AN ACT CONCERNING FORECLOSURE PREVENTION AND RESPONSIBLE LENDING.

Be it enacted by the Senate and House of Representatives in General Assembly convened:

Section 1. (NEW) (Effective October 1, 2008) As used in sections 1 to 7, inclusive, of this act:

(1) "Annual percentage rate" or "APR" means the annual percentage rate for the loan calculated according to the provisions of 12 CFR Part 226.

(2) "Borrower" means a borrower or prospective borrower.

(3) "Commissioner" means the Banking Commissioner.

(4) "Creditor" means creditor as described in 24 CFR 3500.2, and shall also mean a mortgage broker.

(5) "Department" means the Department of Banking.

(6) "Fully indexed rate" means the greater of (A) the interest rate that would have applied at the time of the closing had the initial interest rate been determined by the application of the same interest rate formula that applies under the terms of the loan documents to subsequent interest rate adjustments, disregarding any limitations on the amount by which the interest rate may change at any one time, plus one hundred basis points, or (B) the interest rate on the loan at origination, plus one hundred basis points.

(7) "Mortgage broker" means "mortgage broker", as defined in 24 CFR 3500.2, and also means a "first mortgage" loan correspondent lender, as defined in sections 36a-485 of the 2008 supplement to the general statutes and a "secondary mortgage correspondent lender" as defined in section 36a-510 of the 2008 supplement to the general statutes.

(8) "Mortgage loan" means any loan or extension of credit, including an open-end line of credit but excluding a reverse mortgage transaction, as defined in 12 CFR 226.33, as amended from time to time:

(A) In which the borrower is a natural person;

(B) The proceeds of which are to be used primarily for personal, family or household purposes;

(C) In which the loan is secured by a mortgage upon any interest in a one to four-family residential real property located in this state that is, or, when the loan is made, intended to be occupied by the borrower as a principal residence; and

(D) In which the principal amount, or, in the case of an open-end credit plan, the borrower's initial maximum credit limit, does not exceed the conforming loan size limit for a single-family dwelling, as established from time to time by the Federal National Mortgage Association.

(9 "Nontraditional mortgage" has the same meaning as set forth in the "Interagency Guidance on Nontraditional Mortgage Product Risks", 71 Federal Register 58609 (Oct. 4, 2006), as amended from time to time.

(10) "Subprime" means:

(A) In the case of an adjustable rate loan secured by a first lien on a dwelling, a loan for which the APR is greater than two percentage points above the yield on United States Treasury securities having comparable periods of maturity as of the fifteenth day of the preceding month if the rate is set between the first and the fourteenth day of the month, and as of the fifteenth day of the current month if the rate is set on or after the fifteenth day.

(B) For all other loans secured by a first lien on a dwelling, a loan for which the APR is greater than three percentage points above the yield on United States Treasury securities having comparable periods of maturity as of the fifteenth day of the preceding month if the rate is set between the first and the fourteen day of the month, and as of the fifteenth day of the current month if the rate is set on or after the fifteenth day.

(C) For loans secured by a subordinate lien on a dwelling, a loan for which the APR is greater than five percentage points above the yield on United States Treasury securities having comparable periods of maturity as of the fifteenth day of the preceding month if the rate is set between the first and the fourteen day of the month, and as of the fifteenth day of the current month if the rate is set on or after the fifteenth day.

(11) "Finance charge" means "finance charge", as defined in 12 CFR 226.4.

Sec. 2. (NEW) (Effective October 1, 2008) (a) A mortgage broker shall be considered an agent of the borrower in all cases and shall, in addition to duties imposed by other statutes and common law, comply with the duties in subsection (b) of this section.

