Indiana Home Loan Practices Act

Coverage: Article 9 of Section 24 of the Indiana Code entitled Home Loan Practices ("Article 9") became effective on January 1, 2005. The high-cost home loan restrictions in Article 9 apply generally to any "home loan," defined to include:

• all closed-end loans, without regard to lien position, including purchases, refinances and construction loans
• secured by a one- to four-family residence
• occupied or to be occupied as the borrower's principal dwelling

Excluded from Article 9's coverage (with the exception of the prohibition against engaging in a deceptive act with respect to a home loan under IC 24-9-3-7(3)) are:

• HUD-insured loans
• VA-guaranteed loans
• Loans made or acquired by state or federally-chartered financial institutions
• Loans made or guaranteed by the U.S. Department of Agriculture Rural Housing Bureau
• Loans funded by the Indiana housing finance authority
• Loans that can be purchased by Fannie Mae, Freddie Mac, or the Federal Home Loan Bank
• Open-end loans and reverse mortgages
• Loans exceeding the Fannie Mae conforming loan size limit for a single-family dwelling
• Non-owner occupied loans
• Multifamily loans

Thresholds: Under Article 9, a home loan is a high-cost home loan if it meets or exceeds either of two thresholds:

1. The Rate Test: the "trigger rate" exceeds the "benchmark rate."
   1. The "Trigger Rate": The determination of the "trigger rate" depends on the type of loan:
      1. Fixed rate loans: the trigger rate is the interest rate in effect on the loan's closing date, i.e., the note rate;
      2. Variable rate loans: if the rate varies in accordance with an index, the trigger rate is the sum of the index rate as of the date of closing plus the maximum margin permitted under the loan agreement, i.e., the fully-indexed rate;
      3. All other loans: the maximum rate that may be charged during the term of the loan.
   2. The "Benchmark Rate": Is defined as the interest rate established under the high-cost provisions of TILA and Regulation Z, Section 32. Presumably, this means the corresponding yield on Treasury securities value as of the 15th of the month preceding the month in which the application is received, plus either 8% (for first liens) and 10% (for junior liens).
      

2. The Points and Fees Test: Total points and fees exceed:

   1. Five percent (5%) of the "loan principal" if the loan principal is $40,000 or more; or
   2. Six percent (6%) of the "loan principal" if the loan principal is less than $40,000.

   "Points and Fees" are defined as follows:

   		Prepaid Finance Charge - the total amount of prepaid finance charges
   	-	Prepaid Interest - to be deducted from prepaid finance charge
   	+	Other Mortgage Broker Compensation - all compensation paid directly or indirectly to a broker; this includes all non-prepaid finance charges paid to the broker and all premiums, regardless of the source of payment, i.e., yield spread premiums and other "back end" compensation paid by the lender to the mortgage broker are included (but see Excludable Broker Compensation below).
   	+	Other Charges Paid to Creditor - 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; unlike Section 32, all reasonable fees paid to an affiliate of the creditor are excluded; we assume fees paid to affiliates are reasonable.
   	+	Optional Credit Insurance/Related Products Paid At or Before Closing - optional credit life/accident/health/loss of income/debt cancellation coverage costs, regardless of how named or paid (in cash or financed) and regardless if a single premium or initial payment.
   	-	Bona Fide Discount Points - Article 9 permits an unlimited number of "bona fide discount points" to be excluded from points and fees. Bona fide discount points are defined as loan discount points that: (1) are knowingly paid by the borrower; (2) are paid for the express purpose of reducing the interest rate applicable to the loan; (3) reduce the interest rate from an interest rate that does not exceed the benchmark rate; and (4) are recouped within the first four (4) years of the scheduled loan payments. For purposes of our calculation, we assume that all discount points are bona fide unless the trigger rate exceeds the benchmark rate.
   	-	Excludable Broker Compensation - up to one and one-half (1½) points in "indirect broker compensation" may be excluded from points and fees if the terms of the loan do not permit a prepayment charge in excess of two percent (2%) of the home loan principal. "Indirect broker compensation" is not defined but we assume it means compensation paid by the lender to the broker (e.g., YSP, SRP and other premiums). For purposes of completing this analysis, if the loan has a prepayment provision, we assume the prepayment charge exceeds two percent (2%) of the home loan principal. However, a "flag" can be set to exclude up to one and one-half (1 ½) points of premiums if a customer requests it.
   	+/-	Creditor Requested Adjustments -the total amount of all customer requested overrides

