State Mini-HOEPA Laws: State Mini-HOEPA Laws: A Guide to Hot Legal A Guide to Hot Legal

IssuesIssues

Alys CohenAlys Cohen

National Consumer Law CenterNational Consumer Law Center

MWCOG Conference 4/27/06MWCOG Conference 4/27/06

Context: How do state laws Context: How do state laws fit into the legislative fit into the legislative

picture?picture?

State laws primarily are modeled on State laws primarily are modeled on HOEPA; they effectively create HOEPA; they effectively create statewide underwriting standards.statewide underwriting standards.

The “Threshold Model” is only one The “Threshold Model” is only one approach, but it is the prevailing one approach, but it is the prevailing one now.now.

Ups and Downs of Segregating Ups and Downs of Segregating Loans by CostLoans by Cost

Benefits:Benefits:

Can act as an effective ceiling on loansCan act as an effective ceiling on loans Provides expanded legal remediesProvides expanded legal remedies Laboratory for regulatory/legislative Laboratory for regulatory/legislative

fixesfixes Allows for research on specific segment Allows for research on specific segment

of the marketof the market

More on Ups and Downs of More on Ups and Downs of Segregating Loans by CostSegregating Loans by Cost

Risks:Risks: Denies other loans sufficient protectionsDenies other loans sufficient protections Battle of the calculators (Finance charge Battle of the calculators (Finance charge

vs. Amount Financed)vs. Amount Financed) Many HOEPA loans aren’t identified by the Many HOEPA loans aren’t identified by the

lenderlender Effect on credit score; ironic cycleEffect on credit score; ironic cycle Focuses on origination to the exclusion of Focuses on origination to the exclusion of

servicing issuesservicing issues

Key Background ConceptsKey Background Concepts

Alternative Approaches:Alternative Approaches: Regulate all home equity loans equallyRegulate all home equity loans equally Alter definition of Finance Charge –> all-inclusiveAlter definition of Finance Charge –> all-inclusive

The Goal: The Goal: All Credit is NOT good. Restricting credit access All Credit is NOT good. Restricting credit access

makes sense in some situations. makes sense in some situations. The goal is to stop abuses. You must include the The goal is to stop abuses. You must include the

whole process—origination, servicing, collection, whole process—origination, servicing, collection, access to remedies (arbitration, assignee liability, access to remedies (arbitration, assignee liability, damages, rescission).damages, rescission).

State laws: Highlights of State laws: Highlights of key issues and categorieskey issues and categories

North Carolina North Carolina

First state to pass a predatory mortgage First state to pass a predatory mortgage lending statutelending statute

Provides guide to ongoing legislative issuesProvides guide to ongoing legislative issues

Needs to be viewed through the lens of ALL Needs to be viewed through the lens of ALL of North Carolina law (common law and of North Carolina law (common law and other statutory remedies).other statutory remedies).

North CarolinaNorth Carolina

Covers more loans than HOEPACovers more loans than HOEPA 5% for loans of $20K or more5% for loans of $20K or more Separate threshold for loans with harsh Separate threshold for loans with harsh

prepayment penaltiesprepayment penalties Issue: Threshold approach in generalIssue: Threshold approach in general

Outlaws more abusive loan termsOutlaws more abusive loan terms Points and fees cannot be financedPoints and fees cannot be financed No points/fees on high-cost loan refis w/same No points/fees on high-cost loan refis w/same

lenderlender Issue: Equity Stripping MechanismsIssue: Equity Stripping Mechanisms

North CarolinaNorth Carolina

Provides guidance on defining asset-based Provides guidance on defining asset-based lending and flippinglending and flipping No refinancing unless borrower receives No refinancing unless borrower receives

reasonable net tangible benefitreasonable net tangible benefit List of factors that a lender must consider in List of factors that a lender must consider in

assessing repayment abilityassessing repayment ability Establishes a presumption that a loan is Establishes a presumption that a loan is

affordable if total monthly debt, including the affordable if total monthly debt, including the loan, does not exceed 50% of verified gross loan, does not exceed 50% of verified gross monthly incomemonthly income

Issue: How can the law get at seemingly Issue: How can the law get at seemingly hard-to-define practices?hard-to-define practices?

