YSP's Not Included In California's Covered Loan Law Calculations

When the California predatory lending law (CA Financial Code Section 4970 et seq.) (the "Covered Loan Law") became effective on July 1, 2002, we noted that there was some confusion regarding the treatment of yield spread premiums and other lender-paid back end compensation for purposes of the Covered Loan Law's total points and fees test. Based on our interpretation of the applicable provisions of the Covered Loan Law, we concluded that such compensation should not be included as points and fees. In a recent California appellate court case, the court reached the same conclusion that we did: YSPs should not be included as points and fees under the Covered Loan Law. Wolski v. Fremont Investment & Loan, 125 Cal. App. 4th 12, December 2, 2004.

The plaintiff, Daniel Wolski, working through a a mortgage broker, sought and obtained an ARM loan from Fremont Investment & Loan. Mr. Wolski's mortgage broker received a YSP payment of $3,700 from Fremont in connection with the loan. Fremont did not include the amount of the YSP in its points and fees calculation. Therefore, according to Fremont's points and fees calculation, total points and fees were less than 6% of the total loan amount, and hence the loan was not a covered loan.

After the loan closed, Mr. Wolski discovered that he could have obtained a loan with a lower and fixed rate. Mr. Wolski filed suit against Fremont claiming, among other things, a violation of the Covered Loan Law because Fremont had failed to make certain required disclosures and had included a prepayment penalty in the terms of his loan. Mr. Wolski argued that Fremont's YSP payment to the broker was a point and fee, and when so construed, total points and fees exceeded 6% of the total loan amount rendering his loan a covered loan. The trial court concluded that the YSP payment was not a point and fee and that the loan was not a covered loan. Wolski appealed. The appellate court upheld the trial court's decision.

The appellate court began its discussion by quoting the relevant definition from the Covered Loan Law: a covered loan is one where "total points and fees payable by the consumer at or before closing for a mortgage or deed of trust will exceed 6 percent of the total loan amount." (emphasis added.) The court then explained that a YSP is a bonus paid by a lender to a broker for delivering a loan with an interest higher than minimum otherwise approved by the lender for the loan. In return for the lender's payment of the YSP to the broker, the borrower pays a higher interest rate for the life of the loan.

Fremont contended that because a YSP is paid by the lender and not the borrower, a YSP falls outside the definition of points and fees because it is not "payable by the consumer." Wolski contended that he did in fact pay for the YSP in the form of a higher interest rate. Fremont countered that even if the statute could be construed as Wolski suggested, the fact is that the YSP is not "payable at or before closing." The court agreed with Fremont.

The court noted that the meaning of the phrase "at or before closing" was unambiguous and "does not include payments made after closing and over the life of the loan, such as interest." The court then dismissed Wolski's argument that "even though the YSP is not 'paid' at or before closing, it is 'payable' at that time," concluding that such a reading of the word "payable" was "strained and anomalous," and that "[t]o construe the language to include one payment made over the life of the loan, when all others are paid at closing, would lead to an absurd consequence, in derogation of rules of statutory interpretation." (citations omitted.) Finally, the court rejected Wolski's claim that the legislative history supported his position, noting both that the legislative history was devoid of any discussion of the treatment of YSPs, and that in any event, resorting to legislative history was appropriate only in cases where the statutory language was ambiguous, uncertain or unclear, a precondition that did not exist in this case. After its analysis, the court concluded: "Thus, we may safely infer the Legislature was aware of the mechanics of YSPs and understood that they are paid by the lender with a concomitant higher interest owed by the borrower. Had it intended that a YSP be included as "points and fees payable by the consumer at or before closing" (§4970, subd. (b)(1)(B)), it would have included appropriate language."

Despite the favorable outcome, the court's rationale is a bit curious. The court largely ignores the strongest argument for excluding YSPs from points and fees, namely the clear and unambiguous language of the Covered Loan Law that points and fees must be payable by the borrower. The fact that YSPs are paid by the lender would seem to settle the matter. To buttress its conclusion, the court could have noted the similarity of the Covered Loan Law's definition of points and fees to the definition under Regulation Z (indeed, the Covered Loan Law makes numerous references to Regulation Z) and pointed out that the Federal Reserve Board's official staff commentary to Regulation Z expressly excludes YSPs from points and fees. Comment 1 to Paragraph 226.32(b)(1)(ii) entitled Mortgage broker fees provides: "In determining "points and fees" for purposes of this section, compensation paid by a consumer to a mortgage broker (directly or through the creditor for delivery to the broker) is included in the calculation whether or not the amount is disclosed as a finance charge. Mortgage broker fees that are not paid by the consumer are not included. Mortgage broker fees already included in the calculation as finance charges under §226.32(b)(1)(i) need not be counted again under §226.32(b)(1)(ii)." (emphasis added).

The court could have noted that the Covered Loan Law in fact expressly excludes interest as a point and fee. Specifically, the definition of points and fees includes in part "all items required to be disclosed as finance charges under Sections 226.4(a) and 226.4(b) of Title 12 of the Code of Federal Regulations, including the Official Staff Commentary, as amended from time to time, except interest." (emphasis added). A clearer expression of a legislative desire and intent could hardly be asked for. The court could have concluded that the express language of the Covered Loan Law's points and fees test excludes interest, whether paid at closing (in the form of interim or odd days' interest) or over the life of the loan.

A final word of caution: the possibility remains that this decision could be appealed to a higher court. Should that happen, we will be sure to notify our readers.

The California Department of Corporations has concluded that YSPs are not included in the CA points and fees test.  Click here for more information.

Minnesota

Minnesota Residential Mortgage Originator and Servicer Licensing Act

Effective January 1, 2003, Section 58.137 was added to the Minnesota Residential Mortgage Originator and Servicer Licensing Act (the "Act"). To view a copy of the Act, click here.  

Coverage: The Act applies to "residential mortgage loans," defined to mean generally any loan secured primarily by a mortgage on one- to four-family residential real property regardless of occupancy status.  Thus, the Act applies to all closed- and open-end loans, regardless of lien position, loan type, loan purpose, and property types; however, FHA, VA, and multifamily loans are excluded.

Prohibitions: The Act provides as follows:

"A residential mortgage originator making or modifying a residential mortgage loan to a borrower located in this state must not include in the principal amount of any residential mortgage loan all or any portion of any lender fee in an aggregate amount exceeding five percent of the loan amount."

The Act, therefore, prohibits the financing of lender fees exceeding 5% of the loan amount.

Definitions:

1. Residential Mortgage Originator: defined generally as any mortgage lender or mortgage broker, but excludes, among others, banks, savings banks, savings associations, credit unions, as well as their subsidiaries, provided the subsidiary is subject to supervision by either a federal regulatory agency or the Minnesota Department of Commerce.
2. Lender Fee: defined as "interest, points, finance charges, fees, and other charges payable by the borrower to any residential mortgage originator or to any assignee of any residential mortgage originator. Lender fee does not include government recording fees, mortgage registration taxes, pass-throughs, or other amounts that are paid by any person to any person or entity that is not a residential mortgage originator. Lender fee also does not include tax or hazard insurance escrow amounts.
3. Loan amount: defined as: (1) for a line of credit, the maximum principal amount of the line of credit; and (2) for any other residential mortgage loan, the principal amount of the residential mortgage loan excluding all interest, points, finance charges, fees, and other charges.

Note: The Act does not provide for an APR-related high cost test in Minnesota.

The "Lender Fee"1 Test:

1. The calculation of "lender fees financed" is as follows:

+	Total Lender Compensation - the total amount of all charges (including interim interest), whether or not they are prepaid finance charges, if paid by the borrower to the lender ("L"), excluding tax and hazard insurance impound amounts
+	Total Broker Compensation - the total amount of all charges, whether or not they are prepaid finance charges, if paid by either the borrower or the lender to a mortgage broker ("B"), excluding tax and hazard insurance impound amounts
+	Total Assignee Compensation - the total amount of all charges, whether or not they are prepaid finance charges, if paid by the borrower to an investor ("I"), excluding tax and hazard insurance impound amounts
-	Lender Fees Not Financed - deduct all P.O.C. amounts to the extent included in any of the above categories
+/-	Originator Requested Adjustments - the total amount of all customer requested overrides

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

	Original Principal Balance/Credit Line Available
-	Total Interest/Points/Charges/Fees - includes the total amount of ALL costs in connection with the transaction (including interim interest) if paid by the borrower, regardless of to whom they are paid, whether or not they are finance charges, and whether or not they are financed or P.O.C; this includes total Lender, Broker, and Assignee compensation from above, plus all other charges and fees paid to others (e.g., service providers, affiliates, etc.)
+/-	Originator Requested Adjustments - the total amount of all customer requested overrides

1  For purposes of our analysis and determination, we assume that: (i) in any given transaction, only the lender and the broker are licensed residential mortgage originators, and that all other parties to the transaction, including without limitation, affiliates and third-party service providers, are not licensed residential mortgage originators; and (ii) any fee indicated as paid to investor ("I") is paid to the assignee of a residential mortgage originator.

