Connecticut has created a new category of loan, the so-called "nonprime home loan." The new law is contained in Connecticut Public Act 08-176 (the "Act"). Below is a description of the audit DocMagic is implementing to identify such nonprime home loans.
Applicability: The Act applies to loans that meet certain criteria. Further, the Act applies generally to any closed-end loan (open-end loans (HELOCs) and reverse mortgages are expressly excluded) made to a borrower who is a natural person for consumer purposes, the principal amount of which does not exceed a specified dollar amount ($417,000 for loans originated prior to July 1, 2010, and thereafter the then current Fannie Mae conforming loan limit), and which is secured by a one-to-four family residential property that is, or is intended to be, used as the borrower's principal residence. The Act does not apply to Connecticut Housing Finance Authority (CHFA) loans, commercial loans and loans secured by second homes or multifamily properties. The provisions of the Act applicable to nonprime home loans and/or other mortgages generally apply only to loan applications for such loans received on or after August 1, 2008.
Nonprime Home Loan Defined: A "nonprime home loan" is one in which both of the following conditions apply:
- For First Lien Loans: (i) The difference between the loan's APR and the yield on U.S. Treasury securities having comparable periods of maturity on the 15th day of the month prior to the loan application is equal to or greater than 3%; and (ii) the difference between the loan's APR and the conventional mortgage rate published in FRB Statistical Release H-15 for fixed-rate first mortgages during the week in which the interest rate is set is equal to or greater than 1.75%.
- Junior Lien Loans: (i) The difference between the loan's APR and the yield on U.S. Treasury securities having comparable periods of maturity on the 15th day of the month prior to the loan application is equal to or greater than 5%; and (ii) the difference between the loan's APR and the conventional mortgage rate published in FRB Statistical Release H-15 for fixed-rate first mortgages during the week in which the interest rate is set is equal to or greater than 3.75%.
For purposes of determining the difference between the loan APR and the Treasury security yields, the Act incorporates the procedures and calculation methods used in determining the "rate spread" for Home Mortgage Disclosure Act ("HMDA") reporting purposes, with one modification: rather than using the Treasury security yield as of the 15th day of the month prior to the rate lock date (as required under HMDA), the Treasury security yield as of the 15th day of the month prior to the loan application (as required under HOEPA) is used instead. By referencing the HMDA rate spread procedures and calculation methods in the Act, this presumably means that the sole source of Treasury yield data is the "Treasury Securities of Comparable Maturity under Regulation C" Table posted on the Federal Financial Institutions Examination Council (FFEIC) website accessible here.
Prohibitions Applicable to Nonprime Home Loans: If a loan meets the definitional requirements of a nonprime home loan, the following limitations and restrictions apply to nonprime home loan applications received on or after August 1, 2008:
A lender shall not engage in conduct that is misleading, deceptive or untruthful.
Lenders and mortgage brokers shall have a duty of good faith (which cannot be waived) with respect to the performance of any contract with a borrower relative to a nonprime home loan.
In connection with a first lien nonprime home loan, a lender shall provide the borrower with a notice or letter that generally describes the terms of the transaction no later than three business days prior to the closing, and within a reasonable time period of any subsequent material changes to the terms of the transaction. DocMagic, Inc.'s Compliance Department has prepared a Notice of Loan Terms (CTNLT.MSC) designed to comply with this provision.
A lender shall not make a nonprime home loan unless the lender reasonably believes, at loan consummation, that the borrowers, when considered individually or collectively, will be able to make the scheduled payments to repay the loan, related real estate taxes and insurance premiums, based upon a consideration of the borrower's current and expected income, current and expected obligations as disclosed by the borrower, or otherwise known to the lender, including subordinate mortgages made contemporaneously, homeowner's fees, condominium fees, employment status and other financial resources, excluding the equity in the dwelling that secures repayment of the loan. However, in the case of a bridge loan, a lender may consider the equity in the dwelling as a source of repayment for the loan. A lender may utilize commercially recognized underwriting standards and methodologies, including automated underwriting systems provided they comply with the foregoing requirements. The lender shall take reasonable steps to verify the accuracy and completeness of information provided by or on behalf of the borrower using tax returns, consumer reports, payroll receipts, bank records, reasonable alternative methods or reasonable third-party verification. In the case of an adjustable rate loan, the lender shall underwrite the repayment schedule assuming a fixed rate equal to the "fully indexed interest rate" at the time of consummation, or within fifteen days thereof, without considering any initial discounted rate. If the loan is not fully amortizing by its terms, the lender shall underwrite the loan based on a fully amortizing repayment schedule based on the maturity set forth in the note. These provisions do not apply to FHA loans.
