure or structures designed principally for occupancy by from one to four individuals or families that is or will be occupied by a borrower as the borrower’s principal dwelling; or
(2) A security interest on a manufactured home that is or will be occupied by a borrower as the borrower’s principal dwelling.
This term includes a loan secured by an individual condominium unit, cooperative unit, mobile home, or trailer, if it is or will be occupied by a borrower as the borrower’s principal dwelling.
"Person" means an individual or entity, including but not limited to a corporation, firm, trust, partnership or incorporated or unincorporated association existing under or authorized by the laws of this State, any other state, or any foreign country.
"Points and fees" includes:
(1) All items listed in 15 U.S.C. section 1605(a)(1) through (4), except interest or the time-price differential;
(2) All charges listed in 15 U.S.C. section 1605(e);
(3) 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;
(4) The cost of all premiums financed by the creditor, directly or indirectly, for any:
(A) Credit life, credit disability, credit unemployment, credit property, or any other life or health insurance; or
(B) Payments financed by the creditor directly or indirectly for any debt cancellation or suspension agreement or contract, except insurance premiums calculated and paid on a monthly basis shall not be considered financed by the creditor;
(5) The maximum prepayment fees and penalties that may be charged or collected under the terms of the loan documents; and
(6) All prepayment fees or penalties that are charged the borrower if the loan refinances a previous loan made by the same creditor or an affiliate of the creditor.
For open-end loans, the points and fees are calculated by adding the total fees charged at closing plus the maximum additional fees that can be charged pursuant to the loan documents during the term of the loan.
"Rate" means the interest rate charged on the home loan, based on an annual simple interest yield.
"Threshold" means any of the following:
(B) For a subordinate mortgage lien or a mortgage secured solely by a security interest in a manufactured home, eight percentage points over the weekly average yield on five-year United States Treasury securities as of the 15th day of the month immediately preceding the month in which the loan closes.
(2) Excluding up to two bona fide discount points:
(A) For loans in which the total loan amount is $30,000 or more, the total points and fees on the loan, paid by the borrower at or before closing, exceed three per cent of the total loan amount; or
(3) The home loan agreement permits the lender to charge or collect prepayment fees or penalties more than thirty months after the loan closing or which exceed, in the aggregate, more than two per cent of the loan amount prepaid.
"Total loan amount" means the principal of the loan, excluding all points and fees that are included in the principal amount of the loan. For open-end loans, the total loan amount shall be calculated using the total line of credit allowed under the home loan.
"Trigger rate" means:
(1) For fixed-rate loans in which the interest rate will not vary during the term of the loan, the rate as of the date of loan closing;
(2) For loans in which the interest rate will vary according to an index, the sum of the index rate as of the date of loan closing plus the maximum margin permitted at any time under the loan agreement; and
§ -2 Prohibited practices; home loans. It shall be a prohibited practice for any creditor, in connection with a home loan, to engage in any of the following practices:
(1) No creditor shall finance, directly or indirectly, any:
(A) Credit life, credit disability, credit unemployment, credit property, or any other life or health insurance; or
(B) Payments directly or indirectly for any debt cancellation or suspension agreement or contract, except that insurance premiums or debt cancellation or suspension fees calculated and paid on a monthly basis shall not be considered financed by the creditor;
(2) No creditor may engage in the unfair act or practice of flipping a home loan;
(3) No creditor 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 home loan that refinances all or any portion of such existing loan or debt;
(4) No creditor may charge a late payment fee except according to the following:
(A) The late payment fee shall not be in excess of four per cent of the amount of the payment past due;
(B) The fee shall be assessed for a payment past due for fifteen days or more;
(C) The fee shall not be charged more than once with respect to a single late payment. If a late payment charge:
(i) Is deducted from a payment made on the loan, and the deduction causes a subsequent default on a subsequent payment, no late payment charge may be imposed for such default; or
(ii) Has been once imposed with respect to a particular late payment, no charge shall be imposed with respect to any future payment that would have been timely and sufficient, but for the previous default;
(D) No fee may be charged unless the creditor notifies the borrower within forty-five days following the date the payment was due that a late payment charge has been imposed for a particular late payment. No late payment charge may be collected from any borrower if the borrower informs the creditor that nonpayment of an installment is in dispute and presents proof of payment within forty-five days of receipt of the creditor’s notice of the late charge; and
