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) "Bridge loan" means temporary or short-term 1-10 financing requiring payment of only interest until the entire 1-11 unpaid balance is due. 1-12 (2) "Home loan" means a loan that is: 1-13 (A) made to one or more individuals for 1-14 personal, family, or household purposes; and 1-15 (B) secured in whole or part by: 1-16 (i) a manufactured home, as defined by 1-17 Section 347.002, used or to be used as the borrower's principal 1-18 residence; or 1-19 (ii) real property improved by a dwelling 1-20 designed for occupancy by four or fewer families and used or to be 1-21 used as the borrower's principal residence. 1-22 (3) "Restructure" means a change in the payment 1-23 schedule or other terms of a home loan as a result of the 1-24 borrower's default. 1-25 Sec. 343.002. APPLICABILITY. This chapter does not apply 2-1 to: 2-2 (1) a reverse mortgage; or 2-3 (2) an open-end account, as defined by Section 2-4 301.002. 2-5 Sec. 343.003. CONFLICT WITH OTHER PROVISIONS OF TITLE. If 2-6 this chapter conflicts with another provision of this title, this 2-7 chapter controls. 2-8 (Sections 343.004-343.100 reserved for expansion 2-9 SUBCHAPTER B. PROVISIONS RELATING TO HOME LOANS IN GENERAL 2-10 Sec. 343.101. REFINANCING. (a) For purposes of this 2-11 section, a low-rate home loan is a home loan that at its inception 2-12 carries an interest rate two percentage points or more below the 2-13 yield on treasury securities having comparable periods of maturity 2-14 to the loan maturity, except that if the loan's interest rate is a 2-15 discounted introductory rate or a rate that automatically steps up 2-16 over time, the fully indexed rate or the fully stepped-up rate, as 2-17 appropriate, shall be used instead of the rate at the loan's 2-18 inception to determine whether the loan is a low-rate loan. 2-19 (b) A lender may not replace or consolidate a low-rate home 2-20 loan directly made by a government or nonprofit lender before the 2-21 seventh anniversary of the date of the loan unless the new or 2-22 consolidated loan has a lower interest rate and requires payment of 2-23 a lesser amount of points and fees than the original loan or is a 2-24 restructure to avoid foreclosure. 2-25 Sec. 343.102. DISCLOSURE IN CONNECTION WITH CERTAIN HOME 2-26 LOANS. (a) For a home loan with an interest rate of 12 percent or 3-1 greater a year, when the lender makes the disclosure required under 3-2 the Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 3-3 Section 2601 et seq.), as amended, for the good faith estimate, or 3-4 if that Act does not apply, three business days after the date the 3-5 application is made, the lender shall also provide to the borrower: 3-6 (1) a statement regarding the value of mortgage 3-7 counseling before taking out a home loan; 3-8 (2) a list of the nearest available housing counseling 3-9 agencies approved by the United States Department of Housing and 3-10 Urban Development; 3-11 (3) a list of other resources where mortgage 3-12 information can be found, including toll-free telephone numbers and 3-13 online resources; and 3-14 (4) other disclosures required by the finance 3-15 commission, including an official notice regarding high-cost home 3-16 loans. 3-17 (b) This section expires September 1, 2003. 3-18 Sec. 343.103. PENALTIES FOR FAILURE TO PROVIDE DISCLOSURE. 3-19 (a) A person who knowingly and wilfully violates Section 343.102 3-20 is liable to the aggrieved borrower for: 3-21 (1) the actual damages caused by the violation; 3-22 (2) punitive damages not to exceed $10,000 in an 3-23 action brought by the aggrieved borrower; and 3-24 (3) court costs. 3-25 (b) This section expires September 1, 2003. 3-26 Sec. 343.104. RESTRICTIONS ON SINGLE PREMIUM CREDIT 4-1 INSURANCE. A lender may not offer any individual or group credit 4-2 life, disability, or unemployment insurance on a prepaid single 4-3 premium basis in conjunction with a home loan unless the following 4-4 notice is provided to each applicant for the loan by hand delivery 4-5 or mail to the applicant not later than the third business day 4-6 after the date the applicant's application for a home loan is 4-7 received: 4-8 INSURANCE NOTICE TO APPLICANT 4-9 You may elect to purchase credit life, 4-10 disability, or involuntary unemployment insurance in 4-11 conjunction with this mortgage loan. If you elect to 4-12 purchase this insurance coverage, you may pay for it 4-13 either on a monthly premium basis or with a single 4-14 premium payment at the time the lender closes this 4-15 loan. If you choose the single premium payment, the 4-16 cost of the premium will be financed at the interest 4-17 rate provided for in the mortgage loan. 4-18 This insurance is NOT required as a condition of 4-19 closing the mortgage loan and will be included with the 4-20 loan only at your request. 4-21 You have the right to cancel this credit 4-22 insurance once purchased. If you cancel it within 30 4-23 days of the date of your loan, you will receive either 4-24 a full refund or a credit against your loan account. 4-25 If you cancel this insurance at any other time, you 4-26 will receive either a refund or credit against your 5-1 loan account of any unearned premium. YOU MUST CANCEL 5-2 WITHIN 30 DAYS OF THE DATE OF THE LOAN TO RECEIVE A 5-3 FULL REFUND OR CREDIT. 