New Mexico | DocMagic

New Mexico Home Loan Protection Act

Updated: July 3, 2008 (Revisions are highlighted in yellow)

Coverage: The New Mexico Home Loan Protection Act (the "Act") became effective January 1, 2004. Click here to view the Act. The New Mexico Regulation & Licensing Department - Financial Institutions Division (the "NMFIB") has adopted a series of regulations implementing the Act's provisions, which regulations are part of the New Mexico Administrative Code (the "NMAC"). The applicable NMAC regulations can be viewed here. The Act applies to "home loans." A home loan means any closed or open-end loan secured by an owner-occupied, 1-4 family property (which may be a manufactured home) that does not exceed the Fannie Mae conforming limit for a single-family dwelling, regardless of lien position and regardless of whether the loan is a purchase money, construction, or refinance loan.

Loans excluded from coverage are multifamily properties, non-owner occupied properties and second homes.

Prohibitions Applicable to a "Home Loan": The Act contains some prohibitions with respect to home loans, namely a prohibition against financing single-premium credit insurance and a prohibition against "flipping" (refinancing one home loan with another home loan without a reasonable, tangible net benefit to the borrower). However, most of the provisions of, and prohibitions contained in, the Act relate to "high-cost home loans" and the remainder of this memo will focus on high cost home loans.

When is a home loan a "High-Cost Home Loan"? A high-cost home loan is defined as a home loan that exceeds one or more of the following thresholds:

The Rate Threshold Test: the "contract rate" exceeds the "rates threshold"; "rate threshold" means an interest rate equal to either 7% (for first liens) or 9% (for subordinate liens) over the weekly average yield on Treasury securities having comparable periods of maturity on the 15th day of the month immediately preceding the month in which the loan is made; or
Total Points and Fees Threshold (Points and Fees Test): Total Points and Fees payable by the borrower at or before closing exceed:
1. five percent (5%) of the total principal loan amount if the total principal loan amount is $20,000 or more; or
2. the lesser of eight percent (8%) of the total principal loan amount or $1000 if the total principal loan amount is less than $20,000.

The Rate Threshold Test: A couple of points about the Rate Threshold Test:

The Act ties the Rate Threshold to a loan's "contract rate." The term "contract rate" is undefined in the Act but an official with the NMFIB has advised us that the contract rate is based on a loan's interest rate and not the loan APR.
1. Fixed Rate: When the loan provides for a fixed interest rate, the contract rate is equal to the interest rate.
2. ARM: Section 12.15.3.13(D) of the New Mexico Administrative Code (NMAC) provides guidance on how to determine the interest rate with respect to ARM loans: "When calculating the interest rate for adjustable rate loans, the creditor shall not use any introductory rate. The interest rate will be based on the loan's disclosed index plus the margin, which is the fully indexed rate, at the time the loan is made. As an example, if the index is 2% and the margin is 3% for a first lien mortgage, the interest rate is 5% (the fully indexed rate)."
Unlike Section 32 and all other state predatory lending laws which measure the Treasury security yield as of the 15th day of the month in which the application is received, the Act uses the Treasury security yield as of the 15th of the month immediately prior to the month in which the loan is made. Section 12.15.3.13(D) of the NMAC states that a loan is considered made "when the consumer becomes contractually obligated on a credit transaction."

Total Points and Fees: Points and Fees are defined to include (or exclude) the following items:

