2006 -- S 2851 SUBSTITUTE A AS AMENDED

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LC01467/SUB A/2

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STATE OF RHODE ISLAND

IN GENERAL ASSEMBLY

JANUARY SESSION, A.D. 2006

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A N A C T

RELATING TO PROPERTY -- RHODE ISLAND HOME LOAN PROTECTION ACT

     Introduced By: Senators Pichardo, Paiva-Weed, Metts, Perry, and Goodwin

     Date Introduced: February 16, 2006

     Referred To: Senate Judiciary

It is enacted by the General Assembly as follows:

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     SECTION 1. Title 34 of the General Laws entitled "PROPERTY" is hereby amended by

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adding thereto the following chapter:

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     CHAPTER 25.2

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RHODE ISLAND HOME LOAN PROTECTION ACT

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     34-25.2-1. Short title. – This chapter shall be known as the "Rhode Island Home Loan

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Protection Act."

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     34-25.2-2. Legislative findings. – The general assembly finds that predatory lending has

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become an increasing problem in this state, threatening the viability of many communities and

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causing decreases in home ownership. While the marketplace may appear to be operating

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effectively for most home loans, too many homeowners are falling victim to unprincipled

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creditors who provide loans at exorbitant costs and include terms which are unnecessary to secure

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repayment of the loan. The general assembly finds that as competition and self-regulation have

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not eliminated the predatory terms for home-secured loans, the consumer protection provisions of

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this chapter are necessary to encourage responsible lending.

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     34-25.2-3. Purpose. – The purpose of this act is to prohibit predatory lending practices in

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this state while preserving access to credit in the subprime market.

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     34-25.2-4. Definitions. – The following definitions shall apply for the purposes of this

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chapter, unless the context otherwise requires:

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     (a) "Accelerate" means the advancing of a loan agreement's maturity date so that payment

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of the entire debt is due immediately.

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     (b) "Affiliate" means any company that controls, is controlled by, or is under common

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control with another company, as set forth in 12 U.S.C. Section 1841.

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     (c) "Annual percentage rate" means the annual percentage rate for the loan calculated

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according to the provisions of 12 C.F.R. part 226.

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     (d) "Bona fide discount points" means an amount knowingly paid by the borrower for the

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express purpose of reducing, and which in fact does result in a bona fide reduction of, the interest

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rate applicable to the home loan; provided the undiscounted interest rate for the home loan does

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not exceed the conventional mortgage rate by two (2) percentage points for a home loan secured

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by a first lien, or by three and one-half (3.5) percentage points for a home loan secured by a

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subordinated lien.

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     (e) "Borrower" means any person obligated to repay the loan, including a co-borrower,

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co-signor or guarantor.

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     (f) "Brokering" means to act as a loan broker as defined in Rhode Island general laws

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section 19-14-1.

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     (g) "Conventional mortgage rate" means the most recently published annual yield on

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conventional mortgages published by the board of governors of the Federal Reserve System, as

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published in statistical release H.15 or any publication that may supersede it, as of the applicable

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time set forth in 12 C.F.R. 226.32(a)(1)(i).

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     (h) Conventional prepayment penalty" means any prepayment penalty or fee that may be

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collected or charged in a home loan, and that is authorized by law other than this chapter,

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provided the home loan: (1) does not have an annual percentage rate that exceeds the

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conventional mortgage rate by more than two (2) percentage points; and (2) does not permit any

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prepayment fees or penalties that exceed two percent (2%) of the amount prepaid.

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     (i) "Creditor" means any person who regularly makes available a home loan and shall

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include a loan broker.

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     (j) "Department" means the department of business regulation.

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     (k) "Director" means the director of the department of business regulation.

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     (l) "High-cost home loan" means a home loan in which the terms of the loan meet or

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exceed one of more of the thresholds as defined in subsection (r) of this section.

