Home Loan Protection
Creates the Hawaii Home Loan Protection Act to protect the homes and equity of individual borrowers.
HOUSE OF REPRESENTATIVES
TWENTY-SECOND LEGISLATURE, 2003
STATE OF HAWAII
A BILL FOR AN ACT
RELATING TO THE HAWAII HOME LOAN PROTECTION ACT.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:
SECTION 1. The legislature finds that the ever-growing problem of abusive mortgage lending has exacerbated the loss of equity in homes and caused the number of foreclosures to increase in recent years.
One of the most common forms of abusive lending is the making of loans that are equity-based, rather than income-based. The financing of points and fees in these loans provides immediate income to the originator and encourages lenders to repeatedly refinance home loans. The lender's ability to sell loans diminishes the lender's incentive to ensure that the homeowner can afford the payments of the loan. As long as there is sufficient equity in the home, an abusive lender or mortgage broker will benefit even if the borrower is unable to make the payments and is forced to refinance. The financing of high points and fees causes the borrower to lose precious equity each time the mortgage is refinanced. Ultimately, this situation often leads to foreclosure.
The legislature further finds that abusive lending has threatened the viability of many communities and decreased homeownership in our State. While the marketplace appears to operate effectively for conventional mortgages, too many homeowners find themselves victims of overreaching lenders who provide loans with exorbitantly high costs and terms that are unnecessary to secure repayment of the loan.
The legislature believes that because competition and self-regulation have not eliminated the abusive terms from home-secured loans, the consumer protection provisions of this chapter are necessary to encourage lending at reasonable rates with reasonable terms.
The purpose of this Act is to protect the homes and equity of individual borrowers through the creation of the Hawaii home loan protection act.
SECTION 2. The Hawaii Revised Statutes is amended by adding a new chapter to be appropriately designated and to read as follows:
HAWAII HOME LOAN PROTECTION ACT
§ -1 Definitions. As used in this chapter:
"Benchmark rate" means the interest rate, which the borrower can reduce by paying bona fide discount points. This rate shall not exceed the weekly average yield of United States Treasury securities having a maturity of five years, as of the fifteenth day of the month immediately preceding the month in which the loan closes, plus four percentage points.
"Bona fide discount points" means loan discount points that are:
(1) Knowingly paid by the borrower;
(2) Paid for the express purpose of lowering the benchmark rate;
(3) Reducing the interest rate or time-price differential applicable to the loan from an interest rate that does not exceed the benchmark rate; and
(4) Recouped within the first four years of the scheduled loan payments.
For purposes of assessing compliance, loan discount points will be considered to be recouped within the first four years of the scheduled loan payments if the reduction in the interest rate that is achieved by the payment of the loan discount points reduces the interest charged on the scheduled payments such that the borrower’s dollar amount of savings in interest over the first four years is equal to or exceeds the dollar amount of loan discount points paid by the borrower.
"Borrower" means any natural person obligated to repay the loan, including a co-borrower, cosigner, or guarantor.
"Creditor" means a person who extends home loan credit that is subject to a finance charge or is payable by written agreement in more than four installments, and to whom the obligation is payable at any time. This term also includes any person who either:
(1) Arranges for the extension of the credit;
(2) Acts in concert with any named person; or
(3) Formulates or controls the practices of a named person.
"Flipping" means making a home loan to a borrower that refinances an existing home loan when the new loan does not have a reasonable, tangible net benefit to the borrower considering all of the circumstances, including the terms of both the new and refinanced loans, the cost of the new loan, and the borrower’s circumstances. The following home loan refinance transactions shall be presumed to involve flipping if either:
(1) The primary tangible benefit to the borrower is an interest rate lower than the interest rate or rates on debts satisfied or refinanced in connection with the home loan, and it will take more than four years for the borrower to recoup the costs of the points and fees and other closing costs through savings resulting from the lower interest rate; or
(2) The new loan refinances an existing home loan that is a special mortgage originated, subsidized, or guaranteed by or through a state or local government or nonprofit organization, that either:
(A) Bears a below-market interest rate at the time the loan was originated; or
(B) Has nonstandard payment terms beneficial to the borrower, such as payments that vary with income, are limited to a percentage of income, or where no payments are required under specified conditions, and where, as a result of the refinancing, the borrower will lose one or more of the benefits of the special mortgage.
"High-cost home loan" means a home loan in which the terms of the loan meet or exceed one or more thresholds.
