1-1 By: West S.B. No. 1581 1-2 (In the Senate - Filed March 9, 2001; March 14, 2001, read 1-3 first time and referred to Committee on Business and Commerce; 1-4 April 24, 2001, reported adversely, with favorable Committee 1-5 Substitute by the following vote: Yeas 5, Nays 0; April 24, 2001, 1-6 sent to printer.) 1-7 COMMITTEE SUBSTITUTE FOR S.B. No. 1581 By: Carona 1-8 A BILL TO BE ENTITLED 1-9 AN ACT 1-10 relating to certain practices in connection with a home loan. 1-11 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: 1-12 SECTION 1. Subtitle B, Title 4, Finance Code, is amended by 1-13 adding Chapter 343 to read as follows: 1-14 CHAPTER 343. HOME LOANS 1-15 SUBCHAPTER A. GENERAL PROVISIONS 1-16 Sec. 343.001. DEFINITIONS. In this chapter: 1-17 (1) "Bridge loan" means temporary or short-term 1-18 financing requiring payment of only interest until the entire 1-19 unpaid balance is due. 1-20 (2) "Home loan" means a loan that is: 1-21 (A) made to one or more individuals for 1-22 personal, family, or household purposes; and 1-23 (B) secured in whole or part by: 1-24 (i) a manufactured home, as defined by 1-25 Section 347.002, used or to be used as the borrower's principal 1-26 residence; or 1-27 (ii) real property improved by a dwelling 1-28 designed for occupancy by four or fewer families and used or to be 1-29 used as the borrower's principal residence. 1-30 (3) "Restructure" means a change in the payment 1-31 schedule or other terms of a home loan as a result of the 1-32 borrower's default. 1-33 Sec. 343.002. APPLICABILITY. This chapter does not apply 1-34 to: 1-35 (1) a reverse mortgage; or 1-36 (2) an open-end account, as defined by Section 1-37 301.002. 1-38 Sec. 343.003. CONFLICT WITH OTHER PROVISIONS OF TITLE. If 1-39 this chapter conflicts with another provision of this title, this 1-40 chapter controls. 1-41 (Sections 343.004-343.100 reserved for expansion 1-42 SUBCHAPTER B. PROVISIONS RELATING TO HOME LOANS IN GENERAL 1-43 Sec. 343.101. REFINANCING. (a) For purposes of this 1-44 section, a low-rate home loan is a home loan that at its inception 1-45 carries an interest rate two percentage points or more below the 1-46 yield on treasury securities having comparable periods of maturity 1-47 to the loan maturity, except that if the loan's interest rate is a 1-48 discounted introductory rate or a rate that automatically steps up 1-49 over time, the fully indexed rate or the fully stepped-up rate, as 1-50 appropriate, shall be used instead of the rate at the loan's 1-51 inception to determine whether the loan is a low-rate loan. 1-52 (b) A lender may not replace or consolidate a low-rate home 1-53 loan directly made by a government or nonprofit lender before the 1-54 seventh anniversary of the date of the loan unless the new or 1-55 consolidated loan has a lower interest rate and requires payment of 1-56 a lesser amount of points and fees than the original loan or is a 1-57 restructure to avoid foreclosure. 1-58 Sec. 343.102. MANDATORY ARBITRATION PROHIBITED. A lender 1-59 may not make a home loan containing a provision requiring mandatory 1-60 arbitration. 1-61 Sec. 343.103. DISCLOSURE IN CONNECTION WITH CERTAIN HOME 1-62 LOANS. (a) For a home loan with an interest rate of 12 percent or 1-63 greater a year, when the lender makes the disclosure required under 1-64 the Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2-1 Section 2601 et seq.), as amended, for the good faith estimate, or 2-2 if that Act does not apply, three business days after the date the 2-3 application is made, the lender shall also provide to the borrower: 2-4 (1) a statement regarding the value of mortgage 2-5 counseling before taking out a home loan; 2-6 (2) a list of the nearest available housing counseling 2-7 agencies approved by the United States Department of Housing and 2-8 Urban Development; 2-9 (3) a list of other resources where mortgage 2-10 information can be found, including toll-free telephone numbers and 2-11 online resources; and 2-12 (4) other disclosures required by the finance 2-13 commission, including an official notice regarding high-cost home 2-14 loans. 2-15 (b) This section expires September 1, 2003. 2-16 Sec. 343.104. PENALTIES FOR FAILURE TO PROVIDE DISCLOSURE. 