The following article is reprinted from Basis Points® , Vol. 2, Issue 1, Copyright © 2003, with the permission of CounselorLibrary.com, LLC. All Rights Reserved. Further reproduction is prohibited without permission.

Not to be outdone by D.C., on December 18, 2002, Los Angeles Mayor Jim Hahn signed the "Anti-Predatory Lending Ordinance of the City of Los Angeles" (the "Ordinance"), which was adopted unanimously by the L.A. City Council on December 10.

The Ordinance directs the Los Angeles Housing Department to propose, subject to approval by the Council and Mayor, rules, regulations and a funding mechanism to effectuate the purposes of the Ordinance. Once approved, the rules and regulations will take effect immediately upon publication. The Ordinance itself will then become operative 30 days after publication of the rules and regulation. The provisions of the Ordinance apply to applicable home loans executed after the operative date of the Ordinance.

As discussed below, the Ordinance targets "High-Cost Refinance Home Loans" made by lenders other than those regulated by the federal banking agencies. If a refinancing meets the definition of a High-Cost Refinance Home Loan, the following requirements will take effect:

• Mandatory counseling in the Borrower's primary language;

• Mandatory disclosure of credit scores and appraisals prior to counseling;

• Mandatory reporting of loan repayment histories to credit agencies;

• Prohibition of prepayment penalties on any High-Cost Refinance Home Loan after the first two years;

• Prohibition of the sale of single-premium credit insurance as part of the loan transaction;

• Prohibition on making a High-Cost Refinance Home Loan without reasonable belief in the Borrower's ability to repay the loan;

• Prohibition of underwriting a loan without tangible net benefit to the Borrower;

• Penalties for violating the provisions of the Ordinance that extend to loan assignees; and

• Borrowers ability to pursue all legal remedies including punitive damages, statutory fees and use of the ordinance as a defense to foreclosure.

Any written or oral agreement purporting to waive any of the above requirements is deemed by the Ordinance to be against public policy, and void and unenforceable.

Lenders Subject to the Ordinance. Under the Ordinance, a "Lender" is any person or business entity that extends a "Home Loan" (as defined below) or arranges for the extension of a Home Loan. However, the term "Lender" does not include a bank chartered under the federal National Bank Act, a credit union chartered under the Federal Credit Union Act, or a savings and loan association regulated under the federal Home Owners' Loan Act of 1933. An Affiliate of these entities is only excluded from the definition of Lender if the Affiliate itself is not a bank, credit union, or savings and loan association chartered or regulated under one of these federal statutes.

The Ordinance defines "Affiliate" as a business entity that controls, is controlled by, or is under common control with, another entity, as set forth in the Federal Bank Holding Company Act of 1956. "Borrower" means singularly or collectively any natural person or persons with an obligation to repay a Home Loan, including without limitation a co-Borrower, cosigner, or guarantor.

High-Cost Refinance Home Loan. The Ordinance applies to "High-Cost Refinance Home Loans." A "Home Loan" means a consumer credit transaction secured by real property located in the City of Los Angeles, other than a reverse mortgage as defined in the California Civil Code, which meets the following criteria:

(1)	The real property contains or will contain either (a) 1-4 residential units, or (b) an individual residential condominium or cooperative unit. The Borrower must occupy one of the units as the Borrower's principal dwelling. In the case of multiple Borrowers, at least one of the Borrowers must occupy one of the units as the Borrower's principal dwelling.
(2)	The principal amount of the loan does not exceed the current Fannie Mae conforming loan limit for first mortgage loans.

A "High Cost" Home Loan means a non-purchase money Home Loan that meets either of the following two conditions:

(1)

The loan's APR (as calculated under the federal Truth in Lending Act) exceeds by more than 6% the yield on Treasury securities having the period of maturity typically used by Lenders within the industry. (The Los Angeles Housing Department will annually designate this period of maturity.) The yield on Treasury securities is that in effect on the 15th day of the month immediately preceding the month in which the creditor receives the credit application. With respect to teaser rates and variable rate loans: For teaser rate Home Loans, the higher subsequent rate must be used for determining the APR; For variable rate Home Loans, the rate in effect on the date of loan consummation must be used for determining the APR; For teaser rate Home Loans with a variable rate feature, the rate determined by the index plus the margin that would have been in effect on the date of loan consummation must be used for determining the APR; or

(2)

The "Points and Fees" exceed 4 percentage points of the Total Loan Amount, however Points and Fees of up to $1500 do not subject a Home Loan to the Ordinance.

"Total Loan Amount" means the total credit received by the Borrower as part of the loan transaction. "Points and Fees" paid on or before the closing of the transaction are excluded from the Total Loan Amount. However, "Points and Fees" financed as part of the loan transaction must be included in the Total Loan Amount.

