ARIZONA STATE SENATE
Phoenix, Arizona
Purpose
Prohibits and restricts lending activities and charges
associated with loans made for home purchases.
Background
The home loan or mortgage market in
Arizona is a complex market in which lenders use a variety of tools to measure
their risk when they lend money to consumers.
Also, these lenders engage brokers to sell their money products to
consumers and utilize incentives to encourage the sale of one particular
product over another. When a consumer
has chosen a product, there are costs associated with purchasing the money to
buy a home that include origination fees, title, appraisal, underwriting fees
and associated costs with processing the loan.
These costs may fluctuate depending on the terms of the loan being sold.
While consumers’ with adequate
income-to-debt ratios and better-than-average credit enjoy a wider variety of
lower cost loans, those with less-than perfect credit or other issues may
require what is described by industry as a sub-prime loan. The industry argues that these loans make
money available to segments of society that are under-served. Critics of predatory lending argue that when
the sub-prime mortgage lenders charge either an exorbitant interest rate or
abnormally high closing costs and fees the loan moves from a sub-prime loan to
a predatory loan. These individuals
argue that the loans at best are aimed at an ill-informed public or, at worst
constitute fraud by those selling the loans or lending the money. Other factors may play into whether or not a
predatory loan situation exists. No
universally accepted definition of predatory lending practices exists in
Arizona, and arguably not in the United States although other governments have
passed legislation regulating predatory lending practices.
S.B. 1343 defines predatory lending as a loan exceeding
three percent closing costs and exceeding different percentages over a U.S.
Treasury security depending on whether the mortgage is a first or second
mortgage. Based on these criteria, S.B.
1343 restricts or prohibits various costs, fees and practices of lenders or
brokers who are engaging in the sub-prime market.
There
is no anticipated impact to the state general fund.
Provisions
1. Establishes definitions for points and fees relating to an open-ended loan.
2. Establishes the following thresholds in establishing a definition of “high cost home loan”:
Interest
Rates:
§ six percentage points above the weekly average yield on a five-year U.S. Treasury Security for a first mortgage; and,
§
eight percentage points above
the weekly average yield on a five-year U.S. Treasury Security for a second
mortgage
Points
and Fees:
§
equaling three percent for
loans totaling $30,000 or more; or
§
equaling six percent or $900
(the lesser of the two) for loans less than $30,000
3. Prohibits late fees for:
a)
more than four percent of the
amount past due;
b)
a payment that is not at
least 15 days late; and,
c)
more than once for a single
payment and unless the creditor provides notification within 45 days of the
late charge assessment.
4. Prohibits the financing of credit life, credit disability, credit property, or credit unemployment insurance.
5. Prohibits financing more than three percent of the total loan amount in points and fees.
6. Limits:
a)
the amount a lender is
allowed to charge as a pre-payment penalty;
b)
the amount of a balloon
payment that is available to a high cost loan; and,
c)
the number of periodic payments
that may be consolidated and paid in advance from the proceeds of the loan.
7. Prohibits:
a)
negative amortization;
b)
increases in interest rates
following a default by the borrower, unless a variable rate loan and consistent
with the loan agreement and the rise is not due to the default; and,
c)
mandatory arbitration that
limits access to the judicial system for claims or defenses.
8. Prohibits a creditor from making a high cost loan without a “reasonable basis” to believe that the borrower will repay the loan as it becomes due.
9. Prescribes criteria under which the borrower is presumed to be able to make payments as a percentage of their monthly gross income.
10. Requires creditors receive certification that the borrower has received counseling on the advisability of the loan transaction.
11. Prohibits creditors from charging a fee to amend or adjust a high cost loan or to defer any payment under the loan.
12. Prohibits the payment of the proceeds of a high cost loan directly to residential contractors except through escrow accounts or by an instrument payable solely to the borrower.
13. Prohibits a creditor from recommending default on an existing loan to a borrower in connection with refinancing with a high cost loan.
14. Requires creditors to direct borrowers to the creditors’ lowest cost category of loans for which the borrower could qualify with that creditor or its affiliates.
15. Requires brokers, to direct the borrower to a loan from the “lowest cost array of loans available…from the lenders with whom the broker regularly does business.”
16. Assign brokers a fiduciary duty to their borrower, regardless of other responsibilities of the broker relating to the loan.
17. Establishes:
a)
a violation of the measure as
Consumer Fraud and subject to enforcement measures;
b)
a “preponderance of the
evidence” as burden of proof regarding a violation of this measure;
c)
punitive and compensatory
damages relating to violations of the measure, including reasonable costs and
fees; and,
d)
procedures for restitution by
creditors lending in good faith who find they inadvertently violated the law.
18. Permits a borrower to assert a violation of this measure as a defense or counter-claim to any type of default action, including foreclosure actions.
19. Prescribes definitions.
20. Provides for a general effective date.
Prepared by Senate Staff
February 19, 2002