STAND. COM. REP. 740

Honolulu, Hawaii

, 2003

RE: H.B. No. 1438

H.D. 2

 

 

 

Honorable Calvin K.Y. Say

Speaker, House of Representatives

Twenty-Second State Legislature

Regular Session of 2003

State of Hawaii

Sir:

Your Committees on Consumer Protection and Commerce and Judiciary, to which was referred H.B. No. 1438, H.D. 1, entitled:

"A BILL FOR AN ACT RELATING TO HOME LOAN PROTECTION,"

beg leave to report as follows:

The purpose of this bill is to protect consumers from predatory lenders. The bill adds provisions to chapter 454, Hawaii Revised Statutes (HRS), which:

(1) Apply to mortgage brokers and solicitors but exclude banks, trust companies, building and loan associations, pension trusts, credit unions, insurance companies, financial services loan companies, and federally licensed small business investment companies authorized to do business in the State;

(2) Regulate "high cost home loans," as defined under 15 U.S.C. 1602 (aa), which are loans secured by the consumer's principal dwelling:

(A) Other than a residential mortgage transaction, a reverse mortgage transaction, or a transaction under an open end credit plan; and

(B) At 10 percent over comparable Treasury securities or in which total points and fees exceed the greater of eight percent of the total loan amount or $400;

(3) Require a written disclosure to borrowers that the borrower could lose their home and any equity in the home if they fail to meet obligations under the loan;

(4) Establish a mortgage broker or solicitor's fiduciary duty to the borrower;

(5) Prohibit mortgage brokers and solicitors from engaging in specified practices with regard to high cost home loans;

(6) Allow application of existing chapter penalties of a $1,000 fine, one year of imprisonment, and invalidation of the contract; and

(7) Restrict fees, commissions, and charges on the loan transaction to those related to the actual amount of money made available to the borrower through the loan.

Testimony in support of this bill was received from the Hawaii Credit Union League and ILWU Local 142. The Department of Commerce and Consumer Affairs, Hawaii Bankers Association, and Hawaii Financial Services Association supported the intent of this bill. Testimony in opposition was submitted by the Hawaii Association of Mortgage Brokers, Kokua Council, Hawaii Coalition for Responsible Lending, Legal Aid Society of Hawaii, and a concerned individual. Mortgage Bankers Association of Hawaii provided comments.

Your Committees find that the home is the most important financial asset of Hawaii's families. Through their home, families pay for college and retirement and pass their life's earnings on to future generations. Homeowner victims of predatory lenders often place their trust in a loan arranger only to be sold a loan providing little benefit, containing unfair terms, and resulting in the loss of their home and its equity.

Your Committees have heard reports of predatory lending practices resulting in the devastating loss of homes on the island of Hawaii and on Oahu, and are aware that there is a need for meaningful remedies to deter and prevent predatory lending practices and protect Hawaii's families.

In working with the community to develop a solution for this problem, your Committees heard that predatory lending practices involve loan terms that may be abusive in some circumstances, yet legitimate and reasonable in others, making predatory loans difficult to identify and regulate.

Accordingly, your Committees heard concerns that both the original and amended versions of this bill will make useful, reasonable loans unavailable to those consumers for whom the loans may be a lifeline toward financial health. There were also concerns that both versions of this bill might have a severe, negative impact on Hawaii's legitimate loan market, on mortgage lending, and ultimately, on Hawaii's real estate market--the one bright spot in Hawaii's economy.

Upon consideration, your Committees have replaced the amended version of this bill with its original, unamended contents and have changed its effective date to July 1, 2099, to allow further discussion. As amended, the bill contains many of the same provisions of H.B. No. 1438, H.D. 1 (HD1). However, the amended bill:

(1) Establishes a new chapter;

(2) Applies, but is not limited to mortgage brokers and solicitors, defined in the same language as in chapter 454, HRS, without the exclusions contained in the HD1;

(3) Applies to home loans including any mortgage on the borrower's principal dwelling place, as opposed to high cost home loans;

(4) Provides that borrowers must be counseled by the United States Department of Housing and Urban Development for "high-cost" loans defined as mortgages falling under chapter 454, HRS, that exceed eight percent for first-lien loans, or ten percent for subordinate-lien loans, or where total points and fees exceed five percent of the total loan amount, whereas the HD1 requires counseling for all high cost loans as defined in the HD1;

(5) Provides that violation of the chapter is an unfair method of competition of unfair or deceptive act or practice subject to penalties including a $500 to $10,000 fine and invalidation of the contract, and in a suit brought by a consumer, three-fold damages;

(6) Allows the consumer to be awarded actual damages, twice the fees paid under the home loan, punitive damages, and costs and attorney's fees;

(7) Allows mortgage brokers acting in good faith to avoid penalties through notice and appropriate restitution to the borrower; and

(8) Removes the restriction on fees and commissions contained in the HD1.

In amending this bill to replace its contents with those of the original H.B. No. 1438, your Committees do not intend to validate or show a preference for the contents of H.B. No. 1438, which your Committees understand to be in many ways too broad and sweeping to usefully address the problem of predatory lending.

Instead, your Committees have returned to the original version of this bill to signal your Committees' intent to engage in a comprehensive discussion of all the issues raised by this matter. Your Committees do so in hopes of arriving at a workable solution that protects Hawaii's homeowners from the harsh outcome of predatory lending practices. As discussion of this matter continues, your Committees will remain mindful of the concerns of Hawaii's business community, and of the Legislature's stewardship of Hawaii's economy.

As affirmed by the records of votes of the members of your Committees on Consumer Protection and Commerce and Judiciary that are attached to this report, your Committees are in accord with the intent and purpose of H.B. No. 1438, H.D. 1, as amended herein, and recommend that it pass Third Reading in the form attached hereto as H.B. No. 1438, H.D. 2.

Respectfully submitted on behalf of the members of the Committees on Consumer Protection and Commerce and Judiciary,

 

____________________________

ERIC G. HAMAKAWA, Chair

____________________________

KENNETH T. HIRAKI, Chair