Updated: July 31, 2008 (Revisions are highlighted in yellow)

North Carolina has created a new category of predatory loan, the so-called "rate spread home loan."  The new law is contained in North Carolina G.S. Section 24-1.1F (a copy of the bill enacting this new section is available here).  Below is a description of the new law along with a description of the audit DocMagic is implementing to identify such loans.

Document Systems, Inc. ("DSI") receives numerous requests from DocMagic customers asking how we arrive at our high cost determinations.  In an effort to better explain our calculations, we publish detailed information regarding our calculations online.

There is now a memo posted online describing how DocMagic performs its high cost calculations for all states that have some form of predatory/high cost statute or regulation in effect. These states are (some of the memos must be updated to reflect recent upgrades to the DocMagic software products):

Please note that some states have enacted legislation that they have designated as being anti-predatory lending statutes or which are designed to address purported predatory lending abuses but which do not require points and fees and/or APR calculations. These states include:

• Kansas - Revised UCCC--Regulation of Agreements and Practices (Kan. Rev. Stats. §16a-3-301 et seq.): Click Here
• Michigan - The Consumer Mortgage Protection Act (MCL §445.1631 et seq.): Click Here
• Nebraska - The Mortgage Bankers Registration and Licensing Act (Neb. Rev. Stats. §45-701 et seq.): Click Here
• Virginia - The Mortgage Lender and Broker Act (Va. Code §6.1-408 et seq.): Click Here

The provisions of the anti-predatory lending laws in the four states listed immediately above generally limit or prohibit mortgage lenders or mortgage brokers, or both, from engaging in certain practices or from making certain types of loans on specified terms. In the near future, we will post information memos on our website setting forth in greater detail what those limitations and prohibitions are in each of these states.

By process of elimination, the following states have no predatory or high cost legislation in effect:

Please keep the following in mind when taking advantage of the DocMagic high cost tests:

1. The DocMagic Section 32 and state-specific high cost tests have been developed with the goal of identifying those loans that might be considered high cost under the applicable federal or state-specific high cost test so that you don't inadvertently originate a high cost loan. That is why if and when we determine that a particular loan is a high cost loan, we identify the reason(s) for that determination and we provide information on how to get the loan points and fees and/or APR under the applicable threshold. It is important to note that if the DocMagic software determines that a loan is a high cost loan and you decide nonetheless to proceed in originating that loan as a high cost loan, beyond providing any applicable high cost notices and disclosures in your loan package, the DocMagic software does not otherwise audit the loan package for compliance with any substantive limitations or provisions of the applicable high cost loan. By way of example, if a state high cost law prohibits balloon payment loans and you originate a high cost balloon loan in that state, the DocMagic software will not warn or prevent you from doing so.

2. Many states regulate permissible interest rates and/or points and fees that can be assessed in connection with certain types of loans. It is important to note that the DocMagic software generally does not perform any tests to confirm that the loan's interest rate conforms to any applicable state interest rate (usury) limitations, or that any of the points and fees charged by a mortgage lender or a mortgage broker in connection with the loan are permitted under applicable law or regulation. Thus, it is possible for a loan to fall below a state high cost points and fees and/or APR threshold, and yet the loan may exceed state usury limitations or may include the assessment of an impermissible fee by a mortgage lender or broker. While discussions are underway internally at DocMagic to implement appropriate usury and charge audits, the implementation of those audits will not occur soon. However, if you have specific audits that you would like to see implemented for your loans, please contact either a customer service representative or a member of the compliance department to discuss.

Bill Lambropoulos is the General Counsel and Director of Compliance and Legal Services at Document Systems, Inc.

Section 32 (Regulation Z; 12 CFR 226.32)

Regulation Z can be accessed here.

Coverage: Section 32 applies to consumer credit transactions secured by a consumer's principal dwelling. Excluded from coverage are:

• residential mortgage transactions (means a transaction in which a security interest is created or retained in the consumer's principal dwelling to finance the acquisition or initial construction of that dwelling)
• reverse mortgage transactions
• open-end credit plans

Thresholds: A Section 32 loan is a loan that satisfies either or both of the following tests:

1. APR Test: The loan's APR at consummation will exceed by more than either 8% (for first liens) or 10% (for subordinate liens), 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
2. Points and Fees Test: The total points and fees payable by the consumer at or before loan closing will exceed the greater of eight percent (8%) of the total loan amount, or a specified dollar amount that is subject to change annually.

