New York State Banking Law High Cost Loans Clause May Help Homeowners Turn The Tables On Mortgage Lenders With Predatory Lending Claims
In my 10/22/08 post I discussed the recent case of Lasalle v Shearon and the application of the New York State Banking Law to protect consumers against predatory lending. For those who may want to read the Banking Law on “High Cost Loans” I have copied the entire section here.
I make no representation as to the accuracy of this text – those interested in relying on this should check the original source.
§ 6-l. High-cost home loans. 1. Definitions. The following definitions
apply for the purposes of this section:
(a) “Affiliate” means any company that controls, is controlled by, or
is under common control with another company, as set forth in the Bank
Holding Company Act of 1956 (12 U.S.C. § 1841 et seq.), as amended from
time to time.
(b) “Annual percentage rate” means the annual percentage rate for the
loan calculated according to the provisions of the Federal
Truth-in-Lending Act (15 U.S.C. § 1601, et seq.), and the regulations
promulgated thereunder by the federal reserve board (as said act and
regulations are amended from time to time).
(c) “Bona fide loan discount points” means loan discount points
knowingly paid by the borrower funded through any source, for the
purpose of reducing, and which in fact result in a bona fide reduction
of, the interest rate or time-price differential applicable to the loan,
provided that the amount of the interest rate reduction purchased by the
discount points is reasonably consistent with established industry norms
and practices for secondary mortgage market transactions. For purposes
of this section, it shall be presumed that a point is a bona fide loan
discount point if it reduces the interest rate by a minimum of
twenty-five basis points provided all other terms of the loan remain the
same.
(d) A “High-cost home loan” means a home loan in which the terms of
the loan exceed one or more of the thresholds as defined in paragraph
(g) of this subdivision.
(e) “Home loan” means a home loan, including an open-end credit plan,
other than a reverse mortgage transaction, in which:
(i) The principal amount of the loan does not exceed the conforming
loan size limit for a comparable dwelling as established from time to
time by the federal national mortgage association;
(ii) The borrower is a natural person;
(iii) The debt is incurred by the borrower primarily for personal,
family, or household purposes;
(iv) The loan is secured by a mortgage or deed of trust on real estate
upon which there is located or there is to be located a structure or
structures intended principally for occupancy of from one to four
families which is or will be occupied by the borrower as the borrower’s
principal dwelling; and
(v) The property is located in this state.
(f) “Points and fees” means:
(i) All items listed in 15 U.S.C. § 1605(a)(1) through (4), except
interest or the time-price differential;
(ii) All charges for items listed under § 226.4(c)(7) of title 12 of
the code of federal regulations, as amended from time to time, but only
if the lender receives direct or indirect compensation in connection
with the charge or the charge is paid to an affiliate of the lender;
otherwise, the charges are not included within the meaning of the phrase
“points and fees”;
(iii) All compensation paid directly or indirectly to a mortgage
broker, including a broker that originates a loan in its own name in a
table-funded transaction, not otherwise included in subparagraphs (i)
and (ii) of this paragraph;
(iv) The cost of all premiums financed by the lender, directly or
indirectly, for any credit life, credit disability, credit unemployment,
or credit property insurance, or any other life or health insurance, or
any payments financed by the lender directly or indirectly for any debt
cancellation or suspension agreement or contract, except that insurancepremiums calculated and paid on a monthly basis shall not be considered
financed by the lender.
(g) “Thresholds” means:
(i) For a first lien mortgage loan, the annual percentage rate of the
home loan at consummation of the transaction exceeds eight percentage
points over the yield on treasury securities having comparable periods
of maturity to the loan maturity measured as of the fifteenth day of the
month immediately preceding the month in which the application for the
extension of credit is received by the lender; or for a subordinate
mortgage lien, the annual percentage rate of the home loan at
consummation of the transaction equals or exceeds nine percentage points
over the yield on treasury securities having comparable periods of
maturity on the fifteenth day of the month immediately preceding the
month in which the application for extension of credit is received by
the lender; as determined by the following rules: if the terms of the
home loan offer any initial or introductory period, and the annual
percentage rate is less than that which will apply after the end of such
initial or introductory period, then the annual percentage rate that
shall be taken into account for purposes of this section shall be the
rate which applies after the initial or introductory period; or
(ii) The total points and fees exceed: five percent of the total loan
amount if the total loan amount is fifty thousand dollars or more; or
six percent of the total loan amount if the total loan amount is fifty
thousand dollars or more and the loan is a purchase money loan
guaranteed by the federal housing administration or the veterans
administration; or the greater of six percent of the total loan amount
or fifteen hundred dollars, if the total loan amount is less than fifty
thousand dollars; provided, the following discount points shall be
excluded from the calculation of the total points and fees payable by
the borrower:
(1) Up to and including two bona fide loan discount points payable by
the borrower in connection with the loan transaction, but only if the
interest rate from which the loan’s interest rate will be discounted
does not exceed by more than one percentage point the yield on United
States treasury securities having comparable periods of maturity to the
loan maturity measured as of the fifteenth day of the month immediately
preceding the month in which the application is received;
(2) Any and all bona fide loan discount points funded directly or
indirectly through a grant from a federal, state or local government
agency or 501(c)(3) organization.