Rhode Island

Rhode Island Home Loan Protection Act

The Rhode Island Home Loan Protection Act (the "Act") (RI General Laws 35-25.2) becomes effective on December 31, 2006. To view a copy of the Act, click here. Regulated financial institutions and their wholly-owned subsidiaries are by and large exempt from the Act's coverage. The Act applies to any loan that meets the definition of a "home loan." A "home loan" is defined generally as any closed- or open-end loan (including purchase, construction and refinance loans, regardless of lien position, but excluding reverse mortgage loans), repayment of which is secured by a one to four family structure, including a manufactured home, which is or will be occupied as the borrower's principal dwelling. A "high-cost home loan" is defined as a home loan that exceeds either of the following thresholds:

• Rate Threshold: The loan's interest rate is either 8% (for first liens) or 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 creditor receives the application.
• Total Points and Fees Threshold: The total points and fees payable in connection with the home loan, less any excluded points and fees, exceed either five percent (5%) of the total loan amount (if the total loan amount is $50,000 or more), or eight percent (8%) of the total loan amount (if the total loan amount is less than $50,000). "Total loan amount " is defined as the face amount of the note (or total line of credit for open-end loans).

The Act imposes a number of substantive limitations and prohibitions not just on high-cost home loans, but on home loans as well. In connection with a "home loan," a lender may not engage in the following activities:

• No financing of optional credit insurance/related products
• No "flipping" - defined as making a home loan that refinances an existing home loan consummated within the prior 60 months when the new home loan does not have a "reasonable, tangible net benefit" to the borrower.
• No recommending or encouraging default on an existing loan or other debt prior to closing a home loan
• No provision permitting the creditor, in its sole discretion, to accelerate the loan permitted (excludes good faith acceleration due to borrower's breach of material terms of the loan)
• No provision requiring a borrower to assert a claim or defense in less convenient, more costly, or more dilatory forum than otherwise properly available in Rhode Island

High-cost home loans are subject to the following additional limitations and restrictions:

• No financing of points and fees in excess of five percent (5%) of the total loan amount or $800, whichever is greater
• No prepayment penalties
• No loan shall contain a scheduled payment more than twice as large as the average of earlier scheduled payments
• No negative amortization
• No increased interest rate after default permitted
• No more than two (2) periodic payments may be consolidated and collected in advance
• Borrower must receive credit counseling from HUD-approved nonprofit organization
• Creditor must have a reasonable belief of the borrower's repayment ability
• Payments to a contractor under a home improvement contract are permitted only after the creditor has received a completion certificate, and payments must be made either to the borrower, or to the borrower and contractor jointly or (at the borrower's option) through a third-party escrow
• No fees or charges may be assessed for modifying, renewing, extending or amending or deferring payment
• Late fees are limited to 3% of the amount past due after 15 days (reduced to 10 days for biweekly payment loans)
• Payments must be posted on the same business day as received
• The note and security instrument must bear the following notice on the first page in a conspicuous manner: "Notice: This is a high-cost home loan subject to special rules under state law. Purchasers or assignees of this high-cost home loan may be liable for all claims and defenses by the borrower with respect to the home loan."

The Act contains some ambiguous and less than crystal provisions. For example, the Act's definition of "rate threshold" refers not to the loan's APR but rather to the loan's "interest rate." It is possible, perhaps even probable, that this is a drafting error. The Act includes a definition of "annual percentage rate" (by specific reference to Regulation Z (12 CFR 226)), but there is no separate definition of interest rate. Furthermore, there is no other provision in the Act where the use of the term "annual percentage rate" would appear to be necessary other than in the definition of "rate threshold." The Act empowers the Director of the Department of Regulation to promulgate such rules and regulations as are necessary to carry out the provisions of the Act, but no such rules or regulations have yet to be adopted. If indeed the loan's interest rate is to be used for purposes of determining the rate threshold, one hopes that the Director will provide some guidance on what that means in the context of, for example, a variable rate loan. We will attempt to get clarification on this and other provisions well in advance of the December 31, 2006 effective date. Until then, please contact the Compliance Department at (800) 649-1362 if you have any questions or comments.

DocMagic Adds North Carolina Rate Spread Home Loan Audit

UPDATED: August 22, 2011 (Revisions are highlighted in yellow.)

North Carolina has created a new category of predatory loan, the so-called "rate spread home loan." The law is contained in North Carolina G.S. Section 24-1.1F (a copy of the bill enacting this new section is available here). Effective October 1, 2009, North Carolina G.S. Section 24-1.1F has been amended by House Bill 1222 (Session Law 2009-457. Below is a description of the new law along with a description of the audit DocMagic is implementing to identify such rate spread home loans.

Section 32 High Cost Calculations

 UPDATED: August 22, 2011 (Revisions are highlighted in yellow.)

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.

In order to determine which yield on Treasury securities to use, an "Application Date" must be entered in the worksheet.  If the Application Date is missing, the DocMagic system will default to the document date and a warning will display substantially as follows:

WARNING: APPLICATION DATE IS MISSING; DOCMAGIC HAS DEFAULTED TO THE DOCUMENT DATE OF ___ TO RUN THE SECTION 32 APR TEST.

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 (HOEPA4.MSC). 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

South Carolina

UPDATED: August 22, 2011 (Revisions are highlighted in yellow.)

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.

In order to determine which yield on Treasury securities to use, an "Application Date" must be entered in the worksheet.  If the Application Date is missing, the DocMagic system will default to the document date and a warning will display substantially as follows:

WARNING: APPLICATION DATE IS MISSING; DOCMAGIC HAS DEFAULTED TO THE DOCUMENT DATE OF ___ TO RUN THE SC HIGH COST AND CONSUMER HOME LOANS ACT APR TEST.

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.

1 "Conventional mortgage rate" is defined as the required net yield for a ninety-day standard mandatory delivery commitment for a reasonably comparable loan from either Fannie Mae or Freddie Mac, whichever is greater.
2 The Act defines "conventional conforming discount points" as loan discount points knowingly paid by the borrower for the purpose of reducing, and which in fact result in a bona fide reduction of, the interest rate applicable to the loan, so long as the home loan has an APR that does not exceed the conventional mortgage rate (see footnote 1) by more than 1%. Up to two (2) conventional conforming discount points may be excluded if the interest rate from which the loan's interest rate is discounted does not exceed the conventional mortgage rate by more than 1%; up to one (1) conventional conforming discount point may be excluded if the interest rate from which the loan's interest rate is discounted does not exceed the conventional mortgage rate by more than 2%. For purposes of our high-cost home loan analysis and determination, we assume that all discount points paid by the borrower to the lender meet the definitional requirements of "conventional conforming discount points," and that the interest rate from which the loan's interest rate is discounted does not exceed the conventional mortgage rate by more than 1%, thereby permitting the exclusion of up to two (2) discount points from the points and fees calculation.

Texas

UPDATED: August 22, 2011 (Revisions are highlighted in yellow.)

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 2010, 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 2010, the Fannie Mae maximum conventional loan amount for a 4-dwelling unit is $801,950 (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.

In order to determine which yield on Treasury securities to use, an "Application Date" must be entered in the worksheet.  If the Application Date is missing, the DocMagic system will default to the document date and a warning will display substantially as follows:

WARNING: APPLICATION DATE IS MISSING; DOCMAGIC HAS DEFAULTED TO THE DOCUMENT DATE OF ___ TO RUN THE TX HIGH COST HOME LOAN LAW APR TEST.

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.

Oklahoma

UPDATED: August 22, 2011 (Revisions are highlighted in yellow.)

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.

In order to determine which yield on Treasury securities to use, an "Application Date" must be entered in the worksheet.  If the Application Date is missing, the DocMagic system will default to the document date and a warning will display substantially as follows:

WARNING: APPLICATION DATE IS MISSING; DOCMAGIC HAS DEFAULTED TO THE DOCUMENT DATE OF ___ TO RUN THE OK HOME OWNERSHIP AND EQUITY PROTECTION ACT APR TEST.

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.

New York

UPDATED: August 22, 2011 (Revisions are highlighted in yellow.)

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 principal 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, condominium, cooperative 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.

In order to determine which yield on Treasury securities to use, an "Application Date" must be entered in the worksheet.  If the Application Date is missing, the DocMagic system will default to the document date and a warning will display substantially as follows:

WARNING: APPLICATION DATE IS MISSING; DOCMAGIC HAS DEFAULTED TO THE DOCUMENT DATE OF ___ TO RUN THE NY HIGH COST HOME LOAN ACT APR TEST.

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
-	Prepaid Interest - to be deducted from prepaid finance charge
+	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
-	Other Excludable Charges - Mortgage insurance premiums (eg. HUD upfront MIP charges, VA funding fee, Rural housing guarantee fee and upfront premium private mortgage insurance)
+	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
-	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-I.

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 Jersey

UPDATED: December 30, 2011 (Revisions are based on this article here.)

New Jersey Home Ownership Security Act of 2002

Coverage: The New Jersey Home Ownership Security Act of 2002 (N.J.S.A. 46:10B-22 et seq.), as amended by SB 279 on July 6, 2004 (the "Act") applies to "home loans," defined generally as all closed- and open-end loans (including purchase, construction and refinance loans, and regardless of lien position) secured by 1-6 family, owner-occupied properties (including a manufactured home) where the principal amount of the loan does not exceed a designated amount that is adjusted on an annual basis. (Note: For 2012, only loans that do not exceed $438,298.70 are subject to the Act.; For 2011, the applicable threshold was $430,955.10. To view a historical chart with applicable thresholds back to 2003, click here.) Loans excluded from coverage are reverse mortgages and loans not made primarily for personal, family or household purposes (i.e., business, agricultural or commercial purpose loans). The New Jersey Department of Banking and Insurance (NJDOBI) also has a website devoted to predatory lending issues; the website is located here.

