Real Estate Finance Federal IssuesThe Following is for study only and has NOT been approved by the Real Estate Finance Committee, Federal Issues Committee, Executive Committee or the Board of Directors.
Issue: In light of recent policy changes to NAR Predatory Lending Policy and action by C.A.R.’s Board of Directors at the June 2005 meetings, this paper is intended to update the Committee members of current C.A.R. policy at the federal level and proposed federal legislation on this issue.Action: Not required at this time. C.A.R. has a standing policy of neutrality on the general issue of predatory lending. Options: Not Applicable. This paper is for information only.Status/Summary: There are currently two competing predatory lending bills pending in Congress, H.R. 1182 and H.R. 1295. While the two bills address similar issues dealing with predatory loans, they have a number of significant differences. Most glaring is the preemption of state law by H.R. 1295, the Responsible Lending Act. Introduced by Representatives Bob Ney (R-OH) and Paul Kanjorski (D-PA), H.R. 1295 is considered the favorite to act as the platform for any predatory lending legislation passed by Congress this year.
Responsible Lending Act – H.R. 1295: 1. Covered Loans: A consumer credit transaction that is secured by the consumer’s principaldwelling, other than a reverse mortgage transaction, including home purchase loans and home equity lines of credit, AND - The annual percentage rate on the credit will exceed by more than 8% the yield on Treasury security OR - transaction is secured by a junior or subordinate mortgage and the annual percentage rate on the credit will exceed by more than 10% on Treasury security OR - the total loan exceeds $40,000 AND total points and fees exceed 5% of the total loan amount OR - the total loan amount is $40,000 or less AND total points and fees exceed 6% of the total loan amount. 2. Counseling: A Consumer Mortgage Protection Board would be established under HUD with the responsibility for establishing, coordinating and monitoring the administration of counseling procedures. The Board has the authority to develop requirements, standards and performance measures that relate to homeownership counseling. However, the bill does not demand that counseling be “required,” but leaves this up to the Board to decide as it relates to HUD programs.
3. Reasonable Belief in Borrower’s Ability to Repay: The Borrower shall be presumed to be able to make the scheduled payments if the Borrower’s total monthly debts (including amounts owned under the loan) do not exceed 50% of the Borrower’s gross monthly income. No special circumstances are provided in cases where the Borrower’s gross monthly income exceeds 50%.
4. Payment Penalties: Lenders may charge prepayment penalties only during the first 36 months following the date of signing.
5. Loan Assignment: Any persons who purchase or are otherwise assigned a high-cost mortgage shall be subject to an action under this title only if they had actual knowledge, were recklessly indifferent, or have policies in place against purchasing these types of loans.
6. Corrections: A creditor or assignee shall have no liability under this section for any failure to comply if, within 60 days after discovering the error, the creditor or assignee notifies the consumer of the error and makes appropriate restitution or modifies the terms of the transaction so that it is no longer ahigh-cost mortgage and pays $2,000 error penalty to the consumer; or within 45 days on consummation of the loan notifies consumer of error and makes appropriate restitution.
7. Civil Liability: - Increases liability for individual offensefrom $2,000 to $4,000 - Increases liability for class actions from $500,000 to $1,000,0008. Balloon Payments: Total prohibition of balloon payments with certain exceptions for seasonal or irregular income situations.9. LateFees: Late fees could not exceed 5% of the scheduled past due payments.
10. Increasing Interest Rate: A lender may not increase a loans interest rate because of a borrowers default.
11. Broker Licensing: A national mortgage broker registry would be createdBackground:
The issue of predatory lending has been addressed by legislation at the state level. When then Assemblywoman, now Senator, Migden carried AB 489 it was originallyopposed by C.A.R. and other lender groups. Eventually a compromise was worked out and AB 489 and its companion bill were signed into law. C.A.R. was neutral on the final bill. Consumer groups were not satisfied with the final compromise and attempted to impose stricter standards at the local level, notably in Oakland and Los Angeles. Lender groups sued to strike down the local ordinances as pre-empted by the state law and were successful earlier this year.California’s current predatory lending law is:1) Covered loan: - Original principal balance capped at $250,000 for a mortgage and the APR of the loan is more than eight percentage points above the yield on Treasury securities having comparable periods of maturity, or the total points and fees exceed six percent of the total loan. - The loan must be made on a property in California intended to be used as the “principal dwelling” by the consumer, and is a 1-4 unit property.2) Not covered: - Reverse mortgage - Open line of credit - Bridge Loan
3) Prohibited acts and limitations for covered loans: - No prepayment fee or penalty allowed after first 36 months of loan. If there is a prepayment fee or penalty in the first 36 months, the consumer must have been offered an alternative product prior to closing, received a disclosure of the fee or penalty in writing at least three days prior to closing, and the fee must have a statutory cap. - Loan originators of negative amortization loans must fully disclose that the loan may add to the principal balance of the loan, and it may only be on a first mortgage. - The rate of the loan cannot increase as a result of default. - The loan originator must “reasonably believe” that the consumer can make the loan payments prior to financing the loan. This includes ensuring that the monthly debt of the consumer, including amounts owed under theloan, do not exceed 55 percent of the consumer’s monthly gross income. - The loan originator cannot