By Olivo H.B. No. 1437 77R3326 DWS-D A BILL TO BE ENTITLED 1-1 AN ACT 1-2 relating to certain practices in connection with a home loan. 1-3 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: 1-4 SECTION 1. Subtitle B, Title 4, Finance Code, is amended by 1-5 adding Chapter 343 to read as follows: 1-6 CHAPTER 343. HOME LOANS 1-7 SUBCHAPTER A. GENERAL PROVISIONS 1-8 Sec. 343.001. DEFINITIONS. In this chapter: 1-9 (1) "Affiliate" means a company that controls, is 1-10 controlled by, or is under common control with another company, as 1-11 provided by the Bank Holding Company Act of 1956 (12 U.S.C. Section 1-12 1841 et seq.), as amended. 1-13 (2) "Annual percentage rate" means the annual 1-14 percentage rate for a loan computed as provided by the Truth in 1-15 Lending Act (15 U.S.C. Section 1601 et seq.), as amended, and the 1-16 regulations adopted under that Act. 1-17 (3) "High cost home loan" means a home loan in which: 1-18 (A) the annual percentage rate of the home loan 1-19 after the expiration of the period, if any, during which a special 1-20 introductory rate applies, exceeds by 6.5 percent or more the 1-21 weekly average yield on U.S. Treasury securities adjusted to a 1-22 constant maturity of five years, as made available by the Federal 1-23 Reserve Board, as of the week preceding the week in which the 1-24 interest rate for the loan is established; or 2-1 (B) the total points and fees on the loan exceed 2-2 four percent of the total loan amount. 2-3 (4) "Home loan" means a loan to one or more 2-4 individuals, other than a reverse mortgage, in which: 2-5 (A) the principal amount does not exceed the 2-6 conforming loan size limit for a single-family dwelling established 2-7 by the Federal National Mortgage Association; 2-8 (B) the debt is incurred primarily for personal, 2-9 family, or household purposes; and 2-10 (C) the loan is secured by a mortgage or deed of 2-11 trust on real property on which is located or is to be located one 2-12 or more structures designed principally for occupancy by four or 2-13 fewer families that are or will be occupied by the borrower as the 2-14 borrower's principal residence. 2-15 (5) "Lender" means an entity that originated, or acted 2-16 as an intermediary between originators and borrowers, on more than 2-17 five home loans within the preceding 12-month period. 2-18 (6) "Obligor" means each borrower, cosigner, or 2-19 guarantor obligated to pay a loan. 2-20 Sec. 343.002. POINTS AND FEES. (a) For the purposes of this 2-21 chapter, the following are points and fees: 2-22 (1) items required to be disclosed under 12 C.F.R. 2-23 Sections 226.4(a) and (b), as amended, except interest or 2-24 time-price differential; 2-25 (2) charges for items listed under 12 C.F.R. Section 2-26 226.4(c)(7), as amended, if the lender receives direct or indirect 2-27 compensation in connection with the charge or the charge is paid to 3-1 an affiliate of the lender; and 3-2 (3) compensation paid directly or indirectly to a 3-3 mortgage broker, including a broker that originates a loan in its 3-4 own name in a table-funded transaction. 3-5 (b) Points and fees do not include: 3-6 (1) taxes, filing fees, recording fees, and fees paid 3-7 to a public official for determining the existence of or 3-8 perfecting, releasing, or satisfying a security interest; or 3-9 (2) amounts paid to a person other than a lender, an 3-10 affiliate of a lender, a mortgage broker, or an affiliate of a 3-11 mortgage broker for: 3-12 (A) flood certification fees; 3-13 (B) pest infestation and flood determination 3-14 fees; 3-15 (C) appraisal fees; 3-16 (D) fees for inspections performed before 3-17 closing; 3-18 (E) credit reports; 3-19 (F) surveys; 3-20 (G) attorney's fees, if the borrower has the 3-21 right to select the attorney; 3-22 (H) notary fees; 3-23 (I) escrow charges, if not included under 3-24 Subsection (a)(1); 3-25 (J) title insurance premiums; and 3-26 (K) fire insurance and flood insurance premiums, 3-27 if the conditions in 12 C.F.R. Section 226.4(d)(2), as amended, are 4-1 met. 4-2 Sec. 343.003. TOTAL LOAN AMOUNT. For purposes of this 4-3 chapter, the total loan amount for a loan shall be computed as 4-4 provided by the Federal Reserve Board's Official Staff Commentary 4-5 to 12 C.F.R. Section 226.32, as amended. 