HB2642 SD1

Report Title:

Hawaii Home Loan Protection Act

Description:

Enacts the Hawaii Home Loan Protection Act to prohibit predatory lending practices. (SD1)

HOUSE OF REPRESENTATIVES	H.B. NO.	2642
TWENTY-FIRST LEGISLATURE, 2002		H.D. 2
STATE OF HAWAII		S.D. 1

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 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:

"Affiliate" means an "affiliate" under title 12 Code of Federal Regulations section 215.2(a).

"Bridge loan" means temporary or short-term financing with a maturity of twenty-four months or less that only requires payments of interest until such time as the entire unpaid balance is due and payable.

"High-cost loan" means a consumer credit mortgage loan transaction, involving real property located within this State, that is considered a "mortgage" under section 152 of the Home Ownership and Equity Protection Act of 1994, title 15 United States Code section 1602 (aa), and the regulations adopted pursuant thereto by the Federal Reserve Board, including section 226.32 of title 12 of the Code of Federal Regulations, and the Official Staff Commentary to the regulations as each may be amended from time to time. No loan with a principal amount in excess of $500,000 shall be considered a high-cost loan.

"Lender" means any individual or entity that in any twelve-month period originates more than one high-cost loan. The individual or entity to whom the high-cost loan is initially payable, either on the face of the note or contract, or by agreement when there is no note or contract, shall be deemed to be the lender.

"Mortgage broker", whether or not the person is registered as a mortgage broker or solicitor under chapter 454, means a person (not an employee or exclusive agent of a lender) who is subject to chapter 454.

"Obligor" means each obligor, co-obligor, co-signer, or guarantor obligated to repay a high-cost loan.

"Political subdivision" means any county or other political subdivision or public corporation of this State.

"Servicer" has the same meaning as provided in section 2605(i)(2) of the Real Estate Settlement Procedures Act of 1974, title 12 United States Code section 2601 et. seq., as amended from time to time.

§ -2 Protection of obligors; limits on high-cost loans. A high-cost loan shall be subject to the following limitations:

(1) No high-cost loan may contract for a scheduled payment that is more than twice as large as the average of earlier scheduled monthly payments, unless such balloon payment becomes due and payable not less than sixty months after the date of the loan. This prohibition does not apply when the payment schedule is adjusted to account for the seasonal or irregular income of the obligor or if the purpose of the loan is a bridge loan connected with, or related to, the acquisition or construction of a dwelling intended to become the obligor’s principal dwelling.

(2) No high-cost loan may contain a demand feature that permits the lender to terminate the high-cost loan in advance of the original maturity date and to demand repayment of the entire outstanding balance, except in the following circumstances: upon default; pursuant to a due-on-sale provision; where there is fraud or material misrepresentation by an obligor in connection with the loan; or where there is any action or inaction by the obligor that adversely affects the lender’s security for the loan or any rights of the lender in the security.

(3) No high-cost loan may contract for a payment schedule with regular periodic payments that cause the principal balance to increase except for a special purpose lending program offered by or sponsored by a government agency or nonprofit organization. This shall not prohibit negative amortization as a consequence of a temporary forbearance or restructure sought by the obligor.

(4) No high-cost loan may contract for any increase in the interest rate as a result of a default. This provision does not apply to periodic interest rate changes in a variable rate loan otherwise consistent with the provisions of the loan agreement; provided the change in the interest rate is not occasioned by the event of default or a permissible acceleration of the indebtedness.

(5) No high-cost loan may include terms under which more than two periodic payments required under the loan are paid in advance from the loan proceeds provided to the obligor.

(6) A high-cost loan may provide for a prepayment fee or penalty only if:

(A) A high-cost loan does not include a prepayment fee or penalty after the first thirty-six months after the date of consummation of the loan.

