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New York High-Cost Home Loan Law

Coverage

New York's predatory lending law (the "Act") applies to any closed-end and open-end home loan, the prinicpal amount of which is equal to or less than the Fannie Mae conforming loan limit for a single family dwelling made for consumer purposes and secured by a one- to four-family dwelling occupied as the borrower's principal residence. The Act's application is broad and includes purchase money, construction and refinance loans, regardless of lien position.

Loans excluded from coverage are reverse mortgages and commercial loans.

When is a residential mortgage loan a "High-Cost Home Loan"? A high-cost home loan is defined as a loan that satisfies either or both of the following tests:

APR Test: The thresholds are 8% for a first lien loan and 9% 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; or
Points and Fees Test: Total Points and Fees exceeds:
1. If the total loan amount is $50,000 or more, then either:
  1. five percent (5%) of the total loan amount; or
  2. six percent (6%) of the total loan amount if the loan is a purchase money FHA or VA loan; or
2. If the total loan amount is less than $50,000, the greater of six percent (6%) of the total loan amount or $1500.

The APR Test: The Act treats the determination of the APR for fixed rate loans and variable rate loans differently.

Fixed Rate Loans: The determination of the APR is per TILA
Variable Rate Loans: The determination of the APR is per TILA unless the initial interest rate is discounted. If the initial interest rate of the loan is discounted, that is, the initial interest rate is less than the fully-indexed rate (index + margin), the initial interest rate is ignored and instead the interest rate that would be in effect once the introductory rate has expired is used in calculating the APR.

The Points and Fees Test: Points and Fees are defined substantially the same as under Section 32 with a couple of exceptions described below. Here is the formula:

Prepaid Finance Charge - the total amount of prepaid finance charges excluding mortgage insurance premiums.
- Prepaid Interest - to be deducted from prepaid finance charge
+ Other Charges Paid to Lender/Lender Affiliate - the total amount of all Section 226.4(c)(7) charges not included as a part of the Prepaid Finance Charge, if paid to the lender or a lender affiliate
+ Other Mortgage Broker Compensation - the total amount of all compensation paid directly or indirectly to a mortgage broker, including a broker in a table-funding transaction, not otherwise included in points and fees
+ Single Premium Option Insurance and Related Products and Financed1 - premiums for optional credit life/disability/unemployment/property or other life or health insurance or any debt cancellation or suspension agreement or contract that are financed by the lender
- Bona Fide Loan Discount Points2 - up to two (2) bona fide loan discount points may be deducted
+/- Lender Requested Adjustments - the total amount of all customer requested overrides to our automatic determination

Important differences from the Section 32 Points and Fees test are:

Other Mortgage Broker Compensation: Under Section 32, only compensation paid by the borrower is considered, thereby excluding lender-paid compensation from points and fees. Under the Act, "points and fees" are defined to include "all compensation paid directly or indirectly to a mortgage broker," without reference as to the source of such compensation. The New York Banking Department takes the position that yield spread premiums and other "back end" compensation paid by the lender to the mortgage broker are included in points and fees.
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 New York, only single-premium insurance is counted, and only to the extent financed into the loan. See footnote 1. In addition, there is some ambiguity in the Act as to whether hazard insurance premiums and the like are intended to be covered. According to the most recent informal interpretation from the New York Banking Department, real property-related insurance premiums (e.g., hazard insurance, flood insurance, etc.) are not covered by this provision and therefore should not be included in the calculation of points and fees.

Total Loan Amount: The Act deviates from Section 32 significantly in its definition of Total Loan Amount. Total Loan Amount is defined as follows:

Principal Amount of the Loan - the face amount of the note
- Points and Fees Financed Including All Loan Discount Points - the Act calls for the subtraction of "those points and fees as defined in paragraph (f) of [the Act] that are included in the principal amount." The deduction of Bona Fide Loan Discount Points is permitted under paragraph (g) of the Act, not paragraph (f). Therefore, to the extent any Loan Discount Points were deducted for purposes of computing points and fees, and those deduction Loan Discount Points are being financed, they should be included in the points and fees deducted from the principal amount of the loan. Put another way, if any Loan Discount Points were deducted from the points and fees, if they are being financed those Loan Discount Points should be added back into points and fees before the deduction from the principal amount of the loan.

