South Carolina High-Cost and Consumer Home Loans Act

Coverage

The South Carolina High-Cost and Consumer Home Loans Act (the "Act"), effective January 1, 2004, applies to the following types of loans:

• any closed-end loan (includes purchase, construction and refinance loans, and regardless of lien position)
• made to a natural person
• primarily for personal, family or household purposes
• the principal amount does not exceed the Fannie Mae conforming limit for a single-family dwelling
• secured by any one- to four-family dwelling (which may be a manufactured home)
• owner-occupied as the borrower's principal dwelling

Loans excluded from coverage include:

• Open-end loans (HELOCs)
• Non-consumer purpose loans (loans primarily for business, agricultural or commercial purposes)
• Non-owner occupied properties
• Multifamily properties (5+ units)

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

1. The APR Test: The Act APR Test is calculate in the same manner as under Section 32: either 8% (for first liens) or 10% (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.
2. The Points and Fees Test: Total Points and Fees payable by the borrower at or before the closing exceed:
   1. five percent (5%) if the total loan amount is $20,000 or more, or
   2. the lesser of eight percent (8%) of the total loan amount, or $1,000 if the total loan amount is less than $20,000.

The APR Test: note that unlike the Section 32 APR Test, which is limited to refinance transactions, the Act APR Test applies to purchase and construction loans as well.

The Points and Fees Test: 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 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 but only if paid to the creditor or creditor affiliate
+	Other Mortgage Broker Compensation - the total amount of all non-prepaid finance charges paid directly by a borrower to a mortgage broker (excludes payments to a broker by any other person)
+	Maximum Prepayment Fees Permitted Under the Loan Documents - Prepayment penalties are generally prohibited for first-lien loans of $180,000 or less, and all junior lien loans; prepayment charges with respect to first-lien loans of more than $180,000 are generally unregulated. The Act defines a "conventional prepayment penalty" as a prepayment penalty or fee authorized by law other than by the Act, provided the loan (a) does not have an APR that exceeds the "conventional mortgage rate"1 by more than 2%; and (b) does not permit prepayment fees or penalties that exceed 2%of the amount prepaid. The definition is relevant because the Act permits a conventional prepayment penalty to be excluded from points and fees (see below). Because of the prepayment penalty provisions of South Carolina law (including those contained in the Act), for purposes of our high-cost home loan analysis and determination, we assume that if the loan provides for a prepayment penalty, the maximum prepayment penalty is equal to 2% of the loan amount.
+	Optional Credit Insurance/Related Products Paid At or Before Closing - regardless of how named or paid (in cash or financed) and regardless if a single premium or initial payment
-	Other Excludable Charges - the following charges are expressly excluded from the definition of points and fees to the extent they have otherwise been included: taxes, filing fees, recording and other charges and fees paid or to be paid to public officials to determined the existence of or to perfect, release or satisfy a security interest; tax services and attorneys' fees (if the borrower has the right to select the attorney) provided they are not paid to the creditor, a creditor affiliate, a mortgage broker or a mortgage broker affiliate Commissions and other compensation paid to real estate brokers and agents (I'm not sure we separate identify these fees and have any way of excluding them) Fees or charges in connection with local, state or federal government-sponsored mortgage insurance or guaranty programs - for FHA loans, exclude MI premiums; for VA, exclude VA Funding Fee.
-	Conventional Conforming Discount Points/Conventional Prepayment Penalty - the Act permits the deduction of either up to two (2) "conventional conforming discount points,"2 or a conventional prepayment penalty; the selection appears to be left up to the creditor to make. Accordingly, because of our assumptions relating to discount points (see footnote 2) and prepayment penalties (see above), we should assume the following (this is similar to what we do in New Jersey): if the loan has a prepay but no discount points, multiply the principal amount of the loan by 2%; if the loan has no prepay but has discount points, 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, simply deduct two percent (2%) of the loan amount.
+/-	Creditor Requested Adjustments - the total amount of all customer requested overrides

Total Loan Amount: is defined the same as under Section 32.

What Happens If a Loan Is a High-Cost Home Loan?

There are many, many substantive limitations imposed on leniders 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 call provision
• No balloon payment
• No negative amortization
• No increased interest rate after default
• No more than two periodic advance payments
• No modification or deferral fees
• No choice of law provision designating a state other than South Carolina
• No lending without home-ownership counseling certification
• No lending without a reasonable belief regarding repayment ability
• No financing of fees or charges - a lender may not directly or indirectly finance:
  • Any prepayment fees or penalties payable by the borrower in a refinancing transaction if the lender or an affiliate of the lender is the noteholder of the note being refinanced;
  • Points and fees exceeding 2 ½ % of the total loan amount
• No charging points and fees if proceeds used to refinance existing high-cost loan held by the same lender as noteholder
• Restrictions on home-improvement contracts

Recommended Disclosures:

Right to Select an Attorney Disclosure: Attorneys' fees may be excluded from the total points and fees provided the borrower has the right to select the attorney. Other provisions of South Carolina law already require disclosure of the borrower's right to select an attorney, so nothing new or additional must be done.

Bona Fide Discount Points: The Act requires that a borrower "knowingly" pay discount points in order to reduce the rate. Therefore, it is desirable to create a disclosure in which the borrower acknowledges that he or she agrees to pay certain discount points for the express purpose of reducing the interest rate.