The Minnesota legislature has enacted significant changes to the state's residential mortgage lending laws, effective August 1, 2007. Minnesota HF 1004 and SF 998 are the product, in part, of the Minnesota Attorney General's 11-member Predatory Lending Task Force announced in December, 2006. The Minnesota Department of Commerce has published both a brief summary of the bills available, as well as an FAQ. In this article, we will briefly highlight some of the more legal significant changes and describe some additional audits we will be implementing in our DocMagic software to better assist you in complying with these changes.

HF 1004:

House File 1004 made, among other things, the following changes:

Minnesota Statutes 2006, §58.13, subd. (1) has been amended to impose additional prohibitions and/or restrictions on the activities of mortgage originators (the following restrictions do not apply to, among others, state or federally chartered banks, savings banks or credit unions):

• Verification of repayment ability: Prohibits making, providing or arranging a residential mortgage loan without verification, by tax returns, payroll receipts, bank records or other similarly reliable documents, of the borrower's reasonable ability to pay principal, interest, real estate taxes, property insurance, assessments and mortgage insurance. For ARM loans, reasonable ability to pay must be based on the fully indexed rate (index plus margin) and a fully-amortized payment schedule.

• Reasonable, tangible net benefit: Prohibits "churning," defined as making, providing or arranging a residential mortgage loan when the new loan does not provide a reasonable, tangible net benefit to the borrower considering all of the circumstances. No objective standards are provided beyond consideration of the terms of the old and new loan, the cost of the new loan, and the borrower's circumstances.

• Oral disclosure of property tax and insurance payments: The first time a mortgage originator discloses a periodic payment on a first-lien residential loan that does not include property tax or insurance impounds, the mortgage originator must inform the borrower orally that an additional amount will be due for taxes and insurance, and if known, the amount of the periodic payments for property taxes and insurance. If the amount of the periodic payment changes thereafter, a new oral disclosure must be given. This oral disclosure is not required if the prior loan in a refinance does not provide for impounds.

• No negative amortization: Prohibits making, providing or arranging a residential mortgage loan (other than a reverse mortgage) if any repayment option will result in negative amortization during any six-month period. See discussion under "Modifications" below.

Minnesota Statutes 2006, §58.137, subd. 1 has been amended to include amounts payable by the lender to a mortgage broker (e.g., yield spread premiums) in the definition of "lender fee" for purposes of Minnesota's high cost test. Prior to this amendment, only fees paid by the borrower were included as a lender fee. See discussion under "Modifications" below.

Minnesota Statutes 2006, §58.15 has been amended so that mortgage brokers are no longer required to provide the "nonagency disclosure." See discussion under "Modifications" below.

Minnesota Statutes 2006, §58.16 has been amended to specifically provide that mortgage brokers that do not solicit or receive advance fees are not in a fiduciary relationship with the borrower.

Minnesota Statutes 2006, §58.161 has been amended to provide that mortgage brokers shall be deemed to have created an agency relationship with the borrower in all cases, with the following duties:

• Shall act in borrower's best interest; shall act in utmost good faith; shall not compromise a borrower's right or interest in favor of another, including the mortgage broker; and shall not accept, give or charge any undisclosed compensation or remuneration

• Shall carry out all lawful instructions of the borrower

• Shall disclose all material facts to the borrower not reasonably susceptible to the borrower's knowledge

• Shall use reasonable care in performing duties

• Shall account for all of the borrower's money or property received as agent

Mortgage brokers are not prohibited from charging or collecting a fee for services disclosed in advance to the borrower. Finally, mortgage brokers are not required to obtain a loan containing terms or conditions not available to the mortgage broker in the mortgage broker's usual course of business or from a lender with whom the mortgage broker does not do business.

SF 988:

Senate File 988 made, among other things, the following changes:

Minnesota Statutes 2006, §58.02 has been amended to add a definition of a "subprime loan." A loan is a "subprime loan" if the loan's APR exceeds the yield on Treasury securities having comparable periods of maturity as of either the 15th day of the month preceding the month in which the rate is set (if the rate is set between the 1^st and 14^th day of the month) or the month in which the rate is set (if the rate is set on or after the 15^th day of the month) by more than either two percent (2%) (for first-lien ARM loans with interest rates that can increase but not decrease below the fully-indexed rate), or three percent (3%) (for all other first lien loans), or four percent (4%) (for all junior lien loans). See discussion under "Modifications" below.

Minnesota Statutes 2006, §58.137, subd. 2 has been amended to add a new subparagraph (c) prohibiting the imposition of a prepayment penalty in connection with any subprime loan where the principal amount (or maximum credit limit on a HELOC) exceeds the Fannie Mae conforming loan limit for a single-family dwelling (the current limit is $417,000). See discussion under "Modifications" below.

Other changes create private causes of action for violations of certain laws, and makes residential mortgage fraud a crime punishable by, among other things, imprisonment of up to two (2) years.

Modifications:

We will be making the following changes and/or implementing the following audits prior to the August 1, 2007 effective dates for both of the Acts referenced above.

No Negative Amortization: We will develop and audit applicable to all loans on principal dwellings (O/O = Yes), including second homes and regardless of lien position, loan purpose or loan type, but excluding the following property types: 1-4-Family, Commercial, Land and Lots, and Multifamily. The audit would apply anytime the borrower has the option to make payments that could result in negative amortization for 6 months. To make this determination, the software program will look at the loan's amortization schedule and if it discovers that negative amortization occurs for any 6 month period, then the software will generate the appropriate warning audit substantially as follows: NO NEGATIVE AMORTIZATION PERMITTED (MINN. STAT. §58.13, SUBD. 1 (26); NOT APPLICABLE TO STATE/FEDERAL BANKS, SAVINGS BANKS, CREDIT UNIONS.

Lender Fee: We will be modifying our Minnesota high cost test to ensure that yield spread premiums and the like will be included as a lender fee in determining whether or not the five percent (5%) lender fee threshold has been exceeded. Our Minnesota high cost memo will also be updated to reflect this change.

Nonagency Disclosure: We have modified our Minnesota disclosure matrix and modified our form selection logic to reflect the changes regarding the "Nonagency Disclosure". Specifically, because mortgage brokers are no longer required or permitted to provide this disclosure, the matrix has been modified to list only the lender as the person or entity required to provide this disclosure. Also, the form selection logic has been modified so that if the loan origination type entered is "broker," the form will no longer be selected.

Subprime Loan/Prepayment Penalty: In order to determine whether a loan is a subprime loan, the first step is to determine when the rate is set. If the "Rate Lock Date" in the worksheet is missing, an audit would display: DATE INTEREST RATE SET IS MISSING; ENTER IN RATE LOCK DATE. Then, using worksheet or plan data, we will then determine the loan type (loan amount/credit limit, first lien, ARM, term, etc). With all of this information, we will then determine which Treasury yield to use and which APR threshold to apply. Finally, if the loan APR exceeds the applicable threshold percentage, AND the loan does not exceed the Fannie Mae conforming loan limit for a single family dwelling, AND the loan provides for a prepayment penalty, the software will generate the appropriate warning audit substantially as follows: THIS IS A SUBPRIME LOAN; NO PREPAYMENT PENALTY PERMITTED. (MINN. STAT. §§58.02, SUBD. 27; 58.137, SUBD. 2 (C)).

Please contact the DSI Compliance Department at compliance@docmagic.com if you have any questions or comments.