The following article is reprinted from Basis Points® , Vol. 2, Issue 9, Copyright © 2003, with the permission of CounselorLibrary.com, LLC. All Rights Reserved. Further reproduction is prohibited without permission.

On August 20, 2003, the Governor of Illinois signed into law Senate Bill 1784 (Public Act 93-0561), known as the High Risk Home Loan Act. The Act takes effect on January 1, 2004 and is one more in a growing list of state predatory lending statutes enacted this year. The Illinois statute preempts relevant administrative rules previously promulgated and supercedes previously enacted laws regulating "high risk home loans," except the Interest Act. The Act prohibits the waiver of any of its provisions unless otherwise explicitly provided.

 High Risk Home Loan Triggers. A "high risk home loan" is defined as a non-purchase money loan that is secured by a lien on the borrower's primary residence in which (i) the annual percentage rate exceeds by more than 6 percentage points in the case of a first lien mortgage or by more than 8 percentage points in the case of a junior mortgage the yield on U.S. Treasury securities having comparable periods of maturity to the loan maturity, or (ii) the total points and fees payable by the consumer at or before closing will exceed the greater of 5 percent of the total loan amount or $800. The $800 figure is subject to annual adjustment.

 Prohibitions on High Risk Home Loans. In connection with a "high risk home loan," a lender is prohibited from doing:

 Ability to repay. You may not make a "high risk home loan" if you do not believe that the borrower will be able to make the scheduled payments, considering his or her income, obligations, employment status and other financial resources other than the borrower's equity in the home. A borrower is presumed to be able to repay the loan if the borrower's scheduled monthly payments combined with the scheduled payments for all other disclosed debts do not exceed 50 percent of the borrower's monthly gross income. The borrower must submit to the lender a personal income and expense statement and either tax returns, pay stubs or accounting statements to verify the borrower's income. In addition, the lender must obtain a copy of the borrower's credit report.

 Deceptive acts. You may not employ fraudulent or deceptive acts, including deceptive marketing and sales efforts, in the making of a "high risk home loan."

 Prepayment penalty. For a loan that is not subject to HOEPA, you may not include a penalty for prepayment after 36 months after the loan was made or that is more than 3 percent of the total loan amount if the prepayment is within the first 12 months, 2 percent of the total loan amount if the prepayment is within the second 12 months or 1 percent of the total loan amount if the prepayment is within the third 12 months.

 Credit insurance. You may not finance credit insurance; however, insurance premiums that are calculated and paid on a monthly basis are not considered financed by the lender.

 Flipping. You may not refinance a "high risk home loan" within one year of the original loan where there are additional points and fees charged, unless the refinancing results in a tangible net benefit to the borrower.

 Financing fees. You may not finance any points and fees in excess of 6 percent of the loan amount.

 Home improvement. You may not pay a home improvement contractor directly from the proceeds of a "high risk home loan." Any loan proceeds must be delivered by an instrument payable to the borrower, jointly to the borrower and the contractor, or through a third-party escrow agent pursuant to a written escrow agreement signed by you, the borrower and the contractor before the date of payment.

 Negative amortization. You may not establish a payment schedule, other than in connection with a reverse mortgage, where the principal balance will increase at any time over the course of the loan because the regular payments do not cover the full amount of interest due, unless the negative amortization is the consequence of a temporary forbearance sought by the borrower.

 Negative equity. You may not make a "high risk home loan" where the loan amount exceeds the value of the property securing the loan.

 Late payment fees. You may not charge a late payment fee in excess of 5 percent of the amount of the past due payment. You may only assess a late payment charge on a payment past due 15 days or more. You may charge a late payment only once with respect to a single late payment. You must return a late payment upon proof of timely payment. A payment must be posted on the date it was received.

 Advance payments. You may not require that more than two periodic payments be paid in advance from the loan proceeds.

 Acceleration. You may not accelerate the debt except where the borrower has failed to abide by the material terms of the loan.

 Written notice. You may not make a "high risk home loan" without providing the borrower with a written notice, acknowledged in writing and signed by the borrower, substantially similar to the following:

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. 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 AN ATTORNEY-AT-LAW AND AN APPROVED CREDIT COUNSELOR OR OTHER EXPERIENCED FINANCIAL ADVISOR REGARDING THE RATE, FEES, AND PROVISIONS OF THIS LOAN BEFORE YOU PROCEED. A LIST OF APPROVED CREDIT COUNSELORS IS AVAILABLE BY CONTACTING EITHER THE ILLINOIS DEPARTMENT OF FINANCIAL INSTITUTIONS OR THE ILLINOIS OFFICE OF BANKS AND REAL ESTATE. YOU ARE NOT REQUIRED TO COMPLETE THIS LOAN AGREEMENT MERELY BECAUSE YOU HAVE RECEIVED THIS DISCLOSURE OR HAVE SIGNED A LOAN APPLICATION. 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.