(h) “Total loan amount” means the principal of the loan minus those
points and fees as defined in paragraph (f) of this subdivision that are
included in the principal amount.
(i) “Lender” means a mortgage banker as defined in paragraph (f) of
subdivision one of section five hundred ninety of this chapter or an
exempt organization as defined in paragraph (e) of subdivision one of
section five hundred ninety of this chapter.
2. Limitations and prohibited practices for high-cost home loans. A
high-cost home loan shall be subject to the following limitations:
(a) No call provisions. No high-cost home loan may contain a provision
that permits the lender, in its sole discretion, to accelerate the
indebtedness. This provision does not prohibit acceleration of the loan
in good faith due to the borrower’s failure to abide by the material
terms of the loan.
(b) No balloon payments. No high-cost home loan may contain a
scheduled payment that is more than twice as large as the average of
earlier scheduled payments, unless such balloon payment becomes due and
payable at least fifteen years after the loan’s origination. Thisprovision does not apply when the payment schedule is adjusted to the
seasonal or irregular income of the borrower.
(c) No negative amortization. No high-cost home loan may contain a
payment schedule with regular periodic payments that cause the principal
balance to increase. A loan is considered to have such a schedule if the
borrower is given the option to make regular periodic payments that
cause the principal balance to increase, even if the borrower is also
given the option to make regular periodic payments that do not cause the
principal balance to increase. This paragraph shall not prohibit
negative amortization as a result of a temporary forbearance sought by a
borrower.
(d) No increased interest rate. No high-cost home loan may contain a
provision which increases the interest rate after default. This
provision does not apply to interest rate changes in a variable rate
loan otherwise consistent with the provisions of the loan documents;
provided that the change in the interest rate is not triggered by the
event of default or the acceleration of the indebtedness.
(e) Limitation on advance payments. No high-cost home loan may include
terms under which more than two periodic payments required under the
loan are consolidated and paid in advance from the loan proceeds
provided to the borrower.
(f) No modification or deferral fees. A lender may not charge a
borrower 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 if, after the modification, renewal, extension or amendment, the
loan is still a high-cost loan or, if no longer a high-cost home loan,
the annual percentage rate has not been decreased by at least two
percentage points. For purposes of this paragraph, fees shall not
include interest that is otherwise payable and consistent with the
provisions of the loan documents. This paragraph shall not prohibit a
lender from charging points and fees in connection with any additional
proceeds received by the borrower in connection with the modification,
renewal, extension or amendment (over and above the current principal
balance of the existing high-cost home loan) provided that the points
and fees charged on the additional sum must reflect the lender’s typical
point and fee structure for high-cost home loans.
(g) No oppressive mandatory arbitration clauses. No high-cost home
loan may be subject to a mandatory arbitration clause that is
oppressive, unfair, unconscionable, or substantially in derogation of
the rights of consumers.
(h) No financing of insurance or other products sold in connection
with the loan. No high-cost home loan shall finance, directly or
indirectly, any credit life, credit disability, credit unemployment, or
credit property insurance, or any other life or health insurance
premiums, or any payments directly or indirectly for any debt
cancellation or suspension agreement or contract, or any product or
service that is not necessary or related to the high-cost home loan such
as auto club memberships or credit report monitoring, but not including
fees paid to the lender, broker, or closing agent, fees related to the
recording of the mortgage, title insurance or other settlement fees.
Insurance premiums or debt cancellation or suspension fees calculated
and paid on a monthly basis shall not be considered financed.