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. Rate Threshold (APR Test): The same as under Section 32, that is, 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

2. Total Points and Fees Threshold (Points and Fees Test): Total Points and Fees payable by the borrower at or before closing exceed:

   1. four and one/half percent (4.5%) of the total loan amount if the total loan amount is $40,000 or more;
   2. six percent (6%) of the total loan amount if the total loan amount is $20,000 or more but less than $40,000; or
   3. the lesser of (6%) of the total loan amount or $1000 if the total loan amount is less than $20,000.

In order to determine which yield on Treasury securities to use, an "Application Date" must be entered in the worksheet.  If the Application Date is missing, the DocMagic system will default to the document date and a warning will display substantially as follows:

WARNING: APPLICATION DATE IS MISSING; DOCMAGIC HAS DEFAULTED TO THE DOCUMENT DATE OF ___ TO RUN THE NJ HOME OWNERSHIP ACT APR TEST.

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 excluding mortgage insurance premiums (including HUD upfront MIP charges and VA funding fees).
-	Prepaid Interest - odd days interest is deducted from prepaid finance charge.
+	Other Includable Charges - includes the following charges if not included as a part of the Prepaid Finance Charge: (1) document preparation charges, regardless of to whom paid; and (2) the total amount of the following fees if paid to the creditor, the broker or an affiliate (note: any of these fees paid to broker are reflected in the Other Mortgage Broker Compensation area; the list below includes more than just Regulation Z Section 226.4(c)(7) charges): Tax service Flood certification/determination Pest inspection/other prior to closing inspections Appraisal fees Credit report fees Survey fees Attorneys' fees Notary fees Escrow charges Fire (hazard) and/or flood insurance premiums
+	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 - while premiums that are calculated on a monthly basis are excluded, our default is to include all such amounts regardless if paid monthly or otherwise
+	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 Jersey. 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; however, this provision does not apply to a loan which refinances a previous loan made by the same broker and funded by another creditor.
-	Other Excludable Charges - if included as a part of the Prepaid Finance Charge, the total amount of the following charges may be excluded so long as they are not paid to the creditor, broker or affiliate (the list below includes more than just 226.4(c)(7) charges): Title insurance premiums and fees Taxes/recording fees/etc. paid to public officials The following reasonable fees: Tax service Flood certification/determination Pest inspection/other prior to closing inspections Appraisal fees Credit report fees Survey fees Attorneys' fees Notary fees Escrow charges Fire (hazard) and/or flood insurance premiums
-	Conventional Prepayment Penalty/Bona Fide Discount Points - the Act permits the deduction of either a "conventional prepayment penalty," or up to two (2) "bona fide discount points"2; the selection appears to be left up to the creditor to make. Accordingly, 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, I would propose the following solution: if the loan has a prepayment penalty (regardless whether there are or are not discount points charged), we multiply the principal amount of the loan by 2% and exclude 2% (see prepayment penalty discussion in footnote 1); and if the loan has no prepayment penalty but has discount points, we deduct the actual amount of bona fide discount points up to a maximum of two (2) discount points (see bona fide discount point discussion in footnote 2).
+/-	Creditor Requested Adjustments - the total amount of all customer requested overrides

Total Loan Amount: is defined as follows:

	Original Principal Balance/Credit Line Available
-	Total Points and Fees Financed
+/-	Creditor Requested Adjustments

However, for HELOCs, Total Loan Amount is defined simply as the amount of the credit line, without any deductions.

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:

• No financing of optional credit insurance/related products
• No recommending/encouraging default
• Late fee limited to 5%/15 days; may only be assessed once with respect to any single late payment; may not assess unless borrower notified within 45 days after due date that late fee has been imposed; may not assess if borrower disputes within such 45 day period
• No provision permitting creditor, in its sole discretion, to accelerate the loan permitted (excludes good faith acceleration due to borrower's breach of material terms of the loan)
• No charging for payoff demands/releases
• No loan shall contain a scheduled payment that is more than twice as large as the average of earlier scheduled payments
• No negative amortization loans permitted
• No increased interest rate after default permitted
• No more than two periodic payments may be consolidated and paid in advance from the loan proceeds
• Loan agreement may not require that borrower, either individually or on behalf of others similarly situated, assert claim/defense in forum that is less convenient, more costly, more dilatory for dispute resolution than NJ judicial forum - such provisions are unconscionable and void
• Notice requirement - NOTICE TO BORROWER (see below)
• Borrower must receive credit counseling, as certified to creditor by a HUD/NJDOBI-approved counselor
• Payments under a home improvement contract must be made either to the borrower, or jointly to the borrower and the contractor, or to an escrow agent if borrower requests
• No fees may be charged to modify, renew, extend, amend, or defer any payment
• No points and fees may be charged in connection with a high-cost home loan if the proceeds are used to refinance an existing high-cost home loan with the same creditor
• Must use judicial foreclosure procedures to foreclose
• No financing of points and fees in excess of two percent (2%) of the total loan amount
• The following notice to borrower must be given in writing, acknowledged in writing and signed by the borrower, 3 business days prior to loan closing:

NOTICE TO BORROWER

YOU SHOULD BE AWARE THAT YOU MIGHT BE ABLE TO OBTAIN A LOAN AT A LOWER COST. 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 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 CREDITOR OR BROKER YOU SELECT.

IF YOU ACCEPT THE TERMS OF THIS LOAN, THE CREDITOR WILL HAVE A MORTGAGE LIEN ON YOUR HOME. YOU COULD LOSE YOUR HOME AND ANY MONEY YOU PUT INTO IT IF YOU DO NOT MEET YOUR PAYMENT OBLIGATIONS UNDER THE LOAN.

YOU SHOULD CONSULT AN ATTORNEY-AT-LAW AND 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 NEW JERSEY DEPARTMENT OF BANKING AND INSURANCE.

YOU ARE NOT REQUIRED TO COMPLETE THIS LOAN AGREEMENT MERELY BECAUSE YOU HAVE RECEIVED THIS DISCLOSURE OR HAVE SIGNED A LOAN APPLICATION.

REMEMBER, PROPERTY TAXES AND HOMEOWNER'S INSURANCE ARE YOUR RESPONSIBILITY. NOT ALL CREDITORS PROVIDE ESCROW SERVICES FOR THESE PAYMENTS. YOU SHOULD ASK YOUR CREDITOR 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.

1 A "conventional prepayment penalty" must be authorized by law other than the Act, and the home loan's APR may not exceed by more than two percent (2%) the "conventional mortgage rate." The "conventional mortgage rate" is defined as the most recently published yield on conventional mortgages as published in the Federal Reserve's H-15 Statistical Release as of the 15th day of the month immediately preceding the month in which the application is received by the creditor. For purposes of our high-cost home loan analysis and determination, if the home loan provides for a prepayment penalty, we assume that home loan (a) does not have an APR that exceeds the "conventional mortgage rate" (as defined in the Act) by more than two (2) percentage points; and (b) the maximum prepayment fee or penalty is equal to two percent (2%) of the original principal balance.
2 "Bona fide discount points" means loan discount points which are: (1) knowingly paid by the borrower; (2) paid for the express purpose of reducing, and which result in a reduction of, the interest rate or time-price differential applicable to the loan; (3) in fact reducing the interest rate or time-price differential applicable to the loan from an interest rate which does not exceed the "conventional mortgage rate" (see footnote 1 above) for a home loan secured by a first lien, by more than two percentage points, or for a home loan secured by a junior lien, by more than three and one half percentage points; and (4) recouped within the first five years of the scheduled loan payments. Loan discount points will be considered to be recouped within the first five years of the scheduled loan payments if the reduction in the interest rate that is achieved by the payment of the loan discount points reduces the interest charged on the scheduled payments such that the borrower's dollar amount of savings in interest over the first five years is equal to or exceeds the dollar amount of loan discount points paid by the borrower. It is up to the DocMagic software user to determine whether or not discount points can be excluded from the calculation. Within the DocMagic software, if the "Bona Fide" box after "Loan Discount Points" is checked, all of the discount points paid to the Lender so designated will be treated as bona fide and will be excluded from points and fees up to the maximum amount permissible (in this case, up to two (2) discount points). If the box is left blank, the loan discount points will not be treated as bona fide and none of the discount points will be excluded from points and fees. For additional information, click here.

Maryland

UPDATED: August 22, 2011 (Revisions are highlighted in yellow.)

Maryland Covered Loan Law

Effective October 1, 2002, various provisions of the Maryland Commercial Law were amended for the purpose of, among other things, prohibiting lenders from financing certain single premium insurance as part of certain mortgage loans; prohibiting lenders from making certain loans without giving due regard to a borrowers' ability to repay the loans; and requiring certain borrowers to be provided with home buyer education or housing counseling information under certain circumstances.

Definition of Covered Loan: Maryland law defines a "covered loan" by reference to Section 32 with one change: all applicable thresholds are reduced by one percentage point (1%). Therefore, the APR Test and Points and Fees Test are as follows:

1. APR Test: either 7% (for first liens) or 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.
2. Points and Fees Test: Total Points and Fees payable by the borrower at or before the closing exceed the greater of seven percent (7%) of the total loan amount or a specified dollar amount that is subject to change annually.

In order to determine which yield on Treasury securities to use, an "Application Date" must be entered in the worksheet.  If the Application Date is missing, the DocMagic system will default to the document date and a warning will display substantially as follows:

WARNING: APPLICATION DATE IS MISSING; DOCMAGIC HAS DEFAULTED TO THE DOCUMENT DATE OF ___ TO RUN THE MD COVERED HOME LOAN LAW APR TEST.