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     (m) "Home loan" means a loan, including an open-end credit plan, other than a reverse

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mortgage transaction, where the loan is secured by:

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     (1) A mortgage or deed of trust on real estate in this state upon which there is located or

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there is to be located a structure or structures designed principally for occupancy of from one to

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four (4) families which is or will be occupied by a borrower as the borrower's principal dwelling;

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or

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     (2) A security interest on a manufactured home which is or will be occupied by a

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borrower as the borrower's principal dwelling.

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     (n) "Loan originator" means a natural person employee of a lender or loan broker that is

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required to be licensed under Rhode Island general laws section 19-14-1 et seq., and who for or

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with the expectation of a fee, commission or other valuable consideration and whose job

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responsibilities include direct contact with applicants during the loan application process, which

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includes soliciting, negotiating, acquiring, arranging or making mortgage loans, or who in

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connection with the taking of loan applications or the taking of loan pre-approval requests obtains

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personal financial information or other documents, quotes loan rates or terms, or provides

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required disclosures.

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      (o) "Points and fees" means:

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     (1) All items included in the definition of finance charge in 12 C.F.R. 226.4(a) and 12

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C.F.R. 226.4(b) except interest or the time price differential;

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     (2) All items described in 12 C.F.R. 226.32(b)(1)(iii);

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     (3) All compensation paid directly by a borrower to a loan broker including a loan broker

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that originates a loan in its own name in a table-funded transaction;

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     (4) All compensation paid indirectly to a loan broker from any source other than the

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borrower in excess of one percentage point of the total loan amount, including a loan broker that

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originates a loan in its own name in a table-funded transaction;

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     (5) The cost of all premiums financed by the creditor, directly or indirectly for any credit

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life, credit disability, credit unemployment or credit property insurance, or any other life or health

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insurance, or any payments financed by the creditor directly or indirectly for any debt

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cancellation or suspension agreement or contract, except that insurance premiums or debt

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cancellation or suspension fees calculated and paid in full on a monthly basis shall not be

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considered financed by the creditor;

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     (6) The maximum prepayment fees and penalties that may be charged or collected under

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the terms of the loan documents; and

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     (7) All prepayment fees or penalties that are incurred by the borrower if the loan

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refinances a previous loan originated or currently held by the same creditor or an affiliate of the

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creditor.

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     (8) For open-end loans, the points and fees are calculated by adding the total points and

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fees known at or before closing, including the maximum prepayment penalties which may be

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charged or collected under the terms of the loan documents, plus the minimum additional fees the

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borrower would be required to pay to draw down an amount equal to the total credit line.

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     (9) Points and fees shall not include:

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     (i) Points and fees up to and including one percent (1%) of the total loan amount

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attributable to bona fide fees paid to a federal or state government agency that insures payment of

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some portion of a home loan plus an amount not to exceed two percent (2%) of the total loan

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amount attributable to a bona fide discount points or a conventional prepayment penalty. In no

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case shall the total excluded points and fees in connection with a home loan exceed three percent

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(3%) of the total loan amount;

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     (ii) Taxes, filing fees, recording and other charges and fees paid or to be paid to public

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officials for determining the existence of or for perfecting, releasing or satisfying a security

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interest; or

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     (iii) Bona fide and reasonable fees paid to a person other than the creditor or an affiliate

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of the creditor for the following: fees for tax payment services; fees for flood certification; fees

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for pest infestation and flood determination; appraisal fees; fees for inspections performed prior

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to closing; credit reports; surveys; attorneys' fees; notary fees; escrow charges, so long as not

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otherwise included under subparagraph (1) of this paragraph; title insurance premiums; and fire

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and hazard insurance and flood insurance premiums, provided that the conditions in 12 C.F.R.

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226.4(d)(2) are met; or

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     (p) "Predatory lending" means any act and practice which is found in violation of those

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acts and practices prohibited by sections 34-25.2-5 and 34-25.2-6 of this chapter.

