2006 Regular Session
To: Business and Financial Institutions; Judiciary, Division B
By: Senator(s) Frazier
AN ACT ENTITLED THE "MISSISSIPPI HOME LOAN PROTECTION ACT"; TO PROVIDE DEFINITIONS; TO PRESCRIBE CERTAIN PROHIBITED ACTS AND PRACTICES REGARDING HOME LOANS; TO PROVIDE LIMITATIONS AND PROHIBITED PRACTICES FOR HIGH-COST HOME LOANS; TO DEFINE PROCEDURES FOR CURING ANY DEFAULT AND REINSTATEMENT OF THE HOME LOAN PRIOR TO FORECLOSURE; TO PROVIDE CIVIL AND CRIMINAL PENALTIES FOR VIOLATIONS OF THIS ACT; TO AUTHORIZE THE ATTORNEY GENERAL TO ENFORCE THE PROVISIONS OF THIS ACT; AND FOR RELATED PURPOSES.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MISSISSIPPI:
SECTION 1. Title, purposes. (1) This act shall be known as the "Mississippi Home Loan Protection Act."
(2) The Legislature finds that predatory lending has become a problem in this state, exacerbating the loss of equity in homes and causing foreclosures to increase. One of the most common forms of predatory lending is the making of loans that are equity-based, rather than income-based. A hallmark of such loans is the financing of excessive points and fees which provides immediate income to the originator of the loan, encourages creditors to refinance, and reduces the creditor's incentive to ensure that the homeowner can afford the subsequent monthly payments. As long as there is sufficient equity in the home, a creditor benefits if the consumer is unable to make the payments and is forced to refinance. The repeated financing of points and fees primarily for the benefit of the creditor in refinance transactions is called flipping. Flipping is not in the best interest of borrowers because each repeated refinancing transaction strips precious equity, creating a path that can lead to foreclosure.
Predatory lending has threatened the viability of many communities and caused decreases in homeownership. While the marketplace appears to operate effectively for most home loans, too many homeowners are victims of overreaching creditors who provide loans at exorbitant costs and include terms which are unnecessary to secure repayment of the loan. The Legislature finds that as competition and self-regulation have not eliminated the predatory terms from home-secured loans, the consumer protection provisions of this act are necessary to encourage responsible lending.
(3) This act shall be liberally construed to effectuate its purpose of protecting the homes and the equity of individual borrowers. This act is to be construed as a consumer protection statute for all purposes.
SECTION 2. Definitions. The following definitions apply for the purposes of this act:
(a) "Affiliate" means any company that controls, is controlled by, or is under common control with another company, as set forth in 12 USC Section 1841 et seq.
(b) "Annual percentage rate" means the annual percentage rate for the loan calculated according to the provisions of 12 CFR part 226.
(c) "Bona fide discount points" means an amount knowingly paid by the borrower for the express purpose of reducing, and which in fact does result in a bona fide reduction of, the interest rate applicable to the home loan; provided the undiscounted interest rate for the home loan does not exceed the conventional mortgage rate by two (2) percentage points for a home loan secured by a first lien, or by three and one-half (3-1/2) percentage points for a home loan secured by a subordinated lien.
(d) "Borrower" means any natural person obligated to repay the loan, including a co-borrower, co-signer, or guarantor.
(e) "Brokering" means to act as a mortgage broker in connection with a home loan.
(f) "Conventional mortgage rate" means the most recently published annual yield on conventional mortgages published by the Board of Governors of the Federal Reserve System, as published in statistical release H.15 or any publication that may supersede it, as of the applicable time set forth in 12 CFR 226.32(a)(1)(i).
(g) "Conventional prepayment penalty" means any prepayment penalty or fee that may be collected or charged in a home loan, and that is authorized by law other than this act, provided the home loan (i) does not have an annual percentage rate that exceeds the conventional mortgage rate by more than two (2) percentage points; and (ii) does not permit any prepayment fees or penalties that exceed two percent (2%) of the amount prepaid.
(h) "Creditor" means the same as "lender" as set forth in 24 CFR 3500.2 and shall also mean a mortgage broker.
(i) "Excluded points and fees" means, in connection with a home loan, up to and including one percent (1%) of the total loan amount attributable to bona fide fees paid to a federal or state government agency that insures payment of some portion of a home loan plus an amount not to exceed two percent (2%) of the total loan amount attributable to bona fide discount points or a conventional prepayment penalty. In no case shall the total excluded points and fees in connection with a home loan exceed three percent (3%) of the total loan amount.