A lender shall make a nonprime home loan where all or a portion of the proceeds are used to fully or partially pay off a "special mortgage" (a loan originated, subsidized or guaranteed by or through a state, federal, tribal or local government, or nonprofit organization) on the same property unless the lender receives written certification that the borrower has received mortgage counseling from a HUD-approved counselor. A lender shall make a good-faith effort to determine whether the loan to be refinanced is a special mortgage.
After January 1, 2010, a lender shall not make a nonprime home loan unless, (a) with respect to nonprime home loans that are first mortgage loans, the lender requires and collects a monthly escrow for the payment of real property taxes and homeowner's insurance. FHA loans and nonprime home loan products which are generally designed and marketed to the public as a subordinate lien home equity loan product but are in fact secured by a first mortgage loan are not subject to this requirement; (b) the lender obtains written certification that the borrower has received mortgage counseling from a HUD-approved counselor; and (c) the lender mailed or delivered to applicants, no later than three business days after the receipt of a completed application for a nonprime home loan, a notice containing a toll-free number that can be used to obtain a list of nonprofit housing counselors approved by HUD. Note that DocMagic's Compliance Department has prepared a Notice of HUD-Approved Housing Counselors (CTNHHC.MSC) to comply with this latter requirement. No borrower shall have a private right of action for the lender's failure to deliver, on a timely basis, the required notice.
A nonprime home loan may not provide for a prepayment penalty (FHA loans excluded); such a provision is void and unenforceable.
A provision permitting an increase in the rate of interest after default (other than increases to discounted interest rates for failure to comply with automatic electronic payment features are excluded) are void and unenforceable.
A provision that requires borrowers to wavie participation in a class action or to raise individual or class action claims or defenses in a nonjudicial forum (e.g., arbitration) that utilizes principles inconsistent with general statutory or common law, or limits available claims or defenses, or in one that is less convenient, more costly or more dilatory than a judicial forum where the borrower may otherwise make a claim or defense is void and unenforceable.
A lender or mortgage broker shall not attempt in bad faith to avoid the application of the Act by dividing a loan into separate parts or to structure in bad faith a loan as an open-end loan for the purpose of evading the applicable provisions of the Act when the loan would have been a nonprime home loan if the loan had been structured as a closed-end loan.
Prohibitions Applicable to All Mortgages (including Nonprime Home Loans): The following limitations and restrictions apply to "mortgage" applications received on or after August 1, 2008. A "mortgage" means essentially any consensual lien on a one-to-four family residential property that is, or is intended to be, used as the borrower's principal residence, and includes, but is not limited to, a nonprime home loan.
A lender or mortgage broker shall not attempt in bad faith to avoid the application of the Act by dividing a loan into separate parts or to structure in bad faith a loan as an open-end loan for the purpose of evading the applicable provisions of the Act when the loan would have been a nonprime home loan if the loan had been structured as a closed-end loan.
A lender shall not make and a mortgage broker shall not offer a nonprime home loan that refinances a mortgage unless the nonprime home loan provides or is expected to provide a tangible net benefit to the borrower.
A lender or mortgage broker shall not recommend or encourage a default on an existing mortgage or other debt prior to and in connection with a new nonprime home loan that refinances all or any portion of the existing loan or debt.
A lender may not finance, directly or indirectly in connection with a mortgage, any credit life, credit disability, credit unemployment or credit property insurance, or any other life or health insurance or any payments directly or indirectly for any debt cancellation or suspension agreement or contract (insurance premiums , debt cancellation or suspension fees paid on a monthly basis or through regularly scheduled periodic payments shall not be considered financed by the lender).
