AB991: Bill Text

LRB-3277/1

ARG:kmg:jf

2003 - 2004 LEGISLATURE

2003 Assembly BILL 991

March 11, 2004 - Introduced by Representative Morris. Referred to Committee on Financial Institutions.

AB991,1,6 An Act to amend 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 428.201] of the statutes; relating to: the regulation of certain consumer mortgage loans, granting rule-making authority, and providing a penalty.

Analysis by the Legislative Reference Bureau

This bill creates a subchapter of the statutes regulating "high-cost home loans," as defined in the bill. Significant provisions include the following:

High-cost home loans

Scope and definitions

This bill creates several prohibitions and requirements applicable to high-cost home loans. The bill generally defines "high-cost home loan" as a loan made by a lender, as defined under the bill, to a customer that has a principal amount not exceeding the lesser of $300,000 or the maximum amount allowable in order to be eligible for purchase by the Federal National Mortgage Association, that is secured by a mortgage on, or an equivalent security interest in, residential real property, or a manufactured home, occupied or to be occupied by the customer as the customer's principal dwelling, that is not an open-end credit plan or a reverse mortgage transaction, and that satisfies any of the following:

(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, with these annual percentage rates subject to adjustments reflecting changes made by the Board of Governors of the Federal Reserve System.

(2) If the total loan amount is at least $20,000, the total points and fees, other than certain excluded points and fees, payable by the customer at or before the loan closing exceed five percent of the total loan amount or, if the total loan amount is less than $20,000, exceed the lesser of eight percent of the total loan amount or $1,000.

(3) The customer may, under the terms of the loan, be required to pay prepayment fees or penalties more than 30 months after the date on which the loan is made or that exceed, in the aggregate, more than two percent of the amount prepaid.

The bill defines "lender" as a person who regularly makes or arranges high-cost home loans.

Prohibitions and requirements on creditors

The bill imposes all of the following prohibitions and requirements:

(1) With certain exceptions, no lender may make a high-cost home loan that permits the lender or an assignee of the loan to demand payment of the outstanding balance before the original maturity date.

(2) With certain exceptions, no lender may make a high-cost home 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.

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

(4) No lender may make a high-cost home 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 customer's default.

(5) No lender may make a high-cost home 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 charge a customer any fees 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.

(7) No lender may make a high-cost home loan without first receiving certification from a counselor approved by the Department of Financial Institutions (DFI) that the customer has received counseling on the advisability of the loan.

(8) No lender may make a high-cost home loan unless the lender reasonably believes at the time that the loan is consummated that the customer, co-signor, or guarantor under the loan will be able to make the scheduled payments to repay the loan. In making its determination, the lender must consider current or expected income, current obligations, employment status, and other financial resources, not including the customer's equity in the dwelling pledged as security for the loan. The lender's duty is presumed to be fulfilled if the customer's total monthly debts do not exceed 50 percent of the customer's monthly gross income.

(9) No lender may make a high-cost home loan that finances points and fees or any charges payable to persons other than the lender or, if the loan refinances an existing loan held by the lender, that finances prepayment fees or penalties payable by the customer.

(10) No lender may charge a customer points and fees in connection with a high-cost home loan if the proceeds of the high-cost home loan are used to refinance an existing high-cost home loan held by the same lender.

(11) No lender may pay proceeds of a high-cost home 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 customer or jointly to the customer and the person who is under contract or, with the consent of the customer, the payment is made through a third party in accordance with a written agreement signed by the customer, the lender, and the person under contract.

(12) No lender may, for the purpose of evading the provisions of the bill: structure a loan transaction as an open-end credit plan if the loan would have been a high-cost home loan had the loan been structured as a closed-end loan; divide a loan transaction into separate parts; or engage in any other acts of subterfuge.

(13) No lender may make a high-cost home loan to a customer that finances premiums for credit life, credit disability, or credit unemployment insurance or any other life or health insurance, except if the premium is required to be paid monthly.

(14) No lender may make a high-cost home loan to a customer that refinances an existing high-cost home loan, unless the new high-cost home loan provides a reasonable, tangible net benefit to the customer considering the circumstances.

(15) No lender may recommend that a customer default, or encourage a customer to default, on a loan before and in connection with the closing or planned closing of a high-cost home loan.

Remedies

The bill permits a customer, or a cosigner or guarantor under a high-cost home loan, to bring an action to enforce any requirement or prohibition under the subchapter created in the bill regulating high-cost home loans. The bill also specifies that the subchapter may be enforced by class action. An action must be commenced during the term of the high-cost home loan or within six years after the cause of action accrues, whichever is later. The bill further specifies that the remedies section must be liberally construed to the end that any aggrieved party is put in at least as good a position as if the person committing the violation had fully complied with this subchapter.

Under the bill, any act that violates the subchapter confers no rights or obligations enforceable by action. In addition, with certain exceptions, a person who violates the subchapter created in the bill is liable to the customer, cosigner, or guarantor in an amount equal to the total of the following:

(1) Twice the amount of interest paid under the applicable high-cost home loan, plus an amount equal to the total of all interest remaining under the loan.

(2) The actual damages, including any incidental and consequential damages, sustained by the aggrieved party as a result of the violation.

Furthermore, if an aggrieved party prevails in such an action, he or she must recover the aggregate amount of costs and expenses determined by the court to have been reasonably incurred in connection with the prosecution of the action, together with a reasonable amount for attorney fees.

Administration and criminal penalty

The bill permits DFI to promulgate rules to administer the subchapter created in the bill. In addition, the bill requires DFI, upon the request of any person, to review any act, practice, procedure, or form that has been submitted to it in writing to determine whether the act, practice, procedure, or form is consistent with this subchapter. The bill permits DFI to perform investigations and to bring administrative enforcement proceedings to enforce the subchapter created in the bill. The bill also permits the Department of Justice to bring an action to enforce the subchapter.

Affirmative defenses

The bill also provides that a lender is not liable in any action if any of the following applies:

(1) Within 30 days after making the applicable high-cost home loan and before receiving any notice from the customer of the violation on which the action is based, the lender makes appropriate restitution to the customer and appropriate adjustments to the loan.

(2) The violation on which the action is based was unintentional and took place notwithstanding reasonable procedures adopted by the lender to avoid the violations and, within 60 days after making the applicable high-cost home loan and before receiving any notice from the customer of the violation, the lender makes appropriate restitution to the customer and appropriate adjustments to the 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:

AB991, s. 1 Section 1. Chapter 428 (title) of the statutes is amended to read:

AB991,4,4 chapter 428 first lien real estate and high-cost home loans