(j) "High-cost home loan" means a home loan in which the terms of the loan meet or exceed one ormore of the thresholds as defined in subsection (o) of this section.
(k) "Home loan" means an extension of credit, including an open-end credit plan, in which:
(i) The loan is such that it does not exceed the maximum original principal obligation as set forth in and from time to time adjusted according to the provisions of 12 USC 1454(a)(2);
(ii) The loan is such that it is considered a federally related mortgage loan as set forth in 24 CFR 3500.2; and
(iii) The loan is neither a reverse mortgage transaction nor a loan primarily for business, agricultural or commercial purposes.
(l) "Manufactured home" means the same as set forth in 24 CFR 3280.2.
(m) "Mortgage broker" means the same as set forth in 24 CFR 3500.2.
(n) "Points and fees" means:
(i) All items included in the definition of finance charge in 12 CFR 226.4(a) and 12 CFR 226.4(b) except interest or the time price differential;
(ii) All items described in 12 CFR 226.32(b)(1)(iii);
(iii) All compensation paid directly or indirectly to a mortgage broker from any source, including a mortgage broker that originates a loan in its own name in a table-funded transaction;
(iv) The cost of all premiums financed by the creditor, directly or indirectly for any credit life, credit disability, credit unemployment or credit property insurance, or any other life or health insurance, or any payments financed by the creditor directly or indirectly for any debt cancellation or suspension agreement or contract, except that insurance premiums or debt cancellation or suspension fees calculated and paid in full on a monthly basis shall not be considered financed by the creditor;
(v) The maximum prepayment fees and penalties that may be charged or collected under the terms of the loan documents;
(vi) All prepayment fees or penalties that are incurred by the borrower if the loan refinances a previous loan originated or currently held by the same creditor or an affiliate of the creditor;
(vii) For open-end loans, the points and fees are calculated by adding the total points and fees known at or before closing, including the maximum prepayment penalties which may be charged or collected under the terms of the loan documents, plus the minimum additional fees the borrower would be required to pay to draw down an amount equal to the total credit line;
(viii) Points and fees shall not include:
1. Taxes, filing fees, recording, and other charges and fees paid or to be paid to public officials for determining the existence of or for perfecting, releasing or satisfying a security interest; or
2. Bona fide and reasonable fees paid to a person other than the creditor or an affiliate of the creditor for the following: fees for tax payment services; fees for flood certification; fees for pest infestation and flood determination; appraisal fees; fees for inspections performed prior to closing; credit reports; surveys; attorneys' fees, if the borrower has the right to select the attorney from an approved list or otherwise; notary fees; escrow charges, so long as not otherwise included under subparagraph (i) of this paragraph; title insurance premiums; and fire and hazard insurance and flood insurance premiums, provided that the conditions in 12 CFR 226.4(d)(2) are met.
(o) "Threshold" means any one (1) of the following three (3) items, as defined:
(i) "Rate threshold" means for a home loan, the annual percentage rate equals or exceeds the rate set forth in 12 CFR 226.32(a)(1)(i), without regard to whether the home loan may be considered a "residential mortgage transaction" or an extension of "open-end credit" as those terms are set forth in 12 CFR 226.2;
(ii) "Total points and fees threshold"means:
1. For loans in which the total loan amount is Twenty Thousand Dollars ($20,000.00) or more, the total points and fees payable in connection with the home loan less any excluded points and fees exceed five percent (5%) of the total loan amount; and
2. For loans in which the total loan amount is less than Twenty Thousand Dollars ($20,000.00), the total points and fees payable in connection with the home loan less any excluded points and fees exceed the lesser of One Thousand Dollars ($1,000.00) or eight percent (8%) of the total loan amount.
(p) "Total loan amount" means the principal of the loan minus those points and fees as defined in paragraph (h) of this section that are included in the principal amount of the loan. For open-end loans, the total loan amount shall be calculated using the total line of credit allowed under the home loan at closing.
SECTION 3. Prohibited acts and practices regarding home loans. (1) No creditor making a home loan shall finance, directly or indirectly, 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, except that insurance premiums or debt cancellation or suspension fees calculated and paid in full on a monthly basis shall not be considered financed by the creditor.
