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Connecticut

Connecticut Abusive Home Loan Lending Practices Act

Updated: June 25, 2008 (Revisions are highlighted in yellow) 

Coverage: The Connecticut Abusive Home Loan Lending Practices Act, Conn. Gen. Stat. Section 36a-746 through -746g (the "Act") (to view a copy of the Act, click here) applies to the following types of loans:

  • any open-end or closed-end loan (includes HELOCs and purchase, construction and refinance loans, regardless of lien position)
  • secured by any one- to four-family dwelling (which may be a manufactured home)
  • owner-occupied
  • exceeds the APR threshold described below

Reverse mortgages and loans primarily for business, agricultural or commercial purposes are expressly excluded from the definition of a high-cost home loan.

Please note: there is no separate points and fees test under the Act. Rather, Connecticut has adopted statutes of general application that limit the amount of "prepaid finance charges" that a lender may charge.  Specifically, with respect to first lien mortgages, under Conn. Gen. Stat. Section 36a-498a, no licensee or exempt entity "shall charge, impose or cause to be paid, directly or indirectly, prepaid finance charges that exceed in the aggregate, the greater of five percent (5%) of the principal amount of the loan or two thousand dollars ($2,000)."  With respect to secondary mortgages, under Conn. Gen. Stat. Section 36a-521, no licensee or exempt entity may "charge, impose or cause to be paid, directly or indirectly...prepaid finance charges that exceed in the aggregate eight per cent of the principal amount of the loan."  "Prepaid finance charges" are defined in Conn. Gen. Stat. Section 36a-746a generally to mean finance charges as defined under Regulation Z, 12 CFR 226.4; however, "premiums, fees and any other amounts paid to a governmental agency," among other things, are excluded from prepaid finance charges. Again, the restrictions in Sections 36a-498a and 36a-521 are not limited only to high cost home loans, but rather apply to all first and secondary lien mortgages, respectively.  DocMagic has implemented the following audits for Connecticut loans: (1) if the loan is a first lien loan, then if the prepaid finance charges exceed the greater of 5% of the loan amount or $2,000, the following warning will appear: "Total prepaid finance charges exceed the greater of 5% of principal loan amount or $2,000"; and (2) if the loan is a junior lien loan, then if the prepaid finance charges exceed 8% of the loan amount, the following warning will appear: "Total prepaid finance charges exceed 8% of principal loan amount."

What is the APR threshold? The APR threshold is the same manner as under Section 32: either 8% (for first liens) or 10% (for subordinate liens) over the yield on Treasury securities having comparable periods of maturity on the 15th day of the month immediately preceding the month in which the application is received by the creditor. For open-end loans, the APR means the highest APR required to be disclosed. Please note that unlike the Section 32 APR Test, which is limited to refinance transactions, the APR Test applies to many more loans.

What Happens If a Loan Is a High Cost Home Loan? There are many, many substantive limitations imposed on lenders and brokers if a loan is found to be a high-cost home loan. These include the following:

  • No balloon payment unless the loan term is seven years or more
  • No negative amortization
  • No more than two periodic advance payments
  • No increased interest rate after default
  • Prepayment penalties not permitted on high cost home loans. No prepayment penalties exceeding 3 years, and penalties exceeding 3% in year 1, 3% in year 2, and 1% in year 3; the source of the prepayment funds cannot be a refinancing by the lender or lender affiliate; and the borrower's total monthly debts at consummation do not exceed 50% of the borrower's verified monthly gross income
  • No mandatory arbitration
  • No call provision
  • Limitations on payment under home improvement contracts
  • No 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 afterwards, the loan is still a high-cost home loan, or if not, the APR has not been reduced by at least 2%
  • No lending without regard to ability to repay
  • No recommending default
  • No lending unless the high cost home loan provides a benefit to the borrower considering all of the circumstances, including terms of the old and new loan, cost of the new loan, and the borrower's circumstances
  • May not charge, impose or cause to be paid, directly or indirectly, prepaid finance charges exceeding, in the aggregate, the greater of 5% of the principal amount of the loan or $2,000; limitation does not apply to additional proceeds, that is, any new money exceeding the current principal balance of the existing loan; "prepaid finance charges" are defined as any finance charge under Regulation Z Section 226.4, but the term excludes odd-days interest and premiums, fees and any other amounts paid to a governmental agency, but does include fees payable in connection with optional health, disability or unemployment insurance products or unrelated goods and services if prepaid from the loan proceeds and financed.

Disclosure /Notice Requirements.

  1. A lender making a high cost home loan shall disclose to the prospective borrower:
    1. The following statement: "You are not required to complete this agreement merely because you have received these disclosures or have signed a loan application. If you obtain this 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";
    2. The APR;
    3. The amount of the regular monthly or other periodic payment; and
    4. For variable-rate transactions, a statement that the interest rate and monthly payment may increase, and the amount of the single maximum monthly payment, based on the maximum interest rate that may be imposed during the term of the loan.
  2. A lender many not sell or otherwise assign a high cost home loan without furnishing the following statement to the purchaser or assignee: "Notice: This is a loan subject to special rules under the Connecticut Abusive Home Loan Lending Practices Act. Purchasers or assignees of this loan could be liable for all claims and defenses with respect to the loan that the borrower could assert against the lender."

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*This article is distributed to provide general information about the subject matter covered and should not be utilized as a substitute for professional advice in specific situations. If you require such advice, please consult with your own professional advisers.


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