Illinois (including Cook County & Chicago)

Updated: December 29, 2009 (Revisions are highlighted in yellow)

Illinois High Risk Home Loan Act

On June 13, 2003, the Illinois legislature passed the High Risk Home Loan Act (the "Act") and became effect January 1, 2004. The Act largely codifies rules previously adopted in May 2001 by the Illinois Office of Banks and Real Estate to address "predatory lending" concerns. The Act is comparable to the Section 32 and other state predatory lending calculations that we have recently developed but there are some differences.

Coverage

The Act applies to "home equity loans." A home equity loan is defined as "any loan secured by the borrower's primary residence where the proceeds are not used as purchase money for the residence," without regard to lien position. Besides the exclusion for purchase-money loans, the Act also does not apply to open-end loans and commercial loans. The Act would seem to also apply to construction loans.

Please note also that the City of Chicago and Cook County have each adopted predatory lending ordinances (collectively, the "Ordinances"). The Ordinances restrict business dealings between those that violate the Ordinances and the respective governmental entity. The Ordinances are substantially similar to the Act. Key differences between the Act and the Ordinances are discussed at the end of this memorandum.

When is a Home Loan a "High-Risk Home Loan"? A high-risk home loan is defined as a home equity loan that satisfies either of the following tests:

APR Test: At the time of origination, the APR exceeds by more than 6% (for first liens) or 8% (for subordinate liens), the yield on Treasury securities having comparable periods of maturity as of the 15th day of the month immediately preceding the month in which the application is received by the lender; or
Points and Fees Test: Total Points and Fees payable by the consumer at or before closing exceed the greater of (i) five percent (5%) of the total loan amount, or (ii) $908 (figure is adjustable annually by changes to the CPI).

The APR Test: The Act does not separately defined APR. In the absence of a specific definition, we should use the APR calculations as determined under TILA and Regulation Z.

The Points and Fees Test: "Points and fees" are defined substantially similar as under Section 32 to include (or exclude) the following:

Prepaid Finance Charge - the total amount of prepaid finance charges
- Prepaid Interest - to be deducted from prepaid finance charge
+ Other Mortgage Broker Compensation - the total amount of all non-prepaid finance charges paid directly or indirectly to a mortgage broker, including a broker that originates a loan in its own name in a table funded transaction, that is not otherwise included in the Prepaid Finance Charge
+ Other Charges Paid to Creditor/Affiliate - the total amount of all Regulation Z Section 226.4(c)(7) charges not included as a part of the Prepaid Finance Charge if paid to the creditor or creditor affiliate
+ Single Premium Credit Insurance/Related Products and Financed - the premium of any single premium credit life, credit disability, credit unemployment, or any other life or health insurance that is financed directly or indirectly into the loan
+/- Creditor Requested Adjustments - the total amount of all customer requested overrides

A couple of points:

Broker Compensation: The Act is ambiguous as to whether or not yield spread premiums and other "back end" compensation not paid directly by the consumer should be included in points and fees. On one hand, the Act specifically states that a high-risk home loan is one in which "the total points and fees payable by the consumer at or before closing will exceed the greater of 5% of the total loan amount or $800." On the other hand, "points and fees" are defined to include "all compensation paid directly or indirectly to a mortgage broker." While the issue is far from clear, I believe that our position should be that yield spread premiums and other "back end" compensation paid by the lender to the mortgage broker are included from the Illinois High-Risk Home Loan computation and display.
Single Premium Credit Insurance: This is slightly different from the Section 32 treatment of credit insurance and related products. Under Section 32, these costs are included in point and fees regardless of how paid (in cash or financed) and regardless if a single premium or initial payment. However, in Illinois, only single-premium insurance is counted, and only to the extent financed into the loan.

Total Loan Amount: is defined the same as the term used in 12 CFR 226.32, and accordance with the Federal Reserve Board's Official Staff Commentary to that regulation.