(E) The creditor shall treat each and every payment as posted on the same date as it was received by the creditor, servicer, creditor’s agent, or at the address provided to the borrower by the creditor, servicer, or the creditor’s agent for making payments;
(5) No home loan may contain a provision that permits the creditor, in the creditor's sole discretion, to accelerate the indebtedness. This paragraph shall not prohibit acceleration of the loan in good faith due to the borrower’s failure to abide by the material terms of the loan;
(6) No creditor may charge a fee for informing or transmitting to any person the balance due to pay off a home loan or to provide a release upon prepayment. Payoff balances shall be provided within a reasonable time, but in any event no more than seven business days after the request;
(7) No creditor may charge a fee for a product or service where the product or service is not actually provided, or misrepresent the amount charged by or paid to a third party for a product or service;
(8) No creditor may include or cause to be included in a home loan application or any other loan-related document, directly or indirectly, any false or misleading information regarding a borrower including, without limitation, information concerning the borrower’s income or ability to repay the loan;
(9) No creditor may make or cause to be made, directly or indirectly, any false, deceptive, or misleading statement or representation in connection with a home loan transaction including, without limitation, a false, deceptive, or misleading statement or representation regarding the borrower’s ability to qualify for any home loan product, or regarding the value of the borrower’s property; and
(10) No creditor may ask or cause to be asked, directly or indirectly, a borrower to sign any loan-related document in which blanks are left to be filled in after the loan document is signed by the borrower.
§ -3 Prohibited practices; high-cost home loans. In addition to the prohibitions in section -2, it shall be a prohibited practice for any creditor, in connection with a high-cost home loan, to engage in any of the following practices:
(1) No creditor making a high-cost home loan shall directly or indirectly finance any fee or charge included in points and fees;
(2) No prepayment fees or penalties shall be included in the loan documents for a high-cost home loan or charged the borrower that exceed in the aggregate:
(A) In the first twelve months after the loan closing, more than two per cent of the loan amount prepaid; or
(B) In the second twelve months after the loan closing, more than one per cent of the amount prepaid. No prepayment penalty shall be contracted for after the second year following the loan closing;
(3) 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 paragraph shall not apply when the payment schedule is adjusted to the seasonal or irregular income of the borrower;
(4) No high-cost home loan may include payment terms under which the outstanding principal balance will increase at any time over the course of the loan because the regular periodic payments do not cover the full amount of interest due;
(5) No high-cost home loan may contain a provision that increases the interest rate after default. This paragraph shall 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;
(6) No high-cost home loan may include terms under which more than two periodic payments required under the loan are consolidated and paid in advance from the loan proceeds provided to the borrower;
(7) No high-cost home 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 for any and all claims and defenses the borrower may have against the creditor, broker, or other party involved in the loan transaction;
(8) A creditor 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 regulatory agency that has jurisdiction over the creditor, that the borrower has received counseling on the advisability of the loan transaction;
(9) A creditor may not make a high-cost home loan without due regard to repayment ability. A creditor who follows the debt-to-income ratio listed in 38 C.F.R. section 36.4337(c)(1) and as defined in 38 C.F.R. section 36.4337(d) and follows the residual income guidelines established in 38 C.F.R. section 36.4337(e) and VA Form 26-6393 shall benefit from a rebuttable presumption that the creditor made the loan with due regard to repayment ability;
(10) A creditor may not pay a contractor under a home-improvement contract from the proceeds of a high-cost home loan, unless:
(A) The creditor is presented with a signed and dated completion certificate showing that the home improvements have been completed; and
(B) The instrument is payable:
(i) To the borrower;
(ii) Jointly to the borrower and the contractor; or
(iii) 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 creditor, and the contractor prior to the disbursement;
(11) A creditor 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; and
(12) Any creditor making a high-cost home loan that has the legal right to foreclose shall use the judicial foreclosure procedures of the state wherein the property securing the loan is located. The borrower shall have the right to assert in such proceeding the nonexistence of a default and any other claim or defense to acceleration and foreclosure, including any claim or defense based on a violation of this chapter, though no such claim or defense shall be deemed a compulsory counterclaim.
