Tennessee Home Loan Protection Act

Tennessee's Home Loan Protection Act (the "Act") becomes effective on January 1, 2007. To view a copy of the Act, please click here.

Coverage: The Act applies to any "home loan" that meets or exceeds certain thresholds. A "home loan" is defined as any loan in which:

• the principal amount of the loan does not exceed the lesser of (a) Fannie Mae's conforming loan limit for a single family dwelling, or (b) $350,000;
• the debt is incurred for personal, family or household purposes; and
• is secured by real property on which a one (1) to (4) family structure is situated that is or will be occupied as the borrower's principal dwelling.

Specifically excluded from the definition of a home loan are:

• "residential mortgage transactions" as defined under Regulation Z (i.e., loans made to purchase or construct a structure that is or will be the borrower's principal dwelling);
• open-end (HELOC) loans:
• reverse mortgages;
• construction loans as defined under the Act; and
• any loan that is insured or guaranteed by, securitized by or sold to a government agency, including HUD, VA, the Tennessee Housing Development Agency, or the U.S. Department of Agriculture.

When is a Home Loan a "High-Cost Home Loan"? The Act defines a "high-cost home loan" as any home loan in which the terms of the loan meet or exceed either of the following thresholds:

• Rate Threshold: The rate threshold under the Act is defined by reference to HOEPA/Section 32: 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
• The Total Points and Fees Threshold: Total points and fees payable by the borrower at or before loan closing exceed either (a) the greater of five percent (5%) of the total loan amount or $2,400 if the total loan amount is more than $30,000, or (b) eight percent (8%) of the total loan amount if the total loan amount is $30,000 or less.

The Points and Fees Threshold: Points and fees are defined generally by reference to HOEPA/Section 32. However, there are a couple of major differences: (1) up to two (2) Bona Fide Loan Discount Points may be excluded from points and fees; and (2) Regulation Z Section 226.4(c)(7) charges paid to an affiliate of the creditor may be excluded so long as such charges are reasonably comparable to charges by non-affiliates.

Total Points and Fees: Points and Fees are defined to include (or exclude) the following items:

	Prepaid Finance Charge - the total amount of prepaid finance charges
-	Prepaid Interest - to be deducted from prepaid finance charge
+	Other 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).
-	Bona Fide Discount Points - the Act permits the deduction of up to two (2) "Bona Fide Loan Discount Points." "Bona Fide Loan Discount Points" are defined as loan discount points actually paid by the borrower to the lender for the purpose of reducing, and which in fact result in a bona fide reduction of the interest rate applicable to the loan by a minimum of 25 basis points per discount point
+	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
+	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: The total loan amount is defined by reference to the official Federal Reserve Board staff commentary to Section 32:

	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: There are numerous acts and practices prohibited by the Act. They include the following:

• No recommending that borrower default or skip payment on an existing loan
• Must provide up to two (2) pay-off statements per 12-month period upon request within five (5) business days
• May not charge a fee to provide a release upon prepayment except for actual recording cost
• May not knowingly or intentionally make a high-cost home loan that refinances within 30 months an existing home loan or high-cost home loan unless the new loan has a "reasonable benefit" to the borrower
• Limitations on the financing of single premium credit insurance and related products
• No lending without reasonable belief of borrower's repayment ability; presumption of repayment ability if borrower's total monthly debts do not exceed 50% of the borrower's verified monthly gross income
• No financing of points and fees in excess of either the greater of 3% or $1,500 (if the total loan amount is more than $30,000), or 5% of the total loan amount (if the total loan amount is $30,000 or less) (Note: Tennessee industrial loan and thrift registrants may finance points and fees not to exceed charges allowed by TN Code Section 45-5-403(a)(1)(A))
• May not charge points and fees to refinance an existing high-cost home loan with the same lender or an affiliate of the lender except in connection with any additional proceeds received by the borrower
• No prepayment penalties which in the aggregate exceed 2% of the loan amount prepaid in the first 24 months following loan closing, and not permitted at all if refinancing a high-cost home loan if the note holder is the lender or an affiliate of the lender
• No balloon loans
• No negative amortization
• No provision that permits lender, in its sole discretion, to accelerate the indebtedness
• No consolidation and collection of more than two (2) periodic payments from the loan proceeds
• No default rate of interest
• Late payment fee shall not exceed the greater of 5% of the past due amount or $15 for payment past due 10 days or more
• Required written notice must be given to borrower in at least 12-point bold type at least three (3) days prior to consummation; notice must be acknowledged in writing and signed by borrower:

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 LENDER OR BROKER YOU SELECT.