(i) No “loan flipping”. No lender or mortgage broker making or
arranging a high-cost home loan may engage in the unfair act or practice
of “loan flipping”. “Loan flipping” is making a home loan to a borrower
that refinances an existing home loan when the new loan does not have a
tangible net benefit to the borrower considering all of thecircumstances, including the terms of both the new and refinanced loans,
the cost of the new loan, and the borrower’s situation.
(j) No refinancing of special mortgages. No lender or mortgage broker
making or arranging a high-cost home loan may refinance an existing home
loan that is a special mortgage originated, subsidized or guaranteed by
or through a state, tribal or local government, or nonprofit
organization, which either bears a below-market interest rate at the
time of origination, or has nonstandard payment terms beneficial to the
borrower, such as payments that vary with income, are limited to a
percentage of income, or where no payments are required under specified
conditions, and where, as a result of the refinancing, the borrower will
lose one or more of the benefits of the special mortgage, unless the
lender is provided prior to loan closing documentation by a HUD approved
housing counselor or the lender who originally made the special mortgage
that a borrower has received home loan counseling in which the
advantages and disadvantages of the refinancing has been received.
(k) No lending without due regard to repayment ability. A lender or
mortgage broker shall not make or arrange a high-cost home loan without
due regard to repayment ability, based upon consideration of the
resident borrower or borrowers’ current and expected income, current
obligations, employment status, and other financial resources (other
than the borrower’s equity in the dwelling which secures repayment of
the loan), as verified by detailed documentation of all sources of
income and corroborated by independent verification. However, a lender
making a high-cost home loan shall benefit from a rebuttable presumption
that the loan was made with due regard to repayment ability if the
lender demonstrates that at the time the loan is consummated, the
resident borrower or borrowers’ total monthly debts, including amounts
owed under the loan, do not exceed fifty percent of the resident
borrower or borrowers’ monthly gross income; and the lender follows the
residual income guidelines established in 38 C.F.R. § 36.4337(e) and VA
Form 26-6393.
(l) (i) No lending without counseling disclosure and list of
counselors. A lender or mortgage broker must deliver, place in the
mail, fax or electronically transmit the following notice in at least
twelve point type to the borrower at the time of application: “You
should consider financial counseling prior to executing loan documents.
The enclosed list of counselors is provided by the New York State
Banking Department”. In the event of a telephone application, the
disclosures must be made immediately after receipt of the application by
telephone. Such disclosure shall be on a separate form. In order to
utilize an electronic transmission, the lender or broker must first
obtain either written or electronically transmitted permission from the
borrower. A list of approved counselors, available from the New York
state banking department, shall be provided to the borrower by the
lender or the mortgage broker at the time that this disclosure is given.
* (ii) A lender or mortgage broker shall not make or arrange a
high-cost home loan unless either the lender or mortgage broker has
given the following notice in writing to the borrower within three days
after determining that the loan is a high-cost home loan, but no less
than ten days before closing:“CONSUMER CAUTION AND HOME OWNERSHIP COUNSELING NOTICE
If you obtain this loan, which pursuant to New York State Law is a
High-Cost Home 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.You should shop around and compare loan rates and fees. 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 vary based on which
lender or mortgage broker you select. Higher rates and fees may be
related to the individual circumstances of a particular consumer’s
application.
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. The
enclosed list of counselors is provided by the New York State Banking
Department.
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 credit
card debts and other debts in connection with this transaction and then
subsequently incur significant new credit card charges or other debts.
If you continue to accumulate debt after this loan is closed and then
experience financial difficulties, you could lose your home and any
equity you have in it if you do not meet your mortgage loan obligations.
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. Accordingly, it is important that you make regular
payments to your existing creditors.”
* NB Effective until July 1, 2010
* (ii) A lender or mortgage broker shall not make or arrange a
high-cost home loan unless either the lender or mortgage broker has
given the following notice in writing to the borrower within three days
after determining that the loan is a high-cost home loan, but no less
than ten days before closing:“CONSUMER CAUTION AND HOME OWNERSHIP COUNSELING NOTICE
If you obtain this loan, which pursuant to New York State Law is a
High-Cost Home 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.
You should shop around and compare loan rates and fees. 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 vary based on which
lender or mortgage broker you select. Higher rates and fees may be
related to the individual circumstances of a particular consumer’s
application.