The Points and Fees Test: Points and fees are defined as follows:

	Prepaid Finance Charge (the total amount of prepaid finance charges)
-	Prepaid Interest (to be deducted from prepaid finance charge)
+	Other Mortgage Broker Compensation (the total amount of any non-prepaid finance charge paid to broker by borrower (does not include YSPs and other lender-paid compensation to broker))
+	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 if paid to the creditor or creditor affiliate)
+	Optional Credit Insurance/Related Products Paid at or Before Closing (optional credit life/accident/health/loss of income/debt cancellation coverage costs, regardless of how named or paid (in cash or financed) and regardless if a single premium or initial payment)
+/-	Creditor Requested Adjustments (the total amount of all customer requested overrides)

Total Loan Amount: Total loan amount is defined in the Federal Reserve Board commentary to Section 32 to mean the following:

	Amount Financed (loan amount - prepaid finance charges)
-	Other Charges Paid to Creditor/Affiliate and Financed (the total amount of all Regulation Z Section 226.4(c)(7) charges not included as a part of the Prepaid Finance Charge if paid to the creditor or creditor affiliate and financed)
-	Optional Credit Insurance/Related Products Finance by Creditor (optional credit life/accident/health/loss of income/debt cancellation coverage costs if financed (i.e., excludes paid amounts)
+/-	Creditor Requested Adjustments (the total amount of all customer requested overrides)

Disclosures:

A. Notice to Borrower. The following disclosures must be given at least 3 days prior to consummation (the date the borrower signs the loan documents) in conspicuous type size:

1. Notices. The following statement: "You are not required to complete this agreement merely because you have received these disclosures or have signed a loan application. If you obtain this 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."
2. Annual percentage rate. The annual percentage rate.
3. Regular payment; balloon payment. The amount of the regular monthly (or other periodic) payment and the amount of any balloon payment. The regular payment disclosed under this paragraph shall be treated as accurate if it is based on an amount borrowed that is deemed accurate and is disclosed under paragraph (c)(5) of Section 226.32. See Amount borrowed below.
4. Variable-rate. For variable-rate transactions, a statement that the interest rate and monthly payment may increase, and the amount of the single maximum monthly payment, based on the maximum interest rate required to be disclosed.
5. Amount borrowed. For a mortgage refinancing, the total amount the consumer will borrow, as reflected by the face amount of the note; and where the amount borrowed includes premiums or other charges for optional credit insurance or debt-cancellation coverage, that fact shall be stated, grouped together with the disclosure of the amount borrowed. The disclosure of the amount borrowed shall be treated as accurate if it is not more than $100 above or below the amount required to be disclosed.

B. Notice to assignee. The following statement must be provided to the purchaser or assignee:

"Notice: This is a mortgage subject to special rules under the federal Truth in Lending Act. Purchasers or assignees of this mortgage could be liable for all claims and defenses with respect to the mortgage that the borrower could assert against the creditor."

Prohibitions and Limitations:

• No balloon loans with terms of less than 5 years (excluding bridge loans)
• No negative amortization
• No more than 2 payments collected in advance
• No default rates of interest
• No prepayment penalty after 5 years; prepayments only permitted if source of prepayment funds is not a refinancing by the creditor or creditor affiliate, and if at consummation, consumer's total monthly debts do not exceed 50% of the consumer's verified monthly gross income
• No due-on-demand clause
• Limitations on payments under home improvement contracts - must be paid either to the contractor and the consumer jointly, or at the consumer's election, through a third-party escrow agent pursuant to a written agreement signed by the consumer, creditor and contractor
• No refinancing by the same lender or an assignee or servicer of one Section 32 loan into another Section 32 loan within one year unless the refinancing is in the borrower's interest
• No engaging in pattern or practice of extending credit based on the consumer's collateral without regard to the consumer's repayment ability
• No structuring of closed-end loan as an open-end plan to evade requirements of Section 32

It is the stated policy of both Fannie Mae and Freddie Mac that they will not purchase or securitize any mortgage if the total points and fees charged to the borrower exceed the greater of 5% of the mortgage amount or a maximum of $1,000. In other words, the test is the greater of $1,000 or 5% - the $1,000 only comes into play if the mortgage amount is less than $20,000.

Points and Fees Defined:

Points and fees include:

• origination fees
• underwriting fees
• broker and finder's fees
• charges that the lender imposes as a condition of making the loan - whether they are paid to the lender or a third party.

Exclusions:

Points and fees that do not have to be counted against this limitation include:

• bona fide discount points (no test is specified for determining whether or not discount points are bona fide)
• fees paid for actual services rendered in connection with the origination of the mortgage, such as:
  • The following Regulation Z Section 226.4 (c) (7) charges: attorneys' fees; notary fees; appraisal fees; credit report fees; surveys; title examinations and abstracts; flood certifications; home inspections; title insurance; tax and insurance escrows
  • The following Regulation Z Section 226.4 (d) charges: hazard insurance; flood insurance
  • The following Regulation Z Section 226.4 (e) charges: state and local transfer taxes or fees
  • Mortgage insurance premiums
• other miscellaneous fees and charges that, in total, do not exceed 1/4% of the loan amount.

