In this article and one in Wednesday's issue, Mr. Bernstein examines the Homeownership and Equity Protection Act of 1994, which awaits President Clinton's signature.
Not only are preclosing disclosures triggered for "high-rate" mortgage loans as defined by the new law, such loans also trigger certain prohibitions on loan contract terms.
* First, with a narrow exception, highrate-loan contracts cannot contain prepayment penalties.
If state law permits' prepayment penalties, they may only appear in high-rate mortgageloan contracts when the borrower's total monthly payments on all of its loans is no greater than 50% of its monthly gross income.
Even so, the prepayment penalty cannot arise from a refinancing of the high-rate mortgage with the same lender or an affiliate, nor could the prepayment penalty apply after five years.
* Second, the new act would prohibit contract clauses establishing post-default interest rates that are higher than the contact rate.
* Third, the act would prohibit contract clauses establishing a balloon payment (which the act defines as a final payment larger than regular monthly payments) in a high-rate mortgage loan having a term of less than five years.
* Fourth, the act would prohibt contract clauses establishing tegative amortization. The act defines negative amortization as an increase in the principal balance arising because regular periodic payments do not cover the full amount of interest due.
* Fifth, the act would prohibit contract clauses requiring that more than two prepaid periodic payments be deducted from the loan proceeds at closing.
The act prohibits a lender from engaging in a pattern or practice of granting high-rate mortgage loans based solely on analysis of the consumer's collateral, without regard to the consumer's repayment ability as measured by income, liabilities, and employment status. Also, disbursement checks for highrate mortgage loans for home improvements must be jointly payable to the consumer and the home-improvement contractor (or third-party escrow agent).
The act creates a new disclosure requirement for "reverse mortgages," which are loan products traditionally marketed to senior citziens to convert accumulated home equity into cash payments.
Finally, the act imposes absolute liability on assignees of high-rate mortgage loans for all claims and defenses the consumer has against the original creditor, unless the assignee demonstrates that it could not have determined that the transaction was indeed a "high-risk" mortgage loan. However, the act limits the assignee's liability.
Any failure to comply with the act could trigger a private lawsuit or state attorney general action for actual damages, together with all finance charges and fees paid by the consumer "unless the creditor demonstrates that the failure to comply is not material." Reasonable attomey's fees are also recoverable, and class actions are possible.
Moreover, inclusion of any prohibited clause in a high-rate mortgage contract or any failure to provide a proper and timely preclosing disclosure in compliance with the act will enable the borrower to exercise the "rescission" remedy currently provided under the Truth in Lending act for certain loans.
Rescission is the most severe borrower remedy in consumer compliance law. Unless the lender contests an attempted rescission within 20 days, the lender must automatically remove and satisfy the mortgage and return all finance charges and other amounts paid by the borrower in connection with the loan.
The act and the new regulations should become effective on Oct. 1, 1995. For now, lenders that may offer 'high-rate' loans should watch for the proposed regulations and provide comments.
To see-what other new laws will face segments of the lending industry, go home tonight and watch your favorite prime-time TV news magazine show. That is where today's laws are born.
