The regulations may be found online at www.counselorlibrary.com. An article regarding developments concerning the Act since its passage, including the repeal of certain of the Act's assignee liability provisions, can be found in the March 2004 issue of Basis Points.

Flipping / Reasonable, Tangible Net Benefit Test

The Act prohibits a creditor from knowingly and intentionally engaging in the unfair act or practice of "flipping" a home loan. Flipping is defined as the making of a home loan to a borrower that refinances an existing home loan when the new loan does not have a reasonable, tangible net benefit to the borrower considering all of the circumstances.

The new regulation, NMAC 12.15.5, provides clarification regarding the "reasonable, tangible net benefit" standard. Specifically, the rule provides that the "reasonable, tangible net benefit" standard is based upon the totality of the facts and circumstances of a particular transaction and cautions lenders to refrain from using a "single one-size-fits-all test" for all loan transactions.

The rule notes that the Financial Institutions Division will focus on whether the lender has policies and procedures in place that were used to determine that borrowers received a reasonable, tangible net benefit from the refinancing of their loans, including policies and procedures to evaluate loans in circumstances where an economic test alone may not be sufficient to determine that the transaction provides a reasonable, tangible net benefit to the borrower. The rule does not mandate use of a particular form or system for evaluating the economic and non-economic benefits of a loan.

The rule suggests that a lender may want to create procedures for additional upper-level management review in cases where the benefit to the borrower is not clear based on a strict economic analysis of the old and new loans. The rule also suggests that lenders may want to create worksheets for collecting relevant information from the borrower, such as the borrower's financial status, objectives for use of the funds, and knowledge of other alternatives, as well as an explanation from the borrower regarding any non-economic benefits the borrower expects to obtain from the new loan. The rule encourages, but does not require, lenders to maintain records in their loan files to demonstrate that they performed the requisite analysis to arrive at the conclusion that the transaction provided the borrower with a reasonable, tangible net benefit.

The rule lists factors that could be relevant to determining whether the reasonable, tangible net benefit standard was met, including the note rate, the amortization schedule, balloon payment provisions, points and fees on the new loan, closing costs on the new loan, the loan-to-value ratio of the new loan compared to the loan-to-value ratio associated with the outstanding balance on the old loan, the debt-to-income ratio of the borrower before and after the new loan, the amount of time that has passed since the origination or last refinance of the old loan, and in cases where the economic benefits of the new transaction are unclear, an explanation of how the loan proceeds will be used.

Reasonable Due Diligence by Assignee

The Act provides that a person who purchases or takes assignment of a high-cost home loan is not subject to certain claims and defenses if the person can demonstrate by a preponderance of the evidence that a reasonable person exercising reasonable due diligence could not determine that the mortgage was a high-cost home loan.

The Act provides that an assignee has exercised reasonable due diligence if it:

1. has in place, at the time of assignment, policies that expressly prohibit its purchase of high-cost home loans,
2. requires by contract that the assignor represent and warrant to the assignee that either the assignor will not assign any high-cost home loans to the assignee or that the assignor is the beneficiary of such a representation from a previous assignor,
3. exercises reasonable due diligence, at the time of assignment or within a reasonable time thereafter, intended to prevent the assignee from purchasing or taking assignment of any high-cost home loans, or
4. satisfies (1) and (2) above and establishes that a reasonable person exercising ordinary due diligence could not determine, based on the documentation required by the Truth in Lending Act and the itemization of amount financed and other disclosures, that the loan was a high-cost home loan.

The new regulation, NMAC 12.15.6, defines due diligence as the degree of review that may be reasonably expected from an assignee given the circumstances surrounding the transaction or the conditions existing at the time of the review, including the assignee's involvement with the transaction and the amount of time that has elapsed since the loan's origination.

The rule provides an explanation of the type of circumstances the Financial Institutions Division will consider in determining whether the "reasonable due diligence" standard has been met. The rule provides that the "reasonable due diligence" standard is based upon the totality of the facts and circumstances of the assignee's loan review, policies, and practices but notes that in the vast majority of cases, a loan-by-loan individualized review is not required.

The rule notes that assignees should develop and use reasonable compliance policies and conduct quality control review of appropriate loan documents to identify and avoid the purchase of high-cost home loans. The rules provide for a rebuttable presumption of reasonable due diligence if none of the loans reviewed initially is a high-cost home loan.

However, when a reasonable review discloses at least one high-cost home loan, an upgraded compliance review is required. The level of the upgraded review may depend upon the size of the loan pool, prior experience with and reliability of the assignor, the number of high-cost home loans identified during the initial review, the extensiveness of the initial review, and the procedures used to identify and exclude high-cost home loans from the loan pool.

Liability Exposure of Creditors and Assignees

The Act contains three sections concerning legal liability exposure of creditors and assignees for actions that may be brought for violations of the Act. The new rule, NMAC 12.15.7, explains the interrelationship of the three statutory sections.

Section 58-21A-9 authorizes a borrower to bring a civil action for violations of the Act for actual damages, statutory damages, punitive damages, reasonable attorney fees, injunctive relief, and declaratory and other relief. The rule provides that a creditor or assignee who, in good faith, exercises reasonable due diligence when seeking to comply with the Act will not be liable for punitive damages.

Section 58-21A-11, as discussed earlier, limits the liability of a purchaser or assignee of a high-cost home loan where the purchaser or assignee demonstrates by a preponderance of the evidence that a reasonable person exercising reasonable due diligence could not determine that the mortgage is a high-cost home loan. That section also provides time periods in which a borrower may bring an individual action against the original creditor or an assignee for certain violations and provides that the borrower may only recover the amounts necessary to reduce or extinguish the borrower's liability on the loan plus attorneys' fees and costs.

Section 58-21A-12 specifies that a violation of the Act constitutes an unfair or deceptive trade practice under the New Mexico Unfair Practices Act. The rule provides that the borrower may recover, on an individual or class action basis, actual damages, treble damages where the practice was willful, and reasonable attorneys' fees and costs.

The rule reiterates that an assignee who exercises reasonable due diligence will not be subject to treble damages or other punitive damages under the Unfair Practices Act. The rule also notes that while the Act authorizes a borrower to bring multiple types of claims, the borrower may not be awarded damages for the same injury or loss more than once.

Third-Party, Nonprofit Counselors

The Act provides that no creditor shall make a high-cost home loan without first receiving certification from a third-party, nonprofit counselor approved by the U.S. Department of Housing and Urban Development, the New Mexico Mortgage Finance Authority, or the Director of the Financial Institutions Division of the Regulation and Licensing Department that the borrower has received counseling on the advisability of the loan. The new rule, NMAC 12.15.8, provides that the Financial Institutions Division approves any third-party, nonprofit counselor approved by either the New Mexico Mortgage Finance Authority or the Secretary of HUD.

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