Senate File 2226 - Introduced
SENATE FILE
BY BOLKCOM
Passed Senate, Date Passed House, Date
Vote: Ayes Nays Vote: Ayes Nays
Approved
A BILL FOR
1 An Act relating to high=cost home loans and making penalties
2 applicable.
3 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA:
4 TLSB 5898SS 81
5 kk/je/5
PAG LIN
1 1 Section 1. NEW SECTION. 535D.1 DEFINITIONS.
1 2 For the purposes of this chapter unless the context
1 3 otherwise requires:
1 4 1. "High=cost home loan" means a loan other than an open=
1 5 end credit plan or a reverse mortgage transaction in which all
1 6 of the following apply:
1 7 a. The principal amount of the loan is greater than
1 8 fifteen thousand dollars and does not exceed two hundred
1 9 thousand dollars.
1 10 b. The borrower is a natural person.
1 11 c. The debt is incurred by the borrower primarily for
1 12 personal, family, or household purposes.
1 13 d. The loan is secured by a mortgage on residential real
1 14 property or secured by collateral which has a mortgage lien
1 15 interest in residential real property, which is or will be
1 16 occupied by the borrower as the borrower's principal dwelling.
1 17 e. Without regard to whether the loan transaction is or
1 18 may be a "residential mortgage transaction" as defined in 12
1 19 C.F.R. } 226.2(a)(24), the loan at the time the loan is made
1 20 is such that the loan is considered a "mortgage" under section
1 21 152 of the home ownership and equity protection Act of 1994,
1 22 Pub. L. No. 103=325, 15 U.S.C. } 1602(aa), and regulations
1 23 adopted pursuant thereto.
1 24 2. "Lender" means any person who funds or negotiates the
1 25 terms of a high=cost home loan or acts as a mortgage broker or
1 26 lender, finance company, or retail installment seller with
1 27 respect to a high=cost home loan.
1 28 Sec. 2. NEW SECTION. 535D.2 HIGH=COST HOME LOAN
1 29 LIMITATIONS.
1 30 A high=cost home loan shall be subject to all of the
1 31 following limitations:
1 32 1. A high=cost home loan shall not contain a provision
1 33 which permits the lender to charge or collect prepayment fees
1 34 or penalties more than thirty=six months after the loan
1 35 closing or which exceed three percent of the amount prepaid
2 1 during the first twelve months, two percent of the amount
2 2 prepaid during the second twelve months, or one percent of the
2 3 amount prepaid during the third twelve months.
2 4 2. A high=cost home loan shall not contain a provision
2 5 which permits the lender, in its sole discretion, to
2 6 accelerate the indebtedness. This subsection does not apply
2 7 when repayment of the loan has been accelerated by default,
2 8 pursuant to a due=on=sale provision, or pursuant to some other
2 9 provision of the loan documents unrelated to the payment
2 10 schedule.
2 11 3. A high=cost home loan shall not contain a scheduled
2 12 payment that is more than twice as large as the average of
2 13 earlier scheduled payments. This subsection does not apply
2 14 when the payment schedule is adjusted to the seasonal or
2 15 irregular income of the borrower.
2 16 4. A high=cost home loan shall not contain a payment
2 17 schedule with regular periodic payments that cause the
2 18 principal balance to increase.
2 19 5. A high=cost home loan shall not contain a provision
2 20 which increases the interest rate after default. This
2 21 subsection does not apply to interest rate changes in a
2 22 variable rate loan otherwise consistent with the provisions of
2 23 the loan documents, provided the change in the interest rate
2 24 is not triggered by the event of default or the acceleration
2 25 of the indebtedness.
2 26 6. A high=cost home loan shall not include terms under
2 27 which more than two periodic payments required under the loan
2 28 are consolidated and paid in advance from the loan proceeds
2 29 provided to the borrower.
