Pennsylvania Banking Department Proposes Regulation to Protect Mortgage Borrowers
Proposal Includes Additional Disclosures, Evaluating Borrowers' Ability to
HARRISBURG, Pa., July 5 /PRNewswire-USNewswire/ -- To protect borrowers who seek home loans in Pennsylvania, Acting Banking Secretary Victoria A. Reider announced today that the Department of Banking has forwarded a new regulation for consideration by the commonwealth's Independent Regulatory Review Commission. "It is projected that the number of foreclosures will skyrocket nationwide as a result of problems in the subprime market," said Reider. "Let's be clear: innovative mortgage products can help certain borrowers. The problem is that too many mortgages have been inappropriately sold to people who didn't understand or couldn't afford them. The goal of this regulation is to ensure that Pennsylvania families will never again be as vulnerable as they are today." The proposed regulation requires mortgage companies to use a department- mandated disclosure form to advise borrowers of, among other things, variable interest rates, balloon payments, prepayment penalties, negative amortization and whether the lender will escrow taxes and insurance for the loan. The regulation also requires mortgage companies to evaluate a borrower's ability to repay the loan based on income, fixed expenses and other relevant factors. "If a loan has an adjustable interest rate, the lender needs to make sure that the borrower will still be able to afford the monthly payments as they rise to the fully indexed and amortized rate. It's not enough just to consider the initial 'teaser' payment," said Reider. The proposed regulation, which was the subject of public hearings in September, is part of a broader, ongoing effort by the Department of Banking to protect consumers in the mortgage marketplace. This past December, the banking department issued a statement of policy to clearly define dishonest, fraudulent, illegal, unfair, unethical, negligent or incompetent conduct for mortgage companies under existing laws. The department is also supporting a package of six bills in the General Assembly that are aimed at curbing abusive lending practices. The changes mirror those outlined in a 2005 report to the General Assembly on mortgage foreclosures in the state, Losing the American Dream: A Report on Residential Mortgage Foreclosures and Abusive Lending Practices in Pennsylvania. "Pennsylvanians deserve to be treated fairly in the mortgage market," Reider said. "Most companies in the commonwealth already do that. The regulations proposed today will dramatically reduce the possibility for lenders to knowingly make loans that borrowers cannot afford or don't fully understand. Imagine if it was someone you cared about who was applying for a loan." "Wouldn't you want the lender or broker to, at the very least, make sure they understood the loan's features and could pay it back? Of course you would." Reider urges prospective homeowners to thoroughly research a company or broker before obtaining a mortgage. Consumers can search for Pennsylvania- licensed companies at http://www.banking.state.pa.us. They can also ask questions about mortgage lending or other financial matters by calling 800-PA-BANKS or learn more about the financial aspects of homeownership in the "Housing" section of the Pennsylvania Office of Financial Education's Web site, http://www.moneysbestfriend.com. EDITOR'S NOTES: Language of the proposed regulation is provided below and is also available at http://www.banking.state.pa.us. The Pennsylvania Department of Banking protects the public from financial abuse, ensures that safety and soundness of the state's depository institutions and works to foster a strong economy. Learn more at http://www.banking.state.pa.us. The Independent Regulatory Review Commission reviews agency regulations, excluding the Game Commission and the Fish and Boat Commission, to ensure that they are in the public interest and to make certain that the agency has the statutory authority to enact the regulation and determine whether the regulation is consistent with legislative intent. IRRC then considers economic impact, public health and safety, reasonableness, and clarity. Learn more at http://www.irrc.state.pa.us. TITLE 10. BANKS AND BANKING PART IV. BUREAU OF CONSUMER CREDIT AGENCIES CHAPTER 46. PROPER CONDUCT OF LENDING AND BROKERING IN THE MORTGAGE LOAN BUSINESS Sec. 46.1. Definitions. 46.2. Proper conduct of lending and brokering in the mortgage loan business. 46.3. Enforcement. Authority The provisions of this Chapter 46 are issued under section 310(a) of the Mortgage Bankers and Brokers and Consumer Equity Protection Act (63 P.S. section 456.310(a)), section 16(1) of the Secondary Mortgage Loan Act (7 P.S. section 6616(1)) and section 12 of the Consumer Discount Company Act (7 P.S. section 6212), unless otherwise noted. Source The provisions of this Chapter 46 adopted __________, effective _________, __ Pa.B. ___, unless otherwise noted. Section 46.1. Definitions. The following words and terms, when used in this chapter, have the following meanings, unless the context clearly indicates otherwise: Advertising -- As defined in 12 CFR 226.2(a)(2) (relating to definitions and rules of construction). Applicant -- A person who submits an application for a loan. Application -- As defined in 24 U.S.C. section 3500.2(b) (relating to definitions). CDCA -- The Consumer Discount Company Act (7 P. S. sections 6201- 6219). Consummation -- As defined in 12 CFR 226.2(a)(13) (relating to definitions and rules of construction). Covered loan -- A covered loan as defined in section 503 of the MBBCEPA (63 P.S. section 456.503). First mortgage loan -- A mortgage loan as defined in section 302 of the MBBCEPA (63 P.S. section 456.302). Income -- As defined in 26 U.S.C. section 61 (relating to definitions). Licensee -- A licensee under the MBBCEPA, SMLA, CDCA or a partially exempt entity under the MBBCEPA. Loan -- A first mortgage loan or secondary mortgage loan, or both, as the context may require. The term does not include a covered loan. MBBCEPA -- The Mortgage Bankers and Brokers and Consumer Equity Protection Act (63 P. S. sections 456.101 -- 456.3101). Mortgage loan business -- The first mortgage loan