(b) A mortgage broker shall:

(1) Act in the borrower's best interest and in the utmost good faith toward borrowers, and shall not compromise a borrower's right or interest in favor of another's right or interest, including a right or interest of the mortgage broker;

(2) Make reasonable efforts to secure a loan that is in the best interests of the borrower considering all the circumstances, including, but not limited to, the rates, points, fees, charges, costs, product type and shall ensure that the cost of credit is not more than appropriate considering the borrower's level of credit worthiness;

(3) Carry out all lawful instructions given by the borrower;

(4) Timely disclose to the borrower all material facts of which the mortgage broker has knowledge that might reasonably affect the borrower's rights, interests or ability to receive the borrower's intended benefit from the home loan, including total compensation the broker would receive from the loan options the broker presents to the borrower and the effect of that compensation on any loan terms the borrower receives. Timeliness shall depend on when the mortgage broker receives the information, but shall be no later than one day before the closing;

(5) Use reasonable care, skill and diligence in performing his or her duties;

(6) Shall account to a borrower for all of the borrower's money and property received; and

(7) Not broker a subprime or nontraditional adjustable rate mortgage loan without disclosing and offering to the borrower at the time of the initial offer and before the day of closing, in writing, the terms and costs associated with a fixed rate mortgage loan from the same creditor at the lowest annual percentage rate for which the borrower qualifies.

(c) Notwithstanding any rule of evidence, written acknowledgment of receipt of any disclosures required pursuant to this section does no more than create a rebuttable presumption of delivery thereof.

(d) The duties and standards of care set forth in this section may not be waived or modified.

Sec. 3. (NEW) (Effective October 1, 2008) (a) A creditor, other than a mortgage broker, shall:

(1) Act in good faith and with fair dealing in any transaction, practice or course of business in connection with the brokering or making of any home loan;

(2) Safeguard and account for any money handled for the borrower;

(3) Follow reasonable and lawful instructions from the borrower;

(4) Use reasonable skill, care and diligence;

(5) Provide timely and accurate disclosures required under state and federal law; and

(6) Make reasonable efforts to make a loan that is reasonably advantageous to the borrower considering all the circumstances including the product type, rates, charges and repayment terms of the loan options for which the borrower qualifies and the creditor, or an affiliate thereof, offers.

(b) The duties and standards of care in this section may not be waived or modified.

Sec. 4. (NEW) (Effective October 1, 2008) The following acts and practices are prohibited in the making or brokering of a mortgage loan:

(1) A creditor may not recommend or encourage default on an existing loan or other debt prior to and in connection with the closing or planned closing of a residential mortgage loan that refinances all or any portion of the existing loan or debt.

(2) A creditor may not knowingly or intentionally engage in the act or practice of churning a mortgage loan. For purposes of this subdivision, "churning a mortgage loan" means the making of a mortgage loan to a borrower that refinances an existing mortgage loan when the new loan does not have reasonable, tangible net benefit to the borrower considering all of the circumstances, including the terms of both the new and refinanced loans, the cost of the new loan and the borrower's circumstances.

(3) A mortgage loan may not contain a provision that permits the creditor, in its sole discretion, to accelerate indebtedness. This subdivision does not prohibit the acceleration of the loan in good faith due to the borrower's failure to abide by the material terms of the loan.

(4) A creditor may not finance, directly or indirectly, in connection with a mortgage loan, 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 on a monthly basis or through regularly scheduled periodic payments are not considered financed by the creditor.

(5) No creditor shall make, arrange or provide for a mortgage loan unless the creditor has a reasonable belief that the borrower will be able to repay the loan based upon a credible analysis of the borrower's capacity to repay the full amount of credit that may be extended.

(6) If all defaults in connection with a residential mortgage loan are cured after the initiation of any action to foreclose, the creditor or the servicer shall take steps as necessary to terminate the foreclosure proceeding or other action. The creditor may require that the borrower pay any reasonable costs actually incurred by the creditor or servicer before the cure of default. Cure of default reinstates the borrower to the same position as if the default had not occurred and nullifies, as of the date of the cure, any acceleration of any obligation under the security instrument or note arising from the default.

Sec. 5. (NEW) (Effective October 1, 2008) (a) The following acts and practices are prohibited in the making of a subprime or nontraditional mortgage loan:

(1) No subprime or nontraditional mortgage loan shall be made unless the creditor requires and collects the monthly escrow of property taxes and hazard insurance. The provisions of this subdivision shall not apply to a subprime or nontraditional loan that is a subordinate lien when the taxes and insurance are escrowed through another mortgage loan.