(B) A high-cost loan may include a prepayment fee or penalty up to the first thirty-six months after the date of consummation of the loan if:

(i) The lender who originates the high-cost loan has limited the amount of the prepayment fee or penalty to an amount not to exceed the payment of six months’ advance interest, at the contract rate of interest then in effect, on the amount prepaid in any twelve-month period in excess of twenty per cent of the original principal amount.

(ii) A high-cost loan shall not impose a prepayment fee or penalty if the high-cost loan is accelerated as a result of default.

(iii) The lender who originates the high-cost loan shall not finance a prepayment penalty through a new loan that is originated by the same lender.

§ -3 Restricted acts and practices. The following acts and practices are prohibited in the making of a high-cost loan.

(1) No lending without cautionary notice:

(A) A lender may not make a high-cost loan unless the lender or a mortgage broker has given the following notice (or substantially similar notice) in writing to the obligor within a reasonable time of determining that the loan would result in a high-cost loan but no later than the time the notice is required under the notice provision contained in title 12 Code of Federal Regulation section 226.31(c) as amended from time to time:

"CONSUMER CAUTION AND HOME OWNERSHIP COUNSELING NOTICE

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. Mortgage loan rates and closing costs and fees vary based on many factors, including your particular credit and financial circumstances, your earnings history, the loan-to-value requested, and the type of property that will secure your loan. The loan rate and fees could also vary based on which lender or mortgage broker you select.

You should consider consulting a qualified independent credit counselor or other experienced financial adviser regarding the rate, fees, and provisions of this mortgage loan before you proceed. For information on contacting a qualified credit counselor, call the United States Department of Housing and Urban Development’s counseling hotline at 1-888-466-3487 or go to www.hud.gov/fha/sfh/hcc for a list of counselors.

You are not required to complete any loan agreement merely because you have received these disclosures or have signed a loan application. If you proceed with this mortgage loan, you should also remember that you may face serious financial risks if you use this loan to pay off debts and then later incur significant new debts.

Property taxes and homeowner’s insurance are your responsibility. Not all lenders provide escrow services for these payments. You should ask your lender about these services. Your payments on existing debts contribute to your credit ratings. You should not accept any advice to ignore your regular payments to your existing creditors."

(B) The lender or mortgage broker shall secure a signed acknowledgment of receipt by the obligor of a copy of the notice set forth in paragraph (A).

(2) No lending without due regard to repayment ability.

(A) No lender, who originates a high-cost loan, shall engage in a pattern and practice of extending credit to an obligor, based on the obligor’s collateral, without regard to the obligor’s ability to repay, including the obligor’s current or expected income, current obligations, and employment.

(B) A lender shall be presumed to have violated this paragraph, if the lender engages in the pattern or practice of making high-cost loans without verifying or documenting the obligor’s repayment ability.

(C) Any expected income from any source other than the borrower’s equity in the property securing the high-cost loan, including regular salary or wages, gifts, expected retirement payments, or income from self-employment may be considered. A lender may verify and document an obligor’s income and current obligations through any reliable source that provides the lender with a reasonable basis for believing there are sufficient funds to support the high-cost loan. Reliable sources include but are not limited to credit reports, tax returns, pension statements, and payment records for employment income.

(D) In the case of a stated income loan, the reasonable basis for believing there are sufficient funds to support the high-cost loan may be based on the income stated by the consumer, as well as other information in the possession of the person originating the loan after the solicitation of all information that the person customarily solicits in connection with loans of this type. A lender shall not knowingly or wilfully originate a high-cost loan as a stated income loan with the intent of evading this paragraph.

(3) A lender shall not refinance an existing high-cost loan originated by that lender or an affiliate of the lender for a period of twelve months from the date of consummation of the existing high-cost loan.

A mortgage broker shall not solicit or arrange for the refinance of an existing high-cost loan solicited or arranged by the mortgage broker within the preceding twenty-four months.

(4) For purposes of this chapter, "additional proceeds" means the amount over and above the outstanding principal balance of the existing high-cost loan.