North CarolinaNorth Carolina

Requires housing counseling on high-cost Requires housing counseling on high-cost loansloans

Issue: How can we distinguish between Issue: How can we distinguish between housing counseling (and credit counseling) housing counseling (and credit counseling) that is a real help and situations where it that is a real help and situations where it simply immunizes a predatory lender? simply immunizes a predatory lender?

No explicit assignee liability provision—No explicit assignee liability provision—common law provides for this already.common law provides for this already.

Issue: What is the role and responsibility Issue: What is the role and responsibility of the secondary market?of the secondary market?

State laws with a lower/more State laws with a lower/more inclusive trigger than HOEPAinclusive trigger than HOEPA

New YorkNew York IllinoisIllinois California (note points and fees test is narrower California (note points and fees test is narrower

but number is lower)but number is lower) MassachusettsMassachusetts New JerseyNew Jersey New MexicoNew Mexico Arkansas Arkansas GeorgiaGeorgia District of Columbia (exempts some lenders)District of Columbia (exempts some lenders)

State laws with more State laws with more restrictions than HOEPA restrictions than HOEPA

include…include… (These are highlights of the state laws)(These are highlights of the state laws)New YorkNew York Broader restrictions on balloon payments, refinancing, & asset-Broader restrictions on balloon payments, refinancing, & asset-

based lendingbased lending Also restricts arbitration clauses, financing of points and fees and Also restricts arbitration clauses, financing of points and fees and

credit insurance, broker feescredit insurance, broker fees ““Tangible net benefit test”Tangible net benefit test” Rescission availableRescission available

ConnecticutConnecticut Cap on prepaid finance chargesCap on prepaid finance charges Credit insurance must be offered with a monthly payment schemeCredit insurance must be offered with a monthly payment scheme Asset-based lending prohibition without need to prove pattern or Asset-based lending prohibition without need to prove pattern or

practicepractice Prohibits mandatory arbitration clauses (but this was held to be Prohibits mandatory arbitration clauses (but this was held to be

preempted by federal law)preempted by federal law)

State restrictions cont’dState restrictions cont’d

New JerseyNew Jersey Prohibits mandatory arbitration clausesProhibits mandatory arbitration clauses Caps financing of points/feesCaps financing of points/fees For ALL loans: restricts flipping & credit insurance For ALL loans: restricts flipping & credit insurance

financingfinancing

New MexicoNew Mexico Prohibits mandatory arbitration clausesProhibits mandatory arbitration clauses Restricts financing of points and feesRestricts financing of points and fees Requires credit counselingRequires credit counseling

State restrictions cont’dState restrictions cont’d

IllinoisIllinois Presumptive threshold for unaffordable loansPresumptive threshold for unaffordable loans Prohibits financing of single-premium credit insuranceProhibits financing of single-premium credit insurance

CaliforniaCalifornia Greater restrictions on prepayment penalties and asset-based Greater restrictions on prepayment penalties and asset-based

lendinglending Prohibits steeringProhibits steering BUT--specifically exempts assigneesBUT--specifically exempts assignees

MassachusettsMassachusetts Limits financing of fees and restricts prepayment penaltiesLimits financing of fees and restricts prepayment penalties Prohibits mandatory arbitration clausesProhibits mandatory arbitration clauses ALL refinancings in the borrower’s interest if within five yearsALL refinancings in the borrower’s interest if within five years

State restrictions cont’dState restrictions cont’d

ArkansasArkansas Restricts mandatory arbitration clauses and refinancing Restricts mandatory arbitration clauses and refinancing

without a tangible net benefit to the borrowerwithout a tangible net benefit to the borrower Violation of this law is a UDAP violationViolation of this law is a UDAP violation

KentuckyKentucky Restrictions on asset-based lending & arbitration clausesRestrictions on asset-based lending & arbitration clauses