Calculation of Points and Fees:

	Lender Origination Fees/Discount Points (the total amount of origination fees and discount points paid by the borrower to the lender)
+	Lender Underwriting Fees (underwriting fees paid by borrower to lender)
+	Total Mortgage Broker/Finder's Fees (the total amount of all fees and charges (whether or not prepaid or non-prepaid finance charges) paid by the borrower to a mortgage broker)
+	Other Lender-Imposed Charges (the total amount of all fees and charges paid by the borrower, whether or not prepaid or non-prepaid finance charges and without regard to whom the fee or charge is paid) to the extent not otherwise captured in any of the above categories; for purposes of this calculation, we assume that all fees and charges (excluding lien and other payoffs) paid by the borrower and not otherwise captured in any of the above categories is a fee or charge imposed by the lender)
-	Bona Fide Discount Points (for purposes of this calculation, we assume that all discount points paid by borrower to lender only are bona fide; discount points not paid to lender are deemed not bona fide)
-	Fees Paid for Actual Services Rendered (these fees include generally those fees set forth in Regulation Z Section 226.4(c)(7), (d) and (e) and mortgage insurance charges, and are excludable regardless of to whom the fee is paid, to the extent included in any of the "Total Mortgage Broker/Finder's Fees" or "Other Lender-Imposed Charges" categories above)
-	Other Miscellaneous Fees/Charges Up To .25% of Mortgage Amount (this is a "catch-all" category which permits the deduction of up to .25% of the mortgage amount of any miscellaneous fees and charges only included in any of the "Total Mortgage Broker/Finder's Fees" or "Other Lender-Imposed Charges" categories above)
+/-	Creditor Requested Adjustments (the total amount of all customer requested overrides)

Mortgage Amount means:

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

Wisconsin Responsible High Cost Mortgage Lending Law

The Wisconsin Responsible High Cost Mortgage Lending law (Wis. Stats. 428.202 et seq.) (the "Act") became effective for loans the applications for which are received by the lender on or after February 1, 2005. To view a copy of the Act, click here. The Wisconsin Department of Financial Institutions has also promulgated rules effective February 1, 2005 relating to the Act. To view a copy of the rules, click here.

The loans covered by and excluded under the Act are exactly the same as under Section 32, with the exception that unlike Section 32, purchase money (Loan Purpose = P or PMJ) and construction and construction to perm loans (Loan Type = CON or CONTP) are covered by the Act.

In addition, the APR Test and Points and Fees Test (including the calculation of the Total Loan Amount) under the Act are calculated in exactly the same manner as under Section 32, with the exception that the Points and Fees Threshold is reduced from 8% to 6% of the Total Loan Amount.

What Happens If a Loan Is a Covered Loan?

The following substantive limitations apply if a loan is found to be a covered loan:

• No balloon loan (excludes loans where payments adjust based on consumer's seasonal or irregular income, and bridge loans of less than one year obtained for purpose of financing acquisition or construction of borrower's principal dwelling)
• No call/demand provision (excludes demands based on non payment, due on sale, or fraud or material misrepresentation
• No negative amortization
• No increased interest rate after default
• No more than two periodic advance payments
• Lender must verify and document customer's ability to repay
• No refinancing within 1 year unless refinancing is in the interest of the borrower (anti-flipping)
• Payments under a home improvement contract must be made directly to customer, or jointly to customer and contractor, or if customer consents, made by third party pursuant to written agreement signed by customer, lender and contractor
• No financing of single premium optional credit insurance/related products
• No refinancing of subsidized low-rate loans
• May not make, propose or solicit fraudulent, false or misleading statements on any document relating to a covered loan
• No recommending/encouraging default

• No prepay if covered loan is held by refinancing lender; otherwise, prepayment penalty limited to 36 months and lender offers borrower the option of a loan product without a prepay penalty in writing and initialed by the borrower; the offer must include the following clear and conspicuous disclosure:

  LOAN PRODUCT CHOICE DISCLOSURE

  I was provided with an offer to accept a product both with and without a prepayment penalty provision. I have chosen to accept the product with a prepayment penalty.

  The prepayment may not exceed 60 days' interest at the contract rate for fixed rate loans over $25,000 if the borrower prepays more than 20% of the original loan amount with 36 months following loan consummation. No prepay is permitted on fixed rate loans of $25,000 or less, or on ARMS.