4-6 SUBCHAPTER B. PROHIBITIONS AND REQUIREMENTS 4-7 REGARDING HOME LOANS 4-8 Sec. 343.101. PREPAYMENT PENALTIES. (a) A lender may not 4-9 make a home loan that contains a prepayment penalty that extends 4-10 for a longer period than any initial or introductory interest rate 4-11 of the loan. 4-12 (b) A lender may not make a home loan that contains a 4-13 prepayment penalty payable on refinancing of the home loan if the 4-14 lender on the refinancing is the same as, or an affiliate of, the 4-15 lender on the loan being refinanced. 4-16 Sec. 343.102. RECOMMENDING PAYMENT NOT BE MADE ON PRIOR 4-17 DEBT. A lender may not recommend or encourage that payment not be 4-18 made on an existing debt before and in connection with the closing 4-19 of a home loan that refinances all or part of the existing debt. 4-20 Sec. 343.103. CHARGE FOR PRODUCT OR SERVICE. A lender may 4-21 not charge a fee for a product or service not provided or 4-22 misrepresent the amount charged by or paid to another person for a 4-23 product or service. 4-24 Sec. 343.104. FALSE, MISLEADING, OR DECEPTIVE STATEMENT OR 4-25 REPRESENTATION. A lender, appraiser, or real estate agent may not 4-26 make or cause to be made, directly or indirectly, a false, 4-27 deceptive, or misleading statement or representation in connection 5-1 with a home loan. A statement or representation is deceptive or 5-2 misleading if it has the capacity or tendency to deceive or mislead 5-3 a borrower or potential borrower, considering: 5-4 (1) the overall impression that the statement or 5-5 representation reasonably creates; and 5-6 (2) the particular type of audience to which the 5-7 statement or representation is directed and whether the statement 5-8 or representation may be reasonably comprehended by that audience. 5-9 Sec. 343.105. INFLUENCING APPRAISAL. A lender may not 5-10 directly or indirectly compensate, coerce, or intimidate an 5-11 appraiser for the purpose of influencing the independent judgment 5-12 of the appraiser with respect to the value of real property that is 5-13 to be covered by a home loan or is being offered as security for a 5-14 home loan. 5-15 Sec. 343.106. CREDIT INSURANCE. A lender may not require or 5-16 allow the advance collection of: 5-17 (1) a premium, on a single premium basis, for any 5-18 credit life insurance, credit health and life insurance, or similar 5-19 insurance; or 5-20 (2) a fee for a debt cancellation or suspension 5-21 agreement in connection with a home loan, regardless of whether the 5-22 premium or fee is paid directly by the borrower or financed through 5-23 the loan. 5-24 Sec. 343.107. DOCUMENT WITH BLANKS. A home loan document in 5-25 which blanks are left to be filled in after it is signed by the 5-26 borrower is void. 5-27 Sec. 343.108. TRUTH IN LENDING DISCLOSURES. If the 6-1 discussions between the lender and the borrower on a home loan are 6-2 conducted primarily in a language other than English, before 6-3 closing the lender shall provide an additional copy of all 6-4 information required to be disclosed to the borrower under the 6-5 Truth in Lending Act (15 U.S.C. Section 1601 et seq.), as amended, 6-6 translated into the language in which the discussions were 6-7 conducted. 6-8 SUBCHAPTER C. LIMITATIONS AND PROHIBITIONS FOR HIGH COST 6-9 HOME LOANS 6-10 Sec. 343.201. BALLOON PAYMENT. A lender may not make a high 6-11 cost home loan that provides for a scheduled payment that is more 6-12 than twice as large as the average of the payments previously due, 6-13 unless the amount of the payment is determined by a provision of 6-14 the loan agreement providing for irregular payment amounts because 6-15 of the borrower's irregular income. 6-16 Sec. 343.202. ADVANCE PAYMENTS. A lender may not make a high 6-17 cost home loan that allows more than two periodic payments required 6-18 under the loan to be consolidated and paid in advance from the loan 6-19 proceeds provided to the borrower. 6-20 Sec. 343.203. REFINANCING. (a) A lender may not, in 6-21 connection with the formation or consummation of a high cost home 6-22 loan, directly or indirectly finance any points, fees, or other 6-23 charges required to be paid by the borrower in connection with the 6-24 loan if: 6-25 (1) the loan is refinancing an existing high cost home 6-26 loan; and 6-27 (2) the lender of the new loan or an affiliate of the 7-1 lender is the lender of the loan being refinanced. 7-2 (b) A lender may not refinance a home loan with a high cost 7-3 home loan unless the new loan results in a reasonable, tangible net 7-4 benefit to the borrower considering all circumstances, including 7-5 the terms of both loans, the cost of the new loan, and the 7-6 borrower's circumstances. 