"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 property in this State upon which there is located or there is to be located a residential structure or structures designed principally for occupancy by one to four individuals or families that is or will be occupied by a borrower as the borrower’s principal dwelling; or
(2) A security interest on a manufactured home that is or will be occupied by a borrower as the borrower’s principal dwelling.
This term includes a loan secured by an individual condominium unit, cooperative unit, mobile home, or trailer, if it is or will be occupied by a borrower as the borrower’s principal dwelling.
"Person" means an individual or entity, including but not limited to a corporation, firm, trust, partnership or incorporated or unincorporated association existing under or authorized by the laws of this State, any other state, or any foreign country.
"Points and fees" includes:
(1) All items listed in 15 U.S.C. section 1605(a)(1) through (4), except interest or the time-price differential;
(2) All charges listed in 15 U.S.C. section 1605(e);
(3) All compensation paid directly or indirectly to a mortgage broker, including a broker that originates a loan in the broker's own name in a table-funded transaction;
(4) The cost of all premiums financed by the creditor, directly or indirectly, for either any:
(A) Credit life, credit disability, credit unemployment, credit property, or any other life or health insurance; or
(B) Payments financed by the creditor directly or indirectly for any debt cancellation or suspension agreement or contract, except insurance premiums calculated and paid on a monthly basis shall not be considered financed by the creditor;
(5) The maximum prepayment fees and penalties that may be charged or collected under the terms of the loan documents; and
(6) All prepayment fees or penalties that are charged the borrower if the loan refinances a previous loan made by the same creditor or an affiliate of the creditor.
For open-end loans, the points and fees are calculated by adding the total fees charged at closing plus the maximum additional fees that can be charged pursuant to the loan documents during the term of the loan.
"Rate" means the interest rate charged on the home loan based on an annual simple interest yield.
"Threshold" means any of the following:
(B) For a subordinate mortgage lien or a mortgage secured solely by a security interest in a manufactured home, eight percentage points over the weekly average yield on five-year United States Treasury securities as of the fifteenth day of the month immediately preceding the month in which the loan closes;
(2) Excluding up to two bona fide discount points:
(A) For loans in which the total loan amount is $30,000 or more, the total points and fees on the loan, paid by the borrower at or before closing, exceed three per cent of the total loan amount; or
(3) The home loan agreement permits the lender to charge or collect prepayment fees or penalties more than thirty months after the loan closing or which exceed, in the aggregate, more than two per cent of the loan amount prepaid.
"Total loan amount" means the principal of the loan, excluding all points and fees that are included in the principal amount of the loan. For open-end loans, the total loan amount shall be calculated using the total line of credit allowed under the home loan.
"Trigger rate" means:
(1) For fixed-rate loans in which the interest rate will not vary during the term of the loan, the rate as of the date of loan closing;
(2) For loans in which the interest rate will vary according to an index, the sum of the index rate as of the date of loan closing plus the maximum margin permitted at any time under the loan agreement; and
§ -2 Prohibited practices; home loans. It shall be a prohibited practice for any creditor, in connection with a home loan, to engage in any of the following practices:
(1) Financing, directly or indirectly, either:
(A) Credit life, credit disability, credit unemployment, credit property, or any other life or health insurance; or
(B) 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 on a monthly basis shall not be considered financed by the creditor;
(2) Engaging in the unfair act or practice of flipping a home loan;
(3) Recommending or encouraging default on an existing loan or other debt prior to and in connection with the closing or planned closing of a home loan that refinances all or any portion of such existing loan or debt;
(4) Charging a late payment fee except under the following conditions:
(A) The late payment fee shall not be in excess of five per cent of the amount of the payment past due;
(B) The fee shall be assessed for a payment past due for fifteen days or more;
(C) The fee shall not be charged more than once with respect to a single late payment; provided that if a late payment charge is deducted from a payment made on the loan, and the deduction causes a subsequent default on a subsequent payment, no late payment charge may be imposed for such default; and provided further that if a late payment charge has been once imposed with respect to a particular late payment, no charge shall be imposed with respect to any future payment that would have been timely and sufficient, but for the previous default;
(D) No fee may be charged unless the creditor notifies the borrower within forty-five days following the date the payment was due that a late payment charge has been imposed for a particular late payment; provided that no late payment charge may be collected from any borrower if the borrower informs the creditor that nonpayment of an installment is in dispute and presents proof of payment within forty-five days of receipt of the creditor’s notice of the late charge; and
(E) The creditor shall treat each and every payment as posted on the same date as it was received by the creditor, servicer, creditor’s agent, or at the address provided to the borrower by the creditor, servicer, or the creditor’s agent for making payments;
