With the passage of Senate Bill 1167, enrolled as
Public Act 095-0691, the Predatory Lending Database Program ("Program), which originally started as a pilot program and covered only certain areas of Cook County, Illinois, has been modified in certain respects. In addition, SB 1167 adds restrictions and prohibitions with respect to how lenders and brokers may originate and broker loans in Illinois. As SB 1167 makes sweeping changes, this article addresses only those portions of the Bill that affect new disclosure requirements which became effective June 1, 2008, and DocMagic, Inc.'s audit regarding the Program.
Predatory Lending Database Program
In January, 2007, the Governor of Illinois suspended the Predatory Lending Database Pilot Program, which we addressed in this article. The Pilot Program covered only certain areas within Cook County. With the passage of SB 1167, the suspension has been lifted, with the program reinstated as the Predatory Lending Database Pilot Program. The Program has been expanded to cover the entire area of Cook County, beginning July 1, 2008. SB 1167 also modifies the thresholds used to determine when borrower counseling is required under the Program in addition to other aspects of the Program.
Until June 1, 2008, DocMagic was returning the following audit if the property securing a mortgage loan had a zip code located within the previously designated Pilot Program Area:
"THE PROPERTY IS LOCATED IN THE IL PREDATORY LENDING DATABASE PILOT PROGRAM AREA (HB 4050; 765 ILCS 77/70)"
Note that DocMagic continued to return the above audit under applicable circumstances even though the Pilot Program had been suspended, because the decision to suspend the Pilot Program was not final.
Beginning June 1, 2008 (even though the Program is not effective until July 1), the audit will return if the property securing a mortgage loan is located in Cook County. However, the language of the audit has been modified to read as follows:
"PROPERTY IS LOCATED IN THE IL PREDATORY LENDING DATABASE PROGRAM (765 ILCS 77/70)"
New Disclosures
Two (2) new disclosures - a Loan Product Choice (ILLPC.MSC) and Notice of Material Change in Loan Terms (ILNMCLT.MSC) -- have been created as a result of two (2) new statutes enacted by the passage of SB 1167.
Under the Residential Mortgage License Act of 1987 (RMLA), new 205 ILCS 635/5-8 prohibits a licensee from making, providing, or arranging a mortgage loan with a prepayment penalty unless the licensee offers the borrower a loan without a prepayment penalty. The offer must be in writing, and if the borrower declines the offer without a prepayment penalty, the borrower must initial the offer to indicate that he/she has declined. Additionally, the licensee must disclose the discount in rate received in consideration for a mortgage loan with a prepayment penalty.
A Loan Product Choice has been created to address the provisions of 205 ILCS 635/5-8. This disclosure will appear only in Illinois initial and closing loan packages, originated by a lender or broker, that provide for a prepayment penalty. The selection of this disclosure is further limited to when the property type is not commercial, vacant land, or multifamily, and the occupancy status is owner-occupied or a second home.
DocMagic's Compliance Department has also created a Notice of Material Change in Loan Terms ("Notice") to address the provisions of new 205 ILCS 635/5-9 under RMLA. Under Section 5-9, a licensee must:
(1) Provide timely notice to the borrower of any material change in the terms of the residential mortgage loan prior to the closing of the loan. For purposes of this Section, a "material change means" any of the following:
(A) A change in the type of loan being offered, such as a fixed or variable rate loan or a loan with a balloon payment.
(B) A change in the term of the loan, as reflected in the number of monthly payments due before a final payment is scheduled to be made.
(C) An increase in the interest rate of more than 0.15%, or an equivalent increase in the amount of discount points charged.
(D) An increase in the regular monthly payment of principal and interest of more than 5%.
(E) A change regarding the requirement or amount of escrow of taxes or insurance.
(F) A change regarding the requirement or payment, or both, of private mortgage insurance.
(2) Timely inform the borrower if any fees payable by the borrower to the licensee increase by more than 10% or $100, whichever is greater.
The Notice must be provided with the revised information not later than three (3) days after learning of the change or twenty-four (24) hours before the loan closing, whichever is earlier.
This Notice will appear only in Illinois initial and closing loan packages, originated by a lender or broker, when the property type is not commercial, vacant land, or multifamily, and the occupancy status is owner-occupied or a second home.
Prepayment Penalties
To the extent a prepayment penalty will be charged, provided that the interest rate does not exceed 8% per year and is not an FHA or VA loan, under SB 1167, specifically 205 ILCS 635/5-8 and 815 ILCS 205/4.1a, a lender may charge a prepayment penalty that extends no longer than three years or the first change date or rate adjustment of a variable rate mortgage, whichever comes earlier, provided that, if a prepayment is made during the fixed rate period, the licensee shall receive an amount that is no more than:
(1) 3% of the total loan amount, if the prepayment is made within the first 12-month period following the date the loan was made;
(2) 2% of the total loan amount, if the prepayment is made within the second 12-month period following the date the loan was made; or
(3) 1% of the total loan amount, if the prepayment is made within the third 12-month period following the date the loan was made, provided that the fixed rate period on a variable rate loan extends to 3 years.
Note that prepayment penalties are prohibited in connection with the sale or destruction of a dwelling secured by a "residential mortgage loan." This means that hard prepayment penalty documents are prohibited.
Based on the above, DocMagic's Compliance Department has updated its Illinois prepayment penalty soft addenda and riders (File names: ILPATNS.PPF, ILPRS.PPF, ILAHC.SPP and ILRHC.SPP) to apply when the occupancy status of Illinois property is owner-occupied or a second home and the property type is not commercial, vacant land, or multifamily. Note that the Illinois hard prepayment penalty addendum (ILPATN.PPF) and rider (ILPR.PPF) have not been modified, but will now select when occupancy status is investment property.
Please contact the Compliance Department if you have any questions pertaining to the subject matter of this article.
"Mortgage loan" "residential mortgage loan" or "home mortgage loan" shall mean a loan to or for the benefit of any natural person made primarily for personal, family, or household use, primarily secured by either a mortgage on residential real property or certificates of stock or other evidence of ownership interests in and proprietary leases from, corporations, partnerships, or limited liability companies formed for the purpose of cooperative ownership of residential real property, all located in Illinois. (205 ILCS 635/1-4(f).) "Residential real property" or "residential real estate" shall mean real property located in this State improved by a one to four family dwelling used or occupied, wholly or partly, as the home or residence of one or more persons and may refer, subject to regulations of the Commissioner, to unimproved real property upon which those kinds dwellings are to be constructed. (205 ILCS 635/1-4(a).)
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