Congress, the California Legislature, and a number of other state legislatures
have passed laws aimed at restricting predatory lending practices. Although all
of these legislative schemes set thresholds for interest rates and costs, above
which a loan will be considered a predatory or "covered" loan, the triggering
thresholds differ between the Federal and state levels.
Accurate calculation of the threshold amounts can be difficult; therefore, legal
advice should be obtained by those unfamiliar with the statues and regulations. The
Federal and California statutes
are examined here.
Federal Predatory Lending Law, Overview: 12 CFR Section 226.32 and 15 U.S.C.
§ 1602(aa), known as Section
32 and HOEPA, impose a number of restrictions and additional disclosures on
loans secured by the borrower's principal dwelling which exceed either the interest rate or the loan cost thresholds, causing
the loan to be a "covered" loan. Section 32 is a part of the regulations
for the Truth in Lending Act (TILA). As such, it only applies to loans
which are subject to TILA. Business purpose
loans and loans to organizations, for
example, are exempt from TILA. In addition, certain loans covered by TILA are
exempt from being deemed Section 32 loans, such as
residential mortgage transactions (where the lender obtains a security
interest in the consumer's principal dwelling to secure financing for the
purchase or construction of that dwelling), reverse mortgages and open end
credit plans like home equity lines of credit.
Section 32 Threshold-Annual Percentage Rate (APR): A non-exempt loan
will be deemed a "covered loan" if the APR at loan consummation is more than
8% for 1st mortgages, 10% for junior loans, above the yield rate set for
T-Bills with a term comparable to the loan term. The T-Bill rate from
the fifteenth of the month before the creditor receives the loan application
is used.
Section 32 Threshold-Points and Fees: A non-exempt loan will be
deemed a "covered" loan if the points and fees, as defined in Section 32,
exceed the greater of $400 (plus a CPI increase) or 8% of the total loan
amount. The total loan amount is the amount financed minus points and
fees financed by the creditor.
Section 32 Disclosures: For a loan covered by Section 32, certain
additional disclosures must be made, as set out
in the regulations. If these additional disclosures are not made for a
covered loan, the borrower may have the right to rescind the loan years
later as if no disclosures at all had been made (See the
Article on the Right of Rescission.)
Section 32 Prohibited Loan Provisions: For a loan covered by Section 32,
the following
loan terms are prohibited: balloon payments on a loan for less than five years
(except "bridge loans"); negative amortization; advance payments in excess of
two periodic payments; default interest, certain methods of calculating
rebates after loan acceleration on default; certain prepayment penalties; due
on demand clauses; certain home improvement contract terms; prohibitions on
sale of the loans without notice that special TILA provisions apply;
certain refinances within one year; or a pattern or practice by lenders of
ignoring borrower repayment ability. This latter prohibition may be
problematic for Section 32 loans made by lenders who advertise that they lend
based upon the value of the collateral, regardless of income or credit
history.
Section 32 Prohibited Evasion: Section 32 also prohibits the structuring of a loan as an open end
loan in order to avoid the application of Section 32, if the loan is not
anticipated to involve recurring draws like a line of credit.
Section 32 Penalties: Willful inaccurate disclosures or failure to disclose can subject a lender to a $5,000 fine or
1 year in prison. If a required disclosure is not made, or is inaccurate, it could also form the basis for the
borrower to rescind the loan, as discussed in the Article on the Right of Rescission.
California Predatory Lending Law: Financial Code Sections 4970 et seq.,
known as AB489 or Cal-Section 32, imposes a number of restrictions and
requires additional
disclosures on loans which meet either the interest rate or the loan cost
thresholds, which cause the loan to be a "covered loan." In addition,
unlike the Federal Section 32, it
prohibits financing of fees and costs in excess of the 6% threshold. The
statute only governs loans applied for after July 1, 2002. Loans which
exceed the Fannie Mae conforming loan limit, currently $417,000, are not
covered. Until January 1, 2006, loans in excess of $250,000 were not
covered. Certain other loans are
exempt from being deemed Cal Section 32 loans, such as: business purpose loans;
loans which are not secured by a 1-4 unit residential parcel of real property,
where the owner occupies or intends to occupy one of the units as the owner's
principal residence; bridge loans with a term of one year or less; reverse
mortgages; and, open end credit plans like home equity lines of credit.
Loans made to borrowers who are not natural persons would be exempt as not
made to a consumer.
Cal-Section 32 Threshold-Annual Percentage Rate (APR): A
non-exempt loan will be deemed a "covered loan" if the APR at loan
consummation is more than 8% above the yield rate set for T-Bills with a term
comparable to the loan term. Unlike the Federal Section 32, the
threshold for first trust deeds and junior trust deeds is the same. The T-Bill rate from the fifteenth of the
month before the creditor receives the loan application is used.
Cal-Section 32 Threshold-Points and Fees: A non-exempt loan will be
deemed a "covered" loan if the points and fees, as defined in Section 4970(c),
exceed 6% of the total loan
amount. The total loan amount is the amount financed minus points and
fees.
Cal-Section 32 Disclosures-For a loan covered by Cal-Section 32, certain
additional disclosures must be made, as set out in Section 4973(k)(1).
Cal-Section 32 Prohibited Loan Terms and
Practices-For a loan covered by Section 32, the
following
loan terms and practices are prohibited: loans for 5 years or less which are not fully
amortized (except for interest only bridge loans payable in less than 18
months); negative amortization; advance payment of periodic mortgage payments;
default interest; certain payment schedules for seasonal workers; certain
prepayment penalties; due on demand clauses; certain home improvement contract
terms; certain refinances; recommending default on an existing loan; making a
loan without a reasonable belief that the borrower can make the payments;
financing points and fees in excess of 6%; or a broker advising a borrower to
accept a less favorable loan than the borrower is qualified for. This latter prohibition may be problematic for
Cal-Section 32 loans facilitated by brokers who advertise loans based upon the
value of the collateral, regardless of income or credit history.
Cal-Section 32 Penalties: Financial Code Section 4974 provides for cure of an inadvertent
error for a 45 day period after receiving a complaint or discovery of the error. It also provides that
a person originating a loan who knew of and showed reckless disregard for unlawful broker conduct will be
jointly and severally liable with the broker. Section 4975 provides that violation of Cal-Section 32
will constitute a licensing violation justifying license suspension. Section 4977 provides for licensing agencies
to impose administrative penalties of $2,500 each, and for civil penalties of up to $25,000 each for willful
and knowing violations, and allows for joinder of a claim for restitution and disgorgement. Section 4978
provides victims with $15,000 or actual damages and attorneys' fees, and that contract provisions violating
subdivisions (a), (b), (c), (d), (e), or (i) of Section 4973, Section 4979.6, or Section 4979.7, are
unenforceable. The section also provides for reformation of the offending contract, injunctive relief
and punitive damages.
Mr. Imfeld frequently reviews loans, both before and
after close of escrow, to determine whether Predatory Lending thresholds
were exceeded, and whether the provisions of Section 32 and Cal-Section 32
have been met. Should you have questions about these types of loans,
predatory lending litigation, or
wish to consult with an attorney regarding application of Predatory Lending
Law to a particular loan, please contact the firm or submit the Information Request Form
below.
