2003 - 2004 LEGISLATURE
March 1, 2004 - Introduced by Senator Schultz, cosponsored by Representative
Montgomery. Referred to Committee on Agriculture, Financial Institutions
and Insurance.
SB509,1,6
1An Act to amend 138.052 (2) (a) 2., 138.052 (9), 138.056 (3) (a), chapter 428
2(title), 428.101 (intro.), 428.101 (3), 428.102 (intro.), 428.102 (2), 428.103 (1)
3(intro.) and 428.106; and
to create subchapter I (title) of chapter 428 [precedes
4428.101] and subchapter II of chapter 428 [precedes 428.202] of the statutes;
5relating to: regulating certain consumer mortgage lenders, granting
6rule-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 credit mortgage loan transaction other than an open-end credit plan or
reverse mortgage in which the consumer is a natural person, the loan is obtained by
the consumer primarily for personal, family, or household purposes, the loan is
secured by a mortgage on, or an equivalent security interest in, residential real
property occupied or to be occupied by the consumer as the consumer's principal
dwelling, and the terms of the loan provide any of the following:
(1) That 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.
(2) That the total points and fees payable by the consumer at or before the loan
closing 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).
(3) That the total points and fees payable by the consumer at or before the loan
closing exceed six percent of the total loan amount.
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.
(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 make covered loans to consumers based on the consumer's
collateral without regard to the consumer's ability to repay, including the consumer's
current or expected income, current obligations, and employment. A lender is
presumed to violate this prohibition if the lender engages in a pattern or practice of
making covered loans without verifying and documenting the consumer's repayment
ability.
(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) With certain exceptions, no lender may finance through a covered loan, or
finance to the same customer within 30 days of making a covered loan, any individual
or group credit life, credit accident and health, credit disability, or credit
unemployment insurance product on a prepaid single premium basis sold in
conjunction with a covered loan.
(10) No lender may knowingly replace or consolidate a zero-interest rate or
other subsidized low-rate loan made by a governmental or nonprofit lender with a
covered loan within the first ten years of the zero-interest rate or other subsidized
low-rate loan unless the current holder of the loan consents in writing to the
refinancing.
(11) 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.
(12) 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.
(13) 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
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 also allows the servicer of a
covered loan to impose a prepayment penalty, unless the servicer is also the lender
and holds the loan at the time of the refinancing. The bill provides the following
limitations on any otherwise permissible prepayment penalty:
(1) A prepayment penalty is permitted only during the 36 months immediately
following the date of consummation of the covered loan.
(2) A lender may not include a prepayment penalty in a covered loan unless the
lender offers the consumer the option of choosing a loan product without a
prepayment penalty and the offer is in writing, is initialed by the consumer, and
includes a prescribed notice to the consumer.
(3) A prepayment penalty is limited to a calculated amount for certain types
of covered loans and is not permitted on other types of covered loans.
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.
Exclusive state regulation
The bill provides that the state has sole authority, except as provided under
federal law, to regulate any matter governed under the bill or under a rule
promulgated pursuant to the bill, and prohibits local governmental units from
attempting to regulate any matter governed by the bill.
Debt collection
With certain exceptions, the bill exempts specified personal property and
household goods of the consumer from levy, execution, or sale in satisfaction of a
judgment for an obligation arising from a covered loan.
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.
Parity for federally insured depository institutions
The bill provides that, if federal law preempts or prohibits the application of the
provisions of the bill to any federally chartered bank, trust company, savings and
loan association, savings bank, or credit union, the bill does not apply to the same
type of state chartered bank, trust company, savings and loan association, savings
bank, or credit union, or to any subsidiary thereof.
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:
SB509, s. 1
1Section
1. 138.052 (2) (a) 2. of the statutes is amended to read:
SB509,5,62
138.052
(2) (a) 2.
The Except as provided in s. 428.207, the parties may agree
3that if a prepayment is made within 5 years of the date of the loan, then the lender
4shall receive an amount not exceeding 60 days' interest at the contract rate on the
5amount by which the aggregate principal prepayments for a 12-month period
6exceeds 20% of the original amount of the loan.
SB509, s. 2
7Section
2. 138.052 (9) of the statutes is amended to read:
SB509,5,118
138.052
(9) Chapters 421 to
428 427 and subch. I of ch. 428 do not apply to the
9refinancing, modification, extension, renewal or assumption of a loan which had an
10original principal balance in excess of $25,000 if the unpaid principal balance of the
11loan has been reduced to $25,000 or less.