   "Loan Principal" is not defined in Article 9. Article 9 does define "total loan amount" to mean the principal of the home loan minus the points and fees that are included in the principal amount of the loan (i.e., financed); however, the term "total loan amount" is nowhere used in Article 9. It is unclear whether "loan principal" or "total loan amount" is the appropriate denominator to use for the points and fees calculation. However, because using the "total loan amount" as the denominator is a more conservative approach (i.e., using total loan amount results in a smaller denominator, which in turn returns a higher percentage figure), the "total loan amount" will be used as the denominator.

   		Original Principal Balance
   	-	Total Points and Fees Financed
   	+/-	Originator Requested Adjustments

Prohibitions: Article 9 contains a laundry list of prohibited practices, including the following:

• no financing single-premium credit-related insurance and debt cancellation agreements
• no refinancing of special/subsidized loans
• no recommending/encouraging default
• payments must be posted on the day received
• no arbitrary acceleration provision without material cause
• no payoff balance or release fees except for actual charges for express or priority delivery request by borrower
• no dividing transaction into separate parts/structure as open-end with intent to evade coverage
• no direct or indirect financing of any points and fees (this is particularly onerous to lenders)
• no prepayment penalties exceeding 2% of the amount prepaid within the first 24 months; borrower must first be offered, in a writing initialed by the borrower, a loan product without a prepayment fee
• no balloon payments on loans with terms of less than 10 years
• no negative amortization
• no default rates of interest
• no collection of more than two (2) periodic payments in advance
• no lending without due regard to repayment ability
• restrictions on payments to contractors under home-improvement contracts
• no modification or deferral fees
• no arbitration provisions/forum restrictions/claim or defense limitations

Notices:

1. Prepayment Penalty/Loan Product Choice: A high cost loan may not include a prepayment penalty unless the borrower is offered a choice of a product without a prepayment penalty. The disclosure containing the offer must be clearly labeled in large bold type and must include the following disclosure:

   LOAN PRODUCT CHOICE

   I was provided with an offer to accept a product both with and without a prepayment penalty provision. I have chosen to accept the product with a prepayment penalty.

2. Notice of Assignee Liability: A creditor may 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 IC 24-9. Purchasers or assignees may be liable for all claims and defenses with respect to the loan that the borrower could assert against the Lender.

3. Contract Notice: A mortgage or deed of trust that secures a high cost home loan at the time the mortgage or deed of trust is recorded must prominently display the following on the face of the instrument:

   This instrument secures a high cost home loan as defined in IC 24-9-2-8.

4. Counseling: A creditor must provide the borrower, at the same time the good faith estimate is required to be given, information to facilitate contact with a nonprofit counseling agency certified by HUD or the Indiana Department of Commerce. No format/model is provided.

5. Notice to Borrower: the following notice must be given at the same time Section 32 disclosures are required (i.e., three (3) 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 COMPARE LOAN RATES, COSTS, AND FEES. MORTGAGE 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, COSTS, AND FEES COULD ALSO VARY BASED ON WHICH CREDITOR OR BROKER YOU SELECT.

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

   YOU SHOULD CONSULT AN ATTORNEY AND A QUALIFIED INDEPENDENT CREDIT COUNSELOR OR OTHER EXPERIENCED FINANCIAL ADVISER REGARDING THE RATE, FEES, AND PROVISIONS OF THIS MORTGAGE LOAN BEFORE YOU PROCEED. A LIST OF QUALIFIED COUNSELORS IS AVAILABLE FROM THE INDIANA DEPARTMENT OF COMMERCE.

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

   REMEMBER, PROPERTY TAXES AND HOMEOWNER'S INSURANCE ARE YOUR RESPONSIBILITY. NOT ALL CREDITORS PROVIDE ESCROW SERVICES FOR THESE PAYMENTS. YOU SHOULD ASK YOUR CREDITOR ABOUT THESE SERVICES.

   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 CREDITORS.