GeorgiaGeorgia For ALL home loans: restricts unfair late charges, limits For ALL home loans: restricts unfair late charges, limits

payoff fees, and prohibits financing of credit insurance payoff fees, and prohibits financing of credit insurance premiums premiums

For high-cost loans: restricts prepayment penalties, For high-cost loans: restricts prepayment penalties, mandatory arbitration clauses, and asset-based lendingmandatory arbitration clauses, and asset-based lending

State restrictions cont’dState restrictions cont’d

District of ColumbiaDistrict of Columbia Restrictions on asset-based lending and refinancingsRestrictions on asset-based lending and refinancings

OklahomaOklahoma Restricts refinancings of low-interest loans and asset-based Restricts refinancings of low-interest loans and asset-based

lendinglending

MaineMaine Requires credit reportingRequires credit reporting Restrictions on advertising regarding lowering of monthly Restrictions on advertising regarding lowering of monthly

paymentspayments Restricts points charged on refis of high-cost loansRestricts points charged on refis of high-cost loans

Assignee LiabilityAssignee Liability

North Carolina (separate from mini-HOEPA)North Carolina (separate from mini-HOEPA) MassachusettsMassachusetts New York New York New JerseyNew Jersey New MexicoNew Mexico OklahomaOklahoma Maine Maine District of ColumbiaDistrict of Columbia ArkansasArkansas IllinoisIllinois

LocalitiesLocalities

New YorkNew York New York CityNew York City law found to be preempted (by state trial law found to be preempted (by state trial

court) by state and federal law (mayor brought suit)court) by state and federal law (mayor brought suit)

CaliforniaCalifornia Oakland Oakland ordinance found by California Supreme Courtordinance found by California Supreme Court to be to be

preempted by state law. preempted by state law. Los AngelesLos Angeles ordinance blocked by Oakland decision. ordinance blocked by Oakland decision.

MarylandMaryland Montgomery County ordinance, Bill 36-04, which takes a Montgomery County ordinance, Bill 36-04, which takes a

fair lending approach. OTS has issued a preemption letter fair lending approach. OTS has issued a preemption letter regarding federal savings associations.regarding federal savings associations.

Localities cont’dLocalities cont’d

OhioOhio DaytonDayton ordinance found to be preempted by state appeals ordinance found to be preempted by state appeals

court. court. State appeals court upheld State appeals court upheld ClevelandCleveland ordinance on “home ordinance on “home

rule” theory; this is on appeal to the Ohio S. Ct. rule” theory; this is on appeal to the Ohio S. Ct. State appeals court also upheld State appeals court also upheld ToledoToledo ordinance on similar ordinance on similar

grounds, however anti-steering and disclosure grounds, however anti-steering and disclosure requirements regarding counseling were unconstitutionally requirements regarding counseling were unconstitutionally vague but severable.vague but severable.

PennsylvaniaPennsylvania Philadelphia Philadelphia ordinanceordinance preempted by state legislation. City preempted by state legislation. City

didn’t challenge preemption issue in light of AFSA lawsuit. didn’t challenge preemption issue in light of AFSA lawsuit.

Additional State IssuesAdditional State Issues

Remedy Issues Remedy Issues E.g.,E.g., GeorgiaGeorgia—Rescission with 5 year statute of limitations.—Rescission with 5 year statute of limitations.

Weaker LawsWeaker Laws OH, PA, SC, NB, NE, MD, FL, CO, MI, WI, UT, IN, CT, MN, VAOH, PA, SC, NB, NE, MD, FL, CO, MI, WI, UT, IN, CT, MN, VA

Other ModelsOther Models TexasTexas and and VirginiaVirginia have limited laws that apply to all home have limited laws that apply to all home

loans.loans.

New New IllinoisIllinois law with data collection and credit counseling law with data collection and credit counseling requirement for some loans made by state licensed loan requirement for some loans made by state licensed loan originators.originators.

Montgomery County, MDMontgomery County, MD fair housing approach. fair housing approach.