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 (for which we should consider developing audits):

No lending without verification of ability to repay
A lender must act in good faith in all relations with a borrower
The imposition of a prepayment charge is limited to 36 months, and 3% of the "total loan amount" if prepaid in year one, 2% in year two, and 1% in year three
No financing of single premium credit insurance and related products
No refinancing within 12 months of existing high-cost home loan with new loan when new points and fees charged unless borrower receives a net tangible benefit
No financing of points and fees in excess of 6% of the total loan amount
Restrictions on home-improvement contracts
No negative amortization
No loan in excess of 100% of the value of the security property
Late charges are limited to 5% of the amount of the payment past due after 15 days
No more than two periodic advance payments collected at closing
No call provision
Disclosure requirements must be met (see below)
Mandatory arbitration provisions that are oppressive, unfair, unconscionable or substantially in derogation of the rights of the borrower are void
Prior to making a high risk home loan, the lender must inform the borrower in writing of the right to participate in the Mortgage Awareness Program; and a lender may not offer less favorable loan terms to a borrower due to a borrower's participation in the Mortgage Awareness Program

Required disclosure: Prior to making a high risk home loan, a lender give the following notice or a substantially similar notice in writing, to the borrower, acknowledged in writing and signed by the borrower not later than three days prior to consummation:

NOTICE TO BORROWER

YOU SHOULD BE AWARE THAT YOU MIGHT BE ABLE TO OBTAIN A LOAN AT A LOWER COST. YOU SHOULD SHOP AROUND AND COMPARE LOAN RATES AND FEES.

LOAN RATES AND CLOSING COSTS AND FEES VARY BASED ON MANY FACTORS, INCLUDING YOUR PARTICULAR CREDIT AND FINANCIAL CIRCUMSTANCES, YOUR EMPLOYMENT HISTORY, THE LOAN-TO-VALUE REQUESTED, AND THE TYPE OF PROPERTY THAT WILL SECURE YOUR LOAN. THE LOAN RATE AND FEES COULD ALSO VARY BASED ON WHICH LENDER OR BROKER YOU SELECT.

IF YOU ACCEPT THE TERMS OF THIS LOAN, THE LENDER WILL HAVE A MORTGAGE LIEN ON YOUR HOME. YOU COULD LOSE YOUR HOME AND ANY MONEY YOU PUT INTO IT IF YOU DO NOT MEET YOUR PAYMENT OBLIGATIONS UNDER THE LOAN.

YOU SHOULD CONSULT AN ATTORNEY-AT-LAW AND AN APPROVED CREDIT COUNSELOR OR OTHER EXPERIENCED FINANCIAL ADVISOR REGARDING THE RATE, FEES, AND PROVISIONS OF THIS LOAN BEFORE YOU PROCEED. A LIST OF APPROVED CREDIT COUNSELORS IS AVAILABLE BY CONTACTING EITHER THE ILLINOIS DEPARTMENT OF FINANCIAL INSTITUTIONS OR THE ILLINOIS OFFICE OF BANKS AND REAL ESTATE.

YOU ARE NOT REQUIRED TO COMPLETE THIS LOAN AGREEMENT MERELY BECAUSE YOU HAVE RECEIVED THIS DISCLOSURE OR HAVE SIGNED A LOAN APPLICATION.

ALSO, YOUR PAYMENTS ON EXISTING DEBTS CONTRIBUTE TO YOUR CREDIT RATINGS. YOU SHOULD NOT ACCEPT ANY ADVICE TO IGNORE YOUR REGULAR PAYMENTS TO YOUR EXISTING LENDERS.

City of Chicago/Cook County Predatory Lending Ordinances: The City of Chicago Predatory Lending Ordinances may be found here (See Title 2, Chapter 2-32, Article V, Division 455) and the Cook County Predatory Lending Ordinances may be found here (See Sec. 34-340 et seq.). The applicable high cost calculations under the Ordinances are identical to those under the Act. The key differences between the Act and the Ordinances relate to the loans covered: (1) unlike the Act, which is limited by and large to owner-occupied refinances, the Ordinances apply to all loans secured by 1-4 family residential property, including purchase money loans, open-end loans, and loans secured by non-owner occupied properties; (2) unlike the Act, which applies to all otherwise covered loans without regard to the loan amount, the Ordinances apply only to loans less than or equal to $250,000; and (3) certain charges that are otherwise included in the definition of points and fees under the Act are excluded from points and fees under the Ordinances. These excludable charges include: tax service charges, attorney's fee (if the borrower has the right to select the attorney which, for purposes of the Chicago/Cook County high cost test, we assume they do), and payments to government agencies or government-sponsored agencies in connection with a government-sponsored mortgage program (e.g. UFMIP).

Our City of Chicago/Cook County high cost test runs at the same time as the Illinois high cost test; however, the only time a City of Chicago/Cook County specific response will display is when the loan otherwise passes the Illinois high cost test but fails the City of Chicago/Cook County high cost test. In other words, if the Illinois high cost test results come back indicating that the loan is not an Illinois high cost loan, that also means that it is not a City of Chicago/Cook County high cost loan. Please note the state high-cost display will reflect the results of the Illinois high-risk home loan test and not the results of the City of Chicago/Cook County high cost test.