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     (q) "Tangible, net benefit" means at the time of refinancing a home loan(s), the new home

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loan(s) meet, at a minimum, one of the following:

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     (1) The borrower's new monthly payment(s) is lower than the total of all monthly

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obligations being financed, taking into account the costs and fees as disclosed on the HUD-1

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settlement statement;

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     (2) There is a beneficial change in the amortization period of the new loan(s);

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     (3) The borrower receives cash in excess of the costs and fees, as disclosed on the HUD-1

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settlement statement, as part of the refinancing;

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     (4) The borrower's current note rate of interest is reduced, or in the event more than one

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loan in being refinanced, the weighted average note rate of the current loans is reduced;

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     (5) There is a change from an adjusted rate loan(s) to a fixed rate loan(s); or

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     (6) The refinancing is necessary to respond to a bona fide personal need or an order of a

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court of competent jurisdiction.

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     (r) "Threshold" means any one of the following two (2) items, as defined:

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     (1) "Rate threshold" means:

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     (i) for a first lien mortgage home loan, an interest rate equal to eight (8) percentage points

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over the yield on comparable United States treasury securities on the fifteenth (15th) day of the

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month immediately preceding the month in which the loan application was received by the

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lender; and

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     (ii) for a subordinate mortgage lien, an interest rate equal to nine (9) percentage points

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over the yield on comparable United States treasury securities on the fifteenth (15th) day of the

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month immediately preceding the month in which the loan application was received by the

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lender;

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     (2) "Total points and fees threshold" means:

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     (i) for loans in which the total loan amount is fifty thousand dollars ($50,000) or more,

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the total points and fees payable in connection with the home loan less any excluded points and

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fees exceed five percent (5%) of the total loan amount; and

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     (ii) for loans in which the total loan amount is less than fifty thousand dollars ($50,000)

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the total points and fees payable in connection with the home loan less any excluded points and

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fees exceed eight percent (8%) of the total loan amount.

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     (s) "Total loan amount" means the total amount the consumer will borrow, as reflected by

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the face amount of the note. For open-end loans, the total loan amount shall be calculated using

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the total line of credit allowed under the home loan at closing.

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     34-25.2-5. Prohibited acts and practices regarding home loans. – A home loan shall

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be subject to the following prohibited acts and practices.

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     (a) No creditor making a home loan shall finance, directly or indirectly, any credit life,

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credit disability, credit unemployment or credit property insurance, or any other life or health

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insurance, or any payments directly or indirectly for any debt cancellation or suspension

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agreement or contract, except that insurance premiums or debt cancellation or suspension fees

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calculated and paid in full on a monthly basis shall not be considered financed by the creditor.

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     (b) No creditor shall knowingly or intentionally engage in the unfair act or practice of

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flipping a home loan. "Flipping a home loan" is the making of a home loan to a borrower that

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refinances an existing home loan that was consummated within the prior sixty (60) months when

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the new loan does not have reasonable, tangible net benefit in accordance with subsection 34-

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25.2-4(q), to the borrower considering all of the circumstances, including, but not limited to, the

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terms of both the new and refinanced loans, the cost of the new loan, and the borrower's

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circumstances.

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     (c) No creditor shall recommend or encourage default on an existing loan or other debt

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prior to and in connection the closing or planned closing of a home loan that refinances all or any

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portion of such existing loan or debt.

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     (d) No home loan may contain a provision that permits the creditor, in its sole discretion,

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to accelerate the indebtedness. This provision does not prohibit acceleration of the loan in good

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faith due to the borrower's failure to abide by the material terms of the loan.

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     (e) No home loan may contain a provision that allows a party to require a borrower to

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assert any claim or defense in a forum that is less convenient, more, costly, or more dilatory for

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the resolution of a dispute than a judicial forum established in this state where the borrower may

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otherwise properly bring a claim or defense or limits in any way claim or defense the borrower

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may have.

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     34-25.2-6. Limitations and prohibited practices regarding high-cost home loans. -- A

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high-cost home loan shall be subject to the following additional limitations and prohibited

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practices:

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     (a) In connection with a high-cost home loan, no creditor shall directly or indirectly

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finance any points or fees which total is greater than five percent (5%) of the total loan amount of

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eight hundred dollars ($800) whichever is greater.

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     (b) No prepayment fees or penalties shall be included in the loan documents for a high-

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cost home loan.

