AB792: Bill Text

LRB-3260/1

RJM:kmg:rs

2003 - 2004 LEGISLATURE

2003 Assembly BILL 792

February 2, 2004 - Introduced by Representative Montgomery, cosponsored by Senator Schultz. Referred to Committee on Financial Institutions.

AB792,1,6 An Act to amend 138.052 (2) (a) 2., 138.052 (9), 138.056 (3) (a), chapter 428 (title), 428.101 (intro.), 428.101 (3), 428.102 (intro.), 428.102 (2), 428.103 (1) (intro.) and 428.106; and to create subchapter I (title) of chapter 428 [precedes 428.101] and subchapter II of chapter 428 [precedes 428.202] of the statutes; relating to: regulating certain consumer mortgage lenders, granting rule-making authority, and providing a penalty.

Analysis by the Legislative Reference Bureau

This bill creates a subchapter of the statutes regulating certain consumer mortgage loans, defined as "covered loans." Significant provisions include the following:

Scope and definitions

This bill creates several prohibitions and requirements applicable to covered loans and the lenders that make them. The bill generally defines "covered loan" as a consumer transaction that involves real property located in this state, that is secured by the consumer's principal dwelling, and in which either: 1) the annual percentage rate at consummation will exceed, by more than eight percent for first-lien loans or by more than ten percent for subordinate-lien loans, the yield on specified U.S. Treasury securities; or 2) the total points and fees payable by the consumer at or before loan closing will exceed the greater of eight percent of the total loan amount or $400. (The $400 amount is adjusted annually on January 1 by the annual percentage change in the Consumer Price Index that was reported on the preceding June 1).

The bill defines "lender" as a person who originates a covered loan and to whom the covered loan is initially payable. "Lender" does not include an assignee of a covered loan or any person who, for at least 12 consecutive months, has failed to originate any covered loans.

Prohibitions and requirements on lenders and others

The bill imposes all of the following prohibitions and requirements:

(1) With certain exceptions, no lender may make a covered loan that requires, or that permits the lender to require, a payment that is more than twice as large as the average of all earlier scheduled payments, unless the payment becomes due at least 60 months after the date on which the loan is made.

(2) No lender may make a covered loan that permits the lender or an assignee of the loan to demand payment of the outstanding balance before the original maturity date, except in cases of default, fraud, or material misrepresentation by the consumer or any act or omission by the consumer that adversely affects the lender's or assignee's security for the loan or any right of the lender or assignee in that security or in certain cases where the real property that is pledged as security for the loan has been sold.

(3) With certain exceptions, no lender may make a covered loan with a payment schedule that causes the principal balance to increase.

(4) No lender may make a covered loan that imposes or permits the lender or an assignee of the loan to impose an increase in the interest rate as a result of the consumer's default.

(5) No lender may make a covered loan that includes a payment schedule that consolidates more than two scheduled payments and pays them in advance out of the proceeds of the loan.

(6) No lender may engage in a pattern or practice of making covered loans to consumers who have collateral but who, considering their current and expected income, current obligations, and employment status, would be unable at the time of application to make the scheduled payments under the loans.

(7) With certain exceptions, no lender may make a covered loan that refinances an existing covered loan that the lender made to the same consumer, unless the refinancing takes place at least one year after the date on which the loan being refinanced was made or the refinancing is in the interest of the consumer. In addition, with certain exceptions, no assignee or servicer of a covered loan may make a covered loan that refinances the covered loan, unless the refinancing takes place at least one year after the date on which the loan being refinanced was made or the refinancing is in the interest of the consumer. No lender, assignee of a covered loan, or servicer may engage in a pattern or practice of evading these prohibitions.

(8) No lender may pay proceeds of a covered loan to a person who is under contract to make home improvements, as specified in the bill, unless the payment is made by an instrument that is payable to the consumer or jointly to the consumer and the person who is under contract or, with the consent of the consumer, the payment is made through a third party in accordance with a written agreement signed by the consumer, the lender, and the person under contract.

(9) No lender may knowingly contract with any person who is engaged in work as a mortgage banker or mortgage broker but who has not obtained the registration required by law.