2 30 7. A lender shall not charge a borrower any fees to
2 31 modify, renew, extend, or amend a high=cost home loan or to
2 32 defer any payment due under the terms of a high=cost home
2 33 loan, unless the fees are less than one=half of any fees that
2 34 would be charged for a refinance or unless the borrower is in
2 35 default.
3 1 8. A lender shall not make a high=cost home loan unless
3 2 the borrower has been provided the following notice or a
3 3 substantially similar notice, in writing, not later than the
3 4 time that notice provided by 12 C.F.R. } 226.31(c), is
3 5 required:
3 6 "NOTICE TO BORROWER
3 7 IF YOU OBTAIN THIS LOAN, THE LENDER WILL HAVE A MORTGAGE ON
3 8 YOUR HOME. YOU COULD LOSE YOUR HOME AND ANY MONEY YOU PUT
3 9 INTO IT IF YOU DO NOT MEET YOUR OBLIGATIONS UNDER THE LOAN.
3 10 MORTGAGE LOAN RATES AND CLOSING COSTS AND FEES VARY BASED
3 11 ON MANY FACTORS, INCLUDING YOUR PARTICULAR CREDIT AND
3 12 FINANCIAL CIRCUMSTANCES, YOUR EMPLOYMENT HISTORY, THE LOAN=
3 13 TO=VALUE REQUESTED, AND THE TYPE OF PROPERTY THAT WILL SECURE
3 14 YOUR LOAN. THE LOAN RATE AND FEES COULD ALSO VARY BASED ON
3 15 WHICH LENDER OR BROKER YOU SELECT. YOU SHOULD SHOP AROUND AND
3 16 COMPARE LOAN RATES AND FEES.
3 17 YOU SHOULD ALSO CONSIDER CONSULTING A QUALIFIED INDEPENDENT
3 18 CREDIT COUNSELOR OR OTHER EXPERIENCED FINANCIAL ADVISOR
3 19 REGARDING THE RATE, FEES, AND PROVISIONS OF THIS MORTGAGE LOAN
3 20 BEFORE YOU PROCEED. YOU SHOULD CONTACT THE UNITED STATES
3 21 DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT FOR A LIST OF
3 22 CREDIT COUNSELORS AVAILABLE IN YOUR AREA.
3 23 YOU ARE NOT REQUIRED TO COMPLETE THIS LOAN AGREEMENT MERELY
3 24 BECAUSE YOU HAVE RECEIVED THESE DISCLOSURES OR HAVE SIGNED A
3 25 LOAN APPLICATION.
3 26 REMEMBER, PROPERTY TAXES AND HOMEOWNER'S INSURANCE ARE YOUR
3 27 RESPONSIBILITY. NOT ALL LENDERS PROVIDE ESCROW SERVICES FOR
3 28 THESE PAYMENTS. YOU SHOULD ASK YOUR LENDER ABOUT THESE
3 29 SERVICES.
3 30 IN ADDITION, YOUR PAYMENTS ON EXISTING DEBTS CONTRIBUTE TO
3 31 YOUR CREDIT RATINGS. YOU SHOULD NOT ACCEPT ANY ADVICE TO
3 32 IGNORE YOUR REGULAR PAYMENTS TO YOUR EXISTING CREDITORS."
3 33 9. A lender shall not make a high=cost home loan unless
3 34 the lender reasonably believes at the time the loan is made
3 35 that one or more of the borrowers, when considered
4 1 individually or collectively, will be able to make the
4 2 scheduled payments to repay the loan based upon a
4 3 consideration of the borrower's current and expected income,
4 4 current obligations, current employment status, and other
4 5 financial resources, other than the borrower's equity in the
4 6 dwelling which secures repayment of the loan. A borrower
4 7 shall be presumed to be able to make the scheduled payments to
4 8 repay the loan if, at the time the loan is consummated, the
4 9 borrower's total monthly debts, including amounts owed under
4 10 the loan, do not exceed fifty percent of the borrower's
4 11 monthly gross income as verified by the credit application,
4 12 the borrower's financial statement, a credit report, financial
4 13 information provided to the lender by or on behalf of the
4 14 borrower, or any other reasonable means. A presumption of
4 15 inability to make the scheduled payments to repay the
4 16 obligation shall not arise solely from the fact that, at the
4 17 time the loan is made, the borrower's total monthly debts,
4 18 including amounts owed under the loan, exceed fifty percent of
4 19 the borrower's monthly gross income.