(2) A creditor may not make a subprime or nontraditional mortgage loan without first furnishing the borrower with a written list of counselors with independent, third-party nonprofit organizations approved by the United States Department of Housing and Urban Development, accompanied by the organizations' addresses and telephone numbers. The list of counselors shall be furnished in writing to the borrower no later than ten days prior to consummating the loan. The commissioner shall maintain a list of approved counseling programs. A subprime or nontraditional mortgage loan originated by a creditor in violation of this section shall not be enforceable.

(3) No creditor shall make, provide or arrange for a mortgage loan all or a portion of the proceeds of which are used to fully or partially pay off a special mortgage unless the borrower has obtained a written certification from a counselor with an independent, third-party nonprofit organization approved by the United States Department of Housing and Urban Development that the borrower has received counseling on the advisability of the loan transaction. For purposes of this subdivision, "special mortgage" means a residential mortgage loan originated, subsidized or guaranteed by or through a state, federal, tribal or local government, or nonprofit organization, that bears one or more of the following nonstandard payment terms that substantially benefit the borrower: (A) Payments vary with income; (B) payments of principal or interest are not required or can be deferred under specified conditions; (C) principal or interest is forgivable under specified conditions; (D) where the interest rate is subsidized by a state, federal, tribal or local government, or nonprofit organization; or (E) the down payment was subsidized by a state, federal, tribal or local government, or nonprofit organization.

(4) No prepayment fee or penalty may be charged or collected under the terms of a subprime or nontraditional mortgage loan. Any prepayment fee, penalty or charge in violation of this section shall be void and unenforceable.

(5) A subprime or nontraditional mortgage loan may not provide for or include a scheduled payment that is more than two times the amount of the average earlier scheduled payments. The provisions of this subdivision shall not apply when the payment schedule is adjusted to the seasonal or irregular income of the borrower.

(6) A subprime or nontraditional mortgage loan shall not provide for or include a payment schedule with regular periodic payments that cause or may cause the principal balance to increase, either automatically or at the borrower's option. A loan is considered to have such a schedule if the borrower is given the option to make regular periodic payments that cause the principal balance to increase, even if the borrower is also given the option to make regular periodic payments that do not cause the principal balance to increase. This subdivision shall not apply to a mortgage loan originated, subsidized or guaranteed by or through a state, federal, tribal or local government, or nonprofit organization, that bears one or more of the following nonstandard payment terms that substantially benefit the borrower: (A) Payments vary with income; (B) payments of principal or interest are not required or can be deferred under specified conditions; (C) principal or interest is forgivable under specified conditions; (D) where the interest rate is subsidized by a state, federal, tribal or local government, or nonprofit organization; or (E) the down payment was subsidized by a state, federal, tribal or local government, or nonprofit organization.

(7) A subprime or nontraditional mortgage loan shall not require a borrower, regardless of whether a borrower is acting individually or on behalf of others similarly situated, to assert any claim or defense in a forum that does not have to adhere to the rules of evidence, or apply the law as set forth in laws and common law, or that limits in any way any claim or defense the borrower may have, or 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.

(8) A subprime or nontraditional mortgage loan may not contain a provision that increases the interest rate after default. This subdivision does not apply to interest rate changes in an adjustable 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.

(9) No creditor shall make, provide or arrange for a subprime or nontraditional mortgage loan without verifying the borrower's reasonable ability to meet all the requirements of the loan including, but not limited to, the ability to timely repay the scheduled payments of the following, as applicable: Principal, interest, real estate taxes, insurance, assessments, any required homeowner or condominium fees, and any subordinate mortgages, including those that will be made contemporaneously to the same borrower.

(A) In evaluating the ability to repay for mortgage loans, the ability to repay shall be determined based on, at a minimum, the fully indexed rate specified by the loan documents and a fully amortizing repayment schedule based on the term set forth in the note.

(B) The borrower's income and financial resources shall be verified in writing. Verification shall be based on the best and most appropriate form of documentation available including payroll receipts, bank records, tax returns or other similar reliable documents.

(C) There shall be a rebuttable presumption that the loan was made without due regard to repayment ability if, based on a fully amortizing repayment schedule within the loan term and the fully indexed rate specified by the loan note, the borrower's total monthly debts, including the borrower's other debts plus amounts owed under the loan, taxes, insurance, any required homeowner or condominium fees, and any subordinate mortgages including those that will be made contemporaneously to the same borrower, exceed forty-five per cent of the borrower's or borrowers' verified monthly gross income.

