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

1. State Mini-HOEPA Laws: A Guide to Hot Legal Issues Alys Cohen National Consumer Law Center MWCOG Conference 4/27/06

2. Context: How do state laws fit into the legislative picture? • State laws primarily are modeled on HOEPA; they effectively create statewide underwriting standards. • The “Threshold Model” is only one approach, but it is the prevailing one now.

3. Ups and Downs of Segregating Loans by Cost Benefits: • Can act as an effective ceiling on loans • Provides expanded legal remedies • Laboratory for regulatory/legislative fixes • Allows for research on specific segment of the market

4. More on Ups and Downs of Segregating Loans by Cost Risks: • Denies other loans sufficient protections • Battle of the calculators (Finance charge vs. Amount Financed) • Many HOEPA loans aren’t identified by the lender • Effect on credit score; ironic cycle • Focuses on origination to the exclusion of servicing issues

5. Key Background Concepts Alternative Approaches: • Regulate all home equity loans equally • Alter definition of Finance Charge –> all-inclusive The Goal: • All Credit is NOT good. Restricting credit access makes sense in some situations. • The goal is to stop abuses. You must include the whole process—origination, servicing, collection, access to remedies (arbitration, assignee liability, damages, rescission).

6. State laws: Highlights of key issues and categories North Carolina • First state to pass a predatory mortgage lending statute • Provides guide to ongoing legislative issues • Needs to be viewed through the lens of ALL of North Carolina law (common law and other statutory remedies).

7. North Carolina Covers more loans than HOEPA • 5% for loans of $20K or more • Separate threshold for loans with harsh prepayment penalties • Issue: Threshold approach in general Outlaws more abusive loan terms • Points and fees cannot be financed • No points/fees on high-cost loan refis w/same lender • Issue: Equity Stripping Mechanisms

8. North Carolina • Provides guidance on defining asset-based lending and flipping • No refinancing unless borrower receives reasonable net tangible benefit • List of factors that a lender must consider in assessing repayment ability • Establishes a presumption that a loan is affordable if total monthly debt, including the loan, does not exceed 50% of verified gross monthly income • Issue: How can the law get at seemingly hard-to-define practices?

9. North Carolina • Requires housing counseling on high-cost loans • Issue: How can we distinguish between housing counseling (and credit counseling) that is a real help and situations where it simply immunizes a predatory lender? • No explicit assignee liability provision—common law provides for this already. • Issue: What is the role and responsibility of the secondary market?

10. State laws with a lower/more inclusive trigger than HOEPA • New York • Illinois • California (note points and fees test is narrower but number is lower) • Massachusetts • New Jersey • New Mexico • Arkansas • Georgia • District of Columbia (exempts some lenders)

11. State laws with more restrictions than HOEPA include… • (These are highlights of the state laws) New York • Broader restrictions on balloon payments, refinancing, & asset-based lending • Also restricts arbitration clauses, financing of points and fees and credit insurance, broker fees • “Tangible net benefit test” • Rescission available Connecticut • Cap on prepaid finance charges • Credit insurance must be offered with a monthly payment scheme • Asset-based lending prohibition without need to prove pattern or practice • Prohibits mandatory arbitration clauses (but this was held to be preempted by federal law)

12. State restrictions cont’d New Jersey • Prohibits mandatory arbitration clauses • Caps financing of points/fees • For ALL loans: restricts flipping & credit insurance financing New Mexico • Prohibits mandatory arbitration clauses • Restricts financing of points and fees • Requires credit counseling

13. State restrictions cont’d Illinois • Presumptive threshold for unaffordable loans • Prohibits financing of single-premium credit insurance California • Greater restrictions on prepayment penalties and asset-based lending • Prohibits steering • BUT--specifically exempts assignees Massachusetts • Limits financing of fees and restricts prepayment penalties • Prohibits mandatory arbitration clauses • ALL refinancings in the borrower’s interest if within five years

14. State restrictions cont’d Arkansas • Restricts mandatory arbitration clauses and refinancing without a tangible net benefit to the borrower • Violation of this law is a UDAP violation Kentucky • Restrictions on asset-based lending & arbitration clauses Georgia • For ALL home loans: restricts unfair late charges, limits payoff fees, and prohibits financing of credit insurance premiums • For high-cost loans: restricts prepayment penalties, mandatory arbitration clauses, and asset-based lending

15. State restrictions cont’d District of Columbia • Restrictions on asset-based lending and refinancings Oklahoma • Restricts refinancings of low-interest loans and asset-based lending Maine • Requires credit reporting • Restrictions on advertising regarding lowering of monthly payments • Restricts points charged on refis of high-cost loans

16. Assignee Liability • North Carolina (separate from mini-HOEPA) • Massachusetts • New York • New Jersey • New Mexico • Oklahoma • Maine • District of Columbia • Arkansas • Illinois

17. Localities New York • New York City law found to be preempted (by state trial court) by state and federal law (mayor brought suit) California • Oakland ordinance found by California Supreme Courtto be preempted by state law. • Los Angeles ordinance blocked by Oakland decision. Maryland • Montgomery County ordinance, Bill 36-04, which takes a fair lending approach. OTS has issued a preemption letter regarding federal savings associations.

18. Localities cont’d Ohio • Dayton ordinance found to be preempted by state appeals court. • State appeals court upheld Cleveland ordinance on “home rule” theory; this is on appeal to the Ohio S. Ct. • State appeals court also upheld Toledo ordinance on similar grounds, however anti-steering and disclosure requirements regarding counseling were unconstitutionally vague but severable. Pennsylvania • Philadelphia ordinancepreempted by state legislation. City didn’t challenge preemption issue in light of AFSA lawsuit.

19. Additional State Issues Remedy Issues • E.g.,Georgia—Rescission with 5 year statute of limitations. Weaker Laws • OH, PA, SC, NB, NE, MD, FL, CO, MI, WI, UT, IN, CT, MN, VA Other Models • Texas and Virginia have limited laws that apply to all home loans. • New Illinois law with data collection and credit counseling requirement for some loans made by state licensed loan originators. • Montgomery County, MD fair housing approach.