(5) Including or causing to be included in a home loan application or any other loan-related document, directly or indirectly, a provision that permits the creditor, in the creditor's sole discretion, to accelerate the indebtedness; provided that this paragraph shall not prohibit acceleration of the loan in good faith due to the borrower’s failure to abide by the material terms of the loan;
(6) Charging a fee for informing or transmitting to any person the balance due to pay off a home loan or to provide a release upon prepayment; provided that payoff balances shall be provided within a reasonable time, but in any event no more than seven business days after the request;
(7) Charging a fee for a product or service where the product or service is not actually provided, or misrepresent the amount charged by or paid to a third party for a product or service;
(8) Including or causing to be included in a home loan application or any other loan-related document, directly or indirectly, any false or misleading information regarding a borrower including, without limitation, information concerning the borrower’s income or ability to repay the loan;
(9) Making or causing to be made, directly or indirectly, any false, deceptive, or misleading statement or representation in connection with a home loan transaction including, without limitation, a false, deceptive, or misleading statement or representation regarding the borrower’s ability to qualify for any home loan product, or regarding the value of the borrower’s property; or
(10) Asking or causing to be asked, directly or indirectly, a borrower to sign any loan-related document in which blanks are left to be filled in after the loan document is signed by the borrower.
§ -3 Prohibited practices; high-cost home loans. In addition to the prohibitions in section -2, it shall be a prohibited practice for any creditor, in connection with a high-cost home loan, to engage in any of the following practices:
(1) Financing, directly or indirectly, any fee or charge included in points and fees;
(2) Charging or causing the high-cost home loan document to include prepayment fees or penalties that exceed in the aggregate:
(A) In the first twelve months after the loan closing, more than two per cent of the loan amount prepaid; or
(B) In the second twelve months after the loan closing, more than one per cent of the amount prepaid; provided that no prepayment penalty shall be contracted for after the second year following the loan closing;
(3) Charging or causing the high-cost home loan document to contain a scheduled payment that is more than twice as large as the average of earlier scheduled payments; provided that this paragraph shall not apply when the payment schedule is adjusted to the seasonal or irregular income of the borrower;
(4) Charging or causing the high-cost home loan document to include payment terms under which the outstanding principal balance will increase at any time over the course of the loan because the regular periodic payments do not cover the full amount of interest due;
(5) Charging or causing the high-cost home loan document to include a provision that increases the interest rate after default; provided that this paragraph shall not apply to interest rate changes in a variable rate loan otherwise consistent with the provisions of the loan documents; and provided further that the change in the interest rate shall not be triggered by the event of default or the acceleration of the indebtedness;
(6) Charging or causing the high-cost home loan document to include terms under which more than two periodic payments required under the loan are consolidated and paid in advance from the loan proceeds provided to the borrower;
(7) Causing the high-cost home loan to be subject to a mandatory arbitration clause that limits in any way the right of the borrower to seek relief through the judicial process for any and all claims and defenses the borrower may have against the creditor, broker, or other party involved in the loan transaction;
(8) Making a high-cost home loan without first receiving certification from a counselor approved by the United States Department of Housing and Urban Development, a state housing financing agency, or the regulatory agency that has jurisdiction over the creditor, that the borrower has received counseling on the advisability of the loan transaction;
(9) Making a high-cost home loan without due regard to repayment ability; provided that a creditor who follows the debt-to-income ratio listed in 38 C.F.R. section 36.4337(c)(1) and as defined in 38 C.F.R. section 36.4337(d) and follows the residual income guidelines established in 38 C.F.R. section 36.4337(e) and VA Form 26-6393 shall benefit from a rebuttable presumption that the creditor made the loan with due regard to repayment ability;
(10) Paying or causing to pay a contractor under a home-improvement contract from the proceeds of a high-cost home loan, unless:
(A) The creditor is presented with a signed and dated completion certificate showing that the home improvements have been completed; and
(B) The instrument is payable:
(i) To the borrower;
(ii) Jointly to the borrower and the contractor; or
(iii) 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;
(11) Charging or causing to be charged 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.
§ -4 Right to cure. (a) If a creditor asserts that grounds for acceleration exist and requires the payment in full of all sums secured by the security instrument, the borrower, or anyone authorized to act on the borrower’s behalf, shall have the right at any time, up to the time title is transferred by means of foreclosure, by judicial proceeding and sale or otherwise, to cure the default and reinstate the home loan by tendering the amount or performance as specified in this section. Cure of default as provided in this section shall reinstate the borrower to the same position as if the default had not occurred and shall nullify, as of the date of the cure, any acceleration of any obligation under the security instrument or note arising from the default.