(b) A creditor in a subprime or nontraditional mortgage loan who, when acting in good faith, fails to comply with this section, will not be deemed to have violated this section if the creditor establishes that either:

(1) No later than ninety days after the loan closing and prior to the institution of any action against the creditor under this section, the borrower was notified of the compliance failure, the creditor tendered appropriate restitution, the creditor offered, at the borrower's option, either to (A) make the subprime or nontraditional mortgage loan comply with this section, or (B) change the terms of the subprime or nontraditional mortgage loan in a manner beneficial to the borrower so that the loan will no longer be considered a subprime or nontraditional mortgage loan subject to the provisions of this section, and within a reasonable period of time following the borrower's election of remedies, the creditor took appropriate action based on the borrower's choice; or

(2) The compliance failure was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adopted to avoid such errors, and no later than one hundred twenty days after the discovery of the compliance failure and prior to the institution of any action against the creditor under this section or the creditor's receipt of written notice of the compliance failure, the borrower was notified of the compliance failure, the creditor tendered appropriate restitution, the creditor offered, at the borrower's option, either to (A) make the subprime or nontraditional mortgage loan comply with this section, or (B) change the terms of the subprime or nontraditional mortgage loan in a manner beneficial to the borrower so that the loan will no longer be considered a subprime or nontraditional mortgage loan subject to the provisions of this section, and within a reasonable period of time following the borrower's election of remedies, the creditor took appropriate action based on the borrower's choice. For purposes of this subdivision, bona fide errors include, but are not limited to, clerical, calculation, printing, computer malfunction and programming errors, but do not include errors of legal judgment with respect to a person's obligations under this section.

Sec. 6. (NEW) (Effective October 1, 2008) (a) Any violation of the provisions of sections 1 to 7, inclusive, of this act shall be an unfair and deceptive trade practice. The commissioner, the Attorney General or any party to a mortgage loan may bring suit in a court of competent jurisdiction to enforce the provisions of sections 1 to 7, inclusive, of this act and under chapter 735a of the general statutes.

(1) An injured party to a mortgage loan shall have a private right of action and may bring a claim in a court of competent jurisdiction within five years of the closing of a mortgage loan.

(2) A borrower may assert fraud and any violation of sections 1 to 7, inclusive, of this act as a counterclaim or defense to foreclosure without time limitation.

(3) A borrower, acting only in an individual capacity, may assert claims based on violations of the provisions of sections 2 to 5, inclusive, of this act that the borrower could assert against the original creditor of a subprime or nontraditional mortgage loan, against any subsequent holder or assignee of the loan in an original action within five years of the closing of the loan. Such claims shall be limited to amounts required to reduce or extinguish the borrower's liability under the loan plus amounts required to recover costs, including reasonable attorney's fees.

(4) In any action by a subsequent holder or assignee to enforce a subprime or nontraditional mortgage loan against a borrower in default or in foreclosure, a borrower may assert all defenses and claims for fraud and any violations of sections 1 to 7, inclusive, of this act, without time limitation, that the borrower could assert against the original creditor of the loan. Such claims shall be limited to amounts required to reduce or extinguish the borrower's liability under the loan plus amounts required to recover costs, including reasonable attorney's fees.

(5) An injured borrower shall be awarded the following remedies:

(A) Actual, consequential and incidental damages;

(B) For violations of the provisions of section 2 or 3 of this act, statutory damages of five thousand dollars per violation;

(C) For violations of the provisions of section 4 or 5 of this act, statutory damages of twice the amount of the finance charge paid under the loan and forfeiture of the remaining interest payable under the loan;

(D) For violations of the provisions of section 4 or 5 of this act, the borrower shall have the right to reform or rescind the mortgage loan transaction. Such remedy of reform or rescission shall be available as a defense without time limitation; and

(E) Costs and reasonable attorney's fees.