 Mandatory arbitration. You may not include a mandatory provision in a "high risk home loan" agreement that is oppressive, unfair, unconscionable, or substantially in derogation of the borrower's rights.

 Requirements for High Risk Home Loans. In connection with a "high risk home loan," a lender must do the following:

  Counseling prior to foreclosure. If a "high risk home loan" becomes delinquent by more than 30 days, you must send a notice providing, at a minimum, the following:

"YOUR LOAN IS OR WAS MORE THAN 30 DAYS PAST DUE. YOU MAY BE EXPERIENCING FINANCIAL DIFFICULTY. IT MAY BE IN YOUR BEST INTEREST TO SEEK APPROVED CREDIT COUNSELING. A LIST OF APPROVED CREDIT COUNSELORS MAY BE OBTAINED FROM EITHER THE ILLINOIS DEPARTMENT OF FINANCIAL INSTITUTIONS OR THE ILLINOIS OFFICE OF BANKS AND REAL ESTATE."

If you receive written notice from an approved credit counselor, within 15 days after mailing the notice suggesting counseling, that the borrower is seeking counseling, then you shall not institute foreclosure for 30 days after the date of that notice. If, within the 30-day period, you, the credit counselor and the borrower agree to debt management plan, then you shall not commence foreclosure as long as the borrower is complying with the plan. The debt management plan must be in writing and cannot be modified without the mutual agreement of you, the counselor and the borrower.

  Right to cure. Before foreclosure, you must deliver to the borrower a notice of the right to cure the default, which includes the nature of the default, the right to cure the default, the date (not less than 30 days after the date the notice is delivered) by which the default may be cured, the name, address and telephone number of a person to whom payment shall be made, the consequences of not curing the default and the name, address and telephone number of a person the borrower may contact if the borrower disagrees that a default has occurred or with the cure amount. A borrower may cure a default after acceleration and prior to foreclosure. To cure a default, a borrower is not required to pay any fee attributable to the exercise of the right to cure except for attorney's fees not in excess of $100 incurred by the lender after the 30-day notice period for the right to cure but before filing a foreclosure action and reasonable attorney's fees actually incurred after the filing of a foreclosure action. Foreclosure must be by means of judicial foreclosure procedures.

  Mortgage awareness program. Prior to making a "high risk home loan," you must inform the borrower in writing of the right to participate in the Mortgage Awareness Program provided by the Commissioner of the Office of Banks and Real Estate and the Director of Financial Institutions. The borrower may waive the right to participate in the program no less than 2 business days after the borrower receives notice of the right to participate, on a form approved by the Commissioner and the Director.

  Report of default and foreclosure rates. Twice each year you must file a report containing certain required default and foreclosure data.

  Liability. A loan made in knowing violation of the prohibitions above constitutes a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act. The statute allows lenders acting in good faith to avoid liability by acting expeditiously, making appropriate restitution and making appropriate adjustments to the loan.

  Assignee Liability. Purchasers/assignees of "high risk home loans" are subject to all affirmative claims and defenses that the borrower could assert against the lender or broker of the loan unless the purchaser/assignee demonstrates by a preponderance of the evidence that it has in place policies that expressly prohibit its purchase/acceptance of assignment of "high risk home loans," requires by contract that a seller/assignor of "high risk home loans" represent and warrant that either the seller/assignor will not sell/assign any "high risk home loans" to it or the seller/assignor is a beneficiary of a representation and warranty from a previous seller/assignor to that effect, and exercises reasonable due diligence to prevent it from purchasing/taking assignment of a "high risk home loan." The reasonable due diligence requirement can be met by sampling. A borrower acting only in an individual capacity may assert claims against a purchaser/assignee, limited to the amount required to reduce or extinguish the borrower's liability under the "high risk home loan" plus the amount required to recover costs, including reasonable attorney's fees, within 5 years of the closing date or may assert, at any time after an action to collect/foreclose on the loan has been filed or the debt has been accelerated, any defense, claim, counterclaim or action to enjoin foreclosure or preserve or obtain possession of the home securing the loan. The statute allows purchasers/assignees acting in good faith to avoid liability by acting expeditiously, making appropriate restitution and making appropriate adjustments to the loan.

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