call the loan, except in accordance with the terms of the loan contract, and only for: consumer’s default, 2. due-on-sale provision, or 3. due to fraud or material misrepresentation by a consumer in connection with the loan or the value of the security for the loan. - A covered loan may not be refinanced for another covered loan, without an identifiable benefit to the consumer. - The originator of a covered loan must ensure that the consumer is placed in a loan that is commensurate with their risk grade.4) Liabilities and punishments: - License is suspended for no less than six months and not more than three years for the first violation. - A second or subsequent violation will result in a suspension of the license for any time period of no less than three years, or it may be permanently revoked. - The licensing agency may fine the violators for administrative penalties up to $2,500 per violation, and up to $25,000 for civil penalties per violation. - The licensing agency may seek additional relief if they feel it is warranted. - To the consumer, violators are civilly liable in amounts equal to actual damages, plus attorney’s fees and costs. - The courts may award additional punitive damages to the consumer.Analysis:Consumers with inadequate credit scores and histories are often forced to turn to sub-prime lenders and products as their only means to procure a home loan. While the majority of sub-prime lenders offer competitive alternative loan products to help homebuyers and owners secure financing, there are a number of unscrupulous lenders that prey on the ignorance and desperateness of borrowers. It is these lenders for which anti-predatory lending laws are intended. Some have estimated that predatory lending costs homebuyers and homeowners approximately $9.1 billion each year.According to the Center for Responsible Lending, between 2000 and 2003, “subprime mortgage lending grew by 293 percent in states with anti-predatory lending laws, compared to 212 percent in states without anti-predatory lending laws.” Given this information, it is plausible to deduce that predatory lending laws do not hinder the subprime market, but instead foster its growth through consumer confidence and fairer competition. Lenders, however, would contend that while subprime lending may have increased, the strict lending laws would have driven up the overall costs of loans. This would actually costconsumers more money, especially those who can least afford it.Some laws, such as those that place a hard cap on loan-to-income rations for consumers may hinder high-cost states, especially California. With California ’s increase in home prices, more homebuyers are forced to devote more of their gross income towards housing costs to afford a new home. A limit on how much gross income may go towards housing costs could unfairly exclude potential homebuyers.On the issue of state preemption, lenders have argued that having to comply with different lending laws in every state drives up the cost of doing business across the country. However, according to the Center for Responsible Lending, with modern technology and computer lending programs, it is estimated that the additional cost of complying with different state laws is approximately one dollar per loan.NAR Policy:
At the NAR May meetings the position below was taken. However, NAR has not yet comeout in support or opposition of a bill.“That NAR approve the Subprime Lending Work Group report recommending a three-pronged approach to combating predatory lending:1. Building on thepublic awareness campaign to raise awareness of this issue.NAR’s 2005 public awareness campaign already includes a new tagline: “Talk to a REALTOR® First.” This provides a great platform for encouraging REALTORS® to use their central position in the purchase transaction to help consumers become more financially literate and avoid predatory lending.2. Foster consumer education.The Report recommends that NAR encourage REALTORS®: a. Work with existing programs to help consumers qualify for fair and affordable financing b. Refer consumers to information about financial literacy, including how to avoid predatory lending; andc. Refer consumers, when appropriate, to reputable credit and housing counselors. This will include posting links on Realtor.org.3. Support stronger anti-predatory lending legislation and regulations.The report provides a set of principles for NAR staff, theCommittee, and others in NAR’s leadership as they consider anti-predatory lending legislation and regulations. The Work Group reviewed many possible improvements to the Home Ownership and Equity Protection Act of 1994 known as HOEPA – that protects borrowers with certain high-cost mortgages. The report recommends a long list of improvements to HOEPA. While not every item on the list is likely to be included in legislation or regulations, NAR should only support proposals thattake a strong stand against predatory lending, including as many of the items as possible.”Recommended changes to HOEPA are: - Extend HOEPA to Purchase Money Mortgages - Lower Triggers to Apply HOEPA to More Mortgages - Protections from Predatory Terms and Conditions - Assignee LiabilityThe full report may be accessed at: http://www.realtor.org/gapublic.nsf/pages/SLWGReportC.A.R. Policy:C.A.R. has historically taken a neutral position on the general issue of predatory lending. The rationale for this position was that because the state bill prevents property owners from having the absolute rightto do with their property whatever they see fit, including encumbering it with high cost debt, that C.A.R. should not lobby for the bill. However, the value in protecting consumers was also recognized; therefore, it was determined thatC.A.R. should not lobby against the bill either.At C.A.R.’s June meeting, the following position was taken in response to a new state predatory lending bill that would raise the dollar limit of a qualified loan from $250,000 to the GSEconforming loan limit of $359,650:“That C.A.R., consistent with its opposition to predatory lending practices ‘OPPOSE UNLESS AMENDED’ AB 901, (Ridley-Thomas). The C.A.R. amendment will preserve the existing dollar threshold, and its accompanying inflation adjuster, in the definition of a covered loan.”