Limitations and Prohibited Practices. A high-cost home loan is subject to the following limitations:

No call provisions
No balloon payments of less than 15 years
No negative amortization
No default interest rate
No more than 2 advance payments from loan proceeds
No modification or deferral fees
No oppressive mandatory arbitration clauses
No financing of single premium insurance
No "loan flipping" (defined as making a home loan to a borrower who refinances an existing home loan when the new loan does not have a "tangible net benefit" (undefined) to the borrower considering all of the circumstances, including the terms of both the new and refinanced loans, the cost of the new loan and the borrower's situation)
No refinancing of special mortgages (a "special mortgage" is one originated, subsidized or guaranteed by or through a state, tribal, local government or nonprofit organization and which bears a below market interest rate at the time of origination or has non-standard payment terms beneficial to the borrower)
No lending without due regard to repayment ability
No financing of "points and fees" in excess of 3% of the principal amount of the loan
No direct payment of home improvement contractors
No encouragement of default
No payments to mortgage brokers, other than for reasonable value of goods, facilities or services actually provided
No points and fees by lender refinancing a high-cost loan held by lender or affiliate

Disclosures. The new act requires you to make the following disclosures.

Application Disclosures. At time of application, the lender or broker must deliver, mail, fax or electronically transmit the following notice on a separate form accompanied by the list of approved counselors, in at least 12-point type, to the borrower:

You should consider financial counseling prior to executing loan documents. The enclosed list of counselors is provided by the New York State Banking Department.

Pre-Closing Disclosure. The following notice must be given in writing to the borrower within 3 days after determining the loan is a high cost home loan, but no less than 10 days before closing.

CONSUMER CAUTION AND HOME COUNSELING NOTICE

If you obtain this loan, which pursuant to New York State Law is a High-Cost Home 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.

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 earnings history, the loan-to-value requested, and the type of property that will secure your loan. The loan rate and fees could vary based on which lender or mortgage broker you select. Higher rates and fees may be related to the individual circumstances of a particular consumer's application.

You should consider consulting a qualified independent credit counselor or other experienced financial adviser regarding the rate, fees, and provisions of this mortgage loan before you proceed. The enclosed list of counselors is provided by the New York State Banking Department.

You are not required to complete any loan agreement merely because you have received these disclosures or have signed a loan application. If you proceed with this mortgage loan, you should also remember that you may face serious financial risks if you use this loan to pay off credit card debts and other debts in connection with this transaction and then subsequently incur significant new credit card charges or other debts. If you continue to accumulate debt after this loan is closed and then experience financial difficulties, you could lose your home and any equity you have in it if you do not meet your mortgage loan obligations.

Property taxes and homeowner's insurance are your responsibility. Not all lenders provide escrow services for these payments. You should ask your lender about these services.

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. Accordingly, it is important that you make regular payments to your existing creditors.

Mortgage Legend. A legend in 12-point type must be included on the top of each mortgage that secures a high-cost home loan to indicate to any potential purchaser that the loan is a high cost loan. Until contrary regulatory guidance appears, the following would seem to meet the statutory requirements:

THIS MORTGAGE SECURES A HIGH-COST HOME LOAN
SUBJECT TO NEW YORK BANKING LAW §6-L.

1 Insurance premiums calculated and paid on a monthly basis are not considered financed by the lender; because we may not be able to distinguish between single-premium versus monthly premiums, we assume that all such insurance premiums are single premium and included in the points and fees calculation.
2 For purposes of the Act, "bona loan discount points" is defined as loan discount points knowingly paid by the borrower from any source for the purpose of reducing, and which in fact result in a bona fide reduction of, the interest rate applicable to the loan, provided the reduction purchased by the discount points is reasonably consistent with established industry norms and practices. A loan discount point is presumed to be bona fide if it reduces the interest rate by a minimum of 25 basis points provided all other terms of the loan remain the same. Loan discount points are deductible but only if the interest rate from which the interest rate is discounted does not exceed by more than 1% the 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; however, all discount points may be deducted if they are paid through a federal, state or local government grant or a non-profit organization.