2-17 (a) A person who knowingly and wilfully violates Section 343.103 2-18 is liable to the aggrieved borrower for: 2-19 (1) the actual damages caused by the violation; 2-20 (2) punitive damages not to exceed $10,000 in an 2-21 action brought by the aggrieved borrower; and 2-22 (3) court costs. 2-23 (b) This section expires September 1, 2003. 2-24 (Sections 343.105-343.200 reserved for expansion 2-25 SUBCHAPTER C. HIGH-COST HOME LOANS 2-26 Sec. 343.201. DEFINITIONS. In this subchapter: 2-27 (1) "High-cost home loan" means a loan that: 2-28 (A) is made to one or more individuals for 2-29 personal, family, or household purposes; 2-30 (B) is secured in whole or part by: 2-31 (i) a manufactured home, as defined by 2-32 Section 347.002, used or to be used as the borrower's principal 2-33 residence; or 2-34 (ii) real property improved by a dwelling 2-35 designed for occupancy by four or fewer families and used or to be 2-36 used as the borrower's principal residence; 2-37 (C) has a principal amount equal to or less than 2-38 one-half of the maximum conventional loan amount for first 2-39 mortgages as established and adjusted by the Federal National 2-40 Mortgage Association; 2-41 (D) is not: 2-42 (i) a reverse mortgage; or 2-43 (ii) an open-end account, as defined by 2-44 Section 301.002; and 2-45 (E) is a credit transaction described by 12 2-46 C.F.R. Section 226.32, as amended, except that the term includes a 2-47 residential mortgage transaction, as defined by 12 C.F.R. Section 2-48 226.2, as amended, if the total loan amount is $20,000 or more and: 2-49 (i) the annual percentage rate exceeds the 2-50 rate indicated in 12 C.F.R. Section 226.32(a)(1)(i), as amended; or 2-51 (ii) the total points and fees payable by 2-52 the consumer at or before loan closing will exceed the amount 2-53 indicated in 12 C.F.R. Section 226.32(a)(1)(ii), as amended. 2-54 (2) "Points and fees" has the meaning assigned by 12 2-55 C.F.R. Section 226.32(b), as amended. 2-56 Sec. 343.202. BALLOON PAYMENT. A high-cost home loan may 2-57 not contain a provision for a scheduled payment that is more than 2-58 twice as large as the average of earlier scheduled monthly 2-59 payments, unless the balloon payment becomes due not less than 60 2-60 months after the date of the loan. This prohibition does not apply 2-61 if the payment schedule is adjusted to account for the seasonal or 2-62 otherwise irregular income of the borrower or if the loan is a 2-63 bridge loan in connection with the acquisition or construction of a 2-64 dwelling intended to become the borrower's principal dwelling. 2-65 Sec. 343.203. NEGATIVE AMORTIZATION. A high-cost home loan 2-66 may not provide for a payment schedule with regular periodic 2-67 payments that cause the principal balance to increase, except that 2-68 this section does not prohibit negative amortization as a 2-69 consequence of a temporary forbearance, bridge loan, or restructure 3-1 sought by the borrower. 3-2 Sec. 343.204. CONSIDERATION OF OBLIGOR'S PAYMENT ABILITY. 3-3 (a) In this section, "obligor" means a person obligated to pay a 3-4 loan, including a borrower, cosigner, or guarantor. If more than 3-5 one person is obligated to pay a loan, the term refers to those 3-6 persons collectively. 3-7 (b) A lender may not engage in a pattern or practice of 3-8 extending credit to consumers under high-cost home loans based on 3-9 the consumers' collateral without regard to the obligor's repayment 3-10 ability, including the obligor's current and expected income, 3-11 current obligations, employment status, and other financial 3-12 resources, other than the obligor's equity in the dwelling that 3-13 secures repayment of the loan. 3-14 Sec. 343.205. PREPAYMENT PENALTIES PROHIBITED. A lender may 3-15 not make a high-cost home loan containing a provision for a 3-16 prepayment penalty. 3-17 SECTION 2. (a) This Act takes effect September 1, 2001, 3-18 and, except as provided by Subsection (b) of this section, applies 3-19 only to a loan closed on or after that date. 3-20 (b) Section 343.103, Finance Code, as added by this Act, 3-21 applies only to a home loan application received on or after 3-22 September 1, 2001. 3-23 * * * * *