2005 - 2006 LEGISLATURE
June 3, 2005 - Introduced by Senators Stepp, Plale, Brown and Harsdorf,
cosponsored by Representatives
Hundertmark, Montgomery, Lamb, Hahn,
Hines, Owens, Petrowski, Kreibich, Vrakas, Pridemore, Van Roy, Ballweg,
Lothian and Albers. Referred to Committee on Housing and Financial
1An Act to repeal
138.056 (3) (a); to renumber
138.056 (3) (b); to amend
(3) (title); and to create
138.056 (3m) of the statutes; relating to: prepayment
3penalties on variable rate residential mortgage loans.
Analysis by the Legislative Reference Bureau
Under current law, a residential mortgage loan (a loan secured by a first lien
real estate mortgage on, or an equivalent security interest in, a one- to four-family
dwelling used by the borrower as his or her principal residence) made after
November 1, 1981, may be prepaid in whole or in part by the borrower at any time,
but the lender may impose a prepayment penalty or fee if the prepayment is made
within five years of the date of the loan. The prepayment penalty or fee may not
exceed 60 days' interest at the contract rate on the amount by which the aggregate
principal prepayments for a 12-month period exceeds 20 percent of the original
amount of the loan.
Current law imposes different prepayment penalty requirements on a "variable
rate loan," which is a residential mortgage loan, or a consumer loan secured by an
interest in a mobile home, the terms of which permit the interest rate to be increased
or decreased. Such increases or decreases may correspond to an "approved index."
A variable rate loan involving a mobile home transaction or using an approved index
may be prepaid in whole or in part at any time without penalty. Other variable rate
loans may be prepaid in whole or in part without penalty within 30 days after notice
of an increase in the interest rate, and may be prepaid at other times subject to the
prepayment penalty described above.
This bill eliminates the prepayment penalty requirements for variable rate
loans that are described above and creates new requirements. Under the bill, a
lender may not include a prepayment penalty in a variable rate loan unless the
lender has, in writing, offered the borrower a variable rate loan without a
prepayment penalty and the borrower initials the offer to indicate that the borrower
has declined the offer. If the borrower declines the offer, the lender may include a
prepayment penalty that applies if prepayment of the loan is made within the first
three years of the loan and is not made in connection with the sale of the dwelling
or mobile home secured by the loan. The bill limits the prepayment penalty or fee
to 3 percent in the first year of the loan, 2 percent in the second year of the loan, or
1 percent in the third year of the loan, of the amount by which the prepayment
exceeds 80 percent of the principal balance of the loan outstanding immediately prior
The people of the state of Wisconsin, represented in senate and assembly, do
enact as follows:
SB230, s. 1
138.056 (3) (title) of the statutes is amended to read:
(title) Fees and penalties prohibited.
SB230, s. 3
138.056 (3) (b) of the statutes is renumbered 138.056 (3).
SB230, s. 4
138.056 (3m) of the statutes is created to read:
138.056 (3m) Prepayment penalties.
(a) Notwithstanding s. 138.052 (2) (a), 8
and except as provided in s. 428.207, a lender may not include a prepayment penalty 9
in a variable rate loan unless the lender offers the borrower a variable rate loan 10
without a prepayment penalty, the offer is in writing, and the borrower initials the 11
offer to indicate that the borrower has declined the offer.
(b) If a borrower declines an offer required under par. (a), the lender may 13
include a prepayment penalty that provides that, if a prepayment is made within 3 14
years of the date of the loan and prepayment is not made in connection with the sale 15
of the dwelling or mobile home securing the loan, the lender shall receive an amount
not exceeding 3 percent if the prepayment is made in the first year of the loan, 2 2
percent if the prepayment is made in the 2nd year of the loan, or 1 percent if the 3
prepayment is made in the 3rd year of the loan, of the amount by which the 4
prepayment exceeds 80 percent of the principal balance of the loan outstanding 5
immediately prior to the prepayment.
(c) This subsection applies variable rate loans made, refinanced, renewed, 7
extended, or modified on or after the effective date of this paragraph .... [revisor 8