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 charg
+	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 Financed 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

Prohibitions: With respect to loans that meet the definition of a Covered Loan, a lender is prohibited from doing the following:

• A lender generally may not finance as part of the covered loan transaction single premium coverage for credit health insurance, involuntary unemployment benefit insurance, or credit life insurance;
• A lender may not make a covered loan without giving due regard to the borrower's ability repay the loan in accordance with its terms.

Disclosures: At the time a borrower completes a loan application for a covered loan, a lender must provide the borrower with (1) a written recommendation that the borrower seek home buyer education or housing counseling; and (2) a list of agencies and organizations approved by the county in which the residential real property securing the loan is located to provide home buyer education or housing counseling.

Indiana

UPDATED: August 22, 2011 (Revisions are highlighted in yellow.)

Indiana Home Loan Practices Act

Coverage: Article 9 of Section 24 of the Indiana Code entitled Home Loan Practices ("Article 9") became effective on January 1, 2005. The high-cost home loan restrictions in Article 9 apply generally to any "home loan," defined to include:

• all closed-end loans, without regard to lien position, including purchases, refinances and construction loans
• secured by a one- to four-family residence
• occupied or to be occupied as the borrower's principal dwelling

Excluded from Article 9's coverage (with the exception of the prohibition against engaging in a deceptive act with respect to a home loan under IC 24-9-3-7(3)) are:

• HUD-insured loans
• VA-guaranteed loans
• Loans made or acquired by state or federally-chartered financial institutions
• Loans made or guaranteed by the U.S. Department of Agriculture Rural Housing Bureau
• Loans funded by the Indiana housing finance authority
• Loans that can be purchased by Fannie Mae, Freddie Mac, or the Federal Home Loan Bank
• Open-end loans and reverse mortgages
• Loans exceeding the Fannie Mae conforming loan size limit for a single-family dwelling
• Non-owner occupied loans
• Multifamily loans

Thresholds: Under Article 9, a home loan is a high-cost home loan if it meets or exceeds either of two thresholds:

1. The Rate Test: the "trigger rate" exceeds the "benchmark rate."
   1. The "Trigger Rate": The determination of the "trigger rate" depends on the type of loan:
      1. Fixed rate loans: the trigger rate is the interest rate in effect on the loan's closing date, i.e., the note rate;
      2. Variable rate loans: if the rate varies in accordance with an index, the trigger rate is the sum of the index rate as of the date of closing plus the maximum margin permitted under the loan agreement, i.e., the fully-indexed rate;
      3. All other loans: the maximum rate that may be charged during the term of the loan.
   2. The "Benchmark Rate": Is defined as the interest rate established under the high-cost provisions of TILA and Regulation Z, Section 32. Presumably, this means the corresponding yield on Treasury securities value as of the 15th of the month preceding the month in which the application is received, plus either 8% (for first liens) and 10% (for junior liens).

   In order to determine which yield on Treasury securities to use, an "Application Date" must be entered in the worksheet.  If the Application Date is missing, the DocMagic system will default to the document date and a warning will display substantially as follows:

   WARNING: APPLICATION DATE IS MISSING; DOCMAGIC HAS DEFAULTED TO THE DOCUMENT DATE OF ___ TO RUN THE IN HOME LOAN PRACTICES PROVISION APR TEST.

2. The Points and Fees Test: Total points and fees exceed:

   1. Five percent (5%) of the "loan principal" if the loan principal is $40,000 or more; or
   2. Six percent (6%) of the "loan principal" if the loan principal is less than $40,000.

   "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 - all compensation paid directly or indirectly to a broker; this includes all non-prepaid finance charges paid to the broker and all premiums, regardless of the source of payment, i.e., yield spread premiums and other "back end" compensation paid by the lender to the mortgage broker are included (but see Excludable Broker Compensation below).
   	+	Other Charges Paid to Creditor - 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; unlike Section 32, all reasonable fees paid to an affiliate of the creditor are excluded; we assume fees paid to affiliates are reasonable.
   	+	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.
   	-	Bona Fide Discount Points - Article 9 permits an unlimited number of "bona fide discount points" to be excluded from points and fees. Bona fide discount points are defined as loan discount points that: (1) are knowingly paid by the borrower; (2) are paid for the express purpose of reducing the interest rate applicable to the loan; (3) reduce the interest rate from an interest rate that does not exceed the benchmark rate; and (4) are recouped within the first four (4) years of the scheduled loan payments.
   	-	Excludable Broker Compensation - up to one and one-half (1½) points in "indirect broker compensation" may be excluded from points and fees if the terms of the loan do not permit a prepayment charge in excess of two percent (2%) of the home loan principal. "Indirect broker compensation" is not defined but we assume it means compensation paid by the lender to the broker (e.g., YSP, SRP and other premiums). For purposes of completing this analysis, if the loan has a prepayment provision, we assume the prepayment charge exceeds two percent (2%) of the home loan principal. However, a "flag" can be set to exclude up to one and one-half (1 ½) points of premiums if a customer requests it.
   	+/-	Creditor Requested Adjustments -the total amount of all customer requested overrides

"Loan Principal" is not defined in Article 9. Article 9 does define "total loan amount" to mean the principal of the home loan minus the points and fees that are included in the principal amount of the loan (i.e., financed); however, the term "total loan amount" is nowhere used in Article 9. It is unclear whether "loan principal" or "total loan amount" is the appropriate denominator to use for the points and fees calculation. However, because using the "total loan amount" as the denominator is a more conservative approach (i.e., using total loan amount results in a smaller denominator, which in turn returns a higher percentage figure), the "total loan amount" will be used as the denominator.

		Original Principal Balance
	-	Total Points and Fees Financed
	+/-	Originator Requested Adjustments

Prohibitions: Article 9 contains a laundry list of prohibited practices, including the following:

• no financing single-premium credit-related insurance and debt cancellation agreements
• no refinancing of special/subsidized loans
• no recommending/encouraging default
• payments must be posted on the day received
• no arbitrary acceleration provision without material cause
• no payoff balance or release fees except for actual charges for express or priority delivery request by borrower
• no dividing transaction into separate parts/structure as open-end with intent to evade coverage
• no direct or indirect financing of any points and fees (this is particularly onerous to lenders)
• no prepayment penalties exceeding 2% of the amount prepaid within the first 24 months; borrower must first be offered, in a writing initialed by the borrower, a loan product without a prepayment fee
• no balloon payments on loans with terms of less than 10 years
• no negative amortization
• no default rates of interest
• no collection of more than two (2) periodic payments in advance
• no lending without due regard to repayment ability
• restrictions on payments to contractors under home-improvement contracts
• no modification or deferral fees
• no arbitration provisions/forum restrictions/claim or defense limitations

Notices:

1. Prepayment Penalty/Loan Product Choice: A high cost loan may not include a prepayment penalty unless the borrower is offered a choice of a product without a prepayment penalty. The disclosure containing the offer must be clearly labeled in large bold type and must include the following disclosure:

   LOAN PRODUCT CHOICE

   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.

2. Notice of Assignee Liability: A creditor may not sell or otherwise assign a high cost home loan without furnishing the following statement to the purchaser or assignee:

   NOTICE: This is a loan subject to special rules under IC 24-9. Purchasers or assignees may be liable for all claims and defenses with respect to the loan that the borrower could assert against the Lender.

3. Contract Notice: A mortgage or deed of trust that secures a high cost home loan at the time the mortgage or deed of trust is recorded must prominently display the following on the face of the instrument:

   This instrument secures a high cost home loan as defined in IC 24-9-2-8.

4. Counseling: A creditor must provide the borrower, at the same time the good faith estimate is required to be given, information to facilitate contact with a nonprofit counseling agency certified by HUD or the Indiana Department of Commerce. No format/model is provided.

5. Notice to Borrower: the following notice must be given at the same time Section 32 disclosures are required (i.e., three (3) days prior to consummation):

   NOTICE TO BORROWER

   YOU SHOULD BE AWARE THAT YOU MIGHT BE ABLE TO OBTAIN A LOAN AT A LOWER COST. YOU SHOULD COMPARE LOAN RATES, COSTS, AND FEES. 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, COSTS, AND FEES COULD ALSO VARY BASED ON WHICH CREDITOR OR BROKER YOU SELECT.

   IF YOU ACCEPT THE TERMS OF THIS LOAN, THE CREDITOR WILL HAVE A MORTGAGE LIEN ON YOUR HOME. YOU COULD LOSE YOUR HOME AND ANY MONEY YOU HAVE PAID IF YOU DO NOT MEET YOUR PAYMENT OBLIGATIONS UNDER THE LOAN.

   YOU SHOULD CONSULT AN ATTORNEY AND A QUALIFIED INDEPENDENT CREDIT COUNSELOR OR OTHER EXPERIENCED FINANCIAL ADVISER REGARDING THE RATE, FEES, AND PROVISIONS OF THIS MORTGAGE LOAN BEFORE YOU PROCEED. A LIST OF QUALIFIED COUNSELORS IS AVAILABLE FROM THE INDIANA DEPARTMENT OF COMMERCE.

   YOU ARE NOT REQUIRED TO COMPLETE THIS LOAN AGREEMENT MERELY BECAUSE YOU HAVE RECEIVED THIS DISCLOSURE OR HAVE SIGNED A LOAN APPLICATION.

   REMEMBER, PROPERTY TAXES AND HOMEOWNER'S INSURANCE ARE YOUR RESPONSIBILITY. NOT ALL CREDITORS PROVIDE ESCROW SERVICES FOR THESE PAYMENTS. YOU SHOULD ASK YOUR CREDITOR 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.

Georgia

UPDATED: August 22, 2011 (Revisions are highlighted in yellow.)