4 20 10. If the proceeds of the high=cost home loan are used to
4 21 refinance an existing high=cost home loan held by the same
4 22 lender as noteholder, the lender shall not directly or
4 23 indirectly finance any of the following:
4 24 a. Any prepayment fees or penalties payable by the
4 25 borrower.
4 26 b. Points and fees, excluding those provided for in 12
4 27 C.F.R. } 226.4(c)(7), which in the aggregate are in excess of
4 28 four percent of the total amount financed.
4 29 11. A lender shall not, within one year of the
4 30 consummation of a high=cost home loan, charge a borrower
4 31 points and fees in connection with a high=cost home loan if
4 32 the proceeds of the high=cost home loan are used to refinance
4 33 an existing high=cost home loan on which points were charged.
4 34 A lender shall not, at any time, charge a borrower points and
4 35 fees in addition to those allowed by 12 C.F.R. } 226.4(c)(7)
5 1 if the proceeds of the high=cost home loan are used to
5 2 refinance an existing high=cost home loan, on which points
5 3 were charged, held by the same lender as noteholder. However,
5 4 points and fees in accordance with this section may be charged
5 5 on any proceeds of a high=cost home loan which are in excess
5 6 of the amount refinanced on the existing high=cost home loan.
5 7 12. A lender shall not pay a contractor under a home=
5 8 improvement contract from the proceeds of a high=cost home
5 9 loan other than by an instrument payable to the borrower or
5 10 jointly to the borrower and the contractor, or at the election
5 11 of the borrower, through a third=party escrow agent in
5 12 accordance with terms established in a written agreement
5 13 signed by the borrower, the lender, and the contractor prior
5 14 to the disbursement.
5 15 13. A lender shall not refinance, replace, or consolidate
5 16 a zero=interest=rate or low=interest=rate loan made by a
5 17 governmental or nonprofit lender with a high=cost home loan.
5 18 For purposes of this subsection, a low=interest=rate loan is
5 19 defined as a loan that carries a current interest rate that is
5 20 two percentage points or more below the current yield on
5 21 United States treasury securities with a comparable maturity.
5 22 14. A lender shall not finance single premium credit life,
5 23 credit accident, credit health, credit disability, or credit
5 24 loss of income insurance in connection with a high=cost home
5 25 loan.
5 26 15. A lender shall not make a high=cost home loan unless
5 27 the lender has made available to the borrower a videotape, or
5 28 other similar audio=video media format such as a digital video
5 29 disc (DVD) or compact disc (CD), approved by the
5 30 superintendent of banking, which explains the borrower's
5 31 rights and responsibilities with regard to this chapter or
5 32 high=cost home loans. A lender shall have available for
5 33 viewing at least one copy of the video in the principal office
5 34 and each branch office of the lender.
5 35 16. A lender shall not make a high=cost home loan subject
6 1 to a mandatory arbitration clause that is oppressive, unfair,
6 2 unconscionable, or substantially in derogation of the rights
6 3 of consumers. Arbitration clauses that comply with the
6 4 standards set forth in the statement of principles of the
6 5 national consumer dispute advisory committee of the American
6 6 arbitration association in effect on June 24, 2003, shall be
6 7 presumed not to violate this subsection.
6 8 17. A lender shall not charge a late payment fee on a
6 9 high=cost home loan except in accordance with all of the
6 10 following:
6 11 a. The late payment fee shall not be in excess of five
6 12 percent of the amount of the payment past due or ten dollars,
6 13 whichever is greater.