(2) No creditor shall knowingly or intentionally engage in the unfair act or practice of flipping a home loan. Flipping a home loan is the making of a home loan to a borrower that refinances an existing home loan when the new loan does not have reasonable, tangible net benefit to the borrower considering all of the circumstances, including, but not limited to, the terms of both the new and refinanced loans, the cost of the new loan, and the borrower's circumstances.
(3) No creditor shall recommend or encourage default on an existing loan or other debt prior to and in connection with the closing or planned closing of a home loan that refinances all or any portion of such existing loan or debt.
(4) No borrower may incur a late payment charge unless the loan documents specifically authorize the charge, the charge is not imposed unless the payment is past due for ten (10) days or more, and the charge does not exceed five percent (5%) of the amount of the late payment. A late payment charge may not be imposed more than once with respect to a particular late payment. If a late payment charge is deducted from a payment made on the home loan and such deduction results in a subsequent default on a subsequent payment, no late payment charge may be imposed for such default. A lender may apply any payment made in the order of maturity to a prior period's payment due even if the result is late payment charges accruing on subsequent payments due.
(5) No home loan may contain a provision that permits the creditor, in its sole discretion, to accelerate the indebtedness. This provision does not prohibit acceleration of the loan in good faith due to the borrower's failure to abide by the material terms of the loan.
(6) No borrower may be charged a fee for being informed or receiving a statement of the balance due to pay off a home loan or to be provided a release upon prepayment. Payoff balances shall be provided within a reasonable time, but in any event no more than seven (7) business days after the request.
SECTION 4. Limitations and prohibited practices for high-cost home loans. A high-cost home loan shall be subject to the following additional limitations and prohibited practices:
(a) In connection with a high-cost home loan, no creditor shall directly or indirectly finance any points or fees.
(b) No prepayment fees or penalties shall be included in the loan documents for a high-cost home loan.
(c) No high-cost home loan may contain a scheduled payment that is more than twice as large as the average of earlier scheduled payments. This provision does not apply when the payment schedule is adjusted to the seasonal or irregular income of the borrower.
(d) No high-cost home loan may include payment terms under which the outstanding principal balance or accrued interest will increase at any time over the course of the loan because the regularly scheduled periodic payments do not cover the full amount of interest due.
(e) No high-cost home loan may contain a provision that increases the interest rate after default. This provision does not apply to interest rate changes in a variable rate loan otherwise consistent with the provisions of the loan documents, provided the change in the interest rate is not triggered by the event of default or the acceleration of the indebtedness.
(f) No high-cost home loan may include terms under which more than two (2) periodic payments required under the loan are consolidated and paid in advance from the loan proceeds provided to the borrower.
(g) A creditor may not make a high-cost home loan without first receiving certification from a counselor with a third-party nonprofit organization approved by the United States Department of Housing and Urban Development, a housing financing agency of this state, or the regulatory agency which has jurisdiction over the creditor, that the borrower has received counseling on the advisability of the loan transaction.
(h) A high-cost home loan shall not be extended to a borrower unless a reasonable creditor would believe at the time the loan is closed that the borrower residing in the home will be able to make the scheduled payments associated with the loan based upon a consideration of his or her current and expected income, current obligations, employment status, and other financial resources, other that the borrower's equity in the collateral that secures the repayment of the loan. There is a rebuttable presumption that the borrower residing in the home is able to make the scheduled payments to repay the obligation if, at the time the loan is consummated, said borrower's total monthly debts, including amounts under the loan, do not exceed fifty percent (50%) of said borrower's monthly gross income as verified by tax returns, payroll receipts and other third-party income verification.
(i) A creditor may not pay a contractor under a home-improvement contract from the proceeds of a high-cost home loan, unless:
1. The creditor is presented with a signed and dated completion certificate showing that the home improvements have been completed; and
2. The instrument is payable to the borrower or jointly to the borrower and the contractor, or, at the election of the borrower, through a third-party escrow agent in accordance with terms established in a written agreement signed by the borrower, the creditor and the contractor prior to the disbursement.
(j) A creditor may not charge a borrower any fees or other charges to modify, renew, extend, or amend a high-cost home loan or to defer any payment due under the terms of a high-cost home loan.
(k) All high-cost home loan documents that create a debt or pledge property as collateral shall contain the following notice on the first page in a conspicuous manner: Notice: This is a high-cost home loan subject to special rules under state law. Purchasers or assignees of this high-cost home loan may be liable for all claims and defenses by the borrower with respect to the home loan.