A lender shall not refinance a high-cost loan by the lender or an affiliate of the lender unless the obligor receives the benefit of additional proceeds or the interest rate of the new high-cost loan is less than the interest rate of the existing high-cost loan.

(5) A lender shall not pay a contractor under a home-improvement contract from the proceeds of a high-cost loan other than by an instrument payable to the obligor or jointly to the obligor and the contractor or, at the election of the obligor, through a third-party in accordance with terms established in a written agreement signed by the obligor, the lender, and the contractor prior to the disbursement of funds to the contractor.

(6) A lender shall not sell any individual or group credit life, accident and health, disability, or unemployment insurance product on a prepaid single premium basis in conjunction with a high-cost loan unless the following conditions are met:

(A) If a lender offers any individual or group credit life, accident and health, disability, or unemployment insurance products purchased on a prepaid single premium basis in conjunction with a high-cost loan, the lender shall offer the obligor the option of purchasing all such insurance on a monthly premium basis.

(B) A lender shall not sell credit life, accident and health, disability, or unemployment insurance products in conjunction with a high-cost loan, other than where the insurance premiums are calculated, earned, and paid on a monthly or other regular, periodic basis, without providing a separate disclosure no later than the third business day after the date of the obligor’s application for a high-cost loan is received substantially similar to the following:

"INSURANCE NOTICE TO BORROWER(S)

You may elect to purchase credit life, accident and health, disability and/or unemployment insurance in conjunction with this mortgage loan. If you elect to purchase this insurance coverage, you may pay for it either on a monthly premium basis or with a single premium payment at the time the lender closes this loan. If you choose the single premium payment, the cost of the premium will be financed at the interest rate provided for in the mortgage loan.

This insurance is NOT required as a condition of closing this loan and has been included with the loan at your request.

At any time you have the right to cancel any or all such policies purchased in conjunction with this loan. You may cancel your policy or policies by signing and returning a copy of this notice to your lender or you may contact your lender directly.

If you cancel your insurance within thirty days of the date of your loan, then you will receive either a full refund or a credit against your loan account. If you cancel your insurance at any other time, you will receive either a refund or credit against your loan account of any unearned premium.

YOU MUST CANCEL WITHIN 30 DAYS OF THE DATE

OF THE LOAN TO RECEIVE A FULL REFUND.

CREDIT INSURANCE CANCELLATION

I (we) request that the lender cancel the ________________ insurance that I (we) purchased in conjunction with my (our) mortgage loan dated ________________.

____________________________________________________________

Borrower Date"

To assist you in making an informed choice, the following estimates of premiums are being provided along with an example of the cost of financing. The examples assume that the term of the insurance product is ____ years and that the interest rate is ____ percent (a rate that has recently been available for the type of loan you are seeking). PLEASE NOTE THAT THE ACTUAL LOAN TERMS YOU QUALIFY FOR MAY VARY FROM THIS EXAMPLE.

"Total amount paid" is the amount that would be paid if you financed only the total insurance premium for a ____ year period and is equal to the amount you would have paid if you made all scheduled payments. This is NOT the total payment on your loan.

CREDIT LIFE INSURANCE: Estimated premium of $______________

DISABILITY INSURANCE: Estimated premium of $_______________

INVOLUNTARY UNEMPLOYMENT INSURANCE: Estimated premium of $________________

TOTAL INSURANCE PREMIUMS: $________________

TOTAL AMOUNT PAID: $________________

(C) If an obligor elects to cancel, within thirty days of the date of the high-cost loan, any individual or group credit life, accident and health, disability, or unemployment insurance product purchased on a prepaid single premium basis in conjunction with a high-cost loan, the lender or the insurance company who sold the insurance or the insurance company providing the product, shall give the obligor either a full premium refund or a full premium credit to the unpaid loan balance. If the obligor elects to cancel any individual or group credit insurance purchased in conjunction with a high-cost loan at any other time, the refund or credit shall be computed as provided or permitted by state law. The lender or insurance company will decide whether the return of premium shall be by means of credit to the account or by refund to the obligor.