5-4 To assist you in making an informed choice, the 5-5 following estimates of premiums are being provided 5-6 along with an example of the cost of financing. The 5-7 examples assume that the term of the insurance product 5-8 is ____ years and that the interest rate is ______ 5-9 percent (a rate that has recently been available for 5-10 the type of loan you are seeking). PLEASE NOTE THAT 5-11 THE ACTUAL LOAN TERMS YOU QUALIFY FOR MAY VARY FROM 5-12 THIS EXAMPLE. "Total amount paid" is the amount that 5-13 would be paid if you financed only the total insurance 5-14 premium for a ___ year period and is equal to the 5-15 amount you would have paid if you made all scheduled 5-16 payments. This is NOT the total of payments on your 5-17 loan. 5-18 CREDIT LIFE INSURANCE: Estimated premium of $_______ 5-19 DISABILITY INSURANCE: Estimated premium of $_______ 5-20 INVOLUNTARY UNEMPLOYMENT INSURANCE: Estimated premium 5-21 of $________ 5-22 TOTAL INSURANCE PREMIUMS: $_______ 5-23 TOTAL AMOUNT PAID: $_______ 5-24 (Sections 343.105-343.200 reserved for expansion 5-25 SUBCHAPTER C. HIGH-COST HOME LOANS 5-26 Sec. 343.201. DEFINITIONS. In this subchapter: 6-1 (1) "High-cost home loan" means a loan that: 6-2 (A) is made to one or more individuals for 6-3 personal, family, or household purposes; 6-4 (B) is secured in whole or part by: 6-5 (i) a manufactured home, as defined by 6-6 Section 347.002, used or to be used as the borrower's principal 6-7 residence; or 6-8 (ii) real property improved by a dwelling 6-9 designed for occupancy by four or fewer families and used or to be 6-10 used as the borrower's principal residence; 6-11 (C) has a principal amount equal to or less than 6-12 one-half of the maximum conventional loan amount for first 6-13 mortgages as established and adjusted by the Federal National 6-14 Mortgage Association; 6-15 (D) is not: 6-16 (i) a reverse mortgage; or 6-17 (ii) an open-end account, as defined by 6-18 Section 301.002; and 6-19 (E) is a credit transaction described by 12 6-20 C.F.R. Section 226.32, as amended, except that the term includes a 6-21 residential mortgage transaction, as defined by 12 C.F.R. Section 6-22 226.2, as amended, if the total loan amount is $20,000 or more and: 6-23 (i) the annual percentage rate exceeds the 6-24 rate indicated in 12 C.F.R. Section 226.32(a)(1)(i), as amended; or 6-25 (ii) the total points and fees payable by 6-26 the consumer at or before loan closing will exceed the amount 7-1 indicated in 12 C.F.R. Section 226.32(a)(1)(ii), as amended. 7-2 (2) "Points and fees" has the meaning assigned by 12 7-3 C.F.R. Section 226.32(b), as amended. 7-4 Sec. 343.202. BALLOON PAYMENT. A high-cost home loan may 7-5 not contain a provision for a scheduled payment that is more than 7-6 twice as large as the average of earlier scheduled monthly 7-7 payments, unless the balloon payment becomes due not less than 60 7-8 months after the date of the loan. This prohibition does not apply 7-9 if the payment schedule is adjusted to account for the seasonal or 7-10 otherwise irregular income of the borrower or if the loan is a 7-11 bridge loan in connection with the acquisition or construction of a 7-12 dwelling intended to become the borrower's principal dwelling. 7-13 Sec. 343.203. NEGATIVE AMORTIZATION. A high-cost home loan 7-14 may not provide for a payment schedule with regular periodic 7-15 payments that cause the principal balance to increase, except that 7-16 this section does not prohibit negative amortization as a 7-17 consequence of a temporary forbearance, bridge loan, or restructure 7-18 sought by the borrower. 7-19 Sec. 343.204. CONSIDERATION OF OBLIGOR'S PAYMENT ABILITY. 7-20 (a) In this section, "obligor" means a person obligated to pay a 7-21 loan, including a borrower, cosigner, or guarantor. If more than 7-22 one person is obligated to pay a loan, the term refers to those 7-23 persons collectively. 7-24 (b) A lender may not engage in a pattern or practice of 7-25 extending credit to consumers under high-cost home loans based on 7-26 the consumers' collateral without regard to the obligor's repayment 8-1 ability, including the obligor's current and expected income, 8-2 current obligations, employment status, and other financial 8-3 resources, other than the obligor's equity in the dwelling that 8-4 secures repayment of the loan. 8-5 Sec. 343.205. PREPAYMENT PENALTIES PROHIBITED. A lender may 8-6 not make a high-cost home loan containing a provision for a 8-7 prepayment penalty. 8-8 SECTION 2. (a) This Act takes effect September 1, 2001, 8-9 and, except as provided by Subsection (b) of this section, applies 8-10 only to a loan closed on or after that date. 8-11 (b) Section 343.102, Finance Code, as added by this Act, 8-12 applies only to a home loan application received on or after 8-13 September 1, 2001. Section 343.104, Finance Code, as added by this 8-14 Act, applies only to a loan closed on or after the later of January 8-15 1, 2002, or the date the Texas Department of Insurance approves a 8-16 product allowing lenders to offer individual or group credit life 8-17 or credit disability insurance complying with that section and 8-18 certifies to the Finance Commission of Texas that this coverage is 8-19 available. _______________________________ _______________________________ President of the Senate Speaker of the House I hereby certify that S.B. No. 1581 passed the Senate on May 1, 2001, by a viva-voce vote. _______________________________ Secretary of the Senate I hereby certify that S.B. No. 1581 passed the House on May 23, 2001, by a non-record vote. _______________________________ Chief Clerk of the House Approved: _______________________________ Date _______________________________ Governor