Chapter 06-573

Chapter 573

2006 -- S 2851 SUBSTITUTE A AS AMENDED

Enacted 07/11/06

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

It is enacted by the General Assembly as follows:

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

adding thereto the following chapter:

CHAPTER 25.2

RHODE ISLAND HOME LOAN PROTECTION ACT

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

Protection Act."

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

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

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

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

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

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

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

this chapter are necessary to encourage responsible lending.

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

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

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

chapter, unless the context otherwise requires:

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

of the entire debt is due immediately.

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

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

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

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

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

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

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

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

subordinated lien.

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

co-signor or guarantor.

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

section 19-14-1.

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

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

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

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

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

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

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

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

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

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

include a loan broker.

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

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

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

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

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

mortgage transaction, where the loan is secured by:

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

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

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

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

borrower as the borrower's principal dwelling.

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

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

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

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

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

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

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

required disclosures.

(o) "Points and fees" means:

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

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

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

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

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

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

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

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

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

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

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

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

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

considered financed by the creditor;

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

the terms of the loan documents; and

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

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

creditor.

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

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

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

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

(9) Points and fees shall not include:

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

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

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

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

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

(3%) of the total loan amount;

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

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

interest; or

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

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

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

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

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

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

226.4(d)(2) are met; or

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

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

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

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

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

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

settlement statement;

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

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

settlement statement, as part of the refinancing;

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

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

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

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

court of competent jurisdiction.

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

(1) "Rate threshold" means:

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

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

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

lender; and

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

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

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

lender;

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

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

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

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

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

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

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

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

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

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

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

be subject to the following prohibited acts and practices.

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

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

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

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

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

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

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

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

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

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

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

circumstances.

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

portion of such existing loan or debt.

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

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

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

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

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

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

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

may have.

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

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

practices:

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

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

eight hundred dollars ($800) whichever is greater.

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

cost home loan.

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

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

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

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

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

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

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

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

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

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

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

provided to the borrower.

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

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

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

advisability of the loan transaction.

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

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

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

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

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

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

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

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

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

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

proceeds of a high-cost home loan, unless:

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

the home improvements have been completed; and

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

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

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

the disbursement.

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

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

cost home loan.

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

payment fee except as follows:

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

payment past due.

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

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

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

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

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

the default.

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

received.

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

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

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

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

loan."

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

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

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

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

evidence that it:

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

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

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

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

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

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

assignor to that effect; and

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

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

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

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

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

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

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

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

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

high-cost home loan as follows:

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

connection with the loan as an original action; and

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

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

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

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

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

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

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

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

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

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

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

this chapter.

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

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

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

this chapter;

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

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

violates this chapter;

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

conform to this chapter;

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

conduct; or

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

and equitable.

constitute a violation of this chapter.

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

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

that either:

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

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

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

of the borrower, to either:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

provisions of this chapter;

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

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

had been structured as a closed-end loan;

chapter.

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

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

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

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

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

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

state or federal housing finance agencies.

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

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

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

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

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

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

compliance therewith.

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

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

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

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

January 1, 2007 through June 30, 2008;

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

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

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

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

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

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

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

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

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

provisions of this chapter are declared to be severable.

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

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LC01467/SUB A/2

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