For purposes of this chapter, the term "credit life insurance" does not include any type of life insurance sold by the lender where the obligor chooses the primary beneficiary.

(7) No lender or mortgage broker in any writing in connection with a high-cost loan shall intentionally misrepresent in a false, deceptive, or misleading manner any charge or fee to be paid by an obligor to the lender related to the origination of a high-cost loan. This paragraph shall not apply to a good faith estimate provided by a lender under applicable law.

(8) No lender shall charge a fee at closing for a product or service, other than insurance, to be paid to another party related to the high-cost loan or required as a condition of the loan, where the payment is not actually made or where the payment is made but the lender has actual knowledge the product or service will not be provided. This paragraph shall not apply to a good faith estimate provided by a lender under applicable law.

(9) No lender or mortgage broker shall require an obligor to sign any note, loan agreement, mortgage, or guaranty evidencing a high-cost loan in which blanks for the principal amount and interest rate of the high-cost loan are left to be filled in by the lender after the loan documents are signed by the obligor, unless the obligor has given written authority to the lender or its agents to complete the blanks for the interest rate in the case of a high-cost loan with an adjustable interest rate.

(10) No lender or mortgage broker shall recommend or encourage default on an existing high-cost loan or other debt prior to and in connection with the closing or planned closing of a high-cost loan that refinances all or any portion of the existing loan or debt.

(11) No lender shall charge a late payment fee on a high-cost loan except according to the following:

(A) The late payment fee shall not be in excess of five 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;

(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.

(12) A lender may charge a fee for informing or transmitting to any person the balance due to pay off a high-cost loan if a request is made more than once in any six month period. Payoff balances shall be provided within a reasonable time, but in any event no more than seven business days after the request.

(13) No lender or mortgage broker shall intentionally include in a home loan application for a high-cost loan or any other document related to the high-cost loan, any information the lender or mortgage broker knows to be false or misleading regarding an obligor including, without limitation, information concerning the obligor’s income or ability to repay the loan.

(14) No mortgage broker shall knowingly make or cause to be made any false, deceptive, or misleading statement or representation in connection with a high-cost loan transaction including, without limitation, a false, deceptive, or misleading statement or representation regarding the obligor’s income or ability to repay the high-cost loan, or regarding the value of the residential real property securing the high-cost loan.

§ -4 Relationship to other laws. (a) All political subdivisions of this State are prohibited from enacting, issuing and enforcing ordinances, resolutions, regulations, orders, requests for proposals, or requests for bids pertaining to the financial or lending activities of persons who:

(1) Are subject to the jurisdiction of chapter 412, including activities subject to this chapter;

(2) Are subject to the jurisdiction or regulatory supervision of the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the National Credit Union Administration, the Federal Deposit Insurance Corporation, the Federal Trade Commission or the United States Department of Housing and Urban Development;

(3) Are subject to the jurisdiction or regulatory supervision of a department or agency of another state; or

(4) Originate, purchase, sell, assign, securitize, or service property interests or obligations created by financial transactions or loans made, executed, or originated by persons referred to in paragraph (1), (2), or (3) or assist or facilitate such transactions.

The requirements of this subsection shall apply to all ordinances, resolutions, rules, regulations, orders, requests for proposals, and request for bids pertaining to financial or lending activities, including any ordinances, resolutions, rules, regulations, orders, requests for proposals, and request for bids disqualifying persons from doing business with a political subdivision based upon financial or lending activities or imposing reporting requirements or any other obligations upon persons regarding financial or lending activities.

It is the policy of this State that the laws of this State relating to financial and lending activities are to be applied on a uniform statewide basis. To effectuate this intent, this subsection shall apply both prospectively and retroactively. All existing ordinances, resolutions, rules, regulations, orders, requests for proposals, and requests for bids covered by this subsection are superseded and preempted to the extent that they are inconsistent with this subsection.