IF YOU ACCEPT THE TERMS OF THIS LOAN, THE LENDER 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 A QUALIFIED INDEPENDENT CREDIT COUNSELOR OR OTHER EXPERIENCED FINANCIAL ADVISOR REGARDING THE RATE, FEES AND PROVISIONS OF THIS MORTGAGE LOAN BEFORE YOU PROCEED. THE UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (HUD) MAINTAINS A LIST OF CREDIT COUNSELORS IN YOUR AREA. YOU MAY OBTAIN HUD'S LIST OF CREDIT COUNSELORS BY CONTACTING HUD DIRECTLY OR BY CONTACTING THE TENNESSEE DEPARTMENT OF FINANCIAL INSTITUTIONS.

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 LENDERS PROVIDE ESCROW SERVICES FOR THESE PAYMENTS. YOU SHOULD ASK YOUR LENDER ABOUT THESE SERVICES.

ALSO, YOUR PAYMENTS ON EXISTING DEBTS CONTRIBUTE TO YOUR CREDIT RATINGS. YOU SHOULD NOT ACCEPT ANY ADVICE TO IGNORE YOUR REGULAR PAYMENTS TO YOUR EXISTING LENDERS.

• May not present borrower with materially different interest rate, term or type of loan, or settlement charges disclosed on the HUD-1 or HUD-1A without redisclosure at least one (1) day before closing. "Materially different settlement charges" means final disclosed settlement charges exceed last disclosed settlement charges by more than 15% in the aggregate
• Loan must be closed in lender's office, Tennessee-licensed attorney's office, Tennessee-licensed title insurance company or title insurance agency office, settlement or closing agent office or commercial office of a mortgage broker
• Each security instrument must have the following legend prominently displayed on its face: "This instrument secures a high-cost home loan as defined in Tennessee Code Annotated, Title 45."
• Each note must have the following legend prominently displayed on its face: "This instrument is a high-cost home loan as defined in Tennessee Code Annotated, Title 45."
• Limitations on arbitration provisions
• No omissions of material terms from any loan or closing document permitted
• No modifications of any loan or closing documents permitted without the consent of the person affected by the change (including authorization by valid power of attorney)
• No person shall encourage, solicit or conspire with any other person to violate the Act
• Must provide, on a separate document and at the same time as the good faith estimate of closing costs is provided, notice of the availability of HUD-approved credit counselors or state housing financing agency, which notice shall include a list of counselors or resources

Other Provisions: The Act contains a number of additional provisions dealing with a variety of subjects, including the following:

• Foreclosure Notice and Opportunity to Cure Default: No less than 30 days prior to publishing notice of foreclosure or commencing an action for judicial foreclosure, a notice of the right to cure the default must be sent to the borrower. The borrower has the right at any time, prior to three business days prior to a foreclosure sale, to cure the default and reinstate the home loan by tendering the amount or performance. The borrower's right to cure a default prior to commencing a foreclosure proceeding could not be invoked more than once in any 12-month period.
  
• Assignee Liability: No Class Action; Safe Harbor: A purchaser of a high-cost home loan is subject to all claims and defenses with respect to the loan that the borrower could assert against the lender. Relief granted for an action pursuant to this provision could be asserted by the borrower acting only in an individual capacity; could not exceed the sum of the amount required to reduce the borrower's liability so that it is no longer a high-cost home loan, including costs and reasonable attorneys' fees; could be asserted by the borrower of a high-cost home loan in an action to enjoin foreclosure or preserve or obtain possession of the home after notice of acceleration or foreclosure of the loan; and must be brought within three years from the date of the violation. These provisions would not apply if a purchaser or assignee has demonstrated that the purchaser or assignee: (A) has policies that expressly prohibit the purchase or acceptance of assignment of any high-cost home loan containing such violations; (B) requires that a seller or assignor of such loans represent and warrant that the seller or assignor will not sell or assign any high-cost home loan containing such violations or the seller or assignor is a beneficiary of a representation and warranty from a previous seller or assignor and that the purchaser or assignee would also be a beneficiary of such representation and warranty; and (C) exercised reasonable due diligence intended to prevent the purchaser or assignee from purchasing or taking assignment of any high-cost home loan containing such violations.
  