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     (c) No high-cost home loan may contain a scheduled payment that is more than twice as

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large as the average of earlier scheduled payments. This provision does not apply when the

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payment schedule is adjusted to the seasonal or irregular income of the borrower.

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     (d) No high-cost home loan may include payment terms under which the outstanding

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principal balance or accrued interest will increase at any time over the course of the loan because

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the regularly scheduled periodic payments do not cover the full amount of interest due.

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     (e) No high-cost home loan may contain a provision that increases the interest rate after

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default. This provision does not apply to interest rate changes in a variable rate loan otherwise

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consistent with the provisions of the loan documents, provided the change in the interest rate is

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not triggered by the event of default or the acceleration of the indebtedness.

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     (f) No high-cost home loan may include terms under which more than two (2) periodic

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payments required under the loan are consolidated and paid in advance from the loan proceeds

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provided to the borrower.

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     (g) A creditor may not make a high-cost home loan without first receiving certification

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from a counselor with a third-party nonprofit organization approved by the United States

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Department of Housing and Urban Development that the borrower has received counseling on the

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advisability of the loan transaction.

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     (h) A high-cost home loan shall not be extended to a borrower unless a reasonable

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creditor would believe at the time the loan is closed that one or more of the borrowers will be able

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to make the scheduled payments associated with the loan based upon a consideration of his or her

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current and expected income, current obligations, employment status, and other financial

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resources, other than the borrower's equity in the collateral that secures the repayment of the loan.

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There is a rebuttable presumption that the borrower is able to make the scheduled payments to

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repay the obligation if, at the time the loan is consummated, said borrower's total monthly debts,

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including amounts under the loan, do not exceed fifty percent (50%) of said borrower's monthly

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gross income as verified by tax returns, payroll receipts, and other third-party income verification.

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     (i) A creditor may not pay a contractor under a home-improvement contract from the

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proceeds of a high-cost home loan, unless:

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     (1) the creditor is presented with a signed and dated completion certificate showing that

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the home improvements have been completed; and

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     (2) the instrument is payable to the borrower or jointly to the borrower and the contractor,

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or, at the election of the borrower, through a third-party escrow agent in accordance with terms

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established in a written agreement signed by the borrower, the creditor, and the contractor prior to

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the disbursement.

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     (j) A creditor may not charge a borrower any fees or other charges to modify, renew,

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extend, or amend a high-cost home loan or to defer any payment due under the terms of a high-

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cost home loan.

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     (k) A creditor shall not make available a high-cost home loan that provides for a late

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payment fee except as follows:

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     (1) The late payment fee shall not be in excess of three percent (3%) of the amount of the

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payment past due.

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     (2) The late payment fee shall only be assessed for a payment past due for fifteen (15)

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days or more or ten (10) days or more in cases of bi-weekly mortgage payment arrangement.

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     (3) The late payment fee shall not be imposed more than once with respect to a single late

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payment. If a late payment fee is deducted from a payment made on the loan, and the deduction

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causes a subsequent default on a subsequent payment, no late payment fee may be imposed for

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the default.

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     (4) A creditor shall treat each payment as posted on the same business day as it was

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received.

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     (l) All high-cost home loan documents that create a debt or pledge property as collateral

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shall contain the following notice on the first page in a conspicuous manner: "Notice: This a high-

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cost home loan subject to special rules under state law. Purchasers or assignees of this high-cost

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home loan may be liable for all claims and defenses by the borrower with respect to the home

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loan."

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     34-25.2-7. Assignee liability. – (a) Any person who purchases or is otherwise assigned a

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high-cost home loan shall be subject to all affirmative claims and any defenses with respect to the

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loan that the borrower could assert against the original creditor of the loan; provided, that this

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subsection (a) shall not apply if the purchaser or assignee demonstrates by a preponderance of the

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evidence that it:

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     (1) has in place at the time of the purchase or assignment of the subject loans, policies

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that expressly prohibit its purchase or acceptance of assignment of any high-cost home loans;

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     (2) requires by contract that a seller or assignor of home loans to the purchaser or