7-7 Sec. 343.204. ABILITY TO PAY. (a) A lender may not make a 7-8 home loan unless the lender reasonably believes when the loan is 7-9 consummated that one or more of the obligors, considered 7-10 individually or collectively, will be able to make the scheduled 7-11 payments on the obligation, based on consideration of the obligor's 7-12 income and expected income, obligations, employment status, and 7-13 other financial resources, excluding the property securing the 7-14 loan. 7-15 (b) An obligor is presumed to be able to make the scheduled 7-16 payments on the obligation if, when the loan is consummated, the 7-17 obligor's total monthly debt payments, including payments owed 7-18 under the loan, do not exceed 50 percent of the obligor's monthly 7-19 gross income, as determined from the credit application, the 7-20 obligor's financial statement, a credit report, financial 7-21 information provided to the lender by or in behalf of the obligor, 7-22 or any other reasonable information. An obligor is not presumed to 7-23 be unable to make the scheduled payments to pay the obligation 7-24 solely because a computation under this subsection results in an 7-25 amount equal to or greater than 50 percent of the obligor's monthly 7-26 gross income. 7-27 Sec. 343.205. LIMIT ON FINANCING OF FEES. A lender may not, 8-1 in connection with a high cost home loan, finance points and fees 8-2 equivalent to more than the lesser of an amount equal to three 8-3 percent of the loan amount or $600. 8-4 Sec. 343.206. ACCELERATION. A lender may not make a high 8-5 cost home loan that permits the lender to accelerate the 8-6 indebtedness, except because of default or as provided by a 8-7 due-on-sale provision or other provision of the loan documents 8-8 unrelated to the payment schedule. 8-9 Sec. 343.207. MODIFICATION OR DEFERRAL FEES. A lender may 8-10 not charge a borrower to modify, renew, extend, or amend a high 8-11 cost home loan or to defer any payment due on a high cost home 8-12 loan. 8-13 Sec. 343.208. MANDATORY ARBITRATION CLAUSE. A lender may not 8-14 make a high cost home loan containing a mandatory arbitration 8-15 clause that limits the right of the borrower to seek relief through 8-16 the judicial process. 8-17 Sec. 343.209. HOME IMPROVEMENT CONTRACTS. A lender may not 8-18 pay a contractor under a home improvement contract from the 8-19 proceeds of a high cost home loan other than: 8-20 (1) by an instrument payable to the borrower; or 8-21 (2) at the election of the borrower, through a 8-22 third-party escrow agent in accordance with terms established in a 8-23 written agreement signed by the borrower, the lender, and the 8-24 contractor before the disbursement. 8-25 Sec. 343.210. NEGATIVE AMORTIZATION. A lender may not make a 8-26 high cost home loan that contains a payment schedule with regular 8-27 periodic payments that result in an increase in the principal 9-1 balance. 9-2 Sec. 343.211. INCREASED INTEREST RATE. A lender may not make 9-3 a high cost home loan that provides for an increase in the interest 9-4 rate on default. 9-5 SUBCHAPTER D. DISCLOSURE REQUIREMENTS 9-6 Sec. 343.301. DISCLOSURE. (a) A lender may not make a high 9-7 cost home loan unless the lender provides to the borrower, not 9-8 later than the third day before the date of closing, a clear 9-9 written and oral disclosure, with the written information in at 9-10 least 14-point type, of: 9-11 (1) whether the loan provides for a prepayment penalty 9-12 and, if so, the amount, the period over which it extends, and clear 9-13 notice that the prepayment penalty must be paid if a borrower 9-14 refinances with another lender; 9-15 (2) the amount of the borrower's monthly payments; 9-16 (3) whether the loan has a variable rate and, if so, 9-17 how the variable rate might affect future monthly payments, 9-18 including specific notice of what the fully-indexed interest rate 9-19 of the loan would be at the rate of the index on the date of the 9-20 notice; 9-21 (4) loan fees to be paid by the borrower; and 9-22 (5) information regarding any payments to be made to a 9-23 third-party creditor from the loan proceeds. 9-24 (b) The notice under Subsection (a) must also include a 9-25 statement regarding the value of receiving housing counseling 9-26 before taking out a home loan and a list of the nearest available 9-27 housing counseling agencies approved by the United States 10-1 Department of Housing and Urban Development. 