Georgia Fair Lending Act

Georgia: The Georgia Fair Lending Act (the "GFLA") became effective on October 1, 2002. Significant changes were made to the GFLA effective March 7, 2003. The GFLA (O.C.G.A. Title 7, Chapter 6A) can be accessed here. In addition, the Georgia Department of Banking and Finance has published a massive Q&A regarding the GFLA that is available here.

Coverage: The GFLA applies to any loan meeting the definition of a "home loan." A home loan is defined as any open- and closed-end, purchase and refinance loan, regardless of lien position, less than or equal to the Fannie Mae conforming loan limit for a single family dwelling in Georgia that is secured by any one- to four-family dwelling (which may be a manufactured home) that is the borrower's principal dwelling. Among the types of loans expressly excluded from the definition of a home loan are reverse mortgages, construction loans, multifamily (5+ units) loans, bridge loans and loans primarily for business, agricultural or commercial purposes.

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

1. APR Test: The same 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; or
2. Points and Fees Test: Total Points and Fees exceeds (i) five percent (5%) of the total loan amount if the total loan amount is $20,000 or more, or (ii) 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: The determination of APR under the GFLA is the same as under TILA and Regulation Z.

In order to determine which yield on Treasury securities to use, an "Application Date" must be entered in the worksheet.  If the Application Date is missing, the DocMagic system will default to the document date and a warning will display substantially as follows:

WARNING: APPLICATION DATE IS MISSING; DOCMAGIC HAS DEFAULTED TO THE DOCUMENT DATE OF ___ TO RUN THE GA FAIR LENDING LAW APR TEST.

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 Excludable Charges - to the extent they have been included in prepaid finance charges, the following fees: tax service fees and attorneys' fees provided they are not paid to the creditor or a creditor affiliate; and bona fide fees paid to FHA, VA, Dept. of Agriculture and the Georgia Housing Finance Authority ("GHFA")
+	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 (other than title insurance premiums) if paid to the creditor or creditor affiliate
+	Other Mortgage Broker Compensation - all compensation paid to a mortgage broker regardless of the source of payment, including lender-paid compensation (i.e., YSPs)1
+	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
+	Maximum Prepayment Fees Permitted Under the Loan Documents - a prepayment penalty under a high-cost home loan is permitted only during the first 24 months after closing and may not exceed: (i) two percent (2%) of the amount prepaid in the first 12 months; or (ii) one percent (1%) of the amount prepaid in the second 12 months.2
+	Any Prepayment Fee Assessed on Refinanced Loan Made or Held by the Creditor or Affiliate - if the new loan is refinancing a preexisting loan that was made or is currently being held by the creditor or a creditor affiliate, and a prepayment penalty is assessed on the payoff of the preexisting loan. We have created a field within DocMagic where customers can input this amount.
-	Bona Fide Discount Points - up to two (2) bona fide discount points may be deducted. Note: For purposes of the GFLA, a bona discount point is defined generally as points paid for the express purpose of reducing, and which in fact result in a reduction of, the applicable interest rate provided the undiscounted interest rate does not exceed by more than one percent (1%) the required net yield for a 90-day standard mandatory delivery commitment as of noon ten (10) business days prior to the loan's consummation date for a home loan having a reasonably comparable term from either Fannie Mae or Freddie Mac, whichever is greater. For purposes of our high-cost home loan analysis and determination, we assume that all discount points paid by the borrower are bona fide; the lender should independently determine whether the discount points are indeed bona fide and otherwise comply with the GFLA.
+/-	Creditor Requested Adjustments - the total amount of all customer requested overrides

Total Loan Amount is defined the same as under TILA and Regulation Z. For open-end loans, the total loan amount is equal to the credit limit.

What Happens If a Loan Is a High-Cost Home Loan? There are many, many substantive limitations imposed for home loans and high-cost home loans. These include the following:

Home loans:

• Creditor may not single-premium finance credit insurance, debt suspension coverage or debt cancellation coverage.
• Creditor may not recommend or encourage default of existing loan.
• Creditor may not charge a late fee unless payment is past due by 10 or more days, and such charge may not exceed 5%. If a late payment is deducted from a payment made on the home loan and the deduction results in a subsequent payment default, a late payment charge may not be imposed on the subsequent default.
• Creditor may not charge a payoff or release fee.
• A $10.00 processing fee may be charged if the information is provided by fax or within 60 days of a previous request.
• Payoffs must be provided within 5 business days after the request.

High-Cost Loans:

• No flipping, defined as a refinance within 5 years when the new loan provides no "reasonable, tangible net benefit" to the borrower; there is a presumption of flipping if the new loan refinances a special mortgage (other than first mortgage loans originated by, purchased by, or assigned to GHFA) bearing a below market rate or special terms beneficial to the borrower.
• Prepayment penalties limited to 2% of the amount prepaid in year one, 1% of the amount prepaid in year 2.
• No balloon loans permitted.
• No negative amortization.
• No increased default interest rate.
• No more than 2 payments may be paid in advance from the loan proceeds.
• Creditor may not require a borrower to assert a claim or defense in a forum that is less convenient, more costly or more dilatory for the resolution of a dispute than a judicial forum.
• Counseling certification required.
• Creditor must have reasonable belief that borrower has ability to repay the loan. A rebuttable presumption of ability to repay exists if debt to income ratio is 50% or less.
• No modification or deferral fees are permitted.
• Special foreclosure notices and procedures.
• No call provisions are permitted.
• The following disclosure must be placed on the loan documents that create a debt or pledge property (i.e., the note and the security instrument) on the first page in a conspicuous manner:

Notice: This is a mortgage subject to special rules under the "Georgia Fair Lending Act." Purchasers or assignees of this mortgage may be liable for all claims and defenses by the borrower with respect to the mortgage.

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 receives a notice advising him or her of this right and perhaps indicating their exercise or waiver of this right.

Bona Fide Discount Points: The GFLA requires that a borrower "knowingly" contract for the discount points in order to reduce the rate. Therefore, it is desirable to obtain the borrower's acknowledgment that he or she agrees to pay X number of discount points for the express purpose of reducing the interest rate on the loan from Y% to Z%. It may also be desirable to include the corresponding Fannie Mae/Freddie Mac 90-day net yield amounts to confirm that the undiscounted rate does not exceed the greater of the two by more than one percent (1%).

1 Under the GFLA, points and fees are defined to include, among other things, all mortgage broker compensation from any source including yield spread premiums and other lender-paid compensation except that the portion of any YSP that is disclosed to the borrower in writing and used to pay bona fide and reasonable fees to persons other than the creditor or a creditor-affiliate are excludable. For purposes of our high-cost home loan analysis and determination, we assume that the mortgage broker retains the entire YSP amount.
2 Under the GFLA, points and fees are defined to include, among other things, the maximum prepayment fees and penalties that may be charged or collected under the terms of the loan documents. 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 fee or penalty is equal to the maximum permissible prepayment fee or penalty permitted under the GFLA, namely two percent (2%) of the loan amount prepaid with the first 12 months after closing.

District of Columbia

UPDATED: August 22, 2011 (Revisions are highlighted in yellow.)

District of Columbia Home Loan Protection Act of 2002

Covered loans. There are two "covered loan" tests under the D.C. Home Loan Protection Act of 2002 (the "Act"). The Act can be accessed by clicking here. Implementing regulations can be viewed here. Which test applies depends largely on the status of the maker or purchaser of the loan. For our purposes, we ignore the more lenient test, and instead make only one covered loan determination.1

The D.C. covered loan test applies to the following loans:

• first and subordinate liens
• consumer purpose (i.e., not commercial, business vacant land)
• one- to four-family, owner-occupied dwelling
• principal amount not exceeding Fannie Mae/Freddie Mac conforming limits for comparable dwellings2
• closed-end and open-end (i.e., HELOC)

Excluded from coverage are:

• any loan insured or guaranteed by a state or local authority, the District of Columbia Housing Finance Agency, FHA or VA
• purchase money loans
• construction loans
• commercial loans
• multifamily loans

A "covered loan" is a loan that is defined as a loan that satisfies either of the following tests:

1. APR Test: the APR exceeds by more than 6% (for first liens) or 7% (for subordinate liens), 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 origination/discount points and fees payable by the borrower at or before loan closing exceed five percent (5%) of the total loan amount.

The definition of "APR" is the same as under the Truth in Lending Act.

In order to determine which yield on Treasury securities to use, an "Application Date" must be entered in the worksheet.  If the Application Date is missing, the DocMagic system will default to the document date and a warning will display substantially as follows:

WARNING: APPLICATION DATE IS MISSING; DOCMAGIC HAS DEFAULTED TO THE DOCUMENT DATE OF ___ TO RUN THE DC HOME LOAN PROTECTION ACT APR TEST.

The term "origination/discount points and fees" is defined to mean the same thing as points and fees under Section 32. However, the phrase "total loan amount" is not defined. For purposes of the D.C. covered loan determination, we assume that "total loan amount" has the same meaning as under Section 32.

Required Disclosures

• Red Flag Warning - in form promulgated by Mayor; must be received by the borrower at least 3 business days prior to closing the loan.
• Notice of Assignee Liability - if a covered loan is sold or assigned, the seller or assignee shall include a notice of assignee liability in a form similar to the sample provided by the Department
• Filing Documents - 14 days after a loan is closed, a lender must submit copies of certain documents to the Mayor; these documents are: the note, the HUD-1 settlement statement, the final TIL, and form FP-7 filed with the Recorder of Deeds.