• Subterfuge Prohibited: No person may, with the intent to avoid the application or provisions of the Act: divide a loan transaction into separate parts; structure a loan transaction as an open-end credit plan; or engage in any other subterfuge.
  
• Damages: Any lender who makes a high-cost home loan in violation of Act is subject to actual damages, costs and reasonable attorneys' fees, and, for willful violations, statutory damages equal to the amount of all finance charges and fees paid by the borrower and forfeiture of the remaining interest under the loan. Any lender who collects or services a high cost home loan in violation of the Act is subject to actual damages, costs and reasonable attorneys' fees, and, for willful violations, statutory damages equal to the amount of all finance charges and fees paid by the borrower. Punitive damages could be awarded where the court finds malicious or reckless violation and are limited to three times the actual damages and the amount of all finance charges and fees paid by the borrower. The loan could be reformed to effect the remedies provided by the Act, and the remedies provided therein are not exclusive.
  
• Time Limitation: Any action under the Act must be brought within three years from the date the borrower discovered or should have discovered the violation. A borrower is not barred from asserting a violation of the Act as a defense in an action to collect the debt that was brought more than three years from the date of occurrence of the violation as a matter of defense by recoupment or set-off in such action. Any frivolous or harassing action brought under the Act would enable the court to require the borrower instituting the action to indemnify the defendant for reasonable costs and attorneys' fees.
  
• Cure Provisions: A lender or servicer of a high-cost home loan who fails to comply with the Act while acting in good faith is not deemed to have violated the Act if the lender or servicer establishes that the borrower is notified of the compliance failure and appropriate restitution, adjustments, refunds, or other necessary actions to cure the violation are made or taken within 30 days of discovery and prior to institution of any action. Also, the lender or servicer is not deemed to have violated the Act if the lender or servicer establishes the compliance failure was not intentional and resulted from a bona fide error and, within 60 days after discovery of the error and prior to institution of any action, the borrower is notified of the error and the appropriate restitution, adjustments, refunds, or other necessary actions to cure the violation are made or taken.
  
• Enforcement: The commissioner of financial institutions may conduct examinations and investigations and issue subpoenas and orders to enforce the provisions of the Act and can recover the actual costs for such investigation and examination from the person reasonably suspected to be subject to the regulatory jurisdiction of the commissioner. In the event a person does not comply with an order or subpoena for documents or testimony under the Act, the commissioner could petition a chancery court to seek injunctive relief to compel compliance with such order. The commissioner could bring an action in the chancery court of Davidson County to enjoin any act or practice in or from this state that constitutes a violation of the Act or any administrative rule issued pursuant thereto. Upon proper showing by the commissioner, the court could grant injunction, restraining order, writ of mandamus, disgorgement, or other proper equitable relief. If, after notice and hearing, the commissioner determines a person to be in violation of the Act or administrative rules pursuant thereto, the commissioner may: order the person to cease and desist the violating action; order a person to make restitution for actual damages to borrowers; impose a civil penalty of up to $10,000 for each violation; suspend, revoke, or refuse to renew any license or registration issued by the commissioner; censure, suspend, or bar an individual responsible for the violation form any position of management, control, employment, or other capacity related to activities regulated by the commissioner; where the interests of the public require immediate action to prevent undue harm to borrowers, enter an emergency order, effective immediately and until entry of a final order; and impose other conditions as the commissioner deems appropriate.
  
• Preemption: All counties, municipalities, or political subdivisions are prohibited from enacting and enforcing ordinances, resolutions, and rules regulating financial and lending activities. The Act does not apply to the extent that it is preempted by or inconsistent with federal laws or regulations.
  
• Effective Date: The Act applies to all loans applied for and closed on after January 1, 2007.