95TH GENERAL ASSEMBLY
State of Illinois
2007 and 2008
HB1478

 

Introduced 2/21/2007, by Rep. Daniel J. Burke

 

SYNOPSIS AS INTRODUCED:
 
New Act

    Creates the Predatory Home Loan Practices Act. Prohibits various practices and charges in connection with home loans made to persons with respect to their primary residence. Prohibits the imposition of prepayment penalties, flipping of loans, and lender financing of credit insurance. Imposes limitations on high-cost loans. Prohibits loans unless the lender reasonably believes that the borrower is able to make scheduled payments to repay the loan without respect to the borrower's equity in the property. Authorizes a borrower to obtain damages for violations of the Act.


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FISCAL NOTE ACT MAY APPLY

 

 

A BILL FOR

 

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1     AN ACT concerning regulation.
 
2     Be it enacted by the People of the State of Illinois,
3 represented in the General Assembly:
 
4     Section 1. Short title. This Act may be cited as the
5 Predatory Home Loan Practices Act.
 
6     Section 5. Definitions. As used in this Act:
7     "Affiliate" means any company that controls, is controlled
8 by, or is under common control with another company, as
9 determined under the Federal Bank Holding Company Act of 1956
10 (12 U.S.C. 1841 et seq.).
11     "Annual percentage rate" means the annual percentage rate
12 for the loan calculated according to the provisions of the
13 federal Truth-in-Lending Act (15 U.S.C. 1601, et seq.) and the
14 regulations promulgated thereunder by the Federal Reserve
15 Board.
16     "Bona fide loan discount points" means loan discount points
17 knowingly paid by the borrower for the purpose of reducing, and
18 which in fact result in a bona fide reduction of, the interest
19 rate or time-price differential applicable to the loan,
20 provided the amount of the interest rate reduction purchased by
21 the discount points is reasonably consistent with established
22 industry norms and practices for secondary mortgage market
23 transactions.

 

 

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1     "High-cost home loan" means a home loan for which the
2 annual percentage rate of the home loan at consummation will
3 exceed by more than 6 percentage points the weekly average
4 yield on United States Treasury securities adjusted to a
5 constant maturity of one year (as made available by the Federal
6 Reserve Board) as of the week immediately preceding the week in
7 which the interest rate for the loan is established.
8     "Home loan" means a loan, other than an open-end credit
9 plan or a reverse mortgage transaction, in which: (i) the
10 principal amount of the loan does not exceed the conforming
11 loan size limit for a single-family dwelling as established
12 from time to time by the Federal National Mortgage Association,
13 (ii) the borrower is a natural person, (iii) the debt is
14 incurred by the borrower primarily for personal, family, or
15 household purposes, and (iv) the loan is secured by a mortgage
16 or deed of trust on real estate upon which there is located or
17 there is to be located a structure or structures, designed
18 principally for occupancy of from one to 4 families, that is or
19 will be occupied by the borrower as the borrower's principal
20 dwelling.
21     "Points and fees" means:
22         (1) all items required to be disclosed under Sections
23     226.4(a) and 226.4(b) of Title 12 of the Code of Federal
24     Regulations, as amended from time to time, except interest
25     or the time-price differential;
26         (2) all charges for items listed under Section

 

 

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1     226.4(c)(7) of Title 12 of the Code of Federal Regulations,
2     but only if the lender receives direct or indirect
3     compensation in connection with the charge or the charge is
4     paid to an affiliate of the lender; otherwise, the charges
5     are not included within the meaning of the phrase "points
6     and fees";
7         (3) all compensation paid directly or indirectly to a
8     mortgage broker, including a broker that originates a loan
9     in its own name in a tablefunded transaction, not otherwise
10     included under item (1) or (2);
11         (4) "Points and fees" does not include (i) taxes,
12     filing fees, recording, and other charges and fees paid or
13     to be paid to public officials for determining the
14     existence of or for perfecting, releasing, or satisfying a
15     security interest and (ii) bona fide and reasonable fees
16     paid to a person other than a lender or an affiliate of the
17     lender or to the mortgage broker or an affiliate of the
18     mortgage broker for any of the following: fees for flood
19     certification; fees for pest infestation and flood
20     determinations; appraisal fees; fees for home inspections
21     performed prior to closing; credit reports; surveys;
22     attorneys' fees (if the borrower has the right to select
23     the attorney from an approved list or otherwise); notary
24     fees; escrow charges, so long as not otherwise included
25     under item (1); title insurance premiums; and fire
26     insurance and flood insurance premiums, provided that the

 

 

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1     conditions in Section 226.4(d)(2) of Title 12 of the Code
2     of Federal Regulations are met.
3     "Total loan amount" means the same as the term "total loan
4 amount" as used in Section 226.32 of Title 12 of the Code of
5 Federal Regulations, and shall be calculated in accordance with
6 the Federal Reserve Board's Official Staff Commentary to that
7 provision.
 