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. The
enclosed list of counselors is provided by the New York State Banking
Department.
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 youmay face serious financial risks if you use this loan to pay off credit
card debts and other debts in connection with this transaction and then
subsequently incur significant new credit card charges or other debts.
If you continue to accumulate debt after this loan is closed and then
experience financial difficulties, you could lose your home and any
equity you have in it if you do not meet your mortgage loan obligations.
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.”
* NB Effective July 1, 2010
(m) Financing of points and fees. In making a high-cost home loan, a
lender shall not, directly or indirectly, finance any points and fees as
defined in paragraph (f) of subdivision one of this section, in an
amount that exceeds three percent of the principal amount of the loan.
(n) Restrictions on home improvement contracts. A lender shall not pay
a contractor under a home improvement contract from the proceeds of a
high-cost home loan other than: by an instrument payable to the borrower
or jointly to the borrower and the contractor; or at the election of the
borrower, through a third-party escrow agent in accordance with terms
established in a written agreement signed by the borrower, the lender,
and the contractor prior to the disbursement.
(o) No encouragement of default. In making or arranging a high-cost
home loan, a lender or mortgage broker shall not recommend or encourage
default on an existing loan or other debt prior to and in connection
with the closing or planned closing of a high-cost home loan that
refinances all or any portion of such existing loan or debt.
(p) Prohibited payments to mortgage brokers. In making or arranging a
high-cost home loan, no lender or mortgage broker shall accept or give
any fee, kickback, thing of value, portion, split or percentage of
charges, other than as payment for goods or facilities that were
actually furnished or services that were actually performed. Such
payment must be reasonably related to the value of the goods or
facilities that were actually furnished or services that were actually
performed.
(q) No points and fees when a lender refinances its own high-cost home
loan with a new high-cost home loan. A lender shall not charge a
borrower 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 lender or an affiliate of the lender.
(r) No prepayment penalties. No prepayment penalties or fees shall be
charged or collected on a high-cost home loan. A prepayment penalty in a
high-cost home loan shall be unenforceable.
(s) No abusive yield spread premiums. In arranging a high-cost home
loan, the mortgage broker shall, at the time of application, disclose
the exact amount and methodology of total compensation that the broker
will receive. Such amount may be paid as direct compensation from the
lender, direct compensation from the borrower, or a combination of the
two. The provisions of this paragraph shall not restrict the ability of
a borrower to utilize a yield spread premium in order to offset any up
front costs by accepting a higher interest rate. If the borrower chooses
this option, any compensation from the lender which exceeds the exact
amount of total compensation owed to the broker must be credited to the
borrower. The superintendent shall prescribe the form that such
disclosure shall take. This provision shall not restrict a broker from
accepting a lesser amount.
(t) Mandatory escrow of taxes and insurance. No high-cost home loan
shall be made after July first, two thousand ten unless the lender
requires and collects the monthly escrow of property taxes and hazardinsurance. With respect to a high-cost home loan, a borrower may waive
escrow requirements by notifying the lender in writing after one year
from consummation of the loan. The provisions of this paragraph shall
not apply to a high-cost home loan that is a subordinate lien when the
taxes and insurance are escrowed through another home loan or where the
borrower can demonstrate a record of twelve months of timely payments of
taxes and insurance on a previous home loan.
(u) Mandatory disclosure of taxes and insurance payments. With respect
to a high-cost home loan, the first time a borrower is informed of the
anticipated or actual periodic payment amount in connection with a
first-lien residential mortgage loan for a specific property, the lender
or mortgage broker shall inform the borrower that an additional amount
will be due for taxes and insurance and shall disclose to the borrower
as soon as reasonably possible the approximate amount of the initial
periodic payment for property taxes and hazard insurance.
(v) No teaser rates. No lender or mortgage broker shall make or
arrange a high-cost home loan which has an initial or introductory rate
with a duration of less than six months.
2-a. (a) High-cost home loan mortgages shall include a legend on top
of the mortgage in twelve-point type stating that the mortgage is a
high-cost home loan subject to this section.
(b) The lender shall report both the favorable and unfavorable payment
history of the borrower to a nationally recognized consumer credit
bureau at least annually during such period as the lender holds or
services the high-cost home loan.