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assignee represents and warrants to the purchaser or assignee that either: (a) the seller or assignor

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will not sell or assign any high-cost home loans to the purchaser or assignee; or (b) that such

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seller or assignor is a beneficiary of a representation and warranty from a previous seller or

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assignor to that effect; and

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     (3) exercises reasonable due diligence at the time of purchase or assignment of high-cost

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home loans or within a reasonable period of time after the purchase or assignment of such high-

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cost home loans, intended by the purchaser or assignee to prevent the purchaser or assignee from

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purchasing or taking assignment of any high-cost home loans; provided, further, that reasonable

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due diligence shall provide for sampling and shall not require loan-by-loan review.

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     (b) Limited to amounts required to reduce or extinguish the borrower's liability under the

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high-cost home loan plus amounts required to recover costs, including reasonable attorneys' fees,

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a borrower acting only in an individual capacity may assert claims that the borrower could assert

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against a creditor of the high-cost home loan against any subsequent holder or assignee of the

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high-cost home loan as follows:

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     (1) within five (5) years of the closing of a high-cost home loan, a violation of this act in

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connection with the loan as an original action; and

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     (2) at any time during the term of a high-cost home loan, after an action to collect on the

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high-cost home loan or foreclose on the collateral securing the high-cost home loan has been

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initiated or the debt arising from the high-cost home loan has been accelerated or the high-cost

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home loan has become sixty (60) days in default, any defense, claim or counterclaim, or action to

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enjoin foreclosure or preserve or obtain possession of the home that secures the loan.

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     (c) The provisions of this section shall be effective notwithstanding any other provision

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of law; provided, that nothing in this section shall be construed to limit the substantive rights,

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remedies or procedural rights available to a borrower against any creditor, assignee or holder

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under any other law. The rights conferred on borrowers by subsections (a) and (b) of this section

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are independent of each other and do not limit each other.

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     34-25.2-8. Civil action. – (a) An aggrieved borrower or borrowers may bring a civil

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action for injunctive relief or damages in a court of competent jurisdiction for any violation of

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this chapter.

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     (b) In addition, the court shall, as the court may consider appropriate:

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     (1) issue an order or injunction rescinding a home mortgage loan contract which violates

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this chapter, or barring the lender from collecting under any home mortgage loan which violates

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this chapter;

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     (2) issue an order or injunction barring any judicial or nonjudicial foreclosure or other

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lender action under the mortgage or deed of trust securing any home mortgage loan which

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violates this chapter;

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     (3) issue an order or injunction reforming the terms of the home mortgage loan to

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conform to this chapter;

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     (4) issue an order or injunction enjoining a lender from engaging in any prohibited

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conduct; or

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     (5) impose such other relief, including injunctive relief, as the court may consider just

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and equitable.

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     (c) Originating or brokering a home loan that violates a provision of this section shall

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constitute a violation of this chapter.

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     (d) A creditor in a home loan who, when acting in good faith, fails to comply with the

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provisions of this act, will not be deemed to have violated this section if the creditor establishes

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that either:

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     (1) Within thirty (30) days of the loan closing and prior to the institution of any action

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under this chapter, the lender notifies the borrower of the compliance failure and makes

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appropriate restitution and whatever adjustments are necessary are made to the loan, at the choice

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of the borrower, to either:

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     (i) make the high-cost home mortgage loan satisfy the requirements of this chapter; or

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     (ii) change the terms of the loan in a manner beneficial to the borrower so that the loan

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will no longer be considered a high-cost home mortgage loan; or

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     (2) The compliance failure was not intentional and resulted from a bona fide error

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notwithstanding the maintenance procedures reasonably adapted to avoid the errors, and within

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sixty (60) days after the discovery of the compliance failure and before the institution of any

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action under this chapter or the receipt of written notice of the compliance failure, the borrower is

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notified of the compliance failure, appropriate restitution is made and whatever adjustments are

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necessary are made to the loan, at the choice of the borrower, to either:

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     (i) make the high-cost home mortgage loan satisfy the requirements of this chapter; or

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     (ii) change the terms of the loan in a manner beneficial to the borrower so that the loan

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will no longer be considered a high-cost home mortgage loan.