Prepaid Finance Charge - the total amount of prepaid finance charges
- Prepaid Interest - to be deducted from prepaid finance charge
- Other Excludable Charges - Tax service fees and attorneys' fees are deducted from prepaid finance charges provided they are not paid to the creditor or a creditor affiliate.; in addition, FHA mortgage insurance (MIP Cash, MIP Financed) and VA loan guarantees (VA Funding Fee, VA Funding Fee Cash and VA Funding Fee Financed) are also excludable provided such fees are shown as paid to HUD and VA, respectively.
+ Other Mortgage Broker Compensation - the total amount of all non-prepaid finance charges paid directly or indirectly to a mortgage broker regardless of the source of payment, i.e., includes all back-end compensation paid by lender to broker
+ Optional Credit Insurance/Related Products Financed by the Creditor - other than premiums calculated on a monthly basis; I'm not sure we can distinguish between the two, so our default should be to include all such amounts
+ Maximum Prepayment Fees Permitted Under the Loan Documents - The Act itself neither expressly authorizes nor restricts prepayment fees. Prepayment penalties are generally prohibited in New Mexico. Certain entities may nonetheless be able to assess a prepayment penalty. The Act permits a "conventional prepayment penalty" to be excluded from the total points and fees. A "conventional prepayment penalty" is limited to two percent (2%) of the amount prepaid.1 For purposes of completing this analysis, if the loan has a prepayment provision, we multiply the principal amount of the loan by 2%.
+ Any Prepayment Fee Assessed on Refinanced Loan Made/Held by Creditor or Affiliate - if the new loan is refinancing a preexisting loan that was made or is currently held by the creditor or an affiliate of the creditor, and a prepayment penalty is assessed on the payoff of the preexisting loan
- Conventional Prepayment Penalty/Bona Fide Discount Points - the Act permits the deduction of the sum of the "conventional prepayment penalty" and "bona fide discount points" up to two percent (2%). "Bona fide discount points" means loan discount points that are knowingly paid by the borrower for the express purpose of reducing, and which in fact do result in a bona fide reduction of, the annual percentage rate otherwise applicable to the home loan; provided, however that discount points are not "bona fide discount points" if the annual percentage rate otherwise applicable to the home loan exceeds the conventional mortgage rate (see footnote 1) by more than: (1) one and one-half percentage points for a home loan secured by a first lien; or (2) three percentage points for a home loan secured by a junior lien. Because we assume that any assessed prepayment penalty meets the definition of a "conventional prepayment penalty," and because we assume that all discount points are bona fide:
if the loan has a prepay but no discount points, we deduct 2% of the principal amount of the loan;
if the loan has no prepay but has discount points, we deduct the actual amount of discount points up to a maximum of two (2) discount points; and
if the loan has both a prepay and discount points, we deduct two percent (2%) of the loan amount.
+/- Creditor Requested Adjustments - the total amount of all customer requested overrides

Total Principal Loan Amount: NMAC Section 12.15.3.15 defines total principal loan amount as "the total principal loan amount as stated in the promissory note." For HELOCs, total principal loan amount means simply the amount of the credit line, without any deductions.

Original Principal Balance/Credit Line Available
+/- Creditor Requested Adjustments

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 (for which we should consider developing audits):

No financing of points and fees in excess of two percent (2%) of the total loan amount
No balloon loan
No negative amortization
No increased interest rate after default
No more than two periodic advance payments
No requirement that borrower assert claim/defense in forum that is less convenient, more costly, more dilatory for dispute resolution than a proper judicial form
After April 1, 2004, Borrower must receive credit counseling from an approved counselor
Must give due regard to borrower's repayment ability
Payments under a home improvement contract must be made jointly to borrower and contractor, or escrow agent if borrower requests
No fees, other than those that are bona fide, reasonable and actual, may be charged to modify, renew, extend or amend
May not charge more than $75 to defer a payment
No recommending/encouraging default
Late fee limited to 5%/15 days
No acceleration unless borrower has failed to abide by material terms of the loan
No prepayment penalty
A violation of the Act also constitutes an unfair and deceptive trade practice under the New Mexico Unfair Practices Act.
Notice requirement - NOTICE TO BORROWER (see below)

Notices: The following notice to borrower must be given in writing, acknowledged in writing and signed by the borrower, not later than the time required under the notice provision in 12 CFR 226.31(c):

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. 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 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 PUT INTO IT IF YOU DO NOT MEET YOUR PAYMENT OBLIGATIONS UNDER THE LOAN.
YOU SHOULD CONSULT AN ATTORNEY-AT-LAW AND A QUALIFIED INDEPENDENT CREDIT COUNSELOR OR OTHER EXPERIENCED FINANCIAL ADVISOR REGARDING THE RATE, FEES AND PROVISIONS OF THIS MORTGAGE LOAN BEFORE YOU PROCEED. A LIST OF QUALIFIED COUNSELORS IS AVAILABLE BY CONTACTING THE NEW MEXICO REGULATION AND LICENSING DEPARTMENT.
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.

1 A "conventional prepayment penalty" must be authorized by federal law, and the home loan's APR may not exceed by more than two percent (2%) the "conventional mortgage rate." The "conventional mortgage rate" is defined as the most recently published yield on conventional mortgages as published by the board of governors of the federal reserve as of the 15th day of the month immediately preceding the month in which the application is received by the creditor. For purposes of our high-cost home loan analysis and determination, if the home loan provides for a prepayment penalty, we assume that home loan (a) does not have an APR that exceeds the "conventional mortgage rate" (as defined in the Act) by more than two (2) percentage points; and (b) the maximum prepayment fee or penalty is equal to two percent (2%) of the original principal balance.