• The following notice to borrower must be given in writing in a clear and conspicuous format at least 3 business days prior to making a covered loan:

  DISCLOSURE TO BORROWER

  1. If you obtain this loan, the lender will have a mortgage on your home. You could lose your home and any money that you have put into it if you do not meet your obligations under this loan. Mortgage loan rates and closing costs and fees vary based on many factors, including your particular credit and financial circumstances, your earnings history, your employment status, the loan-to-value ratio of the requested loan, and the type of property that will secure your loan. The loan rate and fees could also vary based on which lender you select.
  2. As a consumer you should shop around and compare loan rates and fees. You should also 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.
  3. You are not required to complete this 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 or other debts in connection with this transaction and then subsequently incur significant new debt. If you continue to accumulate debt after this loan is made and then experience financial difficulties, you could lose your home and any equity that you have in it if you do not meet your mortgage loan obligations.
  4. Property taxes and homeowner's insurance are your responsibility. Some lenders may require you to escrow money for these payments. However, not all lenders provide escrow services for these payments. You should ask your lender about these services.
  5. 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.
     

• Pursuant to rules promulgated by the Wisconsin Department of Financial Institutions (DFI-Bkg 46.03), each of the above disclosures:

  • shall be designed to call attention to the nature and significance of the information provided, and shall use a typeface and type size that are easy to read
  • shall contain an acknowledgment provision indicating that the borrower has read and understood the terms of the disclosure, and the acknowledgment must be initialed or signed and dated by the borrower
  • shall include the following statement: "A list of adjustment services companies (companies that help consumers budget money) licensed to do business in the state of Wisconsin is available at the Wisconsin Department of Financial Institutions' website, www.wdfi.org."

  In addition, the lender must also provide a copy of the completed disclosure to the borrower.

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.

West Virginian Residential Mortgage Lender, Broker and Service Act

Section 31-17-8 (m) (4) of the West Virginia Code ("Section 31-17-8") places restrictions on the number of combined fees, compensation or points of any kind a licensee under the West Virginia Residential Mortgage Lender, Broker and Service Act may require a borrower to pay. There is no "APR Test" in West Virginia; however, yield spread premiums paid by the lender to the broker are not permitted if the loan APR exceeds 18%.

Coverage: Section 31-17-8 applies to both "primary mortgage loans" and "subordinate mortgage loans." A "primary mortgage loan" is defined as a "consumer loan" made to an individual secured in whole or in part by a first lien on a 1- to 4-family owner-occupied residential dwelling. A "subordinate mortgage loan" is defined the same way, except that there are one or more prior liens. A "consumer loan" is essentially any consumer purpose loan made to a natural person payable in installments or a finance charge is made and secured by an interest in land. Given these rather broad definitions, we interpret Section 31-17-8 to apply to all closed- and open-end loans, regardless of lien position, loan type, and loan purpose, including purchases, refinances and construction loans secured by 1- to 4-family owner-occupied properties; only loans secured by non-owner occupied properties and multifamily properties are excluded.

Maximum Points, Fees and Charges: Section 31-17-8 (m) (4) provides as follows:

"(m) In making any primary or subordinate mortgage loan, no licensee may, and no primary or subordinate mortgage lending transaction may, contain terms which: (4) Require the borrower to pay, in addition to any periodic interest, combined fees, compensation, or points of any kind to the lender and broker to arrange, originate, evaluate, maintain or service a loan secured by any encumbrance on residential property that exceed, in the aggregate, six percent of the loan amount financed, including any yield spread premium paid by the lender to the broker: Provided, That reasonable closing costs, as defined in section one hundred two, article one, chapter forty-six-a of this code, payable to unrelated third parties may not be included within this limitation: Provided, however, That no yield spread premium is permitted for any loan for which the annual percentage rate exceeds eighteen percent per year on the unpaid balance of the amount financed: Provided further, That if no yield spread premium is charged, the aggregate of fees, compensation or points can be no greater than five percent of the loan amount financed..."

Let's attempt to decipher:

1. Points, fees, and charges include only those borrower is required to pay
2. Only fees, compensation and points paid to the lender or broker are taken into account
3. Points, fees, and charges do not include prepaid interest
4. Points, fees, and charges include YSPs (but see YSPs below)
5. Reasonable closing costs (defined essentially to mean Reg Z 226.4(c)(7) charges + recording fees) payable to third parties are excluded
6. YSPs:
   1. Not permitted if the loan's APR exceeds 18%
   2. If a YSP is paid, then the permissible threshold is 6% of the loan amount financed
   3. If no YSP is paid, then the permissible threshold is 5% of the loan amount financed
7. "Amount financed" is defined as the total of the following1:
   1. The cash price of the goods, services or interest in land, less the amount of any down payment, whether made in cash or in property traded in;
   2. The amount actually paid or to be paid by the seller pursuant to an agreement with the buyer to discharge a security interest in or a lien on property traded in; and
   3. If not included in the cash price:
      1. Any applicable sales, use, privilege, excise or documentary stamp taxes;
      2. Amounts actually paid or to be paid by the seller for registration, certificate of title or license fees; and
      3. Additional charges permitted by this article; "additional charges" is in turn defined to mean "every type of charge arising out of the making or acceptance of a primary or subordinate mortgage loan, except finance charges, including, but not limited to, official fees and taxes, reasonable closing costs and certain documentary charges and insurance premiums and other charges which definition is to be read in conjunction with and permitted by section one hundred nine, article three, chapter forty-six-a of this code."