6 14 b. The late payment fee shall only be assessed for a
6 15 payment past due fifteen days or more.
6 16 c. The late payment fee shall only be charged once with
6 17 respect to a single late payment.
6 18 18. A lender shall not charge a borrower a fee in excess
6 19 of ten dollars or actual costs, whichever is greater, per
6 20 request for a written payoff calculation on a high=cost home
6 21 loan for the first two requests by a borrower in a calendar
6 22 year.
6 23 19. A lender shall not initiate a foreclosure or other
6 24 judicial process to terminate a borrower's interest in
6 25 residential real property subject to a high=cost home loan
6 26 without first providing the borrower, at least thirty days
6 27 prior to the initiation of any process, written notice of
6 28 default and of the borrower's right to cure. The notice shall
6 29 include a statement of the amount needed to be paid by the
6 30 borrower in order to cure the default and the date by which
6 31 the payment is due to cure the default. If the amount needed
6 32 to be paid will change during the thirty=day notice period,
6 33 the notice shall provide information sufficient to enable a
6 34 calculation of the daily change.
6 35 20. A lender shall not recommend or encourage default on
7 1 an existing loan or other debt in connection with the closing
7 2 of a high=cost home loan that refinances all or a portion of
7 3 the existing loan or debt.
7 4 21. A lender shall not make a high=cost home loan that is
7 5 an interest=only payment loan which allows the borrower, for
7 6 at least part of the term of the loan, to make payments that
7 7 are applied only to interest and not to principal.
7 8 Sec. 3. NEW SECTION. 535D.3 VIOLATIONS AND PENALTIES.
7 9 1. The making of a high=cost home loan which violates any
7 10 provision of section 535D.2 is usurious and unlawful as an
7 11 unfair practice under section 714.16, subsection 2, paragraph
7 12 "a".
7 13 2. It is a violation of this chapter for any person who in
7 14 bad faith attempts to avoid the application of this chapter by
7 15 any of the following:
7 16 a. The structuring of a loan transaction as an open=end
7 17 credit plan for the purpose and with the intent of evading the
7 18 provisions of this chapter when the loan would have been a
7 19 high=cost home loan if the loan had been structured as a
7 20 closed=end loan.
7 21 b. Dividing any loan transaction into separate parts for
7 22 the purpose and with the intent of evading the provisions of
7 23 this chapter.
7 24 c. Any other such subterfuge.
7 25 3. The attorney general, the superintendent of banking, or
7 26 any party to a high=cost home loan may bring a civil action
7 27 against a person who has violated any provision of this
7 28 chapter for injunctive relief, actual damages, reasonable
7 29 attorney fees, costs, and any other remedy allowed by law.
7 30 Any person seeking damages or penalties for a violation of
7 31 this chapter may recover damages under either this section or
7 32 under section 714.16, but not both.
7 33 Sec. 4. NEW SECTION. 535D.4 DEFENSES.
7 34 1. A lender of a high=cost home loan who, when acting in
7 35 good faith, fails to comply with section 535D.2, shall not be
8 1 deemed to have violated this chapter if the lender establishes
8 2 that either of the following apply:
8 3 a. Within thirty days of the loan closing the borrower is
8 4 notified of the compliance failure, appropriate restitution is
8 5 made, and whatever adjustments necessary are made to the loan,
8 6 at the choice of the borrower, to do either of the following:
8 7 (1) Make the high=cost home loan satisfy the requirements
8 8 of this chapter.
8 9 (2) Change the terms of the loan in a manner beneficial to
8 10 the borrower so that the loan will no longer be considered a
8 11 high=cost home loan subject to the provisions of this chapter.