(b) Before any action filed to foreclose on the home or other action is taken to seize or transfer ownership of the home, a notice of the right to cure the default shall be delivered to the borrower informing the borrower of the following:
(1) The nature of default claimed on the home loan, and of the borrower’s right to cure the default by paying the sum of money required to cure the default; provided that a creditor or servicer shall not refuse to accept any partial payment made or tendered in response to the notice; and provided further that if the amount necessary to cure the default will change during the thirty-day period after the effective date of the notice due to the application of a daily interest rate or the addition of late fees as allowed by this chapter, the notice shall give sufficient information to enable the borrower to calculate the amount at any point during the thirty-day period;
(2) The name, address, and telephone number of a person to whom the payment or tender shall be made, and the date by which the borrower shall cure the default to avoid acceleration and initiation of foreclosure, or other action to seize the home; provided that the date shall not be less than thirty days after the date the notice is effective;
(3) That if the borrower does not cure the default by the date specified, the creditor may take steps to terminate the borrower’s ownership in the property by requiring payment in full of the home loan and commencing a foreclosure proceeding or other action to seize the home; and
(4) The name and address of the creditor and the telephone number of a representative of the creditor whom the borrower may contact if the borrower disagrees with the creditor’s assertion that a default has occurred or the correctness of the creditor’s calculation of the amount required to cure the default.
(c) To cure a default under this section, a borrower shall not be required to pay any charge, fee, or penalty attributable to the exercise of the right to cure a default as provided for in this section, other than the fees specifically allowed by this section. The borrower shall not be liable for any attorney fees relating to the borrower’s default that are incurred by the lender prior to or during the thirty-day period set forth in paragraph (b)(2), nor for any fees in excess of $100 that are incurred by the lender after the expiration of the thirty-day period but prior to the time the lender files a foreclosure action or takes other action to seize or transfer ownership of the home. After the lender files a foreclosure action or takes other action to seize or transfer ownership of the home, the borrower shall only be liable for attorney fees that are reasonable and actually incurred by the lender based on a reasonable hourly rate and a reasonable number of hours.
(d) If a default is cured prior to the initiation of any action to foreclose or seize the residence, the creditor shall not institute the foreclosure proceeding or other action for that default. If a default is cured after the initiation of any action to foreclose, the creditor shall take such steps as are necessary to terminate the foreclosure proceeding or other action. Any creditor making a home loan who has the legal right to foreclose shall use the judicial foreclosure procedures of the state in which the property securing the loan is located. The borrower shall have the right to assert in a judicial foreclosure proceeding or other action the nonexistence of a default and any other claim or defense to acceleration and foreclosure, including any based on a violation of this chapter, though no such claim or defense shall be deemed a compulsory counterclaim.
(e) Any creditor making a high-cost home loan that has the legal right to foreclose shall use the judicial foreclosure procedures of the state in which the property securing the loan is located. The borrower shall have the right to assert in the proceeding the nonexistence of a default and any other claim or defense to acceleration and foreclosure, including any claim or defense based on a violation of this chapter, though no such claim or defense shall be deemed a compulsory counterclaim.
§ -5 Preservation and enforcement of claims and defenses. (a) Notwithstanding any other law to the contrary, where a home loan was made, arranged, or assigned by a person selling either a manufactured home, or home improvements to the dwelling of a borrower, the borrower may assert all affirmative claims and any defenses that the borrower may have against the seller or home improvement contractor against the lender, any assignee, holder, or servicer, in any capacity.
(b) Notwithstanding any other law to the contrary, the remedies provided in section -7 shall apply to the creditor, any director, officer, employee, or controlling stockholder of, or agent for, a creditor who personally participated in the making or approving of a high-cost home loan, and any other person to whom this chapter applies and who violated any requirement of this chapter. 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 or broker of the loan.
(c) Notwithstanding any other law to the contrary, a borrower in default more than sixty days or in foreclosure may assert a violation of this chapter by way of offset:
(1) As an original action;
(2) As a defense or counterclaim to an action to collect amounts owed; or
(3) To obtain possession of the home secured by the home loan.
§ -6 No subterfuge. It shall be a violation of this chapter for any person to attempt to avoid the application of this chapter by dividing any home loan transaction into separate parts for this purpose, or engaging in any other subterfuge.