The term "Points and Fees" means all of the following: (a) all items required to be disclosed under Regulation Z Sections 226.4(a) and 226.4(b), except interest or the time-price differential; (b) all charges for items listed under Regulation Z Section 226.4(c)(7), but only if the Lender receives direct or indirect compensation in connection with the charge or the charge is paid to an Affiliate of the Lender; (c) all compensation not otherwise specified in the Ordinance paid directly or indirectly to a mortgage broker, including a broker that originates a Home Loan in its own name through an advance of funds and subsequently assigns the Home Loan to the Person advancing the funds; (d) the premium of any single premium credit life, credit disability, credit unemployment or other life or health insurance; and (e) all prepayment fees or penalties.

Excluded from the term "Points and Fees" are the following: (a) taxes, filing fees, recording and other charges and fees paid or to be paid to public officials for determining the existence of, or for perfecting, releasing, or satisfying a security interest; and (b) the following charges if reasonable, or if paid to a person other than the Lender, an Affiliate of the Lender, the mortgage broker, or an Affiliate of the mortgage broker: (i) fees for flood certification; (ii) fees for pest infestation and flood determinations; (iii) appraisal fees; (iv) fees for inspections performed prior to loan closing; (v) credit report fees; (vi) survey fees; (vii) attorneys' fees (if the Borrower has the right to select the attorney from an approved list or otherwise); (viii) notary fees; (ix) escrow charges that are not required to be disclosed under Regulation Z Sections 226.4(a) and §226.4(b); (x) title insurance premiums; or (xi) fire insurance or flood insurance premiums (provided that the conditions in Regulation Z Section §226.4(d)(2) are met). The Los Angeles Housing Department is directed to promulgate a schedule of reasonable costs, as part of the rules and regulations discussed above.

If a Lender makes a High-Cost Refinance Home Loan, the Ordinance imposes the following requirements on the refinancing transaction:

No Lending Without Home Loan Counseling. A Lender may not make a High-Cost Home Loan [sic] without first receiving written certification from a "Credit Counselor," stating that the Borrower either has received face-to-face counseling in the Borrower's primary language on the advisability of the loan transaction, or has waived the counseling option as provided for in this subsection. A "Credit Counselor" is a housing or credit counselor, who: (1) is not an Affiliate of a Lender; and (2) has been approved by HUD, the State of California, or the City of Los Angeles; and (3) has completed a training program approved by the Los Angeles City Housing Department.

The Borrower may waive the counseling option, but only by personally meeting with a Credit Counselor at least 5 business days prior to the closing of the High-Cost Refinance Home Loan. The Credit Counselor must inform the Borrower of the advisability of counseling in the Borrower's primary language. If the Borrower declines the counseling, the Borrower must certify in writing to the Credit Counselor that the Borrower has elected to waive the counseling option. Whether the Borrower receives the counseling, or elects to waive it, the Credit Counselor must submit a certificate to the Lender at least 3 business days prior to the closing of the High-Cost Refinance Home Loan.

No Lender may steer a Borrower toward any particular Credit Counselor. Also, no Lender may attempt to persuade a Borrower to waive credit counseling, or attempt to influence any Credit Counselor regarding any specific Home Loan or Borrower. The Ordinance further prohibits Credit Counselors from paying any fee whatsoever to a Lender.

Credit counseling must occur at Borrower's reasonable choice of location. Credit Counselors also must provide reasonable transportation accommodations to Borrowers, where necessary. These accommodations may include vouchers, shuttle services, or other means. Alternatively, credit counseling may occur at the Borrower's residence. No Lender is liable for the content of any advice or counseling a Credit Counselor gives to the Borrower, nor is a Credit Counselor liable to the Lender for the content of any advice or counseling the counselor gives to the Borrower.

Reasonable Belief in Borrower's Ability to Repay Loan. Lender may not make a High-Cost Refinance Home Loan to a Borrower, unless at the time the loan is consummated, the Lender reasonably believes the Borrower will be able to make the scheduled payments to repay the loan. In reaching this conclusion, the Lender must consider the Borrower's current and expected income, current obligations, employment status, credit score, and other financial resources, not including the Borrower's equity in the real property that secures the loan.

The Borrower is presumed to be able to make the scheduled payments to repay the loan if, at the time the loan is consummated, the Borrower's total monthly debts, including amounts owed under the loan, do not exceed 50% of the Borrower's monthly gross income, as verified by the credit application, the Borrower's financial statement, a credit report, and other reliable, documented, and generally accepted financial information typically provided to Lenders by consumers.

If the Borrower's total monthly debts, including amounts owed under the loan, exceed 50% of the Borrower's monthly gross income, the Lender must justify the decision to make the loan in a written statement, provided to the Borrower prior to the loan closing, that sets forth specific compensating factors, such as a distinguished long-term credit history of the Borrower, a documented history of the Borrower's ability to make payments under comparable or greater debt-to-income ratios, conservative use of credit standards, significant liquid assets of the Borrower, or other factors that reasonably justify the approval of the loan.