10-2 Sec. 343.302. NOTICE TO ASSIGNEE. A lender may not sell or 10-3 otherwise assign a home loan without furnishing the following 10-4 statement to the purchaser or assignee: "Notice: This is a home 10-5 loan subject to special rules under Chapter 343, Finance Code. 10-6 Purchasers or assignees of this loan could be liable for all claims 10-7 and defenses with respect to the mortgage that the borrower could 10-8 assert against the creditor." 10-9 SUBCHAPTER E. ATTEMPTED EVASION; UNINTENTIONAL VIOLATIONS 10-10 Sec. 343.401. EVASION OF CHAPTER. A person may not in bad 10-11 faith divide a loan transaction into separate parts or use any 10-12 other subterfuge with the intent of evading the application of 10-13 Subchapter C. 10-14 Sec. 343.402. CORRECTION; UNINTENTIONAL VIOLATION. (a) A 10-15 lender in a high cost home loan who acting in good faith fails to 10-16 comply with Subchapter C does not violate this chapter if the 10-17 lender establishes that: 10-18 (1) not later than the 30th day after the date of the 10-19 loan closing and before the filing of any action under this 10-20 chapter, the borrower is notified of the failure to comply, 10-21 appropriate restitution is made, and necessary adjustments are made 10-22 to the loan so that, at the choice of the borrower: 10-23 (A) the high cost home loan is made to satisfy 10-24 Subchapter C; or 10-25 (B) the terms of the loan are changed in a 10-26 manner beneficial to the borrower so that the loan is no longer a 10-27 high cost home loan; or 11-1 (2) the failure to comply was not intentional and 11-2 resulted from a bona fide error notwithstanding the maintenance of 11-3 procedures reasonably adapted to avoid such an error, and not later 11-4 than the 60th day after the date of discovery of the failure to 11-5 comply and before the filing of any action under this chapter or 11-6 the receipt by the lender of written notice of the failure to 11-7 comply, the borrower is notified of the failure to comply, 11-8 appropriate restitution is made, and necessary adjustments are made 11-9 to the loan so that, at the choice of the borrower: 11-10 (A) the high cost home loan is made to satisfy 11-11 Subchapter C; or 11-12 (B) the terms of the loan are changed in a 11-13 manner beneficial to the borrower so that the loan is no longer a 11-14 high cost home loan. 11-15 (b) For the purposes of this section, bona fide errors 11-16 include clerical, computational, computer malfunction and 11-17 programming, and printing errors. An error of legal judgment with 11-18 respect to a person's obligations under this chapter is not a bona 11-19 fide error. 11-20 SUBCHAPTER F. REPORTING REQUIREMENTS 11-21 Sec. 343.501. HOME MORTGAGE DISCLOSURE. A lender subject to 11-22 this chapter that is exempted from the reporting requirements of 12 11-23 U.S.C. Section 2803, as amended, because the dollar value of the 11-24 home purchase mortgages and refinancings originated by the lender 11-25 in the preceding calendar year totaled less than 10 percent of its 11-26 total loan origination volume shall report to the finance 11-27 commission the information that nonexempt lenders are required to 12-1 report under 12 U.S.C. Section 2803(b) in the format established by 12-2 the United States Department of Housing and Urban Development under 12-3 12 U.S.C. Section 2803(h)(5), as amended. 12-4 Sec. 343.502. ANNUAL PERCENTAGE RATES. (a) A lender 12-5 subject to this chapter shall report to the finance commission the 12-6 average and median annual percentage rates of mortgage loans and 12-7 home improvement loans that the lender originates, grouped 12-8 according to census tract, income level, racial characteristics, 12-9 and gender. 12-10 (b) In computing the annual percentage rate for 12-11 variable-rate loans to fulfill the requirements of Subsection (a), 12-12 the lender shall use the average annual percentage rate on the 12-13 variable-rate loan for the reporting period established under 12 12-14 U.S.C. Section 2803(d), as amended. 12-15 (c) A lender shall submit the information required under 12-16 Subsection (a) in a format similar to that required under 12 U.S.C. 12-17 Section 2803(h)(5), as amended. 12-18 SECTION 2. This Act takes effect September 1, 2001, and 12-19 applies only to a loan closed on or after that date. The reporting 12-20 requirements under Subchapter E begin with the calendar year 12-21 beginning January 1, 2002.