If the borrower cures all defaults in connection with a nonprime home loan after the initiation of foreclose but prior to the entry of judgment, the lender shall terminate the foreclosure proceeding or other action, but may require the borrower to pay any reasonable costs actually incurred by the lender in connection with the default and to protect its rights in the property, including any costs related to collection, foreclosure and termination of the proceeding or other action. The borrower may not exercise this right to reinstatement on more than two occasions over the course of twenty-four consecutive months.
A mortgage broker, in addition to other legally-imposed duties, shall: (1) use reasonable care, skill and diligence in performing the mortgage broker's duties and shall act in good-faith and fair dealing in all transactions with the borrower; (2) make reasonable good-faith efforts to secure a mortgage that is in the reasonable interests of the borrower considering all the circumstances reasonably available to the mortgage broker, including, but not limited to, the rates, points, fees, charges, costs and product type; (3) ensure that the cost of credit is reasonably appropriate considering the borrower's level of creditworthiness and other bona fide underwriting concerns; and (4) if the mortgage broker knows that more than one mortgage will be made by different lenders contemporaneously to a borrower secured by the same real property, then before the closing, the mortgage broker shall notify each lender of the payment obligations associated with each of the other lender's loans. These duties may not be waived.
Remedies: A borrower injured by a violation of the Act has three years after the date of the closing to bring a claim for the greater of actual damages or $1,000, together with costs and reasonable attorney's fees. However, various cure provisions are available to the lender that would cut off the borrower's right to bring such a claim. These are:
Within 90 days after the closing date and prior to the commencement of any action against a lender under this section, the lender notifies the borrower of the compliance failure, the lender tenders appropriate restitution and the lender either makes the nonprime home loan comply with the applicable provisions of the Act, or changes the terms of the mortgage in a manner beneficial to the borrower so that the mortgage will no longer be considered a nonprime home loan under the Act; or
The lender is able to show by a preponderance of evidence that the compliance failure was an unintentional, bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid such errors. For the purposes of this subdivision, the phrase "bona fide error" includes, but is not limited to, a clerical, calculation, printing, computer malfunction or programming error, but does not include an error of legal judgment with respect to a lender's obligations under the relevant provisions of the Act. In actions where the compliance failure has caused material injury to the borrower, the lender shall also be required to show that it cured the compliance failure or otherwise undertook reasonable remedial steps to address or compensate for the injury; or
The lender and borrower otherwise mutually agree on an appropriate remedy or curative action.
A court may grant an injured borrower such relief as it deems just and equitable. A borrower may assert fraud and any violation of the act which causes material injury to a borrower as a counterclaim or defense to foreclosure by the date six years after the date of the closing. Finally, an assignee of a nonprime home loan is not liable for, nor can a defense or counterclaim be raised by the borrower against an assignee for, a violation of the Act by the originating lender or mortgage broker.
Nonprime Home Loan Audit: DocMagic has created an audit specifically to identify if a loan is a nonprime loan. If the security property is located in Connecticut, and the Act applies to the loan in question, then at the time that a worksheet is audited, if both conditions for a nonprime home loan of that lien position are satisfied, then a warning substantially similar to the following will display:
WARNING: THIS IS A CT NONPRIME HOME LOAN (CT PL No. 08-176)
As mentioned above, the new law incorporates by reference the procedures and calculation methods used under HMDA when determining the difference between the loan's APR and the U.S. Treasury security yield, provided that the yield used is as of the 15th day of the month preceding the loan application date. These procedures and calculation methods have been incorporated into this new audit.
In order to determine which conventional mortgage rate to use, you must enter a date into the "Rate Lock Date" field in the worksheet. If the Rate Lock Date is missing, you will receive a fatal warning to that effect and you must enter a Rate Lock Date into the worksheet to proceed.
The conventional mortgage rate in the FRB H-15 statistical release is available here. The audit will automatically use the most recently available conventional mortgage rate available as of the week during which the Rate Lock Date is set.
Please feel free to contact DocMagic's Compliance Department if you have any questions or comments regarding this audit.
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