§ -4 Right to cure. (a) If a creditor asserts that grounds for acceleration exist and requires the payment in full of all sums secured by the security instrument, the borrower, or anyone authorized to act on the borrower’s behalf, shall have the right at any time, up to the time title is transferred by means of foreclosure, by judicial proceeding and sale or otherwise, to cure the default, and reinstate the home loan by tendering the amount or performance as specified herein. Cure of default as provided herein shall reinstate the borrower to the same position as if the default had not occurred and shall nullify, as of the date of the cure, any acceleration of any obligation under the security instrument or note arising from the default.
(b) Before any action filed to foreclose upon the home or other action is taken to seize or transfer ownership of the home, a notice of the right to cure the default must be delivered to the borrower informing the borrower of the following:
(1) The nature of default claimed on the home loan, and of the borrower’s right to cure the default by paying the sum of money required to cure the default; provided that a creditor or servicer may not refuse to accept any partial payment made or tendered in response to said notice. If the amount necessary to cure the default will change during the thirty-day period after the effective date of the notice due to the application of a daily interest rate or the addition of late fees as allowed by this chapter, the notice shall give sufficient information to enable the borrower to calculate the amount at any point during the thirty-day period;
(2) The date by which the borrower shall cure the default to avoid acceleration and initiation of foreclosure, or other action to seize the home, which date shall not be less than thirty days after the date the notice is effective, and the name and address and telephone number of a person to whom the payment or tender shall be made;
(3) That if the borrower does not cure the default by the date specified, the creditor may take steps to terminate the borrower’s ownership in the property by requiring payment in full of the home loan and commencing a foreclosure proceeding or other action to seize the home; and
(4) The name and address of the creditor and the telephone number of a representative of the creditor whom the borrower may contact if the borrower disagrees with the creditor’s assertion that a default has occurred or the correctness of the creditor’s calculation of the amount required to cure the default.
(c) To cure a default under this section, a borrower shall not be required to pay any charge, fee, or penalty attributable to the exercise of the right to cure a default as provided for in this section, other than the fees specifically allowed by this section. The borrower shall not be liable for any attorney fees relating to the borrower’s default that are incurred by the lender prior to or during the thirty-day period set forth in subsection (b)(2), nor for any such fees in excess of $100 that are incurred by the lender after the expiration of the thirty-day period but prior to the time the lender files a foreclosure action or takes other action to seize or transfer ownership of the home. After the lender files a foreclosure action or takes other action to seize or transfer ownership of the home, the borrower shall only be liable for attorney fees that are reasonable and actually incurred by the lender, based on a reasonable hourly rate and a reasonable number of hours.
(d) If a default is cured prior to the initiation of any action to foreclose or to seize the residence, the creditor shall not institute the foreclosure proceeding or other action for that default. If a default is cured after the initiation of any action to foreclose, the creditor shall take such steps as are necessary to terminate the foreclosure proceeding or other action. Any creditor making a home loan who has the legal right to foreclose must use the judicial foreclosure procedures of the state wherein the property securing the loan is located. The borrower shall have the right to assert in a judicial foreclosure proceeding or other action the nonexistence of a default and any other claim or defense to acceleration and foreclosure, including any based on a violation of this chapter, though no such claim or defense shall be deemed a compulsory counterclaim.
§ -5 Preservation and enforcement of claims and defenses. (a) Notwithstanding any other provision of law to the contrary, where a home loan was made, arranged, or assigned by a person selling either a manufactured home, or home improvements to the dwelling of a borrower, the borrower may assert all affirmative claims and any defenses that the borrower may have against the seller or home improvement contractor against the lender, any assignee, holder, or servicer, in any capacity.
