The Wisconsin Responsible High Cost Mortgage Lending law (the "Act") becomes effective for loans the applications for which are received by a lender on or after February 1, 2005. Click here to view a copy of the Act (codified as Wis. Stats. 428.202 et seq.). The Wisconsin Department of Financial Institutions has also promulgated rules (the "Rules"), effective February 1, 2005, that are designed to clarify some of the Act's provisions. Click here to view the Rules.

Coverage

The loans covered by and excluded under the Act are the same as under Regulation Z's Section 32, with the exception that unlike Section 32, purchase money and construction loans are covered by the Act.

Thresholds

The APR Test under the Act is the same as under Section 32: at consummation, the APR exceeds by more than 8% (for first liens) or 10% (for subordinate liens), the yield on U.S. 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.

The Points and Fees Test (including the Total Loan Amount) under the Act is substantially similar to the Points and Fees Test under Section 32, with the exception that the Points and Fees threshold is reduced from 8% to 6% of the Total Loan Amount.

What Happens If a Loan Is a Covered Loan?

The following substantive limitations apply if a loan is found to be a "covered loan" under the Act:

• No balloon loan (excludes loans where payments adjust based on consumer's seasonal or irregular income, and bridge loans of less than one year obtained for the purpose of financing acquisition or construction of borrower's principal dwelling)
• No call/demand provision (excludes demands based on non payment, due on sale, or fraud or material misrepresentation
• No negative amortization
• No increased interest rate after default
• No more than two periodic advance payments
• Lender must verify and document the borrower's ability to repay (the Rules contain guidelines for determining a borrower's ability to repay in the form of non-exclusive debt-to-income ratio tests, along with acceptable forms of verification)
• No refinancing of a covered loan by the same lender or an assignee or servicer within 1 year unless refinancing is in the interest of the customer; no lender, assignee or servicer may engage in a pattern or practice of arranging for the refinancing of covered loans by an affiliated or unaffiliated creditor, modifying covered loans, or similar acts for the purpose of evading the foregoing restrictions (the Rules define "interest of the customer" as "what is proper and prudent for the customer under the circumstances," and lists a number of factors to be considered)
• Payments under a home improvement contract must be made directly to customer, or jointly to customer and contractor, or if customer consents, made by third party pursuant to written agreement signed by customer, lender and contractor
• No financing of single premium optional credit insurance/related products
• No refinancing of subsidized low-rate loans
• May not make, propose or solicit fraudulent, false or misleading statements on any document relating to a covered loan
• May not recommend or encourage default under an existing loan
• No prepayment penalty permitted if a covered loan is held by refinancing lender; otherwise, a prepayment penalty is permitted (subject to the limitations below) provided that the lender must offer the borrower the option of a loan product without a prepay penalty in a written offer containing a proscribed "Loan Product Choice Disclosure" that must be initialed by the borrower. The prepayment penalty in a covered loan may not exceed 60 days' interest at the contract rate for fixed rate loans over $25,000 if the borrower prepays more than 20% of the original loan amount within 36 months following loan consummation. No prepay is permitted on fixed rate loans of $25,000 or less, or on ARMS
• The borrower must be given a written "Disclosure to Borrower" in a clear and conspicuous format at least 3 business days prior to making a covered loan
• Pursuant to rules promulgated by the Wisconsin Department of Financial Institutions (DFI-Bkg 46.03), the lender must also provide a completed copy of both the "Loan Product Choice Disclosure" and the "Disclosure to Borrower" to the borrower, and each of the disclosures:
  • must be designed to call attention to the nature and significance of the information provided, and shall use a typeface and type size that are easy to read
  • must contain an acknowledgment provision indicating that the borrower has read and understood the terms of the disclosure, and the acknowledgment must be initialed or signed and dated by the borrower
  • must include the following statement: "A list of adjustment services companies (companies that help consumers budget money) licensed to do business in the state of Wisconsin is available at the Wisconsin Department of Financial Institutions' website, www.wdfi.org."