§ -7 Remedies for violations. (a) Any person who engages in any act or practice prohibited by this chapter shall be deemed to have engaged in an unfair method of competition or unfair or deceptive act or practice in the conduct of any trade or commerce within the meaning of section 480-2, and each act or practice shall constitute a separate violation.
(b) Any person found by a preponderance of the evidence to have violated this chapter shall be liable to the borrower for the following:
(1) Actual damages sustained by the borrower, including consequential and incidental damages; provided that the borrower shall not be required to demonstrate reliance to receive actual damages;
(2) Statutory damages equal to the finance charges agreed to in the home loan agreement, plus ten per cent of the amount financed;
(3) Punitive damages, when the violation was malicious or reckless; and
(4) Reasonable attorneys’ fees together with the costs of suit.
(c) A borrower may bring proceedings to enjoin any act or practice prohibited by this chapter and to obtain declaratory and other equitable relief as the court deems appropriate, and if the decree is for the borrower, the borrower shall recover reasonable attorneys’ fees together with the costs of suit.
(d) Any home loan agreement in violation of this chapter shall be void and not be enforceable at law or in equity. When a home loan agreement is voided pursuant to this section, the creditor shall have no right to collect, receive, or retain any principal, interest, or other charges whatsoever with respect to the loan, and the borrower may recover any payments made under the agreement.
(e) The right of rescission granted under 15 U.S.C. section 1601 et seq. for violations of that law and all other remedies provided in this chapter shall be available to a borrower by way of recoupment against a party foreclosing on the home loan or collecting on the loan, at any time during the term of the loan.
(f) The remedies provided in this section shall not be the exclusive remedies available to a borrower, nor must the borrower exhaust any administrative remedies provided under any applicable law before proceeding under this section.
(g) Any person, including any principal, manager, director, officer, agent, servant, or employee of the creditor, who knowingly violates this chapter is guilty of a misdemeanor and, on conviction, is punishable:
(1) If a natural person, by a fine not exceeding $2,000 or a higher amount equal to double the pecuniary gain derived from the offense, or by imprisonment not exceeding one year, or by both fine and imprisonment; or
(2) If, in the discretion of the court, the person is not a natural person, by a fine not exceeding $ or a higher amount equal to double the pecuniary gain derived from the offense.
(h) The remedies provided in this section shall be cumulative.
(i) A creditor in a home loan who, when acting in good faith, fails to comply with the provisions of this chapter shall not be deemed to have violated this chapter if the creditor establishes that either:
(1) Within thirty days of the loan closing, and prior to receiving any notice from the borrower of the compliance failure, the creditor has made appropriate restitution to the borrower, and appropriate adjustments are made to the loan; or
(2) Within sixty days of the loan closing and prior to receiving any notice from the borrower of the compliance failure, and the compliance failure was not intentional nor did it result from a bona fide error notwithstanding the maintenance of procedures reasonably adopted to avoid such errors, the borrower is notified of the compliance failure, appropriate restitution is made to the borrower, and appropriate adjustments are made to the loan; provided that bona fide errors may include clerical, calculation, computer malfunction and programming, and printing errors; and provided further that an error of legal judgment with respect to a person's obligations under this section shall not be a bona fide error.
§ -8 Court and venue. Any action or proceeding, whether civil or criminal, authorized by this chapter shall be brought in the circuit court of the circuit in which the real property used to secure the home loan is situated.
§ -9 Limitation of actions. Any action to enforce a cause of action arising under this chapter shall be barred unless commenced within four years after the cause of action accrues, except as otherwise provided in section -5 and section
-7. For the purpose of this section, a cause of action for a continuing violation is deemed to accrue at any time during the period of the violation.
§ -10 Remedies not exclusive. The remedies provided for in this chapter are in addition to and not exclusive of any other remedies provided by law.
§ -11 Interpretation. This chapter shall be liberally construed to effectuate its purpose of protecting the homes and equity of individual borrowers. This chapter shall be construed as a consumer protection statute for all purposes."
SECTION 3. If any provision of this Act, or the application thereof to any person or circumstance is held invalid, the invalidity does not affect other provisions or applications of the Act which can be given effect without the invalid provision or application, and to this end the provisions of this Act are severable.
SECTION 4. This Act does not affect rights and duties that matured, penalties that were incurred, and proceedings that were begun, before its effective date.
SECTION 5. This Act shall take effect upon its approval.