  ---

1 The more lenient D.C. covered loan test applies to loans that will be made or purchased by Fannie Mae, Freddie Mac, a bank, trust company, savings and loan association, or savings bank that is regulated and supervised by a supervising federal agency, including the finance and operating subsidiaries of those entities that are regulated and supervised by a federal agency. With respect to these loans, a "covered loan" is defined the same as a Section 32 loan. In many cases it is unclear who will ultimately purchase the loan and whether or not the purchasing entity is one whose purchase will exclude the loan from coverage under this more lenient test. Rather than have two D.C. specific predatory loan displays, we include information about this more lenient D.C. test in the disclaimer in the software, and simply refer our customer to the analysis and determination under Section 32.
2 Fannie Mae/Freddie Mac conforming limits vary depending on the number of units (SFR, 2-family, 3- family or 4- family). While we distinguish between SFR and 2-4 family properties, within the 2-4 family category, we do not distinguish on the basis of the actual number of units. Unless and until we do so, in the case of a 2-4 family dwelling, we should default to the highest conforming limit (which invariably is the conforming limit for 4-family dwellings) - this approach will result in determinations being made for 2- and 3-family dwellings that would normally fall outside the scope of the Act, but is the most conservative approach.

Colorado

UPDATED: August 22, 2011 (Revisions are highlighted in yellow.)

Colorado Consumer Equity Protection Act

Coverage: The Colorado Consumer Equity Protection Act (the "Act") became effective January 1, 2003. The Act's coverage and thresholds are identical to the federal Section 32 standards except that the points and fees threshold is lowered from eight percent (8%) to six percent (6%) of the total loan amount.

• 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).
• Points and Fees Test: The total points and fees payable by the consumer at or before loan closing will exceed the greater of six percent (6%) of the total loan amount, or a specified dollar amount that is subject to change annually. For a summary comparison of the federal Section 32 high cost provisions with those of the Act prepared by the Colorado Attorney Generals office, please click here (you will be able to access the Act from links embedded in the summary).

In order to determine which yield on Treasury securities to use, an "Application Date" must be entered in the worksheet.  If the Application Date is missing, the DocMagic system will default to the document date and a warning will display substantially as follows:

WARNING: APPLICATION DATE IS MISSING; DOCMAGIC HAS DEFAULTED TO THE DOCUMENT DATE OF ___ TO RUN THE CO COVERED HOME LOAN LAW APR TEST.

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 charges 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: 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

Substantive Limitations: Covered Loans are subject to the following restrictions:

• No balloons with less than 10 year terms
• No call provision
• No negative amortization
• No default rate of interest
• Limitations on arbitration provisions
• No collection of advance payments
• Prepayment charges are permitted for full prepayments only made within the first 36 months in an amount not exceeding six (6) months' interest, so long as the refinance loan is made with a different lender; no prepays in connection with sales; lender must offer borrower a choice (see Notice Requirements below)
• No lending without due regard to repayment ability
• No refinancing permitted by the original lender, or assignee holding and/or servicing the loan within one (1) year unless the refinancing is in the borrower's interest
• No refinancing of certain low-rate loans
• Restrictions on home improvement contracts
• No financing of single premium credit insurance and related products
• No recommending or encouraging that borrower default on existing loan or other debt
• No charge for payoff statement/release
• Must report favorable and unfavorable payment history at least quarterly

Required disclosures:

Prepayment Penalty/Loan Product Choice: A covered loan may not include a prepayment penalty unless the borrower is offered a choice of a product without a prepayment penalty. This requirement is deemed fulfilled if the borrower receives and signs the following disclosure:

Loan Product Choice

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 / ____without a prepayment penalty.

Cautionary Notice: The following notice, or a substantially similar notice, must be given in writing to the borrower within a reasonable period of time after determining that the loan would result in a covered loan, but no later than the time by which the pre-consummation notices are required under HOEPA. A rebuttable presumption of delivery exists if signed acknowledgement of receipt from the borrower is obtained.

Consumer Caution

If you obtain this loan, the lender will have a mortgage in Colorado; this is a deed of trust 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. 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 broker you select.

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 later 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.

California

UPDATED: August 22, 2011 (Revisions are highlighted in yellow.)

Document Systems, Inc. ("DSI") is pleased to introduce the first state-specific predatory lending/high cost loan analysis and display to be incorporated into DSI's flagship "DocMagic" loan document preparation software. As most of you already know, California Assembly Bill 489 amended the California Financial Code to add Division 1.6 (commencing with Section 4970) (the "California Covered Loan Law") effective for all loan applications received on or after July 1, 2002. To view a copy of the California Covered Loan Law, click here. DSI's California Covered Loan computation display screen is designed to assist you in making your California "Covered Loan" determinations. This memo briefly describes the provisions of the California Covered Loan Law and DSI's automated "Covered Loan" determination process.

What is a California "Covered Loan"?

The California Covered Loan Law applies to all applications for "covered loans" received on or after July 1, 2002. A "covered loan" is defined as a "consumer loan" in which the original principal balance does not exceed the most current conforming loan limit for a single-family first mortgage loan established by Fannie Mae, and either:

(i) The APR at consummation will exceed by more than 8% 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 (the "CA APR Test"); or
(ii) Total points and fees payable by the consumer at or before closing will exceed 6% of the total loan amount (the "CA Points and Fees Test").

A "consumer loan" is defined generally as a closed-end consumer credit transaction secured by a 1- to 4-family dwelling that is or will be the consumer's principal dwelling, regardless of lien position; excluded from coverage are reverse mortgages, open-end loans, loans secured by rental properties or second homes, or bridge loans with terms of one (1) year or less. Please note that while the application of Regulation Z Section 226.32 ("Section 32") expressly excludes "residential mortgage transactions" (defined generally as purchase money and construction loan transactions secured by a consumer's principal dwelling), the California Covered Loan Law does not contain a comparable exclusion and on its face applies to purchase and construction loans otherwise fitting within the definition of a consumer loan. Accordingly, the DocMagic Covered Loan computation will apply to any purchase money and construction loan that otherwise falls within the definition of consumer loan.

The DocMagic California Covered Loan Computation and Display

The California Covered Loan computation display screen is vertically divided into two parts, corresponding to the CA APR Test and CA Points and Fees Test; the bottom right hand corner displays the actual determination with a short explanation. The display screen is comparable to the DocMagic computation display screen currently utilized in connection with determinations made under Section 32, but there are differences.

CA APR Test - The CA APR Test is comparable to the APR Test under Section 32; however, the threshold has been reduced from 10% to 8% for all loans regardless of lien position. (Currently, the Section 32 threshold is 10%; effective mandatory on October 1, 2002, the APR threshold for Section 32 loans will be reduced from 10% to 8% for first lien loans, while the APR threshold for junior lien loans will remain at 10%).

In order to determine which yield on Treasury securities to use, an "Application Date" must be entered in the worksheet.  If the Application Date is missing, the DocMagic system will default to the document date and a warning will display substantially as follows:

WARNING: APPLICATION DATE IS MISSING; DOCMAGIC HAS DEFAULTED TO THE DOCUMENT DATE OF ___ TO RUN THE CA HIGH COST LOAN LAW APR TEST.

CA Points and Fees Test - The display screen is divided into three subparts: "Total Points and Fees"; "Total Loan Amount"; and "CA Covered Loan Percentage," with each component individually computed and automatically appearing in its own separate data field.

Total Points and Fees: Points and fees under the California Covered Loan Law are defined generally 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 all non-prepaid finance charges paid by a borrower to a mortgage broker
+	Other Charges Paid to Creditor - the total amount of all Regulation Z Section 226.4(c)(7)1 charges not included as a part of the Prepaid Finance Charge, if paid by a borrower directly to the creditor
+/-	CA Covered Loan Adjustments2 - the total amount of all overrides to our automatic California Covered Loan Law determination that you specifically request
=	Total Points and Fees - the sum of the above components

The definition of points and fees under the California Covered Loan Law is comparable to the current definition of points and fees for purposes of Section 32 (12 CFR 226.32(b)(1)), except that unlike Section 32, 226.4(c)(7) fees paid to creditor affiliates or indirectly to the creditor are not included in the California definition of points and fees.

A word about yield spread premiums and other "back end" compensation paid by the lender to a mortgage broker. The California Covered Loan Law uses language to describe mortgage broker compensation that is similar to that used in Section 32, and the commentary to Section 32 is clear that yield spread premiums and other "back end" compensation paid by the lender to the broker are not included in the Section 32 analysis. However, there are conflicting reports as to the treatment of such compensation by the law's sponsor and, more important, the applicable regulators. For example, DSI has been advised that the bill's author intended and currently believes that mortgage broker compensation does in fact include all such yield spread premiums and other "back end" compensation paid by the lender to the broker. To make matters worse, the applicable regulators (the California DRE, Department of Corporations and Department of Financial Institutions) take no position currently on the treatment of yield spread premiums and other "back end" compensation paid by the lender to the broker. Indeed, the Department of Corporations has taken the position that they will not take any position except through the normal audit review function; that is, they are offering no advance guidance to licensees under their jurisdiction, and instead will address the matter as it arises during the course of individual audits. DSI has decided to exclude yield spread premiums and other "back end" compensation paid by the lender to the mortgage broker from the California Covered Loan computation and display. DSI's position is based on the clear language of the California Covered Loan Law itself (indeed, the CA Points and Fees Test specifically states that a covered loan is one in which "total points and fees payable by the consumer at or before closing will exceed 6% of the total loan amount") and is consistent with the approach under Section 32. However, if you or an investor determine otherwise, please contact our customer service department.3

Total Loan Amount: "Total loan amount" is not defined in the California Covered Loan Law, nor is any reference made to the commentary to Section 32 where the phrase is in fact defined for purposes of Section. DSI has decided to follow the definition of "total loan amount" provided in the Section 32 commentary (with modifications as explained below):

	Amount Financed - calculated in accordance with Regulation Z
-	Other Charges Paid to Creditor and Financed - the total amount of any Section 226.4(c)(7) charges not included as a part of the Prepaid Finance Charge, if paid by a borrower to the creditor, and financed
+/-	CA Covered Loan Adjustments - the total of all overrides to our automatic California Covered Loan Law determination that you request
=	Total Loan Amount - the sum of the above components

Under Section 32, the "total loan amount" is defined generally as the amount financed minus 4(c)(7) charges paid to the creditor or an affiliate and financed. This description tracks the definition of points and fees found in Section 32 as it applies to 4(c)(7) charges paid to the creditor or an affiliate; however, as noted above, the California definition of points and fees excludes 4(c)(7) charges paid to creditor affiliates or indirectly to the creditor. Accordingly, no adjustment to the total loan amount is made if a 4(c)(7) charge is paid to a creditor affiliate or indirectly to the creditor; 4(c)(7) charges paid to the creditor will continue to be deducted from the amount financed only if they are also financed.