8 12 b. The compliance failure was not intentional and resulted
8 13 from a bona fide error notwithstanding the maintenance of
8 14 procedures reasonably adopted to avoid such errors, and within
8 15 sixty days after the discovery of the compliance failure, the
8 16 borrower is notified of the compliance failure, appropriate
8 17 restitution is made, and whatever adjustments necessary are
8 18 made to the loan to either, at the choice of the borrower,
8 19 make the high=cost home loan satisfy the requirements of
8 20 section 533D.2 or change the terms of the loan in a manner
8 21 beneficial to the borrower so that the loan will no longer be
8 22 considered a high=cost home loan subject to the provisions of
8 23 this chapter. For purposes of this paragraph, a "bona fide
8 24 error" includes clerical, calculation, computer malfunction
8 25 and programming, and printing errors.
8 26 2. A person who purchases or is otherwise assigned a high=
8 27 cost home loan shall be subject to an action for violation of
8 28 this chapter only if the violation for which the action or
8 29 proceeding is brought is apparent on the face of the
8 30 disclosure or the underlying promissory note.
8 31 3. For purposes of this section, "appropriate restitution"
8 32 means the reimbursement by the lender of any points, fees,
8 33 interest, or other charges made by the lender and received
8 34 from the borrower necessary to put the borrower in the same
8 35 position as the borrower would have been had the loan, as
9 1 adjusted in accordance with subsection 1, been originally
9 2 made.
9 3 Sec. 5. NEW SECTION. 535D.5 APPLICABILITY.
9 4 1. For purposes of this chapter, any extension of credit
9 5 shall be deemed to have been made in this state, and therefore
9 6 subject to the provisions of this chapter, if the lender
9 7 offers or agrees in this state to lend to a borrower, who is a
9 8 resident of Iowa, on real property located within Iowa, or if
9 9 such borrower accepts or makes the offer in Iowa to borrow,
9 10 regardless of the situs of the contract as specified therein.
9 11 2. Any oral or written solicitation or communication to
9 12 lend originating outside of this state, but forwarded to and
9 13 received in this state by a borrower who is a resident of
9 14 Iowa, shall be deemed to be an offer or agreement to lend in
9 15 Iowa and, therefore, subject to this chapter.
9 16 3. Any oral or written solicitation or communication to
9 17 borrow originating within this state, from a borrower who is a
9 18 resident of Iowa, but forwarded to and received by a lender
9 19 outside of Iowa, shall be deemed to be an acceptance or offer
9 20 to borrow in Iowa.
9 21 4. Any oral or written offer, acceptance, solicitation, or
9 22 communication to lend or borrow, made in this state to, or
9 23 received in this state from a borrower who is not a resident
9 24 of Iowa, shall be subject to the provisions of this chapter,
9 25 applicable federal law, law of the situs of the contract, or
9 26 law of the residence of the borrower, as the parties may
9 27 elect.
9 28 EXPLANATION
9 29 This bill relates to the making of high=cost home loans in
9 30 this state. The bill defines "high=cost home loan" as a loan
9 31 where the principal amount is greater than $15,000 but less
9 32 than $200,000, the borrower is a natural person, the debt is
9 33 incurred primarily for personal, family, or household
9 34 purposes, and the loan is secured by a mortgage or mortgage
9 35 lien interest on residential real property which will be the
10 1 borrower's principal dwelling.
10 2 The bill restricts lenders of high=cost home loans from
10 3 including certain provisions in a high=cost home loan. A
10 4 high=cost home loan shall not contain a provision relating to
10 5 the collection of certain prepayment fees or penalties and
10 6 allowing a lender to accelerate the indebtedness except in
10 7 certain circumstances. A high=cost home loan shall not
10 8 contain a payment schedule that causes the principal balance
10 9 to increase or a provision which increases the interest rate
10 10 after default except in a variable rate loan. The bill
10 11 restricts high=cost home loans from requiring two or more
10 12 periodic payments to be consolidated and paid in advance to
10 13 the borrower. The bill prohibits lenders from charging
10 14 certain fees to modify, renew, extend, or amend a high=cost
10 15 home loan or to defer any payment due and requires lenders to
10 16 provide certain notices to borrowers as described by the bill.