8     Section 10. Prohibited acts and practices regarding home
9 loans.
10     (a) No prepayment fees or penalties shall be contracted by
11 the borrower and lender with respect to any home loan.
12     (b) It shall be unlawful for any lender in a home loan to
13 finance, directly or indirectly, any credit life, credit
14 disability, or credit unemployment insurance or any other life
15 or health insurance premiums, however, insurance premiums
16 calculated and paid on a monthly basis shall not be considered
17 to be financed by the lender.
18     (c) No lender may knowingly or intentionally engage in the
19 unfair act or practice of "flipping" a consumer home loan.
20 "Flipping" a loan is the making of a home loan to a borrower
21 that refinances an existing home loan when the new loan does
22 not have reasonable, tangible net benefit to the borrower
23 considering all of the circumstances, including the terms of
24 both the new and refinanced loans, the cost of the new loan,
25 and the borrower's circumstances. This provision shall apply

 

 

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1 regardless of whether the loan is a high-cost home loan.
2     (d) When there is a charge in addition to the stated rate
3 of interest payable directly or indirectly by the borrower and
4 imposed directly or indirectly by the lender as consideration
5 for the loan, whether paid by the borrower or the seller to a
6 third party in connection with the loan, the charge may not
7 exceed 3% of the total loan amount.
8     (e) No lender shall recommend or encourage default on an
9 existing loan or other debt prior to and in connection with the
10 closing or planned closing of a consumer home loan that
11 refinances all or any portion of the existing loan or debt.
12     (f) As used in this Section, the term "obligor" refers to
13 each borrower, co-borrower, cosigner, or guarantor obligated
14 to repay a loan. A lender may not make a home loan unless the
15 lender reasonably believes at the time the loan is consummated
16 that one or more of the obligors, when considered individually
17 or collectively, will be able to make the scheduled payments to
18 repay the obligation based upon a consideration of their
19 current and expected income, current obligations, employment
20 status, and other financial resources (other than the
21 borrower's equity in the dwelling which secures repayment of
22 the loan). An obligor shall be presumed to be able to make the
23 scheduled payments to repay the obligation if, at the time the
24 loan is consummated, the obligor's total monthly debts,
25 including amounts owed under the loan, do not exceed 45% of the
26 obligor's monthly gross income as verified by the credit

 

 

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1 application, the obligor's financial statement, a credit
2 report, financial information provided to the lender by or on
3 behalf of the obligor, or any other reasonable means.
 
4     Section 15. Limitations and prohibited practices for
5 high-cost home loans.
6     (a) A high-cost home loan is subject to the following
7 limitations and prohibited practices:
8         (1) No call provision. No high-cost home loan may
9     contain a provision that permits the lender, in its sole
10     discretion, to accelerate the indebtedness. This provision
11     does not apply when repayment of the loan has been
12     accelerated by default, pursuant to a due-on-sale
13     provision, or pursuant to some other provision of the loan
14     documents unrelated to the payment schedule.
15         (2) No balloon payment. No high-cost home loan may
16     contain a scheduled payment that is more than twice as
17     large as the average of earlier scheduled payments. This
18     provision does not apply when the payment schedule is
19     adjusted to the seasonal or irregular income of the
20     borrower.
21         (3) No negative amortization. No high-cost home loan
22     may contain a payment schedule with regular periodic
23     payments that cause the principal balance to increase.
24         (4) No increased interest rate. No high-cost home loan
25     may contain a provision that increases the interest rate

 

 

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1     after default. This provision does not apply to interest
2     rate changes in a variable rate loan otherwise consistent
3     with the provisions of the loan documents, provided the
4     change in the interest rate is not triggered by the event
5     of default or the acceleration of the indebtedness.
6         (5) No advance payments. No high cost home loan may
7     include terms under which more than 2 periodic payments
8     required under the loan are consolidated and paid in
9     advance from the loan proceeds provided to the borrower.
10         (6) No modification or deferral fees. A lender may not
11     charge a borrower any fees or other charges to modify,
12     renew, extend, or amend a high-cost home loan or to defer
13     any payment due under the terms of a high cost home loan.
14         (7) No mandatory arbitration clause. No high cost loan
15     may be subject to a mandatory arbitration clause that
16     limits in any way the right of the borrower to seek relief
17     through the judicial process.
18         (8) No lending without home-ownership counseling or
19     advice from an attorney. A lender may not make a high-cost
20     home loan without first receiving certification from a
21     counselor approved by the United States Department of
22     Housing and Urban Development, a state housing financing
23     agency, or the National Credit Union Administration that
24     the borrower has received counseling on the advisability of
25     the loan transaction and the appropriate loan for the
26     borrower.