A. The Maximum Points, Fees and Charges Test: The calculation of maximum points fees and charges is as follows:

+	Total Lender Compensation - the total amount of all charges (excluding interim interest), whether or not they are prepaid finance charges, if paid by the borrower to the lender ("L").
+	Broker Compensation - the total amount of all charges, whether or not they are prepaid finance charges, if paid by the borrower to a mortgage broker ("B").
+	Yield Spread Premiums to Broker - paid by the lender to the broker; other lender-paid compensation to the broker (e.g., servicing release premium) is not included in Total Broker Compensation).
+/-	Originator Requested Adjustments - the total amount of all customer requested overrides such as, for example, reasonable closing costs (defined essentially to mean Reg Z 226.4(c)(7) charges + recording fees) payable to the lender but that are merely third-party pass-throughs

B. The calculation of "loan amount" is as follows:

	Amount Financed - as calculated under Regulation Z
+/-	Originator Requested Adjustments - the total amount of all customer requested overrides

Threshold:

1. If a YSP is paid by lender to broker, then the permissible threshold is 6% of the amount financed
2. If no YSP is paid lender to broker, then the permissible threshold is 5% of the amount financed

DISCLAIMER: WHILE DOCUMENT SYSTEMS, INC. ("DSI") HAS ATTEMPTED TO ENSURE THE ACCURACY OF THE INFORMATION CONTAINED HEREIN, THE INFORMATION HEREIN IS OFFERED "AS IS"AND DSI EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO SUCH INFORMATION. IN NO EVENT SHALL DSI BE LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES OF ANY KIND WHATSOEVER WITH RESPECT TO SUCH INFORMATION AND/OR YOUR USE THEREOF.

1 The definition of "amount financed" is particularly convoluted but in application appears to be substantially similar to "amount financed" under Regulation Z (12 CFR Section 226.18(b)). For the sake of simplicity, we calculate "amount financed" exactly the same as under Regulation Z.

Utah High Cost Home Loan Act

The Utah High Cost Home Loan Act (the "Act") became effective on May 3, 2004. The Act applies to "high-cost mortgages" (defined below) made or originated through a person or business required to be licensed under the Utah Residential Mortgage Practices Act.

Coverage: The Act applies to any borrower credit transaction secured by the borrower's principal dwelling. The phrase "borrower credit transaction" is undefined. Given this rather broad definition, we interpret the Act to apply to all closed- and open-end loans, regardless of lien position, loan type, loan purpose, and property types, including purchases, refinances and construction loans; only loans secured by non-owner occupied properties appear to be excluded.

Definition of High Cost Mortgage: The Act defines a "high-cost mortgage" substantially similar to Section 32:

1. APR Test: 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. Points and Fees Test: Total points and fees payable by the borrower at or before the closing exceed the greater of eight percent (8%) of the total loan amount or a specified dollar amount that is subject to change annually to match the dollar amount under Section 32. Note: while the points and fees test tracks Section 32 to a large extent, the terms "points and fees" and "total loan amount" are not themselves defined in the Act. For purposes of our analysis, we assume that these terms have the same meaning as under Section 32.

Prohibitions: The Act contains a number of substantive limitations with respect to high-cost home loans:

• Prepayment penalties: A high-cost home loan can provide for a prepayment penalty, but only if the prepayment penalty period does not exceed 36 months after the loan was originally made, and the amount of the penalty does not exceed the total amount of interest paid at 80% of the immediately preceding six (6) scheduled payments. Furthermore, a prepayment penalty may not be assessed if the high-cost mortgage is paid with the proceeds of a new loan by the same lender or an affiliate of that lender, or the penalty is prohibited under other applicable law. Finally, if a prepayment does not pay the full amount owed on the high-cost mortgage when the prepayment is made, the penalty shall be reduced by a percentage equal to the percentage of the balance owed before the prepayment that remains unpaid. A "prepayment" is defined as a payment to a lender that: (a) is more than the amount of the next scheduled payment due; (b) pays more than half of the principal balance of the high-cost mortgage; and (c) is paid more than 24 months before the last scheduled payment according to the terms of the high-cost mortgage when it is made.
• No negative amortization
• Prohibition against financing total points, fees or other charges in excess of 8% without the disclosure set forth below
• Arbitration clauses must comply with the standards set forth in the Utah Arbitration Act or the Federal Arbitration Act
• The offer or sale of single premium credit insurance products is prohibited
• No encouraging default (this applies to all loans, high-cost or not)
• Borrower must be provided with a complete set of documents
• All mortgage forms must be filled in before they are signed
• A lender shall provide any brochure or other document information prepared by a federal or state authority in a form intended to inform consumers about home loans or consumer credit on financing or educational resources on financing. This may include public posting of a notice indicating that educational resources are available; a list of educational opportunities or programs in the surrounding area, including the program name and phone number; a printed brochure or booklet on responsible lending and borrowing available to the borrower at no charge; or information from the Department of Financial Institutions on its responsible consumer financial educational program.