(6) In addition, the court shall grant an injured borrower such relief as it deems just and equitable, including, but not limited to:

(A) Issuing an injunction barring foreclosure;

(B) Issuing an injunction reforming the terms of the mortgage loan to conform to the provisions of sections 1 to 7, inclusive, of this act; and

(C) Issuing an injunction prohibiting the creditor from engaging in any prohibited conduct.

(b) The commissioner shall enforce the provisions of sections 1 to 7, inclusive, of this act.

(1) The commissioner may adopt regulations in accordance with chapter 54 of the general statutes necessary to carry out the provisions of sections 1 to 7, inclusive, of this act, and prohibit acts, practices or terms in connection with:

(A) Mortgage loans that the commissioner finds unfair, deceptive or designed to evade the provisions of section 1 to 7, inclusive, of this act; and

(B) Mortgage loans that the commissioner finds are associated with abusive, unfair or deceptive lending practices, or that are otherwise not in the interest of the borrowing public.

(2) The commissioner shall conduct examinations and investigations and issue subpoenas and orders to enforce the provisions of sections 1 to 7, inclusive, of this act with respect to creditors.

(3) The commissioner may examine any instrument, document, account, book, record or file of a person making or brokering a mortgage loan under sections 1 to 7, inclusive, of this act. The commissioner shall recover the cost of examinations from the person. A person making or brokering mortgage loans shall maintain its records in a manner that will facilitate the commissioner in determining whether the person is complying with the provisions of sections 1 to 7, inclusive, of this act and the regulations adopted under this section. The commissioner shall require the submission of reports by persons making or brokering subprime or nontraditional mortgage loans that include such information as the commissioner requires in regulation.

(4) In the event that a person fails to comply with a subpoena for documents or testimony issued by the commissioner, the commissioner may request an order from a court of competent jurisdiction requiring the person to produce the requested information.

(5) If the commissioner determines that a person has violated a provision of sections 1 to 7, inclusive, of this act, the commissioner may do any combination of the following that the commissioner deems appropriate:

(A) Take action against such person in accordance with section 36a-50 of the general statutes. No action taken by the commissioner against a creditor in accordance with section 36a-50 of the general statutes shall relieve the creditor from civil liability.

(B) Suspend, revoke or refuse to renew any license issued by the department.

(C) Prohibit or permanently remove an individual responsible for a violation of sections 1 to 7, inclusive, of this act from working in his present capacity or in any other capacity related to activities regulated by the department.

(D) Order a person to cease and desist any violation of sections 1 to 7, inclusive, of this act and to make restitution and other appropriate relief, including loan modification or forgiveness, to borrowers.

(E) Pending completion of an investigation or any formal proceeding instituted pursuant to sections 1 to 7, inclusive, of this act, if the commissioner finds that the interests of the public require immediate action to prevent undue harm to borrowers, the commissioner may enter an appropriate temporary order to be effective immediately and until entry of a final order. The temporary order may include a temporary suspension of the creditor's authority to make mortgage loans, a temporary cease and desist order, a temporary prohibition against a creditor transacting mortgage loan business in this state, or such other order relating to mortgage loans as the commissioner deems necessary to prevent undue harm to borrowers pending completion of an investigation or formal proceeding.

(F) Impose such other conditions as the commissioner deems appropriate.

(c) Nothing contained in sections 1 to 7, inclusive, of this act shall be construed as a limitation upon the power or authority of the state, the Attorney General or the commissioner to seek administrative, legal or equitable relief pursuant to any provision of the general statutes or at common law.

Sec. 7. (Effective October 1, 2008) The remedies provided in sections 1 to 7, inclusive, of this act are cumulative and do not restrict any other right or remedy otherwise available to the borrower.

Sec. 8. Subdivision (7) of section 36a-746a of the general statutes is repealed and the following is substituted in lieu thereof (Effective October 1, 2008):

(7) "Prepaid finance charge" means any finance charge determined in accordance with 12 CFR [Section] 226.4, as amended from time to time, [amended,] that is paid separately in cash or by check before or at consummation of a loan or extension of credit or withheld from the proceeds of such transaction at any time, except the term includes: (A) Any fees or commissions, including yield spread premiums or similar payments, paid by the lender to the broker in connection with the loan; and (B) any fees or commissions payable to the lender or broker in connection with the sale of credit life, accident, health, disability or unemployment insurance products or unrelated goods or services sold in conjunction with the loan or extension of credit when the cost of such insurance products or goods or services is prepaid with the proceeds of the loan or extension of credit and financed as part of the principal amount of the loan or extension of credit, and excludes premiums, fees and any other amounts paid to a governmental agency, any amounts required to be escrowed by a governmental agency and interim interest.