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     Examples of a bona fide error may include clerical errors, errors in calculation, computer

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malfunction and programming, and printing errors. An error in legal judgment with respect to a

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person's obligation under this chapter shall not be considered a bona fide error.

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     (e) Notwithstanding any provision to the contrary contained in this chapter regarding

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costs and attorneys' fees, in any action instituted by a borrower who alleges that the defendant

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violated subsection 34-25.2-5(b), the borrower shall not be entitled to costs and attorneys' fees if

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the presiding judge, in the judge's discretion, finds that, before the institution of the action by the

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borrower, the lender made a reasonable offer to cure and that offer was rejected by the borrower.

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     34-25.2-9. Subterfuge prohibited. – It shall be a violation of this chapter for any person

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to attempt in bad faith to avoid the application of this chapter by:

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     (a) Dividing any loan transaction into separate parts for the purpose of evading the

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provisions of this chapter;

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     (b) Structuring a home loan transaction as an open-end loan for the purpose of evading

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the provisions of this chapter when the loan would have been a high-cost home loan if the loan

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had been structured as a closed-end loan;

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     (c) Engaging in any other subterfuge with the intent of evading any provision of this

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chapter.

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     34-25.2-10. Rights in addition to other laws. – The rights conferred by this chapter are

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independent of and in addition to any other rights under other laws.

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     34-25.2-11. Exemption. – The provisions of this chapter shall not apply to:

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     (a) Any national bank, federal savings bank, or financial institution, as defined under

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section 19-1-1, or their wholly-owned subsidiary; and

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     (b) The Federal Housing Administration, the Department of Veterans Affairs, or other

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state or federal housing finance agencies.

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     34-25.2-12. Department of business regulation. – The director may promulgate such

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rules and regulations as are necessary and proper to carry out the provisions of this chapter. Rules

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and regulations promulgated for subsections 34-25.2-4(q) and 34-25.2-5(b) may contain such

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factors, classifications, differentiations or other provisions, and may provide for such adjustments

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and exceptions for any class of transactions as, in the judgment of the director, are necessary or

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proper to carry out those sections, to prevent circumvention or evasion thereof or to facilitate

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compliance therewith.

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     34-25.2-13. Reporting. – The department shall report to the governor and the general

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assembly on or before January 1, 2009, with regard to the effectiveness of this act in achieving its

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purpose, which report shall include, but not be limited to:

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     (a) The reported incidence of prohibited practices by calendar quarter for the period

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January 1, 2007 through June 30, 2008;

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     (b) The disposition, if any, of the reported incidences of prohibited practices;

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     (c) Findings and recommendations with regard to any improvements, amendments, or

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changes that should be considered to make the act more effective in achieving its purposes or

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which may be necessary in order to assure fair availability of credit.

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     34-25.2-14. Liberal construction. – This chapter shall be construed liberally in aid of its

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declared purpose of protecting the homes and the equity of individual borrowers in this state.

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     34-25.2-15. Severability. – If any provision of this chapter or the application of this

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chapter to any person or circumstances is held invalid or unconstitutional, the invalidity or

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unconstitutionality shall not affect other provisions or applications of this chapter which can be

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given effect without the invalid or unconstitutional provision or application, and to this end, the

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provisions of this chapter are declared to be severable.

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     SECTION 2. This act shall take effect on December 31, 2006.

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LC01467/SUB A/2

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EXPLANATION

BY THE LEGISLATIVE COUNCIL

OF

A N A C T

RELATING TO PROPERTY -- RHODE ISLAND HOME LOAN PROTECTION ACT

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     This act would establish a home loan protection act to protect borrowers from predatory

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lending practices.

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     This act would take effect on December 31, 2006.

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LC01467/SUB A/

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2006 -- S 2851 H.

SUBSTITUTE A

A N A C T

RELATING TO PROPERTY -- RHODE ISLAND HOME LOAN PROTECTION ACT

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LC01467/SUB A/2

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Presented by