California Covered Loan Percentage: The Points and Fees threshold under Section 32 is the greater of 8% of the Total Loan Amount or $480 (for the year 2002). The CA Points and Fees Test threshold is 6% of the Total Loan Amount; there is no comparable dollar amount trigger as under Section 32. The actual computation of the Total Points and Fees divided by the Total Loan Amount is shown in the display. The resulting CA Covered Loan Percentage, and the amount by which the loan's Total Points and Fees exceeds or falls short of the Points and Fees Test trigger, are indicated.

Prohibited Activities Under the California Covered Loan Law

Here is a brief recap of a list of prohibited activities under the California Covered Loan Law:

• Prepayment Penalty: No prepayment fee or penalty is permitted after the first 36 months after the date of the loan (a covered loan may include a prepayment fee within the first 36 months if the consumer is also offered a choice of another product without a prepayment fee or penalty, a written disclosure is given to the consumer at least three (3) business days prior to consummation containing (a) the terms of the prepayment fee or penalty; (b) the rates, points and fees available for accepting a covered loan without a prepayment penalty; and (c) the prepayment fee or penalty is limited to six months' advance interest at the contract rate then in effect on the amount prepaid in any 12­month period in excess of 20% of the original principal amount). Furthermore, no prepayment fee or penalty is permitted if the covered loan is accelerated because of default, and a person who originates a covered loan may not finance a prepayment penalty through a new loan by the same originator. (To "originate" means to arrange, negotiate, or make a consumer loan and thus encompasses brokering as well as lending activities.)
• A person who originates a covered loan shall not make a covered loan that finances points and fees in excess of $1,000 or 6% of the original principal balance, exclusive of points and fees, whichever is greater.
• No balloon loans with terms of five years or less, subject to certain limited exceptions applicable to consumers with seasonal or irregular income, and bridge loans of less than 18 months.
• No negative amortization is permitted unless the covered loan is a first lien loan and the licensee discloses to the consumer that the loan contains a negative amortization provision.
• A covered loan shall not include terms under which periodic payments are consolidated and paid in advance from the loan proceeds.
• No default rates of interest rate are permitted.
• A person who originates covered loans shall not make or arrange a covered loan unless at the time the loan is made, the person reasonably believes the consumer, when considered collectively in the case of multiple consumers, will be able to make the scheduled payments to repay the loan based on current and expected income, current obligations, employment status and other financial resources other than the consumer's equity in the dwelling. For adjustable rate loans, step rate loans, and any other loans with rate increase provisions occurring within 37 months from date of application, this evaluation is based on the fully indexed rate calculated at the time of application. The consumer is presumed to be able to repay the loan if at the time the loan is made, the consumer's total monthly debts, including loan payments, do not exceed 55% of the consumer's monthly gross income, as verified by the consumer's credit application, financial statement, credit report, information provided to the originator by or on behalf of the consumer, or "any other reasonable means." There is no presumption of inability of the consumer to repay the loan if these debts/payments exceed the 55%. For "stated income loans," the requisite "reasonable belief" may be based on the income stated by the consumer, and other information in the possession of the person originating the loan after the solicitation of all information that the person customarily solicits in connection with loans of this type.
• A person who originates a covered loan shall not pay a contractor under a home improvement contract from the proceeds of a covered loan other than by an instrument payable to the consumer or jointly to the consumer and the contractor or, at the election of the consumer, to a third party escrow agent pursuant to joint escrow instructions. Signed, dated completion certificates for completed work must be presented to the originator by the consumer prior to any payment, including progress payments.
• A person who originates a covered loan shall not encourage a consumer to default on an existing consumer loan or other debt in connection with solicitation or making of a covered loan that refinances all or any portion of the existing loan or debt.
• A person who originates a covered loan shall not steer, counsel or direct any prospective consumer to accept a loan product with a risk grade less favorable than the risk grade the consumer would qualify for based on that person's then current underwriting guidelines. A broker who originates a covered loan shall not steer a prospective consumer to accept a loan at a higher cost than that for which the consumer could qualify based on loan products offered by persons with whom the broker regularly does business.
• No "call provision" is permitted unless pursuant to due on sale provisions, or due to consumer fraud or material misrepresentations. A licensed person shall not refinance or arrange for a refinance of a consumer loan with a covered loan that does not result in an identifiable benefit to the consumer considering the consumer's stated purpose for seeking the loan, and fees, interest rates, finance charges and points.
• A 12­point type disclosure entitled "CONSUMER CAUTION AND HOME OWNERSHIP COUNSELING NOTICE'" with required text must be provided to the consumer no later than three (3) business days before loan documents are signed.
• A person who originates a covered loan shall not avoid, or attempt to avoid, the application of the California Covered Loan Law by (1) structuring a loan transaction as an open-end credit plan for the purpose of evading the laws when the loan would have been a covered loan if it had been structured as a closed-end loan, or (2) dividing any loan into separate parts for the purpose of evading these laws.
• A person who originates a covered loan shall not act in any manner that constitutes fraud. The statute specifically provides that anyone that provides brokerage services for a covered loan is the fiduciary of the consumer, regardless of who else the broker may be acting as an agent for in the course of the loan transaction.
• Financing of Single-Premium Insurance Products: In addition to the forgoing provisions applicable to covered loans, a person who originates a consumer loan may not finance in the loan or within 30 days after the loan is made any credit life, credit disability, credit property or credit unemployment insurance premiums, or any debt cancellation or suspension agreement or contract fees (except such insurance premiums calculated and paid on a monthly basis). PMI insurance or a contract issued by a government agency to insure the lender against loss as a result of the borrower's default is permitted.

If you have any questions or comments, please do not hesitate to contact our customer service or compliance departments at (800) 649-1362. Thank you for making DocMagic #1.

DISCLAIMER: DIVISION 1.6 OF CALIFORNIA FINANCIAL CODE (COMMENCING WITH SECTION 4790) IS A NEW LAW AND MANY OF ITS PROVISIONS ARE AMBIGUOUS OR UNDEFINED AND SUBJECT TO INTERPRETATION. 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 We've identified all potential Section 226.4(c)(7) charges in our database of charges. These charges include title related fees (title exam, title abstract, title insurance, survey and similar fees), document preparation fees, notary fees, credit report fees, appraisal fees, and inspection fees (including pest inspections and flood hazard determinations).  Please note that if you input a miscellaneous fee that is not included as a part of the Prepaid Finance Charge, and the borrower pays the miscellaneous fee to the creditor, the charge will be treated as a Section 226.4(c)(7) charge for all California Covered Loan calculations.
2 Flexibility has always been one of DocMagic's strong suits.  Accordingly, we have given you the power to override of our standard California Covered Loan settings simply by speaking with one of our customer service representatives.
3 In a recent California appellate court case, the court reached the conclusion yield spread premiums should not be included as points and fees under the Covered Loan Law. Wolski v. Fremont Investment & Loan (2004) 127 Cal. App. 4th 347).  For additional information on this case, please click here.  Furthermore, in a recently published release, the California Department of Corporations has concluded that under current law (specifically the decision in Wolski), yield spread premiums are not part of points and fees under California's Covered Loan Law. We believe this is the first written statement by a California governmental agency regarding whether or not yield spread premiums are included as points and fees under California's Covered Loan Law.  To view a copy of the release, click here.

Ohio

UPDATED: August 22, 2011 (Revisions are highlighted in yellow.)

Ohio Predatory Lending Act

The State of Ohio has made some significant changes to the high cost test set forth in the Ohio Predatory Lending Act (Ohio Revised Code Sections 1349.25 to 1349.37) that become effective for all loans with a closing date on or after January 1, 2007.

Currently, the Ohio high cost test is identical to the federal Section 32 test.  The changes that go into effect for loans closing on or after 1/1/2007 are as follows: 

1.   Coverage: The revised OH high cost test will now apply to open-end loans (Loan Type = E); currently, open-end loans are excluded from coverage. 

2.   Points and Fees: The definition of points and fees has been revised.  

a.   Yield spread premiums or other premiums paid to mortgage brokers other than by the borrower are now included in the definition of “Other Mortgage Broker Compensation”; provided, however, that up to one point of such indirect compensation paid to a mortgage broker may be excluded from points and fees.

b.   Fees paid to FHA and VA are excluded from points and fees.