Disclosures. The following disclosures in conspicuous type must be made to a borrower not less than three business days prior to consummation of the high cost loan

YOU ARE NOT REQUIRED TO COMPLETE THIS AGREEMENT MERELY BECAUSE YOU HAVE RECEIVED THESE DISCLOSURES OR HAVE SIGNED THE LOAN APPLICATION.

IF YOU OBTAIN THIS LOAN, THE LENDER WILL HAVE A MORTGAGE ON YOUR HOME. YOU COULD LOSE YOUR HOME OR PROPERTY, AND ANY MONEY YOU HAVE PUT INTO IT, IF YOU DO NOT MEET YOUR OBLIGATIONS UNDER THIS LOAN.

THE TIMING AND AMOUNT OF PAYMENTS ON DEBTS YOU ALREADY ARE CARRYING CONTRIBUTE TO THE CREDIT RATING THAT IS USED TO DETERMINE WHETHER YOU MAY GET A NEW LOAN AND HOW MUCH YOU WILL PAY FOR THAT NEW LOAN. YOU SHOULD NOT ACCEPT ANY ADVICE TO IGNORE OR DELAY MAKING ANY PAYMENT ON LOANS YOU ALREADY HAVE, EVEN IF THOSE LOANS WILL BE PAID OFF WITH THE NEW LOAN.

YOU MAY GET INTO SERIOUS FINANCIAL DIFFICULTIES IF YOU USE THIS LOAN TO PAY OFF OLD DEBTS AND THEN RUN UP OTHER NEW DEBTS.

Texas High Cost Home Loan Law

The Texas high-cost home loan law (the "HCHLL") can be found in Texas Finance Code Sections 343.201 through 343.206, inclusive.

Coverage: The loans covered by and excluded under the HCHLL are exactly the same as under Section 32, with the following exceptions:

• unlike Section 32, purchase money (Loan Purpose = P or PMJ) and construction and construction to perm loans (Loan Type = CON or CONTP) are also covered by the HCHLL as long as the property is owner-occupied and the loan amount equals or exceeds $20,000; and
• the principal loan amount must be equal to or less than one-half of the maximum conventional loan amount for first mortgages as established and adjusted by Fannie Mae. Fannie Mae has differing maximum loan amounts depending on the number of dwelling units (either 1, 2, 3 or 4) located on the property.
  • For 2006, the Fannie Mae maximum conventional loan amount for first mortgages for a single dwelling unit is $417,000. Accordingly, if the Property Type in DocMagic = SFR (Single Family), C (Condominium), P (Planned Unit Development), or MH (Manufactured Housing), the principal loan amount must be equal to or less than one-half of $417,000, or $208,500.
  • For 2006, the Fannie Mae maximum conventional loan amount for a 4-dwelling unit is $691,600 (because DSI does not currently distinguish between 2, 3 and 4 dwelling units, we will default to the 4-dwelling unit because it is the largest loan amount and therefore will capture the greatest number of loans). Accordingly, if the Property Type in DocMagic = 1 (1-4 Family (1-4 units)), we will assume that the property type is for a 4-unit dwelling and the principal loan amount must be equal to or less than one-half of $801,950, or $400,975.

Note that regardless of the property type, the property must be the principal dwelling of the borrower, and thus "owner-occupied" must equal "Yes" for the HCHLL test to run. Note further that the Fannie Mae maximum convention loan amounts for first mortgages change annually usually in late November.

Thresholds: The thresholds are exactly the same as under Section 32:

• APR Test: The loan's APR at consummation will exceed by more than 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); or
• Points and Fees Test: The total points and fees payable by the consumer at or before loan closing will exceed the greater of eight percent (8%) of the total loan amount, or a specified dollar amount that is subject to change annually. The points and fees and total loan amount are calculated exactly the same as under Section 32.

