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.