The Governor of Kentucky signed House Bill 552 on April 24, 2008, as sweeping emergency legislation affecting the mortgage industry in the State.  Among numerous changes, HB 552 amends several provisions of the Mortgage Loan Company and Mortgage Loan Broker Act (MLCMLBA) affecting licensing and other matters; establishes broker standards with regard to the origination of loans; creates the Kentucky Residential Mortgage Fraud Act, which makes residential mortgage fraud a felony; amends Kentucky's high cost loan law; and amends the law on prepayment penalties that may be assessed to the borrower.  This article summarizes the portions of HB 552 affecting the DocMagic software:

Prepayment Penalties 

DocMagic, Inc.'s Compliance Department has updated its Kentucky prepayment penalty hard and soft addenda and riders (File names: KYPATN.PPF, KYPR.PPF, KYPATNS.PPF, KYPRS.PPF) to reflect the amendments made to Kentucky Revised Statute Section 286.8-110(4), which now provides:

No prepayment penalty shall be assessed against the borrower following the third anniversary date of the mortgage or sixty (60) days prior to the date of the first interest rate reset, whichever is less. No prepayment penalty shall exceed three percent (3%) for the first year, two percent (2%) for the second year, and one percent (1%) for the third year of the outstanding balance of the loan; but in no event shall a prepayment penalty be assessed against a borrower refinancing with the mortgage loan company that funded the mortgage.

Prior to HB 552 becoming effective, a prepayment penalty was prohibited after the fifth anniversary date of the mortgage and limited to five percent (5%) of the outstanding loan balance.  

Based on the amendments to Section 286.8-110(4), the prepayment penalty language in DocMagic's prepayment penalty addenda and riders will now substantially read as follows:

If within __________ (________) months after the loan closing I make a full Prepayment or one or more partial Prepayments, I will pay a Prepayment penalty in an amount determined as follows:

(A) ____________ percent (________%) of the outstanding balance of the loan prepaid during the first twelve (12) months of the loan term;

(B) ____________ percent (________%) of the outstanding balance of the loan prepaid during the second twelve (12) months of the loan term; and

(C) ____________ percent (________%) of the outstanding balance of the loan prepaid during the third twelve (12) months of the loan term.

However, in no event shall I be charged a prepayment penalty if (1) I refinance with the same mortgage loan company that funded the loan evidenced by the Note, or (2) I make a full Prepayment or one or more partial Prepayments on the earlier to occur of: (a) the date following the third anniversary date of the Security Instrument, or (b) if the Note contains provisions for a variable interest rate, the date within sixty (60) days prior to the date of the first interest rate reset, as provided in the Note.

High-Cost Home Loans

The Kentucky high-cost home loan law has been amended in a number of ways, the most prominent changes being (i) the inclusion of yield spread premiums in the definition of points and fees; and (ii) the reduction of the applicable points and fees threshold to the greater of $3,000 or six percent (6%) of the total loan amount, as shown as the amount financed on the Truth-in-Lending statement.  Examples of other changes include a more complete description of those fees and charges includable and excludable from points and fees; and revised and expanded limitations applicable to high-cost home loans generally (e.g., rules governing the circumstances under which prepayment penalties may be charged in connection with a high-cost home loan; additional guidance and safe harbors when making the required determination that one or more of the borrowers has the ability to repay a high-cost home loan; a requirement that high-cost home loans must provide for tax and insurance impounds; a requirement that borrowers obtain HUD-approved housing counseling prior to refinancing from a non-high-cost home loan into a high-cost home loan; a prohibition against interest-only high-cost home loans; verification of the borrower's income and financial resources; and a requirement that the borrower be timely notified of any "material change" (as defined), but in any event not later than 24 hours prior to closing.)

DocMagic's Compliance Department has created two new disclosures - a Loan Product Choice (KYLPC.MSC) to address the restriction on charging a prepayment penalty on a high-cost home loan (see Section 360.100(2)) and a Notice of High-Cost Home Loan Mortgage Material Change (KYHCMMC.MSC) to notify the borrower of a material change of a term in a high-cost home loan (see Section 360.100(2)(x)).

Licensee Compensation Limitation

Kentucky law has been amended to prohibit any licensee or exempt entity from receiving "total net income" in excess of the greater of $2,000 or four percent (4%) of the total loan amount.  "Total net income" is defined to include essentially all fees, income or compensation of any kind collected, received or charged by a licensee or exempt entity or any affiliate thereof, including, without limitation, origination fees, lender fees, broker fees, discount points, processing fees, administrative fees, document preparation fees, yield spread and servicing release premiums and financial counseling fees.  Interest and charges to unaffiliated third parties are excludable.  The definition of "total loan amount" for purposes of determining "total net income" differs significantly from the definition of "total loan amount" for high-cost home loan purposes.  Whereas for high-cost home loan purposes "total loan amount" means simply the amount financed as disclosed in the TIL statement, for purposes of determining total net income, "total loan amount" is defined as the amount financed minus total net income generated by the licensee, exempt entity or affiliate thereof.  Interpretive questions abound with respect to this provision. The Kentucky Office of Financial Institutions has posted some information on HB 552 available here.  Hopefully, additional guidance will be forthcoming.  In the meantime, we are attempting to decipher the intricacies of this provision with a view toward the development of an appropriate audit in our DocMagic software products.  When developed, we will post additional information on our website.

Please contact the DocMagic Compliance Department if you have any questions or comments regarding the information in this article.