Sec. 9. Section 36a-492 of the 2008 supplement to the general statutes is repealed and the following is substituted in lieu thereof (Effective October 1, 2008):

(a) No such license, and no renewal thereof, shall be granted unless the applicant has filed a bond with the commissioner written by a surety authorized to write such bonds in this state, in [the sum of forty thousand dollars,] an amount equal to thirty per cent of the conforming loan size limit for a single family dwelling as established from time to time by the Federal National Mortgage Association, the form of [which] such bond shall be approved by the Attorney General. Such bond shall be conditioned upon such licensee faithfully performing any and all written agreements or commitments with or for the benefit of borrowers and prospective borrowers, truly and faithfully accounting for all funds received from a borrower or prospective borrower by the licensee in the licensee's capacity as a mortgage lender or a first mortgage broker, and conducting such mortgage business consistent with the provisions of sections 36a-485 to 36a-498a, inclusive, of the 2008 supplement to the general statutes. [Any borrower or prospective borrower who may be damaged by failure to perform any written agreements or commitments, or by the wrongful conversion of funds paid by a borrower or prospective borrower to a licensee, may proceed on such bond against the principal or surety thereon, or both, to recover damages.] Each such bond required under this subsection shall be conditioned upon the applicant or licensee complying with the provisions of any state or federal law or regulation relating to the conduct of such business, and provided as indemnity for any loss sustained by any person by reason of any acts of the licensee constituting grounds for suspension or revocation of the license or such licensee going out of business. The commissioner may proceed on such bond against the principal or surety thereon, or both, to collect any civil penalty imposed upon the licensee pursuant to subsection (a) of section 36a-50. The proceeds of the bond, even if commingled with other assets of the licensee, shall be deemed by operation of law to be held in trust for the benefit of such claimants against the licensee in the event of bankruptcy of the licensee and shall be immune from attachment by creditors and judgment creditors. The bond shall run concurrently with the period of the license granted to the applicant, and the aggregate liability under the bond shall not exceed the penal sum of the bond.

(b) No mortgage lender or broker shall make, provide for or arrange for a mortgage loan without first disclosing to the borrower the existence of its bond and the steps necessary to make a claim on the bond in the event of any injury.

(c) No bond shall include any provision limiting the rights of any party to recover damages within the statute of limitations for the claim asserted.

[(b)] (d) The surety company shall have the right to cancel the bond at any time by a written notice to the licensee stating the date cancellation shall take effect. Such notice shall be sent by certified mail to the licensee at least thirty days prior to the date of cancellation. A surety bond shall not be cancelled unless the surety company notifies the commissioner in writing not less than thirty days prior to the effective date of cancellation. The commissioner shall automatically suspend the license on the date the cancellation takes effect, unless the surety bond has been replaced or renewed. The commissioner shall give the licensee notice of the automatic suspension pending proceedings for revocation or refusal to renew and an opportunity for a hearing on such actions in accordance with section 36a-51 of the 2008 supplement to the general statutes.

Sec. 10. Section 36a-3 of the 2008 supplement to the general statutes is repealed and the following is substituted in lieu thereof (Effective October 1, 2008):

Other definitions applying to this title or to specified parts thereof and the sections in which they appear are:

Statement of Purpose:

To reduce foreclosure by removing incentives to placing borrowers in loans that they cannot afford or cost significantly more that the borrower would qualify for; creating accountability by conferring legal rights on borrowers who have been taken advantage of by unscrupulous lenders; prohibiting certain loan practices that are antithetical to homeownership; and prohibiting loan terms that significantly increase the likelihood of default and foreclosure.

[Proposed deletions are enclosed in brackets. Proposed additions are indicated by underline, except that when the entire text of a bill or resolution or a section of a bill or resolution is new, it is not underlined.]