SECTION 5. Right To Cure. (1) If a creditor asserts that grounds for acceleration exist and requires the payment in full of all sums secured by the security instrument, the borrower, or anyone authorized to act on the borrower's behalf, shall have the right at any time, up to the time title is transferred by means of foreclosure by judicial proceeding and sale or otherwise, to cure the default and reinstate the home loan by tendering the amount or performance as specified in this section. Cure of default as provided herein shall reinstate the borrower to the same position as if the default had not occurred and shall nullify, as of the date of the cure, any acceleration of any obligation under the security instrument or note arising from the default.
(2) Before any action filed to foreclose upon the home or other action is taken to seize or transfer ownership of the home, a notice of the right to cure the default must be delivered to the borrower informing the borrower of the following:
(a) The nature of default claimed on the home loan, and of the borrower's right to cure the default by paying the sum of money required to cure the default, provided that a partial payment made or tendered in response to said notice must be accepted. If the amount necessary to cure the default will change during the thirty-day period after the effective date of the notice, due to the application of a daily interest rate or the addition of late fees, the notice shall give sufficient information to enable the borrower to calculate the amount at any point during the thirty-day period;
(b) The date by which the borrower shall cure the default to avoid acceleration and initiation of foreclosure, or other action to seize the home, which date shall not be less than thirty (30) days after the date the notice is effective, and the name and address and phone number of a person to whom the payment or tender shall be made;
(c) That if the borrower does not cure the default by the date specified, the creditor may take steps to terminate the borrower's ownership in the property by requiring payment in full of the home loan and commencing a foreclosure proceeding or other action to seize the home; and
(d) The name and address of the creditor and the telephone number of a representative of the creditor whom the borrower may contact if the borrower disagrees with the creditor's assertion that a default has occurred or the correctness of the creditor's calculation of the amount required to cure the default.
(3) To cure a default under this subsection, a borrower shall not be required to pay any charge, fee or penalty attributable to the exercise of the right to cure a default as provided for in this section, other than the fees specifically allowed by this section. The borrower shall not be liable for any attorney fees relating to the borrower's default that are incurred by the creditor prior to or during the thirty-day period set forth in subsection (2)(b) of this section. After the creditor files a foreclosure action or takes other action to seize or transfer ownership of the home, the borrower shall only be liable for attorney fees that are reasonable and actually incurred by the creditor, based on a reasonable hourly rate and a reasonable number of hours.
(4) If a default is cured after the initiation of any action to foreclose, the creditor shall take such steps as are necessary to terminate the foreclosure proceeding or other action.
SECTION 6. Civil action. (1) Any person who purchases or is otherwise assigned a high-cost home loan shall be subject to all affirmative claims and any defenses with respect to the loan that the borrower could assert against the original creditor of the loan; provided that this subsection (1) shall not apply if the purchaser or assignee demonstrates by a preponderance of the evidence that it:
(a) Has in place at the time of the purchase or assignment of the subject loans, policies that expressly prohibit its purchase or acceptance of assignment of any high-cost home loans;
(b) Requires by contract that a seller or assignor of home loans to the purchaser or assignee represents and warrants to the purchaser or assignee that either (i) the seller or assignor will not sell or assign any high-cost home loans to the purchaser or assignee, or (ii) that such seller or assignor is a beneficiary of a representation and warranty from a previous seller or assignor to that effect; and
(c) Exercises reasonable due diligence at the time of purchase or assignment of home loans or within a reasonable period of time after the purchase or assignment of such home loans, intended by the purchaser or assignee to prevent the purchaser or assignee from purchasing or taking assignment of any high-cost home loans; provided further that reasonable due diligence shall provide for sampling and shall not require loan-by-loan review.
(2) Limited to amounts required to reduce or extinguish the borrower's liability under the home loan plus amounts required to recover costs, including reasonable attorneys' fees, a borrower acting only in an individual capacity may assert claims that the borrower could assert against a creditor of the home loan against any subsequent holder or assignee of the home loan as follows:
(a) Within five (5) years of the closing of a high-cost home loan, a violation of this act in connection with the loan as an original action; and
(b) At any time during the term of a high-cost home loan, after an action to collect on the home loan or foreclose on the collateral securing the home loan has been initiated or the debt arising from the home loan has been accelerated or the home loan has become sixty (60) days in default, any defense, claim or counterclaim, or action to enjoin foreclosure or preserve or obtain possession of the home that secures the loan.