(b) Notwithstanding any provision of any other law to the contrary, the remedies provided in section -7 apply to the creditor, any director, officer, employee, or controlling stockholder of, or agent for, a creditor who personally participated in the making or approving of a high-cost home loan, and any other person to whom this chapter applies and who violated any requirement of this chapter. Any person who purchases or is otherwise assigned a high-cost home loan shall be subject to all affirmative claims and any defenses with respect to the loan that the borrower could assert against the original creditor or broker of the loan.
(c) Notwithstanding any provision of any other law to the contrary, a borrower in default more than sixty days or in foreclosure may assert a violation of this chapter by way of offset:
(1) As an original action;
(2) As a defense or counterclaim to an action to collect amounts owed; or
(3) To obtain possession of the home secured by the home loan.
§ -6 No subterfuge. It shall be a violation of this chapter for any person to attempt to avoid the application of this chapter by dividing any home loan transaction into separate parts for this purpose, or engaging in any other subterfuge.
§ -7 Remedies for violations. (a) Any person who engages in any act or practice prohibited by this chapter shall be deemed to have engaged in an unfair method of competition or unfair or deceptive act or practice in the conduct of any trade or commerce within the meaning of section 480-2, and each such act or practice shall constitute a separate violation.
(b) Any person found by a preponderance of the evidence to have violated this chapter shall be liable to the borrower for the following:
(1) Actual damages sustained by the borrower, including consequential and incidental damages; the borrower shall not be required to demonstrate reliance in order to receive actual damages;
(2) Statutory damages equal to the finance charges agreed to in the home loan agreement, plus ten per cent of the amount financed;
(3) Punitive damages, when the violation was malicious or reckless; and
(4) Reasonable attorneys’ fees together with the costs of suit.
(c) A borrower may bring proceedings to enjoin any act or practice prohibited by this chapter and to obtain declaratory and other equitable relief as the court deems appropriate, and if the decree is for the borrower, the borrower shall recover reasonable attorneys’ fees together with the costs of suit.
(d) Any home loan agreement in violation of this chapter is void and is not enforceable at law or in equity, and the creditor shall have no right to collect, receive, or retain any principal, interest, or other charges whatsoever with respect to the loan, and the borrower may recover any payments made under the agreement.
(e) The right of rescission granted under 15 U.S.C. section 1601 et seq. for violations of that law and all other remedies provided in this chapter shall be available to a borrower by way of recoupment against a party foreclosing on the home loan or collecting on the loan, at any time during the term of the loan.
(f) The remedies provided in this section are not intended to be the exclusive remedies available to a borrower, nor must the borrower exhaust any administrative remedies provided under any applicable law before proceeding under this section.
(g) Any person, including any principal, manager, director, officer, agent, servant, or employee of the creditor, who knowingly violates this chapter is guilty of a misdemeanor and, on conviction, is punishable:
(h) The remedies provided herein are cumulative.
§ -8 Court and venue. Any action or proceeding, whether civil or criminal, authorized by this chapter shall be brought in the circuit court of the circuit in which the real property used to secure the home loan is situated.
§ -9 Limitation of actions. Any action to enforce a cause of action arising under this chapter shall be barred unless commenced within four years after the cause of action accrues, except as otherwise provided in section -5 and section -7. For the purpose of this section, a cause of action for a continuing violation is deemed to accrue at any time during the period of the violation.
§ -10 Remedies not exclusive. The remedies provided for in this chapter are in addition to and not exclusive of any other remedies provided by law.
§ -11 Interpretation. This chapter shall be liberally construed to effectuate its purpose of protecting the homes and equity of individual borrowers. This chapter is to be construed as a consumer protection statute for all purposes.
§ -12 Severability. The provisions of this chapter shall be severable, and if any phrase, clause, sentence, or provision is declared to be invalid or is preempted by federal law or regulation, the validity of the remainder of this chapter shall not be affected thereby. If any provision of this chapter is declared to be inapplicable to any specific category, type, or kind of loan or points and fees, the provisions of this chapter shall nonetheless continue to apply with respect to all other loans and points and fees.
§ -13 Applicability. The law of this State shall be applied to all transactions governed by this chapter. This chapter shall apply to all home loans made or entered into after the effective date of this chapter."
SECTION 3. This Act shall take effect upon its approval.
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