10 17 The bill restricts lenders from providing high=cost home
10 18 loans to borrowers who may not reasonably be able to make the
10 19 scheduled payments. If a high=cost home loan is made to
10 20 refinance an existing high=cost home loan with the same
10 21 lender, the lender is prohibited from financing prepayment
10 22 fees or penalties and certain points and fees. The bill
10 23 prohibits lenders from charging a borrower points and fees for
10 24 a high=cost home loan for one year if the proceeds are used to
10 25 refinance an existing high=cost home loan. The bill requires
10 26 lenders to pay proceeds from a high=cost home loan to a
10 27 contractor only by an instrument payable to the borrower or
10 28 jointly to the borrower and the contractor, or a third=party
10 29 escrow agent as agreed by the borrower by written agreement.
10 30 The bill provides that a lender shall not refinance,
10 31 replace, or consolidate a zero or low=interest=rate loan made
10 32 by a governmental or nonprofit lender with a high=cost home
10 33 loan. The bill prohibits a lender from financing certain
10 34 types of insurance in connection with a high=cost home loan.
10 35 The bill requires lenders to make available to borrowers of
11 1 high=cost home loans a video of the borrower's rights and
11 2 responsibilities regarding the bill. Lenders are prohibited
11 3 from including mandatory arbitration clauses in a high=cost
11 4 home loan that are oppressive, unfair, unconscionable, or
11 5 substantially in derogation of the rights of consumers.
11 6 The bill permits a lender to charge a late payment fee on
11 7 high=cost home loans only under certain circumstances. The
11 8 bill restricts lenders from charging fees in excess of $10 or
11 9 the actual costs for a written payoff calculation of a high=
11 10 cost home loan. The bill restricts a lender of a high=cost
11 11 home loan from initiating a foreclosure or other judicial
11 12 process to terminate a borrower's interest in residential real
11 13 property subject to a high=cost home loan without providing at
11 14 least 30 days notice of default and right to cure to the
11 15 borrower. The bill prohibits a lender from recommending or
11 16 encouraging default in connection with a high=cost home loan
11 17 and prohibits lenders from making a high=cost home loan an
11 18 interest=only payment loan.
11 19 The bill provides that a violation of any of the provisions
11 20 of new Code section 535D.2 is usurious and is unlawful as an
11 21 unfair practice under Code section 714.16, subsection 2,
11 22 paragraph "a". The attorney general has authority to
11 23 investigate unfair practices and issue a civil penalty in an
11 24 amount up to $40,000 per violation. The bill prohibits any
11 25 person to avoid application of new Code chapter 535D in bad
11 26 faith by structuring or dividing a loan or through any other
11 27 method. The attorney general, the superintendent of banking,
11 28 and any other injured party to a high=cost home loan may bring
11 29 a civil action for violations of new Code chapter 535D for
11 30 injunctive relief, actual damages, reasonable attorney fees,
11 31 costs, and any other remedy allowed by law. The bill
11 32 restricts a person seeking damages from recovering damages
11 33 either under new Code chapter 535D or as an unfair practice
11 34 under Code section 714.16, but not both.
11 35 The bill provides lenders with certain defenses for
12 1 violations of new Code section 535D.2. A lender may avoid
12 2 liability by either providing notice of the violation and
12 3 appropriate restitution or by showing that the violation was
12 4 not intentional and resulted from a bona fide error and making
12 5 appropriate restitution. The bill defines "appropriate
12 6 restitution" as the reimbursement of any points, fees,
12 7 interest, or other charges made that places the borrower in
12 8 the same position as if the violation had not occurred. The
12 9 bill describes the applicability of new Code chapter 535D to
12 10 certain extensions of credit, or oral or written solicitation
12 11 to lend depending on where the offer to lend is made, the
12 12 residence of the borrower, the location of the real property
12 13 that is the subject of the loan, and the location of the
12 14 acceptance of the offer.
12 15 LSB 5898SS 81
12 16 kk:nh/je/5