3. The provisions of this section shall apply to any person who in bad
faith attempts to avoid the application of this section by any
subterfuge, including but not limited to splitting or dividing any loan
transaction into separate parts for the purpose of evading the
provisions of this section.
4. A lender of a high-cost home loan that, when acting in good faith,
fails to comply with the provisions of this section, will not be deemed
to have violated this section if the lender establishes that either:
(a) Within thirty days of the loan closing and prior to the
institution of any action under this section, the borrower is notified
of the compliance failure, appropriate restitution is made, and whatever
adjustments are necessary are made to the loan to either, at the choice
of the borrower, (i) make the high-cost home loan satisfy the
requirements of this section, or (ii) change the terms of the loan in a
manner beneficial to the borrower so that the loan is no longer a
high-cost home loan subject to the provisions of this section; or
(b) The compliance failure resulted from a bona fide error
notwithstanding the maintenance of procedures reasonably adapted to
avoid such errors and, within sixty days after the discovery of the
compliance failure and prior to the institution of any action under this
section or the receipt of written notice of the compliance failure, the
borrower is notified of the compliance failure, appropriate restitution
is made, and whatever adjustments are necessary are made to the loan to
either, at the choice of the borrower, (i) make the high-cost home loan
satisfy the requirements of this section, or (ii) change the terms of
the loan in a manner beneficial to the borrower so that the loan is no
longer a high-cost home loan subject to the provisions of this section.
Examples of a bona fide error include clerical, calculation, computer
malfunction and programming, and printing errors. An error of legal
judgment with respect to a person’s obligations under this section is
not a bona fide error.
5. The attorney general, the superintendent, or any party to a
high-cost home loan may enforce the provisions of this section.6. A private action against the lender or mortgage broker pursuant to
this section must be commenced within six years of origination of the
high-cost home loan.
7. Any person found by a preponderance of the evidence to have
violated this section shall be liable to the borrower for the following:
(a) actual damages, including consequential and incidental damages;
and
(b) statutory damages as follows (i) all of the interest, earned or
unearned, points and fees, and closing costs charged on the loan shall
be forfeited and any amounts paid shall be refunded; except that this
element of statutory damages shall not be awarded for violations of:
(1) paragraph (i) of subdivision two of this section regarding loan
flipping; and
(2) paragraph (k) of subdivision two of this section regarding
ensuring the borrower’s ability to repay the loan, so long as the lender
demonstrates that at the time of the loan, it verified by detailed
documentation all sources of the borrower’s income and corroborated it
with independent verification; or
(ii) five thousand dollars per violation or twice the amount of points
and fees and closing costs as defined in this section, whichever is
greater, for violations of:
(1) paragraph (i) of subdivision two of this section regarding loan
flipping; and
(2) paragraph (k) of subdivision two of this section regarding
ensuring the borrower’s ability to repay the loan, where the borrower is
not entitled to relief under subparagraph (i) of this paragraph.
8. A court may also award reasonable attorneys’ fees to a prevailing
borrower.
9. A borrower may be granted injunctive, declaratory and such other
equitable relief as the court deems appropriate in an action to enforce
compliance with this section.
10. Upon a finding by the court of an intentional violation by the
lender of this section, or regulation thereunder, the home loan
agreement shall be rendered void, and the lender shall have no right to
collect, receive or retain any principal, interest, or other charges
whatsoever with respect to the loan, and the borrower may recover any
payments made under the agreement.
11. Upon a judicial finding that a high-cost home loan violates any
provision of this section, whether such violation is raised as an
affirmative claim or as a defense, the loan transaction may be
rescinded. Such remedy of rescission shall be available as a defense
without time limitation.
12. The remedies provided in this section are not intended to be the
exclusive remedies available to a borrower of a high-cost home loan.
13. In any action by an assignee to enforce a loan against a borrower
in default more than sixty days or in foreclosure, a borrower may assert
any claims in recoupment and defenses to payment under the provisions of
this section and with respect to the loan, without time limitations,
that the borrower could assert against the original lender of the loan.
14. The provisions of this section shall be severable, and if any
phrase, clause, sentence, or provision is declared to be invalid, or is
preempted by federal law or regulation, the validity of the remainder of
this section shall not be affected thereby. If any provision of this
section is declared to be inapplicable to any specific category, type,
or kind of points and fees, the provisions of this section shall
nonetheless continue to apply with respect to all other points and fees.