Given the foregoing changes, here is how Points and Fees will be calculated:  

	Prepaid Finance Charge - the total amount of prepaid finance charges
-	Prepaid Interest - deducted from prepaid finance charge
+	Other Mortgage Broker Compensation - all compensation paid to broker regardless of the source of payments, i.e., including yield spread premiums and other non-borrower 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
-	Other Excludable Charges - the total of (a) fees paid to FHA or VA; and (b) up to one percentage point (1%) of indirect mortgage broker compensation (i.e., YSP or other premium paid to the mortgage broker other than by the borrower).
+/-	Creditor Requested Adjustments - the total amount of all customer requested overrides

3.   Total Loan Amount: The definition of "Total Loan Amount" under the points and fees test has been revised.  "Total Loan Amount" now means the principal amount of the loan (and for open-end loans, the credit line available) minus points and fees financed. 

	Original Principal Balance/Credit Line Available
-	Total Points and Fees Financed
+/-	Creditor Requested Adjustments

4.   Points and Fees Threshold: The Points and Fees threshold has also been changed to the following: 

      If the Total Loan Amount is $25,000 or more, the threshold is 5%
      If the Total Loan Amount is less than $25,000, the threshold is 8% 

In order to determine which yield on Treasury securities to use, an "Application Date" must be entered in the worksheet.  If the Application Date is missing, the DocMagic system will default to the document date and a warning will display substantially as follows:

WARNING: APPLICATION DATE IS MISSING; DOCMAGIC HAS DEFAULTED TO THE DOCUMENT DATE OF ___ TO RUN THE OH CONSUMER CREDIT LOAN ACT APR TEST.

Please contact the DocMagic Legal/Compliance Department if you have any questions regarding these changes.

Maine

UPDATE: This memo has been updated here.

Maine Anti-Predatory Lending Law

The new Maine anti-predatory lending law (Public Law, Chapter 273) makes significant changes to, among other things, various provisions of the current Consumer Credit Code relative to "residential mortgage loans," and a particular subset of residential mortgage loans defined as "high-rate, high-fee mortgage" loans.  The new law becomes effective January 1, 2008. 

Coverage: The new law applies generally to any loan meeting the definition of a "residential mortgage loan."  A residential mortgage loan is defined as any extension of credit (including an open end loan) that:

• is equal to or less than the Freddie Mac conforming loan limit, and
• meets the definition of a "federally related mortgage loan" under Section 3500.2 of Regulation X promulgated under the Real Estate Settlement Procedures Act of 1974 ("RESPA"). A "federally related mortgage loan" is defined generally as a loan that is secured by a first or subordinate lien loan on a one- to four-family dwelling (including a condominium, cooperative or manufactured home).

Among the types of loans excluded from the definition of residential mortgage loan are reverse mortgages, construction loans (Loan Type = Construction and Construction to Permanent), multifamily (5+ units) loans (Property Type = Multifamily, bridge loans and loans primarily for business, agricultural or commercial purposes (Owner Occupied = No and Property Type = Commercial and Land and Lots).

The new law places a number of substantive restrictions (described below) on residential mortgage loans in general and on a particular subset of residential mortgage loans defined as high-rate, high fee mortgage loans.

When is a Residential Mortgage Loan a "High-Rate, High-Fee Mortgage Loan"?  A high-rate, high-fee mortgage loan is defined as a residential mortgage loan that meet or exceed either or both of the following thresholds:

1. Rate Threshold: The loan's annual percentage rate (APR) equals or exceeds by either 8% (for first liens) or 10% (for subordinate liens) the yield on Treasury securities having comparable periods of maturity on the 15^th day of the month immediately preceding the month in which the application is received by the creditor; or
2. Total Points and Fees Threshold: The total points and fees payable in connection with the residential mortgage loan exceed either (i) five percent (5%) of the total loan amount if total loan amount is $40,000 or more, or (ii) six percent (6%) of the total loan amount if total loan amount is less than $40,000.

The Rate Threshold: The loan APR is calculated in the same manner as under Regulation Z (12 CFR 226.32).

In order to determine which yield on Treasury securities to use, an "Application Date" must be entered in the worksheet.  If the Application Date is missing, the DocMagic system will default to the document date and a warning will display substantially as follows:

WARNING: APPLICATION DATE IS MISSING; DOCMAGIC HAS DEFAULTED TO THE DOCUMENT DATE OF ___ TO RUN THE ME HIGH-RATE HIGH-FEE MORTGAGE LAW APR TEST.

Total Points and Fees Threshold: The 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 - to the extent they have been included in prepaid finance charges, the following fees may be excluded: tax service fees and attorneys' fees provided they are not paid to the creditor or a creditor affiliate; and up to one percent (1%) of bona fide fees paid to any federal or state government agency insuring some portion of the loan (e.g., FHA and VA).
+	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.
+	Other Mortgage Broker Compensation - the total amount of all non-prepaid finance charges paid to a mortgage broker regardless of who pays it (i.e., not only borrower-paid items are included, but all items going to the broker regardless of source), including lender-paid premiums (e.g., YSP).
+	Single Premium Option Insurance and Related Products and Financed - 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.
+	Maximum Prepayment Fees Permitted Under the Loan Documents - 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 fee or penalty is equal to the "conventional prepayment penalty," defined in part as not exceeding two percent (2%) of the amount prepaid.  For purposes of completing this analysis, if the loan has a prepayment provision, we simply multiply the original principal loan amount of the loan by 2% and add that amount to points and fees.
+	Any Prepayment Fee Assessed on Refinanced Loan Made or Held by the Creditor or Affiliate - if the new loan is refinancing a preexisting loan that was made or is currently being held by the creditor or a creditor affiliate, and a prepayment penalty is assessed on the payoff of the preexisting loan.
-	Bona Fide Discount Points/Conventional Prepayment Penalty - either up to two (2) bona fide discount points or a conventional prepayment penalty may be excluded; the selection appears to be left up to the creditor to make.  If a DocMagic user indicates in the worksheet that the discount points are bona fide, we will deduct up to two (2) points; if the worksheets indicates that the discount points are not bona fide, we will not deduct any discount points.  If the loan provides for a prepayment penalty but no discount points, for purposes of our high cost analysis, we assume that the prepayment penalty does not meet the definitional requirements of a conventional prepayment penalty and we will make no deductions.  "Bona fide discount points" means an amount knowingly paid by a borrower for the express purpose of reducing, and which in fact does result in a bona fide reduction of, the interest rate, as long as the undiscounted interest rate does not exceed the conventional mortgage rate as published in statistical release H.15 as of the 15th day of the month immediately preceding the month in which the application is received by the creditor by more than two percentage points (2%) for a residential mortgage loan secured by a first lien or by three and one-half percentage points (3.5%) for a residential mortgage loan secured by a subordinated lien.
+/-	Creditor Requested Adjustments - the total amount of all customer requested overrides

Total Loan Amount is defined as the original principal balance minus points and fees financed.  For open-end loans, the total loan amount is equal to the credit limit.

State-Specific High Cost Memos

	Alabama - No State High Cost Test
	Alaska - No State High Cost Test
	Arizona - No State High Cost Test
	Arkansas
	California
	YSPs Not Included In California's Covered Loan Law Calculations
	Scope of California Predatory Loan Law Expanded
	California Higher-Priced Mortgage Loan Audit
	Colorado
	Connecticut
	Connecticut Nonprime Home Loan Audit
	Delaware - No State High Cost Test
	District of Columbia
	Florida
	Georgia
	Hawaii - No State High Cost Test
	Idaho - No State High Cost Test
	Illinois (including Cook County & Chicago)
	Illinois Anti-Predatory Lending Database Program
	Indiana
	Iowa - No State High Cost Test
	Kansas
	Kentucky
	Louisiana - No State High Cost Test
	Maine - UPDATED!
	Maine Higher-Priced Mortgage Loan Audit - UPDATED!
	Maryland
	Maryland Higher-Priced Mortgage Loan Audit
	Massachusetts
	Massachusetts Borrower Interest Audit
	Michigan
	Minnesota
	Minnesota Amends Residential Mortgage Lending Laws
	Mississippi - No State High Cost Test
	Missouri - No State High Cost Test
	Montana - No State High Cost Test
	Nebraska
	Nevada
	New Hampshire - No State High Cost Test
	New Jersey
	New Mexico
	New York
	New York Subprime Home Loan Audit
	New York Subprime Home Loan Audit Enhancements
	North Carolina (High-Cost Home Loan Law)
	Treatment of Seller-Paid Fees
	North Carolina Rate Spread Home Loan Audit
	North Dakota - No State High Cost Test
	Ohio
	Oklahoma
	Oregon - No State High Cost Test
	Pennsylvania
	Rhode Island
	South Carolina
	South Dakota - No State High Cost Test
	Tennessee
	Texas
	Utah
	Vermont
	Virginia
	Virginia High-Risk Mortgage Loan Law and Audit
	Washington - No State High Cost Test
	West Virginia
	Wisconsin
	Wyoming - No State High Cost Test

If you have any questions regarding any of the information relating to predatory lending, please contact DocMagic's Compliance Department at (800) 649-1362.

Maine Higher-Priced Mortgage Loan Audit

UPDATE: This memo has been updated here.

Maine Senate Bill 523 (Public Law, Chapter 362), which became effective on June 11, 2009, removed a category of loans in Maine, known as the “subprime mortgage loan,” and, in its place, established a new category of loans in Maine called a “higher-priced mortgage loan” (“HPML”).  The Bill also amended the definition of a “rate spread home loan.”  A description of the different categories of loans prior to the implementation of SB 523 can be found here.