(3) The provisions of this section shall be effective notwithstanding any other provision of law, provided that nothing in this section shall be construed to limit the substantive rights, remedies or procedural rights available to a borrower against any creditor, assignee or holder under any other law. The rights conferred on borrowers by subsections (1) and (2) of this section are independent of each other and do not limit each other.
SECTION 7. Enforcement, good faith errors, no subterfuge. (1) The originating or brokering of a home loan that violates a provision of this act shall constitute a violation of the act.
(2) Any person found by a preponderance of the evidence to have violated this act shall be liable to the borrower for the following:
(a) Actual damages, including consequential and incidental damages; the borrower shall not be required to demonstrate reliance in order to receive actual damages;
(b) For violations of Section 3 or Section 4 of this act, statutory damages equal to two (2) times the finance charge paid under the loan and forfeiture of the remaining interest under the loan;
(c) Punitive damages, when the violation was malicious or reckless; and
(d) Costs including reasonable attorneys' fees.
(3) A borrower may be granted injunctive, declaratory and such other equitable relief as the court deems appropriate in an action to enforce compliance with this act.
(4) The right of rescission granted under 15 USC 1601 et seq. for a violation of that law shall be available to a borrower by way of recoupment against a party foreclosing on the home loan or collecting on the loan, at any time during the term of the loan. Nothing in this act shall be construed to limit recoupment rights available to the borrower under any other law.
(5) The remedies provided in this section are not intended to be the exclusive remedies available to a borrower nor must the borrower exhaust any administrative remedies provided under this act or any other applicable law before proceeding under this section.
(6) Any person, including members, officers, and directors of the creditor, who knowingly violates this act is guilty of a misdemeanor and, on conviction, is subject to a fine not exceeding One Thousand Dollars ($1,000.00) or to imprisonment not exceeding six (6) months, or both.
(7) A creditor in a home loan who, when acting in good faith, fails to comply with the provisions of this act, will not be deemed to have violated this section if the creditor establishes that either:
(a) Within thirty (30) days of the loan closing, and prior to receiving any notice of the compliance failure, the creditor has made appropriate restitution to the borrower, and appropriate adjustments are made to the loan; or
(b) Within sixty (60) days of the loan closing and prior to receiving any notice of the compliance failure, and the compliance failure was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid such errors, the borrower is notified of the compliance failure, appropriate restitution is made to the borrower, and appropriate adjustments are made to the loan. Examples of a bona fide error include clerical, calculation, computer malfunction and programming, and printing errors. An error of legal judgment with respect to a person's obligations under this section is not a bona fide error.
(8) The remedies provided herein are cumulative.
(9) Without regard to whether a borrower is acting individually or on behalf of others similarly situated, any provision of a home loan agreement that allows a party to require a borrower to assert any claim or defense in a forum that is less convenient, more costly or more dilatory for the resolution of a dispute than a judicial forum established in this state where the borrower may otherwise properly bring a claim or defense or limits in any way any claim or defense the borrower may have is unconscionable and void.
(10) It shall be a violation of this act for any person to attempt in bad faith to avoid the application of this act by dividing any loan transaction into separate parts or structuring a home loan transaction as an open-end loan for the purpose of evading the provisions of this act when the loan would have been a high-cost home loan if the loan had been structured as a closed-end loan or engaging in any other subterfuge with the intent of evading any provision of this act.
SECTION 8. Public enforcement. The Attorney General and the district attorneys of this state shall have jurisdiction to enforce this act through their general regulatory powers and through civil process.
SECTION 9. Rights in addition to other law. The rights conferred by this section are independent of and in addition to any other rights under other laws.
SECTION 10. Severability. The provisions of this act shall be severable, and if any phrase, clause, sentence or provision is declared to be invalid or is preempted by federal law or regulation, the validity of the remainder of this act shall not be affected thereby. If any provision of this act is declared to be inapplicable to any specific category, type, or kind of loan or points and fees, the provisions of this act shall nonetheless continue to apply with respect to all other loans and points and fees.
SECTION 11. Applicability. The law of the state in which the property is located shall be applied to all transactions governed by this act. This act shall apply to all loans originated or entered into after the effective date of this act.
SECTION 12. This act shall take effect and be in force from and after July 1, 2006.