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Oklahoma Home Ownership and Equity Protection Act

The Oklahoma Home Ownership and Equity Protection Act (the "Act") became effective on January 1, 2004. A high cost loan under the Act is called a "subsection 10 mortgage."

Coverage

The Act applies to the following types of loans:

Loans secured by owner-occupied properties (including manufactured homes)
Consumer credit transaction (loans primarily for personal, family or household purposes)
First and junior lien loans - lien position is irrelevant

The Act does not apply to the following types of loans:

Commercial loans (non-owner occupied; business purpose)
Purchase money loans (including purchase money juniors)
Construction loans
Open-end loans (HELOCs)

When is a loan a "Subsection 10 Mortgage"? A subsection 10 mortgage is defined as a loan that satisfies either of the following tests:

APR Test: the same as under Section 32: at consummation, the APR exceeds by more than 8% (for first liens) or 10% (for subordinate liens), over 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 creditor; or
Points and Fees Test: the total points and fees payable by the consumer at or before closing exceed the greater of (i) eight percent (8%) of the total loan amount, or (ii) or a specified dollar amount that is subject to change annually.

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 Compensation1 - all compensation paid to a mortgage broker 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 otherwise included as a part of the Prepaid Finance Charge if paid to the creditor or creditor affiliate
+ Optional Credit Insurance/Related Products - the total amount of any premiums or other charges for any credit life, accident, health or loss-of-income insurance or debt-cancellation coverage not otherwise included as a part of the Prepaid Finance Charge; these amounts are included regardless of how paid (in cash or financed) and regardless if a single premium or initial payment only
+/- Creditor Requested Adjustments - the total amount of all customer requested overrides

Total Loan Amount: "Total Loan Amount" is undefined in the Act. A reasonable approach would be to calculate the Total Loan Amount in precisely the same manner as determined under Section 32.

Prohibitions: There are many, many substantive limitations imposed on subsection 10 mortgages. These include the following (for which we should consider developing audits):

The imposition of a prepayment charge is limited to 24 months, and 2% of the loan amount prepaid if prepaid in year one, and 1% of the loan amount prepaid if prepaid in year two.
No default interest rates are permitted
No balloon loans if the term of the loan is less than 5 years
No negative amortization
No more than two periodic advance payments collected at closing
Restrictions on payment under home-improvement contracts
Limitation on right to accelerate
Limitation on refinancing zero-interest or other low interest loans by governmental or nonprofit creditors
May not encourage default of existing obligation
No subsection 10 mortgage without reasonable belief of borrower's ability to repay
No refinancing within 12 months of existing subsection 10 mortgage with subsection 10 mortgage unless in borrower's interest
May not structure a transaction as an open-end plan to evade legal requirements
Restrictions on the use of mandatory arbitration provisions
Must report borrower's payment history, both favorable and unfavorable, to nationally recognized credit reporting agency at least quarterly
May not refinance any consumer loan make by the creditor with a subsection 10 mortgage unless in the borrower's interest (includes listing of factors to be considered in making such determination)
May not sell single-premium credit insurance without offering monthly premium option after required disclosure
Disclosure requirements must be met (see below)
Must include notice of potential liability to assignees in as determined by the Administrator

Required disclosures:

A Section 32-type disclosure must be made at least 3 days prior to consummation
Insurance Notice to Obligor required prior to selling single-premium credit insurance
Notice to Assignee in form determined by Administrator

1 The Act is ambiguous as to whether or not yield spread premiums and other forms of "back end" compensation not paid directly by the consumer should be included in points and fees. On the one hand, the Act specifically states that a subsection 10 mortgage is one in which "the total points and fees payable by the consumer at or before closing" exceeds the applicable thresholds. On the other hand, "points and fees" are defined to include "all compensation paid to mortgage brokers," with no express consideration being given to the source of the payment. While the issue is far from clear, to be conservative, our position is that yield spread premiums and other forms of "back end" compensation paid by the lender to the mortgage broker are included as points and fees for purposes of the Oklahoma high cost computation and display.