(b) Any provision of this chapter preempted by federal law with respect to a national bank or federal savings association also shall not apply to the same extent to an operating subsidiary of a national bank or federal savings institution which satisfies the requirements for operating subsidiaries established in title 12 Code of Federal Regulations section 5.34 (relating to operating subsidiaries) or section 559.3 (relating to what are the characteristics of, and what requirements apply to, for subordinate organizations of federal savings associations).

(c) The provisions of this chapter shall be interpreted and applied to the fullest extent practical in a manner consistent with applicable federal laws and regulations, policies and orders of federal regulatory agencies and shall not be deemed to constitute an attempt to override federal law.

§ -5 Enforcement. The attorney general may enforce the provisions of this chapter for any violation within one year of the occurrence of the violation. In addition, any obligor of a high-cost loan may enforce the provisions of this chapter with respect to that high-cost loan for any violation within one year of the occurrence of the violation. Further, any obligor of a high-cost loan may raise any violation by a lender of this chapter as a defense in the nature of recoupment to any action by a lender for recovery of amount, owed by the obligor under a high-cost loan.

It is the specific intent of the legislature that, except for persons under common ownership and control with the lender originating a high-cost loan, no persons engaged in the purchase, sale, assignment, securitization, or servicing of any high-cost loan shall have any liability under this chapter, for the action or inaction of persons originating such a loan. The remedies provided in this chapter shall be the sole and exclusive remedies for any violation of any provision of this chapter.

§ -6 Civil Liability. (a) In any individual action instituted by an obligor on a high-cost loan in which the defendant is found to have materially violated this chapter, the court shall award the obligor actual damages sustained by the obligor as a result of such material violation, and may award the obligor an additional amount not to exceed $5,000, together with a reasonable attorney’s fee and court costs as determined by the court.

(b) In the event of litigation involving a certified class action, damages shall be set at such amount as the court may allow, except that as to each member of the class no minimum recovery shall be applicable, and the total recovery in any class action or series of class actions arising out of the same failure to comply by the same lender shall not be more than the sum of actual damages and the lesser of $500,000, or one per cent of the net worth of the creditor.

(c) In determining the amount of any award under subsection (a) or (b), the court shall consider all relevant circumstances, including, but not limited to acts of omissions by the obligor, the extent of the harm caused by the conduct constituting a violation, the nature and persistence of the conduct, the length of time over which the conduct occurred, the assets, liabilities, and net worth of the defendant, whether corporate or individual, and any corrective action taken by the defendant. If the obligor has previously received an award of damages under the federal Truth in Lending Act for substantially the same act or omission, with regard to the same high-cost loan, the court shall offset the amount of any damage award under this chapter by the amount of the prior damage award.

§ -7 Corrections. (a) A lender in a high-cost loan who, when acting in good faith, fails to comply with this chapter, will not be deemed to have violated this chapter if the lender establishes that within sixty days of the discovery of the error and prior to the institution of any action under this section, the obligor is notified of the compliance failure, appropriate restitution is made, and whatever adjustments are necessary are made to the loan to either make the high-cost loan satisfy the requirements of this chapter, or change the terms of the loan in a manner beneficial to the obligor so that the loan will no longer be considered a high-cost loan subject to this chapter.

(b) A lender or assignee may not be held liable in any action brought under this chapter for a violation of this chapter if the lender or assignee shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error. Examples of a bona fide error include, but are not limited to, clerical, calculation, computer malfunction and programming, and printing errors, except that an error of legal judgment with respect to a person’s obligations under this chapter is not a bona fide error.

§ -8 Severability. The provisions of this chapter are severable and if any of its provisions shall be held unconstitutional, the decision of the court shall not affect or impair any of the remaining provisions of this chapter. It is hereby declared to be the legislative intent that this chapter would have been adopted if the unconstitutional provisions had not been included."

SECTION 2. This Act shall take effect on July 1, 2050.