 

 

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1         (9) No lending without attorney representation. A
2     lender may not make a high cost home loan unless the
3     borrower is represented by an attorney at the closing. The
4     attorney shall represent the borrower's interests at the
5     closing and may be paid from the proceeds of the loan.
6         (10) No benefit from refinancing existing high-cost
7     home loan with new high-cost home loan. A lender may not
8     charge a borrower points, fees, or other charges in
9     connection with a high-cost home loan if the proceeds of
10     the high-cost home loan are used to refinance an existing
11     high-cost home loan unless the annual percentage rate on
12     the new loan is at least 200 basis points below the
13     contract rate on the existing loan.
14         (11) Restrictions on home-improvement contracts. A
15     lender may not pay a contractor under a home-improvement
16     contract from the proceeds of a high-cost home loan other
17     than (i) by an instrument payable to the borrower or (ii)
18     at the election of the borrower, through a third-party
19     escrow agent in accordance with terms established in a
20     written agreement signed by the borrower, the lender, and
21     the contractor prior to the disbursement.
22     (b) The provisions of this Section apply to any person who
23 in bad faith attempts to avoid the application of this Section
24 by (i) the structuring of a loan transaction as an open-end
25 credit plan for the purpose and with the intent of evading the
26 provisions of this Section when the loan would have been a

 

 

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1 high-cost home loan if the loan had been structured as a
2 closed-end loan, (ii) dividing any loan transaction into
3 separate parts for the purpose and with the intent of evading
4 the provisions of this Section, or (iii) any other subterfuge.
5     (c) Except as provided in subsection (d) of this Section,
6 the making of a home loan that violates any provisions of
7 Sections 10 and 15 of this Act is hereby declared usurious in
8 violation of the provisions of this Act and unlawful as an
9 unfair or deceptive act or practice in or affecting commerce.
10 The provisions of this Section apply to any person who in bad
11 faith attempts to avoid the application of this Section by (i)
12 the structuring of a loan transaction as an open-end credit
13 plan for the purpose and with the intent of evading the
14 provisions of this Section when the loan would have been a
15 high-cost home loan if the loan had been structured as a
16 closed-end loan, (ii) dividing any loan transaction into
17 separate parts for the purpose and with the intent of evading
18 the provisions of this Section, or (iii) any other subterfuge.
19 The Attorney General, the Department of Financial and
20 Professional Regulation, or any party to a high-cost home loan
21 may enforce the provisions of this Section. Any person seeking
22 damages or penalties under the provisions of this Section may
23 recover damages under either this Act or other State law, but
24 not both.
25     (d) A lender in a high-cost home loan who, when acting in
26 good faith, fails to comply with subsection (a) of this

 

 

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1 Section, shall not be deemed to have violated this Section if
2 the lender establishes that either: (1) Within 30 days after
3 the loan closing and prior to the institution of any action
4 under this Section, the borrower is notified of the compliance
5 failure, appropriate restitution is made, and whatever
6 adjustments are necessary are made to the loan to either, at
7 the choice of the borrower, (i) make the high-cost home loan
8 satisfy the requirements of subsection (a) of this Section or
9 (ii) change the terms of the loan in a manner beneficial to the
10 borrower so that the loan will no longer be considered a
11 high-cost home loan subject to the provisions of this Section;
12 or (2) the compliance failure was not intentional and resulted
13 from a bona fide error notwithstanding the maintenance of
14 procedures reasonably adapted to avoid errors and within 60
15 days after the discovery of the compliance failure and prior to
16 the institution of any action under this Section or the receipt
17 of written notice of the compliance failure, the borrower is
18 notified of the compliance failure, appropriate restitution is
19 made, and whatever adjustments are necessary are made to the
20 loan to either, at the choice of the borrower, (i) make the
21 high-cost home loan satisfy the requirements of subsection (a)
22 of this Section or (ii) change the terms of the loan in a
23 manner beneficial to the borrower so that the loan will no
24 longer be considered a high-cost home loan subject to the
25 provisions of this Section.
 

 

 

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1     Section 20. Assignee liability. Any subsequent holder who
2 purchases or is otherwise assigned a mortgage referred to in
3 this Section shall be subject to all claims and defenses, with
4 respect to that mortgage, that the consumer could assert
5 against the original creditor of the mortgage.
 
6     Section 25. Damages. If any person, corporation, or other
7 lender knowingly violates either directly or indirectly any of
8 the provisions described in this Act, the borrower may, recover
9 by means of an action or defense, an amount equal to twice the
10 total of all interest, discount, and charges determined by the
11 loan contract or paid by the borrower, whichever is greater,
12 plus such reasonable attorneys' fees and court costs as may be
13 assessed by a court against the lender. Recovery by means of a
14 defense may be had at any time after the loan is transacted.
15 Recovery by means of an action may be had at any time within 2
16 years after the date on which the total loan amount due under
17 the terms of the loan contract is fully paid.
 
18     Section 30. Enforcement. When the Department of Financial
19 and Professional Regulation determines that a violation of this
20 Act has occurred, after due process, it shall withdraw the
21 license of the violator.
 
22     Section 35. Applicability. This Act applies to all loans
23 made or entered into after the effective date of this Act.