SB509, s. 3
12Section
3. 138.056 (3) (a) of the statutes is amended to read:
SB509,5,1913
138.056
(3) (a) A variable rate loan involving a mobile home transaction or
14using an approved index may be prepaid at any time in whole or in part without
15penalty. Other variable rate loans may be prepaid in whole or part without penalty
16within 30 days after notice of an increase in the interest rate and
, except as provided
17in s. 428.207, with the prepayment penalty under s. 138.052 (2) (a) 2. and 3. if
18prepayment is made before or after the 30-day period. This paragraph controls if
19there is a conflict with s. 138.052 (2) (a).
SB509, s. 4
1Section
4. Chapter 428 (title) of the statutes is amended to read:
SB509,6,42
chapter 428
3
first lien real estate
4and other mortgage loans
SB509, s. 5
5Section
5. Subchapter I (title) of chapter 428 [precedes 428.101] of the statutes
6is created to read:
SB509,6,98
Subchapter i
9
first lien real estate loans
SB509, s. 6
10Section
6. 428.101 (intro.) of the statutes is amended to read:
SB509,6,11
11428.101 Applicability. (intro.) This
chapter subchapter applies to:
SB509, s. 7
12Section
7. 428.101 (3) of the statutes is amended to read:
SB509,6,1613
428.101
(3) Loans made on or after November 1, 1981, by a creditor to a
14customer and which are secured by a first lien real estate mortgage or equivalent
15security interest if the amount financed is $25,000 or less
and if the loan is not subject
16to subch. II.
SB509, s. 8
17Section
8. 428.102 (intro.) of the statutes is amended to read:
SB509,6,18
18428.102 Definitions. (intro.) In this
chapter subchapter:
SB509, s. 9
19Section
9. 428.102 (2) of the statutes is amended to read:
SB509,6,2120
428.102
(2) "Creditor" means a person who regularly engages in, arranges for
21or procures from 3rd persons, loans within the scope of this
chapter subchapter.
SB509, s. 10
22Section
10. 428.103 (1) (intro.) of the statutes is amended to read:
SB509,6,2423
428.103
(1) (intro.) The following limitations shall apply to all loans subject to
24this
chapter subchapter:
SB509, s. 11
25Section
11. 428.106 of the statutes is amended to read:
SB509,7,2
1428.106 Remedies. (1) Violations of this
chapter subchapter may be enforced
2by a customer subject to this section and ss. 425.308 to 425.311.
SB509,7,9
3(2) With respect to a loan subject to this
chapter subchapter, if the court as a
4matter of law finds that any aspect of the transaction, any conduct directed against
5the customer, by the creditor, or any result of the transaction is unconscionable, the
6court shall, in addition to the remedies and penalties set forth in this
chapter 7subchapter, and a penalty not to exceed that specified in s. 428.103 (2), refuse to
8enforce the unconscionable aspect of the transaction or so limit the application of any
9unconscionable aspect or conduct to avoid any unconscionable result.
SB509,7,15
10(3) Notwithstanding other provisions of this
chapter subchapter, a customer
11shall not be entitled to recover the specific penalties provided in ss. 428.103 (2) (a)
12and 428.104 (2) (a) if the person violating this
chapter subchapter shows by a
13preponderance of the evidence that the violation was not intentional and resulted
14from a bona fide error notwithstanding the maintenance of procedures reasonably
15adapted to avoid such error.
SB509,7,20
16(4) Any action brought by a customer to enforce rights under sub. (1) shall be
17commenced within one year after the date of the last violation of this
chapter 18subchapter, 2 years after consummation of the agreement or one year after the last
19payment, whichever is later. But in no event shall an action be commenced more
20than 6 years after the date of the last violation.
SB509,8,2
21(5) The administrator specified in s. 426.103, solely through the department
22of justice, may on behalf of any customer institute an action to enforce this
chapter 23subchapter and to recover the damages and penalties provided for this
chapter 24subchapter. In such action the administrator may obtain an order restraining by
25temporary or permanent injunctions any violation of this
chapter subchapter. This
1subsection shall not be construed to incorporate or grant to the administrator with
2respect to the enforcement of this
chapter subchapter, any of the provisions of ch. 426.
SB509, s. 12
3Section
12. Subchapter II of chapter 428 [precedes 428.202] of the statutes is
4created to read:
SB509,8,87
responsible high cost
8
mortgage lending