(10) No lender, mortgage banker, mortgage broker, loan originator (a type of agent of a mortgage banker or mortgage broker), or licensed lender (a person licensed by the Department of Financial Institutions (DFI) to make certain high interest loans) may knowingly make, propose, or solicit fraudulent, false, or misleading statements on any document relating to a covered loan.

(11) No lender, mortgage banker, mortgage broker, loan originator, or licensed lender may recommend or encourage an individual to default on an existing loan or other obligation before and in connection with the making of a covered loan that refinances all or any portion of that existing loan or obligation.

Prepayment

With certain exceptions, the bill allows a consumer to prepay a covered loan at any time without penalty if the payment is made in the context of a refinancing of the covered loan and if the covered loan is held by the refinancing lender. The bill allows the servicer of a covered loan to impose a prepayment penalty, unless the servicer is also the lender that holds the loan at the time of the refinancing.

Required notice

The bill requires a lender to ensure that the consumer is given a specified notice at least three business days before the lender makes the applicable covered loan.

Municipal authority

The bill prohibits any city, village, town, or county from enacting an ordinance that regulates a matter specifically governed under the bill or under a rule promulgated pursuant to the bill. The bill also retroactively invalidates any such ordinance in existence when the bill takes effect.

Administration and penalties

The bill allows DFI to promulgate rules, perform investigations, hold contested case hearings, and issue orders to administer and enforce the provisions created under the bill. With certain exceptions, if the person required to appear at an enforcement hearing fails to appear or if upon the record made at the hearing DFI finds that a violation has been established, DFI may issue an order specifying any of the following:

(1) That the person must cease and desist from the violation or practice and make restitution for any actual damages suffered by a consumer.

(2) That the person must forfeit not more than $1,000 per violation or, if the person willfully or knowingly violated this subchapter, not less than $1,000 nor more than $10,000 per violation.

(3) That the person must pay to DFI the costs of its investigation.

(4) That a license, registration, or certification issued by DFI to the person is suspended or revoked or will not be renewed.

(5) That any individual who is responsible for the violation must be removed from working in any capacity related to the violation or related to activities regulated by DFI.

(6) Any additional conditions that DFI considers reasonable.

However, it is a defense to any alleged violation if the person alleged to have committed the violation establishes that the person acted in good faith while committing the violation and that, no later than 60 days after the discovery of the violation and before any investigation or other enforcement action by DFI, the person notified the affected consumer of the violation and either made appropriate adjustments to the loan to bring the loan into compliance or changed the terms of the loan in a manner beneficial to the consumer so that the loan is no longer a covered loan.

For further information see the state fiscal estimate, which will be printed as an appendix to this bill.

The people of the state of Wisconsin, represented in senate and assembly, do enact as follows:

AB792, s. 1 Section 1. 138.052 (2) (a) 2. of the statutes is amended to read:

AB792,4,6 138.052 (2) (a) 2. The Except as provided in s. 428.207, the parties may agree that if a prepayment is made within 5 years of the date of the loan, then the lender shall receive an amount not exceeding 60 days' interest at the contract rate on the amount by which the aggregate principal prepayments for a 12-month period exceeds 20% of the original amount of the loan.

AB792, s. 2 Section 2. 138.052 (9) of the statutes is amended to read:

AB792,4,11 138.052 (9) Chapters 421 to 428 427 and subch. I of ch. 428 do not apply to the refinancing, modification, extension, renewal or assumption of a loan which had an original principal balance in excess of $25,000 if the unpaid principal balance of the loan has been reduced to $25,000 or less.

AB792, s. 3 Section 3. 138.056 (3) (a) of the statutes is amended to read:

AB792,5,5 138.056 (3) (a) A variable rate loan involving a mobile home transaction or using an approved index may be prepaid at any time in whole or in part without penalty. Other variable rate loans may be prepaid in whole or part without penalty within 30 days after notice of an increase in the interest rate and , except as provided in s. 428.207, with the prepayment penalty under s. 138.052 (2) (a) 2. and 3. if prepayment is made before or after the 30-day period. This paragraph controls if there is a conflict with s. 138.052 (2) (a).

AB792, s. 4 Section 4. Chapter 428 (title) of the statutes is amended to read: