PA 08-176—sHB 5577
Finance, Revenue and Bonding Committee
AN ACT CONCERNING RESPONSIBLE LENDING AND ECONOMIC SECURITY
SUMMARY: This act specifically authorizes the Connecticut Housing Finance Authority (CHFA) to (1) continue the CT FAMILIES refinancing program and (2) implement mortgage refinancing and emergency mortgage assistance programs. It allows CHFA to develop and implement a program for it to purchase foreclosed Connecticut property and turn the property into supportive and affordable housing. The act requires the WorkPlace, Inc. , in conjunction with the other regional workforce development boards and one-stop centers, to establish a mortgage crisis job training program.
The act requires the chief court administrator, by July 1, 2008, to establish a foreclosure mediation program in each judicial district. The program ends in 2010. The act establishes a number of requirements for mortgage loans (mainly for nonprime loans) and for mortgage professionals making those loans. It defines “nonprime loans. ” The act makes a number of additional regulatory changes, including increasing bond requirements for lenders and brokers. It also combines first and second mortgage professionals and makes a number of changes to the National Mortgage Licensing requirements adopted under PA 07-156. The act establishes a commission on nontraditional loans and home equity lines of credit.
Finally, the act makes a number of technical and conforming changes.
EFFECTIVE DATE: July 1, 2008, except for the CT FAMILIES program, state assistance for the Emergency Mortgage Assistance Program, the establishment of the mediation program, and nontraditional mortgage commission provisions, which are effective on passage.
§§ 1-14, 80 — MORTGAGE PROGRAMS/CHFA PROVISIONS
§ 1 — CT FAMILIES
The act specifically authorizes CHFA to continue to develop and implement its program for adjustable rate home mortgage refinancing for homeowners (the Connecticut Fair Alternative Mortgage Lending Initiative and Education Services or CT FAMILIES program). It does this by adding to CHFA's statutory purposes. It specifies that the program must be undertaken, consistent with and subject to its contractual obligations to its bondholders, in an initial amount of $40 million under CHFA-determined terms and conditions.
§ 2 — HERO Program
The act authorizes CHFA to develop and implement the Homeowner's Equity Recovery Opportunity or HERO loan program as one of its purposes under the statutes and consistent with its contractual obligations with its bondholders, in an initial amount of $30 million. The act requires CHFA to implement the HERO program adopt and relevant procedures by July 1, 2008. Under the program, CHFA must, within available funds, purchase mortgages directly from lenders and place eligible borrowers on an affordable repayment plan.
For HERO program purposes, the act defines a borrower as the owner-occupant of one-to-four family residential real property located in this state, including condominiums, who has a mortgage encumbering the real property. It defines a mortgage as an instrument which constitutes a first or second consensual lien on such property, securing a loan made primarily for personal, family, or household purposes. Finally, it defines a lender as the original lender under a mortgage or its agents, successors, or assigns.
Under the act, borrowers are eligible for the program if the HERO loan is in the first lien position and borrowers have:
1. made an effort to meet their financial obligations to the best of their ability;
2. sufficient and stable income to support timely repayment of a HERO loan;
3. legal title to the mortgaged property and reside in these as a permanent residence; and
4. the ability to account for cash flow if they have stopped making monthly payments by showing how the funds were escrowed, saved, or redirected.
Borrowers must apply for HERO loans on a CHFA approved form. Borrowers must give CHFA full disclosure of all assets and liabilities, whether singly or jointly held, and all household income regardless of source. The act specifies what counts as assets.
The act states that assets include the sum of the household's savings and checking accounts; market value of stocks; bonds, and other securities; other capital investments; pensions and retirement funds; personal property; and equity in real property, including the subject mortgage property (the act defines equity as the difference between the market value of the property and the total outstanding principal of any loans secured by the property and other liens).
Assets also include lump-sum additions to family assets such as inheritances; capital gains; and insurance payments included under health, accident, hazard, or worker's compensation policies and settlements, verdicts, or awards for personal or property losses or transfer of assets without consideration within one year of the time of application (pending claims for such items must be identified by the homeowner as contingent assets).
The borrower must complete and sign the application subject to the penalty for false statement. Any borrower who misrepresents any financial or other pertinent information in conjunction with the filing of an application for a HERO loan may be denied assistance. CHFA must make an eligibility determination within 30 days of receiving the borrower's application. All approved borrowers must attend in-person financial counseling at a CHFA-approved agency. HERO loans must be a mortgage of up 30 years, as determined by CHFA, and include property taxes and insurance in the borrower's monthly payment amount. CHFA determines the interest rate and services the loan.
§ 3 — Uninsured CHFA Mortgages
The act increases, from $1 billion to $1. 5 billion, the aggregate amount of mortgage purchases and loans that CHFA can make that are not insured or guaranteed by a U. S. instrumentality or agency; a public U. S. - or congressionally-chartered corporation (e. g. , Freddie Mac); a Connecticut state agency, department, or instrumentality; a Connecticut-licensed insurance company authorized to underwrite mortgage insurance; or CHFA.
§ 4 — Foreclosed Property and Affordable/Supportive Housing
The act allows CHFA to develop and implement a program for it to purchase foreclosed Connecticut property and turn the property into supportive and affordable housing, by making this one of CHFA's powers under statute. It appears to allow them to report on the program and plans for implementing it to the Banks, Housing, and Planning and Development committees by January 1, 2009.
§§ 5-12, 80 — EMAP Changes
The act amends the existing Emergency Mortgage Assistance Program (EMAP) statutes. The program is currently unfunded. The act makes participation in the program mandatory, rather than voluntary, as under prior law. It also expands its scope (1) to cover one-to-four family rather than just one-to-two family owner-occupied homes and specifically include single-family units in a condominium, cooperative, or other common interest community and (2) by expanding the “financial hardship due to circumstances beyond the mortgagor's control” eligibility requirement to include a 25% reduction in aggregate family income due to a significant increase in the periodic payments for a mortgage (including principal, interest, taxes, insurance, and, if applicable, condo fees. ) By law, the homeowners also qualify if they have lost their job, had their hours reduced, or suffered a disability, illness, or death of another homeowner. They also qualify, by law, if a member of their household or dependent (1) loses or has transfer payments cut or delayed, (2) loses or has retirement or other private benefits cut or delayed, (3) has been divorced or lost support payments, (4) suffered uninsured damage to their home requiring costly repairs, or (5) incurred medical or burial expenses.
Starting July 1, 2008, the act requires a lender to comply with the EMAP statute if it wants to foreclose on a mortgage on a one-to-four family owner-occupied residence where the property is not Federal Housing Administration (FHA) insured and the borrower (1) has not mortgaged the property for commercial or business purposes, (2) has not previously received EMAP assistance (except if the person has reinstated the mortgage and has not been delinquent for six consecutive months since the reinstatement), and (3) is not in default under the mortgage except for the monetary delinquency.
This means the lender must send a notice to the borrower stating that he or she has 60 days, rather than the 30 previously required, to (1) have a conference with the lender or a face-to-face meeting with a credit counseling agency to attempt to resolve the default and (2) contact CHFA about EMAP if they are unsuccessful in doing so. Under the act, if the parties reach an agreement, but the borrower still cannot pay due to financial hardship, he or she can still apply for emergency assistance within 30 days of any default. If the borrower fails to comply with the deadlines or CHFA fails to approve the EMAP application within 30 days of its filing, the foreclosure proceeding can continue. However, the lender must file an affidavit to that effect. The act provides that EMAP participants can still exercise their rights under the foreclosure mediation program the act creates, but the concurrent exercise of those rights cannot delay the EMAP eligibility determination.
Additional changes to the EMAP statutes include:
1. increasing the repayment period from 36 to 60 months (and similarly limiting participation to people who have a reasonable prospect of being able to repay within that time period);
2. requiring borrowers to have, except for the current delinquency, a favorable mortgage credit history for the lesser of the period of ownership or the previous two, rather than five, years; and
3. increasing the limit on the number of times a person can be more than 30 days in arrears to four or more times in the previous year from two or more times in the previous two years, before the person is ineligible for the program.
The act appropriates $14 million from the State Banking Fund to CHFA for EMAP for FY 09. It specifies that repayments will be revolving instead of going into the General Fund.
It requires the Office of Policy and Management secretary and the state treasurer to make an agreement (“contract”) by July 1, 2008 with CHFA obligating the state to pay debt service (principal, interest, and other bond-related expenses) on up to $50 million of CHFA bonds issued for EMAP. It allows CHFA to use the state's promise to pay the debt service as security when it sells the original bonds or any refunding bonds the authority issues to refinance them. The act pledges the state's full faith and credit to pay the agreed-upon debt service but specifies that the underlying bonds are not state general obligations. It appropriates $2. 5 million to the state treasurer from the State Banking Fund for FY 09 for these purposes.
§§ 13- 14 — The Workplace, Inc. Mortgage Crisis Job Training
The act requires The WorkPlace, Inc. , in conjunction with the other regional workforce development boards and one-stop centers, to establish a mortgage crisis job training program. For purposes of the program, at least three mortgage crisis job training teams must be established for different areas of the state. The WorkPlace, Inc. and Capital Workforce Partners must manage the teams, which, in cooperation with the regional workforce development boards and one-stop centers, must ensure the provision of rapid, customized employment services, job training, repair training, and job placement assistance to borrowers who are unemployed, underemployed, or in need of a second job. The WorkPlace, Inc. must arrange with CHFA for financial literacy and credit counseling for program participants.
Borrowers are eligible for the program if they are at least 60 days delinquent on their mortgages and (1) are referred by their CHFA lender or (2) demonstrate an imminent need to increase earnings in order to avoid delinquency or foreclosure. Borrowers can also access the program through the one-stop centers.
The act requires The WorkPlace, Inc. and CHFA to submit a joint report on the implementation of the mortgage crisis job training program to the Banks, Housing, and Planning and Development committees by January 1, 2009. The act appropriates $2. 5 million to the Labor Department from the State Banking Fund for the program for FY 09.
§§ 15-20 — FORECLOSURE MEDIATION
The act requires the chief court administrator, by July 1, 2008, to establish a foreclosure mediation program in each judicial district and appropriates $2 million to the Judicial Branch for the program from the State Banking Fund for FY 09. The program is available to owner-occupants of one-to-four family residential real property in Connecticut who are also borrowers under a mortgage encumbering the property and who use the property as their primary residence. The program must address all issues of foreclosure and be conducted by foreclosure mediators who:
1. are employed by the Judicial Branch;
2. are trained in mediation and all relevant aspects of the law, as determined by the chief court administrator;
3. have knowledge of the community-based resources that are available in the judicial district in which they serve; and
4. have knowledge of the mortgage assistance programs.
The mediators can refer participating borrowers to community-based resources and to the mortgage assistance programs the act establishes.
Under the act, until July 1, 2010, if a lender starts a foreclosure action on a one-to-four family dwelling occupied as a residence by a borrower with a return date on or after July 1, 2008, it must give notice of the foreclosure mediation program to the borrower by attaching to the front of the foreclosure complaint, in a chief court administrator-approved form, (1) a notice of the availability of the foreclosure mediation program and (2) a foreclosure mediation request form. This applies to a lender, including the original lender or servicer under a mortgage or its successors or assigns.
Borrowers can request mediation by submitting the form to the court and filing an appearance within 15 days of the return date. The court can extend this period by up to 10 additional days for good cause shown. The court must notify all appearing parties in the action of the request. If the court determines that the notice requirement has not been met, it can, on the borrower's or its own written motion, issue an order delaying judgment for 15 days, during which time the borrower can submit a request for mediation. The borrower's submission of a request does not waive either the borrower's or lender's rights in the foreclosure action. No requests can be accepted on or after July 1, 2010, and the program ends when mediation for applications submitted prior to that date have concluded.
The mediation period starts when the court sends notice of the borrower's request to the appearing parties. This notice must be sent within three business days of the court's receipt of the completed request form. The mediation period ends 60 days after the return date for the foreclosure action. However, the court can extend this period for up to 10 days or shorten it for good cause shown on the court's own motion or the motion of any party. The first mediation session must be held within 10 business days of the court sending the notice. The borrower and lender must appear in person at each session and can agree to a proposed settlement. The lender's attorney can appear instead if he or she has the authority to agree to a proposed settlement and if the lender is available by telephone or electronically.
Within two days of the end of the first mediation session, the mediator must determine if further mediation is useful in a report that must be filed with the court and mailed to the parties. The mediation terminates automatically if the mediator does not think it will be beneficial to continue. If mediation continues, the mediator must file a second report within two days after mediation ends, but no later than 60 days after the return date in the foreclosure action. The report must describe the proceedings and the issues resolved and not resolved. This filing automatically terminates the mediation period. If certain issues have not been resolved, the mediator can refer the borrower to community-based services in the judicial district, but this cannot delay the mediation process. It is not clear how the referral would delay the process, as submission of the report terminates the mediation. The mediator can also refer the borrower to the HERO program or EMAP at any time during the mediation, but this does not stop the lender from going to judgment if it has satisfied mediation requirements. A court cannot enter a judgment of strict foreclosure or foreclosure by sale if a borrower has submitted a timely request for mediation and the mediation period has not expired.
The chief court administrator must establish policies and procedures for the mediation program. The program's policies and procedures must at least include provisions requiring the mediator to advise the borrower at the first mediation session that (1) the mediation does not suspend the borrower's obligation to respond to the foreclosure action in accordance with the court's rules and (2) a judgment of strict foreclosure or foreclosure by sale can cause the borrower to lose the residential real property to foreclosure. The act specifies that it does not require the lender to modify the mortgage or changes the terms of payment without its consent. Additionally, determinations issued by mediators cannot form the basis of an appeal of any foreclosure judgment.
§§ 21-30, 81-82 — LOAN REQUIREMENTS AND MORTGAGE PROFESSIONALS' DUTIES
The act establishes requirements for mortgage loans (mainly for nonprime loans) and for mortgage professionals making those loans. These requirements apply to nonprime home loans and mortgages for which applications are received on or after August 1, 2008. The requirements apply to lenders. The act defines a lender as any person engaged in the business of making mortgage loans who is required to be licensed by the banking department, or its successors or assigns, and also any bank; out-of-state bank; Connecticut, federal, or out-of-state credit union; or an operating subsidiary of a federal bank or a federally chartered out-of-state bank where the subsidiary makes mortgage loans, and their successors and assigns. The term specifically excludes mortgage brokers and originators.
The requirements also apply to brokers. The act defines a mortgage broker as any person, other than a lender, who (1) for a fee, commission, or other valuable consideration negotiates, solicits, arranges, places, or finds a mortgage and (2) is required to be licensed by the banking department under the licensing statutes, or its successors or assigns.
§ 21 — Nonprime Loan Definition
The act defines a “nonprime loan” as any loan or extension of credit when:
1. the borrower is an individual;
2. the proceeds are primarily for personal, family, or household purposes;
3. it is secured by a mortgage on a one-to-four family residential property located in this state which is, or when the loan is made intended to be, used or occupied by the borrower as a principal residence;
4. the principal does not exceed (1) $417,000 for loans originated between July 1, 2008 and June 30, 2010 and (2) the then current conforming loan limit, as established from time to time by the Federal National Mortgage Association (Fannie Mae) for loans originated after July 1, 2010; and
5. the interest rate exceeds specified thresholds.
Nonprime loans do not include CHFA loans, open-end lines of credit, and reverse mortgage transactions.
With regard to interest, nonprime loans are those where the difference between the annual percentage rate (APR) for the loan or extension of credit and the yield on United States Treasury securities having comparable periods of maturity is either 3% or more on first mortgage loans or 5% or more on second mortgage loans. The act requires the difference between the APR and the yield to be determined using the same procedures and calculation methods applicable to loans that are subject to the federal Home Mortgage Disclosure Act's reporting requirement. The yield on United States Treasury securities must be determined as of the 15th day of the month before the loan application.
Additionally, nonprime loans are those where the difference between the APR for the loan and the conventional mortgage rate is either equal to or greater than 1. 75% if the loan is a first mortgage or 3. 75% if it is a second mortgage. The act specifies that the conventional mortgage rate is the most recent daily contract interest rate on commitments for fixed-rate mortgages published by the Board of Governors of the Federal Reserve System in its statistical release H. 15, or any publication that may supersede it, during the week in which the interest rate for the loan is set.
Although the act sets interest rate parameters for identifying nonprime loans, it allows the banking commissioner to increase them after considering relevant factors. The commissioner's, authority and any increases or decreases he makes under this authority, expires on August 31, 2009. (The act does not specifically authorize him to make decreases). The act specifies that the relevant factors to be considered include, but are not limited to, (1) the existence and amount of increases in fees or charges in connection with purchases of mortgages by the Fannie Mae or the Federal Home Loan Mortgage Corporation (Freddie Mac) and (2) increases in fees or charges imposed by mortgage insurers and the impact, including the magnitude of the impact, that such increases have had, or will likely have, on APRs for mortgage loans in this state. Increases to a particular percentage cannot exceed . 25%, and the total of all increases the commissioner authorizes to a particular percentage cannot exceed . 5%.
When considering the factors, the commissioner must focus on those increases that are related to the deterioration in the housing market and credit conditions. The commissioner can choose not to increase the percentage if it appears that lenders are increasing interest rates or fees in bad faith or if increasing the percentages would be contrary to the purposes of the act's nonprime provisions. No increase can be made unless (1) the increase is noticed in the Banking Department Bulletin and the Connecticut Law Journal and (2) a 20-day public comment period is provided. Any increase must be reduced proportionately when the need for the increase diminishes or no longer exists. The commissioner may authorize a percentage increase with respect to all loans or to a certain class or classes of loans.
§ 22 — Duties in Making Nonprime Loans
The act prohibits lenders from engaging in any misleading, deceptive, or untruthful conduct in any transaction, practice, or course of business in connection with making a nonprime loan.
It imposes a duty of good faith on mortgage brokers and lenders concerning a nonprime home loan contract with a borrower. The act specifies that the duty (1) is the same as the one imposed for contracts under the Uniform Commercial Code, (2) includes the observance of reasonable common standards of fair dealing, and (3) cannot be waived.
For nonprime first mortgage home loans, the act requires lenders to give borrowers (1) a notice or letter that generally describes the transaction's terms within three business days of the closing and (2) within a reasonable time period, notification of any subsequent material changes to the terms of the transaction. The requirement does not apply if the borrower expressly requests an expedited closing and the lender, in good faith, has not provided the letter or notice. This requirement cannot be waived.
§ 23 — Ability to Pay
The act prohibits lenders from making nonprime home loans, excluding FHA loans, unless they reasonably believe, when the loan is consummated, that one or more of the people who are incurring the debt will be able, individually or collectively to (1) make the scheduled payments and (2) pay the related taxes and insurance. This must be based on consideration of:
1. current and expected income;
2. current and expected obligations as disclosed by the borrower or otherwise known to the lender, including contemporaneously made subordinate mortgages;
3. homeowner's fees;
4. condo fees;
5. employment status; and
6. other financial resources, excluding the equity in the mortgaged dwelling.
In the case of a bridge loan, the act specifies that the lender can consider the equity in the dwelling as a source of repayment for the loan. The act does not define the term “bridge loan,” but it is generally considered to be a short-term loan made in anticipation of intermediate or long-term financing.
The act allows lenders to use commercially recognized underwriting standards and methods to determine an obligor's ability to repay, including automated underwriting systems. The lender must take reasonable steps to verify the accuracy and completeness of information provided by or on behalf of the borrower using tax returns, consumer reports, payroll receipts, bank records, reasonable alternative methods, or reasonable third-party verification. When the lender is determining the ability to repay a nonprime loan with an adjustable rate feature, the lender must underwrite the repayment schedule assuming that the interest rate is a fixed rate equal to the fully indexed interest rate when the loan is made, or within 15 days afterwards, without considering any initial discounted rate.
The act defines “fully indexed rate” as the interest rate that would have been applied had the initial interest rate been determined by applying 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. In determining a borrower's ability to repay a nonprime home loan that is not fully amortizing by its terms, the lender must underwrite the loan based on a fully amortizing repayment schedule based on the maturity set out in the note.
§ 24 — Special Mortgages
The act prohibits lenders from making nonprime home loans where any of the proceeds are used to fully or partially pay off a special mortgage on the same property unless the lender receives written certification that the borrower has received counseling from an independent U. S. Department of Housing and Urban Development (HUD)-approved non-profit organization. The act defines a special mortgage as a loan originated, subsidized, or guaranteed by or through a state, federal, tribal, or local government or nonprofit organization. However, this requirement does not apply when the borrower gives the lender a statement from the organization on its letterhead stating that the counseling is not available for at least 30-days from the date of the request for counseling.
The lender must make a good faith effort to determine whether the loan is a special mortgage, but does not have to get the certification if it does not get an affirmative response to a good faith inquiry to the borrower and the loan's holder or servicer as to whether the loan is a special mortgage.
§ 25 — Additional Requirements for Nonprime Home Loans
For first-mortgage nonprime loans originated on or after January 1, 2010, the act requires lenders to collect a monthly escrow for payment of property taxes and homeowner's insurance. The provision does not apply to FHA loans and home equity loans and a nonprime home loan product which, in good faith, is generally designed and marketed to the public as a subordinate lien home equity loan product secured by a first mortgage loan.
The act also requires lenders to mail or deliver to applicants, within three business days of receiving a completed application for a nonprime home loan, a notice containing a toll-free number that can be used to obtain a list of HUD-approved nonprofit housing counselors. The act provides that borrowers do not have a private right of action for the lender's failure to deliver notice on a timely basis.
§ 26 — Provisions Prohibited in a Nonprime Loan Agreement
The act prohibits lenders from offering nonprime loans that contain a:
1. prepayment penalty (except in FHA loans);
2. provision increasing the interest rate after default, except when it results from failing to maintain an automatic electronic payment feature that resulted in a rate reduction and the increase is not more than the reduction; or
3. provision requiring the borrower to assert a claim or defense in a nonjudicial forum that uses principles inconsistent with common or statutory law, limits a borrower's claims or defenses, or is less convenient, more costly or more dilatory than going to court.
A loan that violates these provisions is void and unenforceable.
§§ 21 & 27 — Bad Faith Structuring and Division of Loans
The act prohibits lenders and brokers from acting in bad faith to divide a loan into separate parts or structure a residential mortgage loan, in bad faith, as an open-end loan to avoid the act's protections. This prohibition applies to situations where the loan would have been a nonprime home loan if it had been structured as a closed-end loan. The act defines an open-end line of credit as a mortgage extended by a lender under a plan where (1) the lender reasonably contemplates repeated transactions; (2) the lender may periodically impose a finance charge on an outstanding unpaid balance; (3) the amount of credit that may be extended to the consumer during the term of the plan, up to any limit set by the lender, is generally made available to the extent that any outstanding balance is repaid; and (4) none of the proceeds are used at closing to purchase the borrower's primary residence or refinance a mortgage loan that had been used by the borrower to purchase the borrower's primary residence.
§§ 28 & 29 — Mortgage Provisions and Mortgage Broker Duties Applicable to All Mortgages
The act prohibits lenders from making, and brokers from offering, a nonprime home loan that refinances a mortgage unless the loan provides the borrower a tangible net benefit. (The act does not define this term. ) The act prohibits lenders and mortgage brokers from taking any action that recommends or encourages a default on an existing mortgage or other debt prior to, and in connection with, the closing or planned closing of a new nonprime home loan that refinances all or any portion of the existing loan or debt. It also prohibits lenders from financing, in connection with a mortgage, any life or health insurance or any payments for any debt cancellation or suspension agreement or contract (except for those calculated and paid on a monthly basis or using periodic payments).
The act imposes the following unwaivable duties on mortgage brokers, in addition to any other duties imposed by federal, state, or common law:
1. to use reasonable care, skill, and diligence and act in good faith and fair dealing with the borrower;
2. to make reasonable good faith efforts to secure a mortgage that is in the borrower's reasonable best interests considering all the circumstances reasonably available to the broker, including the rates, points, fees, charges, costs, and product type;
3. to ensure that the cost of credit is reasonably appropriate considering the borrower's level of credit worthiness and other bona fide underwriting concerns; and
4. if more than one mortgage is to be made by different lenders, to notify the other lenders of the payment obligations before closing.
For these sections, the act defines the term “mortgage” as a mortgage deed or other instrument that constitutes a first or secondary consensual lien on any interest in 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. It includes nonprime loans.
§ 28(d) — Right to Reinstatement
The act requires lenders to terminate foreclosure proceedings or other actions if all defaults in connection with a nonprime loan are cured before a judgment is entered. The lender can require the borrower to pay any of its reasonable actual costs associated with the default and protecting its rights in the property. Cure of default reinstates the borrower to the same position as if the default had not occurred and nullifies any acceleration of any obligation under the security instrument or note arising from the default as of the date of the cure. The borrower can only use this right twice over the course of 24 consecutive months.
§ 30 — Private Right of Action
The act establishes a private right of action for violations of the act's provisions on loan requirements and mortgage professional duties (sections 22 through 29 only). The borrower must sue in court within three years of the mortgage closing for (1) the greater of actual damages or $1,000 and (2) attorney's fees, unless:
1. within 90 days of the closing and before any action against the lender, it notifies the borrower of the noncompliance, provides appropriate restitution (the act does not specify what is appropriate), and (a) makes the loan comply with the nonprime provisions or (b) changes the loan terms so that it is no longer a nonprime loan; or
2. the lender shows by a preponderance of the evidence that the noncompliance was unintentional and resulted from a bona fide error despite the fact that it maintained procedures to avoid the errors; or
3. the lender and borrower reach a mutual agreement on an appropriate remedy or curative action.
The act specifies that a bona fide error includes a clerical, calculation, printing, computer malfunction, or programming error, but does not include an error of legal judgment with respect to a lender's obligations under the act's nonprime provisions. In actions where the compliance failure has caused material injury to the borrower, the lender must also be able to show that it cured the compliance failure or otherwise undertook reasonable remedial steps to address or compensate for the injury.
The act allows the court to grant an injured borrower equitable relief and allows the borrower or mortgagor to assert fraud and any violation of these provisions causing material injury as a counterclaim or defense in a foreclosure action within six years of the mortgage closing date. However, the act specifies that it does not create a cause of action or defense or counterclaim against an assignee of a nonprime loan or other mortgage for the original lender's or broker's violations.
§§ 81 - 82 — Influencing Residential Real Estate Appraisals
The act prohibits mortgage brokers, real estate brokers, and real estate salespeople from influencing residential real estate appraisals. For brokers, the act specifies that this includes refusal or intentional failure to (1) pay an appraiser for an appraisal that reflects a fair market value estimate that is less than the sale contract price or (2) utilize, or encouraging other mortgage brokers not to utilize, an appraiser based solely on the fact that the appraiser provided an appraisal reflecting a fair market value estimate that was less than the sale contract price.
For real estate brokers and salespeople, this includes refusal or intentional failure to refer a homebuyer, or encouraging other real estate brokers or salespeople not to refer a homebuyer, to a mortgage broker or lender, as defined in the act's loan provisions, based solely on the fact that the mortgage broker or lender uses an appraiser who has provided an appraisal reflecting a fair market value estimate that was less than the sale contract price.
§§ 31-84 — NATIONWIDE MORTGAGE LICENSING SYSTEM AND OTHER REGULATORY CHANGES
§§ 32, 38 — First and Second Mortgage Professionals
The act subjects first and second mortgage professionals to the same provisions and repeals separate provisions governing secondary mortgage professionals. It eliminates references to first and second mortgage professionals by combining definitions (i. e. , mortgage lenders, mortgage broker, and mortgage originators). However, the act retains the definitions of first and secondary mortgage loans. The act excludes the term “correspondent lender” from the definition of “mortgage lender” and defines it separately.
Specifically, the act defines a “mortgage broker” as a person who, for a fee, commission, or other valuable consideration, directly or indirectly, negotiates, solicits, arranges, places, or finds a mortgage loan that is to be made by a mortgage lender or mortgage correspondent lender, whether or not that lender is required to be licensed in Connecticut.
It defines a “mortgage lender” as a person engaged in the business of making mortgage loans in such person's own name using such person's own funds or by funding loans through a warehouse agreement, table funding agreement, or similar agreement. Finally, it defines a “mortgage correspondent lender” as a person engaged in the business of making mortgage loans in the person's own name where the loans are not held by such person for more than ninety days and are funded by another person through a warehouse agreement, table funding agreement, or similar agreement.
§§ 31-33, 35 & 39 — Nationwide Mortgage Licensing System
The act moves up, from September 30 to July 1, 2008, the effective date of the National Mortgage Licensing System provisions of PA 07-156 and changes the name of the system to the Nationwide Mortgage Licensing System. The act converts existing “first” and “second” mortgage professional licenses to the combined license on July 1, 2008. The act requires those licensed on that date to transition to the system before October 1, 2008. All filings must be submitted exclusively through the system starting on July 1, 2008. (Initial applications submitted on the system between October 1 and December 31, 2008 cannot be approved before January 1, 2009. )
§ 37 — Examination Fees
The act allows, rather than requires, the commissioner to suspend a license for failure to pay the cost of any examination of the licensee within 60 days, rather than 30 days, of the demand.
§§ 38 & 40 — Business of Making Loans
The law requires those engaged in the business of making loans to be licensed (with exceptions). The act provides that a person, other than a licensed originator acting on behalf of a lender or broker, that employs or retains the mortgage loan originator is deemed to be engaged in the business of making mortgage loans if the person advertises, causes to be advertised, solicits, offers to make, or makes mortgage loans, either directly or indirectly. The act specifically expands the definition of advertisement to include any announcement, statement, assertion, or representation that is placed before the public in a newspaper, magazine, or other publication; or in the form of a notice, circular, pamphlet, letter, or poster; over any radio or television station; by means of the Internet or by other electronic means of distributing information; by personal contact; or in any other way. Under prior law, it included the use of media, mail, computer, telephone, personal contact, or any other means.
The act allows an originator or lender licensee to file a notification of the termination of an originator with the nationwide system. Prior law requires both the originator and the broker or lender licensee to do so with the commissioner.
The act specifies that licenses must be obtained for each main office (the address filed with the nationwide system) and branch office (any other location).
§ 41 — Exemptions from Licensure
The act exempts operating subsidiaries of federal banks and federally chartered out-of-state banks from license requirements. In a conforming change, it removes the exemption for secondary mortgage licensees who made less than 12 first mortgage loans in 12 months and instead limits the exemption to people owning real property who take a secondary mortgage back from the buyer. Finally, it moves the existing secondary mortgage exemption for relatives to this section.
§ 42 — Licensing Requirements
The act increases the tangible net worth requirement for brokers and correspondent lenders from $25,000 to $50,000 starting on March 1, 2009.
The act also requires lenders and brokers to have a qualified individual at a main office and a branch manager at a branch office, with supervisory authority over the lending or brokerage activities, who has at least three years of experience in the mortgage business in the previous five years to be present at each office. (Prior law required lenders and brokers to have a person with supervisory authority at each location with those experience requirements. ) The act defines this experience to include paid experience in the origination, processing; or underwriting of mortgage loans; the marketing of such loans in the secondary market or in the supervision of such activities; or any other relevant experience as determined by the commissioner. The term was not defined in prior law.
Starting on July 1, 2008, the act requires an application that was previously filed with the commissioner to be filed instead with the nationwide system. However, it requires applicants to submit supplementary information directly to the commissioner, some of which had to be included on the application under prior law. First, as required under prior law, applicants must submit a financial statement with the banking department. However, under the act, the statement must be as of a date not more than 12 months prior to the filing, rather than the six months required by prior law. The act also requires the submission of the required bond and, as under prior law, evidence that the experience requirements are met. The act specifies that such evidence includes:
1. a statement specifying the duties and responsibilities of the person's employment; the term of employment, including month and year; and the name, address, and telephone number of a supervisor, employer, or, if self-employed, a business reference; and
2. if required by the commissioner, copies of W-2 forms, 1099 tax forms, or, if self-employed, 1120 corporate tax returns; signed letters from the employer on the employer's letterhead verifying the person's duties, responsibilities and term of employment including month and year; and if the person is unable to provide the letters, other proof satisfactory to the commissioner that the person meets the experience requirement.
Finally, as under prior law, the act requires the submission of any other information about the applicant, its activities, and the background of the applicant and its principals, employees, and, although not required under prior law, originators.
§ 44 —Notifications
The act changes the way licensees update their name and address to reflect use of the nationwide licensing system. It extends the notice required before a change from 21 to 30 days. It also eliminates provisions (1) specifying what must be stated on the license and (2) requiring the license to be maintained at the location and available for public inspection. The act also specifies that licensees must use the legal or fictitious name approved by the commissioner.
It requires licensees who will cease doing business for any reason to file a surrender of the license on the nationwide system within 15 days of cessation. However, this requirement does not apply when licenses have been suspended. Finally, the act requires licensees to file with the system or notify the commissioner if certain things occur.
For lenders and brokers, these things include:
1. filing for bankruptcy, or the consummation of a corporate restructuring, of the licensee;
2. filing of a criminal indictment against the licensee in any way related to the licensee's lending or brokerage activities, or receiving notification of the filing of any criminal felony indictment or felony conviction of any of the licensee's officers, directors, members, partners, or shareholders owning 10% or more of the outstanding stock;
3. receiving notification of license denial, cease and desist, suspension, or revocation procedures or other formal or informal regulatory action by any government agency against the licensee and the reasons for it;
4. receiving notification of the initiation of any action by the attorney general of this or any other state and the reasons for it;
5. receiving notification of a material adverse action with respect to any existing line of credit or warehouse credit agreement;
6. suspension or termination of the licensee's status as an approved seller or servicer by Fannie Mae, Freddie Mac, or the Government National Mortgage Association;
7. exercise of recourse rights by investors or subsequent assignees of mortgage loans if such loans for which the recourse rights are being exercised, in the aggregate, exceed the licensee's net worth exclusive of real property and fixed assets;
8. receiving notification of filing for bankruptcy of any of the licensee's officers, directors, members, partners, or shareholders owning 10% or more of the licensee's outstanding stock; or
9. any proposed change in control in the ownership licensee's or among the licensee's officers, directors, members, or partners on a form provided by the commissioner. (The act provides that the commissioner can investigate the change as if it were a new license and it defines “change in control. ”)
For originators, notification is required upon:
1. filing for bankruptcy of the mortgage loan originator licensee;
2. filing of a criminal indictment against the mortgage loan originator licensee;
3. receiving notification of the institution of license or registration denial, cease and desist, suspension, or revocation procedures or other formal or informal regulatory action by any government agency against the mortgage loan originator licensee and the reasons for it; or
4. receiving notification of the initiation of any action against the mortgage loan originator licensee by the attorney general of this or any other state and the reasons for it.
The act also allows a licensee to use its legal or fictitious name if allowed by the commissioner. Prior law required a licensee to use the name stated on its license.
§ 45 — License Expiration Dates and Fees
The act changes the expiration date for licenses and designates licensing fees. Under PA 07-156, starting October 1, 2008, all licenses must expire on December 31st of the year following issuance and all licensees must pay the required licensing and processing fee to the national system. For lender and broker licenses that expire on September 30, 2008, the act extends the expiration date to December 31, 2008. Starting on July 1, 2008, lender and broker licenses must expire at the close of business on December 31 of the year in which they are approved, unless the license is renewed. However, licenses approved after November 1 expire on December 31 of the following year. The act requires a renewal application to be filed between November 1 and December 31 of the year in which the license expires, provided a licensee may file a renewal application by March 1 of the following year together with a late fee of $100. Any filing by that date with the fee is deemed timely and sufficient.
The act specifies that the licensing fee is $800 for lender licenses and $400 for broker licenses. However, lenders licensed on September 30, 2008 must submit a renewal fee of $900 and brokers licensed on June 30, 2008 must submit a renewal fee of $450. Each mortgage loan originator license expires when the associated lender or broker license expires. The act requires the lenders or brokers to pay $100 for each originator. However, for those lenders and brokers licensed on September 30, 2008 who submit a renewal application for a mortgage loan originator, the fee is $125. Starting on January 1, 2010, the fee is $100.
The act specifies that fees paid in connection with a withdrawn or denied application are nonrefundable, but provides that fees paid for an originator license where the originator is not sponsored by a lender or broker can be refunded.
§§ 46 - 47 — Lender and Broker Bond Requirements
The act increases the bond amount for lenders and brokers from $40,000 to $80,000 starting on August 1, 2009 and allows borrowers or prospective borrowers who are damaged by a licensee's failure to satisfy a judgment against a licensee from the making of a nonprime loan to collect from the bond. The act also allows the commissioner to proceed on the bond for unpaid examination costs, as well as for civil penalties as is permitted under prior law.
The act eliminates language requiring the commissioner to automatically suspend a license on the date a surety bond is cancelled and the associated due process requirements.
§§ 48 - 49 — Records
By law, lenders and brokers must maintain adequate records of each loan transaction. The act requires lenders and brokers to send loan transaction records to the commissioner within five business days of his request by certified mail, return receipt requested, or by an express delivery carrier that provides a dated delivery receipt. On request, the commissioner can grant additional time to comply with this requirement. The law already required licensees to make the records available to the commissioner within that time frame. The act requires the record to include a copy of the initial and final loan application and a copy of all information used in evaluating the application. The act also requires lenders and brokers to retain copies of the note and settlement statement or other records that can verify compliance with the licensing statutes.
§ 50 — Suspension, Revocation, or Refusal to Renew Originator Licenses
The act adds to the circumstances under which the commissioner can suspend, revoke, or refuse to renew an originator license to include situations where a licensee has concealed, suppressed, intentionally omitted, or otherwise intentionally failed to disclose any of the material particulars of any loan transaction.
§ 51 — Referrals from Unlicensed Brokers or Originators
The act specifies that mortgage lending licensees cannot accept applications or referrals from, or pay fees to, any broker or originator who was not licensed at the time he or she “originated” or “brokered” a loan, as opposed to at the point of the application acceptance, referral, or fee payment.
§ 53 — Mortgage Trigger Leads
The law prohibits first and second mortgage lenders and brokers from engaging in any unfair or deceptive act or practice when soliciting a mortgage secured by residential property in Connecticut if the solicitation is based in any way on a mortgage trigger lead. The act extends this prohibition to originators. A “mortgage trigger lead” is a consumer report that is (1) obtained in accordance with the provisions of the federal Fair Credit Reporting Act (FCRA) governing the issuance of consumer reports when the transaction is not initiated by the consumer and (2) issued as a result of an inquiry to a consumer reporting agency (CRA) in connection with a consumer's credit application. It excludes from the definition a consumer report obtained by a lender that holds or services the applicant's existing debt.
§ 54 — Prepaid Finance Charges in Secondary Loans
The act prohibits in a secondary loan (1) prepaid finance charges in excess of 8% of the principal amount of the loan and (2) in a loan agreement where prepaid finance charges have been assessed, any provision that allows the lender to demand payment of the entire loan balance before the scheduled maturity (unless there is a default of more than 60 days or if any other condition of default in the mortgage note exists).
The act makes any lender or broker who fails to comply with this liable to the borrower in an amount equal to the sum of: (1) the amount by which the total of all prepaid finance charges exceeds 8% of the principal amount of the loan; (2) the lesser of 8% of the principal amount of the loan or $2,500; and (3) the costs incurred by the borrower in bringing an action, including reasonable attorney's fees, as determined by the court. However, no broker or lender can be liable for more than these amounts in a secondary mortgage loan transaction involving more than one borrower.
§ 54 — Recording in Land Records
The act requires that any mortgage deed securing a secondary mortgage loan recorded in any town's land records contain (1) the word “Mortgage” in the heading, either in capital letters or underscored, and (2) the principal amount of the loan.
§ 55 — Mortgage Releases
The act requires licensed lenders and brokers to deliver a release of a secondary mortgage to the borrower upon receiving the outstanding balance of the obligation secured by the mortgage (1) in cash or a certified check or (2) in a check that is payable to the licensee or its assignee from the payor bank. Licensees must advise any person designated by the borrower of the outstanding balance of the obligation secured by the secondary mortgage granted to the licensee by the second business day after receiving a request for the information.
§ 56 — Mortgage Loan Policy
The act requires lenders to annually adopt a mortgage loan policy for subprime and nontraditional loans they make. The act does not define the term subprime loan. The policy must be based on and consistent with the most current version of the (1) Conference of State Bank Supervisors, American Association of Residential Mortgage Regulators and National Association of Consumer Credit Administrators' statement on subprime mortgage lending and (2) Conference of State Bank Supervisors and American Association of Residential Mortgage Regulators' guidance on nontraditional mortgage product risks. Licensed lenders must comply with the policy and develop and implement internal controls that are reasonably designed to ensure compliance. The mortgage loan policy and any mortgage loan made under the policy are subject to examination concerning prudent lending practices by the banking commissioner.
§ 58 — Small Loan Lenders
The act requires lenders making secondary mortgage loans of up to $15,000 with an interest rate, charge, or other consideration higher than 12% to be licensed as small loan lenders. Such lenders were exempt from this requirement under prior law.
§ 64 — High Cost Loans
The act bans, in a high cost loan, (1) prepayment penalties and (2) a provision requiring the borrower to assert a claim or defense in a nonjudicial forum that uses principles inconsistent with common or statutory law; limits claims or defenses; or is less convenient, more costly, or more dilatory. It removes the provision banning mandatory arbitration clauses and exceptions that allowed certain prepayment penalties.
§ 77 — Commission on Nontraditional Loans and Home Equity Lines of Credit
The act establishes, from the date of its passage, a 13-member Commission on Nontraditional Loans and Home Equity Lines of Credit. The commission must determine:
1. the number of Connecticut homeowners who have nontraditional loans and home equity lines of credit;
2. the number of Connecticut residents who have nontraditional loans or home equity lines of credit which are in default or who have been affected by foreclosure action or are likely to face such action over the next four years;
3. the types of nontraditional loans and home equity lines of credit that pose a high risk of loan default or foreclosure and the characteristics or features of such loans that are possible factors in defaults or foreclosure; and
4. the circumstances under which nontraditional loans and home equity lines of credit are appropriate for borrowers.
The act defines a nontraditional mortgage in the same way it is defined in the “Interagency Guidance on Nontraditional Mortgage Product Risks,” 71 Federal Register 58609 (Oct. 4, 2006), as amended from time to time. It specifies that a “home equity line of credit” is a mortgage extended by a lender under a plan in which: (1) the lender reasonably contemplates repeated transactions; (2) the lender may impose a finance charge from time to time on an outstanding unpaid balance; (3) the amount of credit that may be extended to the consumer during the term of the plan, up to any limit set by the lender, is generally made available to the extent that any outstanding balance is repaid; and (4) none of the proceeds of the open-end line of credit are used at closing to purchase the borrower's primary residence or refinance a mortgage loan that had been used by the borrower to purchase the borrower's primary residence.
The commission must consist of the banking commissioner and the Banks Committee chairpersons and ranking members, or their designees. Additionally, it must include:
1. two people appointed by the governor, one who must represent state chartered banks and one who is a housing advocate who represents low-income residents;
2. one person appointed by the House speaker who represents mortgage bankers;
3. one person appointed by the Senate president pro tempore who is an attorney who represents homeowners who are defendants in foreclosure actions;
4. one person appointed by the Senate majority leader who is a consumer who has been a defendant in a foreclosure action related to a nontraditional mortgage or home equity line of credit;
5. one person appointed by the House majority leader who is an attorney who represents the banking industry;
6. one person appointed by the Senate minority leader who represents a nonprofit organization that advocates for people affected by predatory lending; and
7. one person appointed by the House minority leader who represents federally chartered banks.
The appointing authorities must make their appointments by August 1, 2008 and fill any vacancy. The banking commissioner must serve as the committee chairperson. The Banks Committee staff must serve as the commission's administrative staff.
The commission must report its findings and recommendations to the Banks Committee by January 1, 2009. It must include recommendations on measures that address nontraditional loans and home equity lines of credit that have a high incidence of defaults and foreclosures and possible restrictions on such loans or certain features of such loans that increase the likelihood of foreclosure or default. When making the recommendations, the commission must give consideration to the impact that such measures and restrictions might have on responsible lending activities that can help to serve the credit needs of Connecticut residents, including the impact on the secondary market and credit costs and availability. The commission must terminate on the date it submits the report or January 1, 2009, whichever is later.
§§ 78 - 79 — Agreements for Supervision
The act allows the commissioner to enter cooperative, coordinating, and information-sharing agreements with other state and federal supervisory agencies for examinations, exam fees, and other supervision of not just banking department licensees, as is allowed under existing law, but also for any mortgage and certain other banking activity it regulates under statute. As under prior law, the act provides that any such agreement may include provisions concerning the assessment or sharing of fees for such examination or supervision.
OLR Tracking: SC: JH: CR: ts