Prohibitions and Limitations:

• No balloon loans with terms of less than 5 years (excluding bridge loans in connection with the purchase or construction of the borrower's principal dwelling)
• No negative amortization except as a consequence of a temporary forbearance, bridge loan, or restructure sought by the borrower
• No prepayment penalty permitted
• No engaging in pattern or practice of extending credit based on the consumer's collateral without regard to the obligor's repayment ability, including the obligor's current and expected income, current obligations, employment status, and other financial resources, other than the obligor's equity in the dwelling securing repayment of the loan ("obligor" includes borrowers, cosigners and guarantors)
• Lender may not charge an amount for a service or product if the borrower does not receive the service or product.

Pennsylvania Consumer Equity Protection Act

The Pennsylvania Consumer Equity Protection Act (the "Act") became effective for all loans made on or after June 25, 2002.

Definition of Covered Loan: The Act defines a "covered loan" by reference to Section 32 with one change: the Act applies only to a loan for which the original principal balance is less than $100,000. The APR Test and Points and Fees Test are as follows:

1. APR Test: 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. Points and Fees Test: Total Points and Fees payable by the borrower at or before the closing exceed the greater of eight percent (8%) of the total loan amount or a specified dollar amount that is subject to change annually.

Prohibitions: The Act contains a number of substantive limitations with respect to high-cost home loans:

• Prepayment penalties. A prepayment fee may be charged only during the first 60 months after the date of execution. A lender may not include a prepayment fee in a covered loan unless it also makes available a loan product without a prepayment fee. A prepayment fee may not be charged in connection with the refinancing of a covered loan with a new covered loan if the refinancing lender owns the old loan.
• No balloon payments for a high-cost home loan with a term of less than 10 years.
• No negative amortization (unless borrower's gross income exceeds 150% of the median family income).
• No demand feature/call provision.
• No default rates of interest.
• No more than 2 advance payments.
• No lending without due regard to repayment ability.
• Restrictions on payments under home improvement contracts.
• No refinancing of certain low-rate loans.
• No point may be charged (except on new principal) (1) the proceeds are used to refinance an old covered loan, (2) own by the same lender, and (3) that is less than one year old.
• Restrictions on the sale of single premium credit life, accident and health or unemployment insurance.

Disclosures.

1. The lender or must make the following or substantially similar notice to a borrower must be furnished not less than three business days prior to consummation of the high cost loan

   NOTICE TO BORROWER

   If you obtain this loan, the lender will have a mortgage on your home. You could lose your home and any money you put into it if you do not meet your obligations under the loan.

   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 lender or broker you select. As an obligor, you should shop around and compare loan rates and fees.

   You should also consider consulting 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 Pennsylvania Housing Finance Agency.

   You are not required to complete this loan agreement merely because you have received these disclosures or have signed a loan application.

   Remember, 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.

   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.

2. Notice regarding the sale credit life, accident and health or unemployment insurance. A lender must provide a separate disclosure with a copy acknowledged by the insured no later than the time of closing in a form substantially similar to the following:

   INSURANCE NOTICE TO BORROWER(S)

   You have elected to purchase credit life, accident and health and/or unemployment insurance in conjunction with this mortgage loan. The cost of this insurance is being prepaid and financed at the interest rate provided for in the loan.

   This insurance is NOT required as a condition of closing this loan and has been included with the loan at your request.

   At any time you have the right to cancel any or all such policies purchased in conjunction with this loan. You may cancel your policy or policies by signing and returning a copy of this notice to your lender or you may contact your lender directly.

   If you cancel your insurance within 30 days of the date of your loan, then you will receive either a full refund or a credit against your loan account. If you cancel your insurance at any other time, you will receive either a refund or credit against your loan account of any unearned premium.

   YOU MUST CANCEL WITHIN 30 DAYS OF THE DATE OF THE LOAN TO RECEIVE A FULL REFUND.

   CREDIT INSURANCE CANCELLATION

   I (we) request that the lender cancel the insurance that I (we) purchased in conjunction with my (our) mortgage loan dated .

   Date

   Borrower

   ACKNOWLEDGMENT OF RECEIPT

   I (we) acknowledge receipt of the above notice.

   Date

   Borrower

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:

1. 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
2. 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.

North Carolina High-Cost Home Loan Law

Updated: December 2007 (Revisions are highlighted in yellow)

Coverage: The North Carolina High-Cost Home Loan law (the "NCHCL") applies to the following types of loans:

• closed-end and open-end loans (includes purchase, construction and refinance loans, and regardless of lien position)
• the principal amount of the loan (or the maximum credit limit in the case of an open-end loan) does not exceed the lesser of $300,000, or the Fannie Mae conforming loan limit for a single-family dwelling
• secured by a one- to four-family dwelling (which may be a manufactured home)
• owner-occupied as the borrower's principal dwelling
• meets or exceeds one or more of the "thresholds" as defined in the NCHCL

Reverse mortgages and loans primarily for business, agricultural or commercial purposes are expressly excluded from the definition of a high-cost home loan. To view a copy of the NCHCL, click here.