Making a High-Cost Refinance Home Loan Without Net Borrower Benefit. Lenders may not make a High-Cost Refinance Home Loan if the loan pays off all or part of an existing Home Loan or other debt of the Borrower, and the Borrower does not receive a reasonable and tangible net benefit from the new Home Loan. The term "reasonable and tangible net benefit" is not defined.

Prepayment Penalties. Lenders may charge prepayment penalties on High-Cost Refinance Home Loans only during the first 24 months following the date of the promissory note. However, the Ordinance expressly states that this provision is not intended to limit prepayment penalties otherwise allowed by state and federal law.

Financing of Credit Insurance. A Lender may not finance single-premium, credit life, credit disability, credit property, or credit unemployment insurance, or any other life or health insurance premiums as part of a High-Cost Refinance Home Loan transaction. Insurance premiums that are not included in the High-Cost Refinance Home Loan principal, and that are calculated and payable on a monthly basis, are not considered financed by the Lender for purposes of this rule.

No Lending Without Disclosure to the Borrower of Credit Scores and Appraisals. Before making a High-Cost Refinance Home Loan, a Lender must first provide to the Borrower written copies of Borrower's credit reports, and any appraisals of the property in the possession of the Lender. These documents must be provided to the Borrower prior to any loan counseling. If the Borrower waives loan counseling, the Lender must submit these documents to the Borrower no later than 5 business days prior to the closing of the Home Loan.

Failing to Report Loan Repayment to Credit Agencies. Lenders who regularly report to credit bureaus must promptly report High-Cost Refinance Home Loan repayments to credit reporting agencies.

No Mandatory Arbitration Clause Without Full Disclosure. Lenders may not make a High-Cost Refinance Home Loan that requires mandatory arbitration, limiting the right of the Borrower to seek relief through the judicial process, unless the Borrower specifically agrees to such a clause after having obtained, or waived, the required loan counseling. Any mandatory arbitration clause agreed to by the Borrower must be separately signed by the Borrower, and printed in at least 10-point bold type or in contrasting red print in at least 8-point bold type.

High-Cost Refinance Home Loans Violating State or Federal Law. Lender's may not make a Home Loan that violates any applicable provision of the federal Truth in Lending Act, as amended by HOEPA, the federal Real Estate Settlement Procedures Act of 1974, the California Anti-predatory Loan Act, or any regulations implementing these statutes, as these statutes and regulations may be amended from time to time. A violation of these statutes gives rise to civil cause of action under the Ordinance.

Curing Violations. A Lender who, when acting in good faith, fails to comply with the Ordinance may cure a violation if the Lender establishes that, within 45 calendar days after receipt of a complaint by a borrower or discovery of the error, the Lender has notified the Borrower of the compliance failure. Within this 45-day time period, the Lender must also make appropriate restitution, and adjust the terms of the High-Cost Refinance Home Loan in a manner beneficial to the Borrower to make the loan comply with the Ordinance.

Loan Assignments. Any Lender selling or assigning a High-Cost Refinance Home Loan that fails to comply with the Ordinance must explicitly disclose this fact to the purchaser or transferee. Any person who purchases or is otherwise assigned a High-Cost Refinance Home Loan is subject to all claims, actions, and defenses related to that High-Cost Refinance Home Loan that the Borrower could assert against the original Lender.

Civil Enforcement and Remedies. The Ordinance provides for substantial penalties in the event a Lender violates the Ordinance and does not properly cure the violation. If a court finds that a Home Loan is made in violation of the Ordinance, the court is mandated by the Ordinance to award: (1) actual damages sustained by the Borrower as a result of the violation; and (2) reasonable costs and attorneys' fees.

The court also may issue injunctive orders: (1) rescinding a Home Loan contract, or barring the Lender from collecting amounts owed on the Home Loan; (2) barring any judicial or nonjudicial foreclosure; (3) reforming the terms of the Home Loan to conform to the Ordinance; (4) enjoining a Lender from engaging in prohibited conduct; (5) awarding statutory damages to the Borrower in the amount of the Points and Fees charged for the Home Loan plus 10% of the Total Loan Amount; (6) awarding punitive damages as the court may deem appropriate if the court determines by clear and convincing evidence that a Lender showed reckless disregard for the rights of a Borrower or other aggrieved party; and (7) imposing other relief, including injunctive relief, as the court deems just and reasonable.

Borrower's may assert a violation of the Ordinance as a defense, bar, or counterclaim to any default action, collection action, or judicial or nonjudicial foreclosure. Further, any relief granted under law or equity to a Borrower may not reflect negatively in the credit history of the Borrower. A Lender also may not report any action or relief granted to a Borrower under the Ordinance to any credit agency, and may not consider any action or relief when considering the making of any future Home Loans to the Borrower.

The remedies provided under the Ordinance are cumulative. The protections and remedies are also in addition to other protections and remedies that may otherwise be available under law.

Statute of Limitation. Finally, please note that an aggrieved party must file any civil action brought under the Ordinance within three years after the discovery of the violation.

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