The NCHCL "thresholds": The NCHCL threshold are threefold: an APR Test, a Points and Fees Test, and a Prepayment Test:

1. The APR Test: The NCHCL 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. Note that unlike the Section 32 APR Test, which is limited to refinance transaction, the NCHCL APR Test applies to purchase and construction loans as well.
2. The Points and Fees Test: Total Points and Fees payable by the borrower at or before the closing exceed (i) five percent (5%) if total loan amount is $20,000 or more, or (ii) the lesser of eight percent (8%) or $1,000 if total loan amount is less than $20,000.
3. The Prepayment Test: The prepayment penalty exceeds 30 months or exceeds, in the aggregate, 2% of the amount prepaid.

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 - For loans entered into prior to January 1, 2008, the total amount of all non-prepaid finance charges paid directly by a borrower to a mortgage broker. For loans entered into on or after January 1, 2008, this category includes all compensation paid from any source to a mortgage broker, including compensation paid to the mortgage broker in a table-funded transaction. Accordingly, lender-paid compensation paid to a mortgage broker (e.g. YSPs) are included.
+	Maximum Prepayment Fees Permitted Under the Loan Documents Excluding Amount Excludable - if the prepayment penalty term exceeds 30 months or the prepayment amount exceeds 2% of the amount prepaid, the loan is by definition a high cost home loan. In addition, prepayment fees and penalties are included in the points and fees test. However, the NCHCL expressly excludes from points and fees, prepayment fees not exceeding 1% of the amount prepaid so long as the prepayment term is not more than 30 months after the loan closing. For purposes of our high-cost home loan analysis, we assume that, if the loan provides for a prepayment penalty, the maximum prepayment penalty is equal to 2% of the amount prepaid. So long as the prepayment term is 30 months or less, the NCHCL permits the exclusion of up to 1% of that prepayment fee from points and fees, and therefore, only 1% of the loan amount (i.e., the amount exceeding the excludable amount) will be included. However, if the prepayment period exceeds 30 months, none of the prepayment fee is excludable, and the entire two percent (2%) of the loan amount should be included.
-	Other Excludable Charges - the following charges are expressly excluded to the extent otherwise 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; the following charges and fees provided they are not paid to the creditor, a creditor affiliate, a mortgage broker or a mortgage broker affiliate: tax services attorneys' fees (if the borrower has the right to select the attorney from an approved list or otherwise) title insurance, fire insurance and flood insurance premiums
-	Bona Fide Discount Points1 - up to two (2) bona fide discount points may be deducted
+/-	Creditor Requested Adjustments - the total amount of all customer requested overrides

Note Regarding Points and Fees in Connection With Open- End Loans: For open-end credit plans, points and fees also include (i) the minimum additional fees the borrower would be required to pay to draw down an amount equal to the total loan amount, and (ii) the maximum prepayment fees and penalties which may be charged or collected under the terms of the loan documents. We assume: (a) there are no additional charges the borrower is required to pay to draw down an amount equal to the maximum credit limit; and (2) the borrower has no right or option under the loan documents to repay all or any portion of the outstanding principal balance at a fixed interest rate over a specified period of time.

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 if a loan is found to be a high-cost home loan, including the following:

• 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 lending without home-ownership counseling certification
• No lending without due regard to 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;
  • Any points and fees; or
  • Any other charges payable to third parties.
• No benefit from refinancing existing high-cost home loan with new high-cost home loan
• Restrictions on home-improvement contracts
• No shifting of liability to the closing agent or closing attorney for any violation of this section.

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 from an approved list or otherwise. Therefore, it is desirable that the borrower receive a notice advising him or her of this right and indicating their exercise or waiver of this right.

Bona Fide Discount Points: The NCHCL requires that a borrower "knowingly" contract for the discount points in order to reduce the rate. Therefore, it is desirable that borrower acknowledge that he or she is agreeing, agrees to pay a specified number of discount points for the express purpose of reducing the interest rate on the loan.

DISCLAIMER: WHILE DOCUMENT SYSTEMS, INC. ("DSI") HAS ATTEMPTED TO ENSURE THE ACCURACY OF THE INFORMATION CONTAINED HEREIN, THE INFORMATION HEREIN IS OFFERED "AS IS"AND DSI EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO SUCH INFORMATION. IN NO EVENT SHALL DSI BE LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES OF ANY KIND WHATSOEVER WITH RESPECT TO SUCH INFORMATION AND/OR YOUR USE THEREOF.

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:

1. 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
2. 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.

1. Fixed Rate Loans: The determination of the APR is per TILA
2. 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:

1. 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.
2. 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.

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:

1. 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
2. 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