business as defined in section 302 of the MBBCEPA, the secondary mortgage loan business as defined in the section 3(a)(5) of the SMLA (7 P.S. section 6603(a)(5)), and any kind of mortgage lending or brokering activity conducted by a licensee under the CDCA. Person -- A person as defined in section 302 of the MBBCEPA, section 2 of the SMLA (7 P.S. section 6602) and section 2 of the CDCA (7 P.S. section 6202), as applicable. Secondary mortgage loan -- A secondary mortgage loan as defined in section 2 of the SMLA. SMLA -- The Secondary Mortgage Loan Act (7 P.S. sections 6601-6627). Section 46.2. Proper conduct of lending or brokering in the mortgage loan business. (a) Advertising. A licensee may not engage in false or misleading advertising. (b) Disclosures to applicant. On a form prescribed by the Department and signed and dated by the applicant and the licensee, a licensee who has contact with the applicant shall disclose the following to the applicant no later than three business days after the application is received or prepared by the licensee: (1) If the lender providing the loan will escrow the applicable taxes and insurance. (2) If the licensee is a lender with the ability to directly lock-in a loan interest rate. (3) Whether the loan contains a variable interest rate or balloon payment feature. (4) Whether the loan includes a prepayment penalty. (5) Whether the loan has a negative amortization feature. (c) Required redisclosures. A licensee who has issued the disclosure form required by subsection (b) shall issue an updated disclosure form at the time the licensee knows or reasonably should know that the initial disclosure form is inaccurate. (d) Required retention of disclosure form. A licensee shall retain the disclosure form required by subsections (b) and (c) in the applicant's loan file. (e) Evaluation of applicant ability to repay. (1) A licensee shall not offer a loan without having reasonably determined, based on the documents and information provided under this subsection, that the applicant will have the ability to repay the loan in accordance with the loan terms and conditions by final maturity at the fully indexed rate, assuming a fully amortized repayment schedule. (2) In performing an analysis to determine whether an applicant will have the ability to repay a loan, a licensee shall consider, verify and document the: (i) income of the applicant. (ii) fixed expenses of the applicant. (3) A licensee may consider and document information in addition to verified income and fixed expenses as required in subsection (e)(2) in determining an applicant's ability to repay an offered loan, provided that the additional factors are reasonably related to an applicant's ability to repay. (4) A licensee shall not primarily rely upon the sale or refinancing of an applicant's collateral in determining an applicant's ability to repay an offered loan. (5) All records, worksheets, and supporting documentation used in the licensee's ability to repay analysis shall be maintained in the applicant's loan file. (6) In determining an applicant's ability to repay a loan offered under this subsection, a licensee shall not ignore facts or circumstances that it knows or reasonably should know which would indicate that an applicant does not have the ability to repay the offered loan. (7) In addition to the analysis required by this subsection, great weight and due consideration shall be given to the Guidance on Nontraditional Mortgage Product Risks, as amended, issued by the Department in establishing a licensee's internal procedures and guidelines when implementing the ability to repay analysis required by this subsection. (f) Loan transaction prohibitions. A licensee may not: (1) Advise or imply to an applicant that the applicant's income is not relevant to the loan transaction. (2) Recommend or imply that an applicant default on any existing contract or financial obligation. (3) Advise or induce an applicant to refinance an existing loan or otherwise enter into a new financial obligation without performing the ability to repay analysis required by subsection (e). (4) If an applicant qualifies for a loan offered by the licensee, offer to the applicant a covered loan without advising the applicant that the applicant qualifies for a loan other than a covered loan. (5) Advise or imply that an applicant should ignore any required disclosures or suggest that a document or the execution of any document is unimportant or of no consequence. (6) Direct, encourage, permit or otherwise be involved with the improper execution of any document, including: (i) Requesting or allowing an applicant to sign documents that contain blank spaces where material information regarding the loan transaction is required. (ii) Permitting the execution of documents where signatures are required to be witnessed without the witnesses being physically present. (iii) Permitting someone other than the required signatory to execute a document unless otherwise authorized by law. (7) Knowingly submit or permit or encourage an applicant or third party to submit, false or misleading information, or information that the licensee reasonably should know is false or misleading, to any party to a loan transaction. (8) Improperly influence, or attempt to improperly influence: (i) An appraiser by committing any act or omission that is intended to: (A) Compromise the independent judgment of an appraiser. (B) Ensure that an appraisal matches a requested or target value. (ii) Any other entity related to the mortgage loan business, such as notaries, title companies, real estate agents, builders and sellers of properties. (9) Obtain insurance required for a loan for an applicant at loan consummation without providing the applicant with the opportunity to secure or provide evidence of their own insurance. (10) Charge an applicant a fee for any legally required notices or disclosures unless otherwise authorized by law. (11) Pay compensation to or receive compensation from, contract with, or employ any person engaged in the mortgage loan business who is not licensed or otherwise exempt from licensure. (12) Render legal advice to an applicant. (g) Loan funding. (1) A licensee lender may not refuse or fail to fund a consummated loan, other than when an applicant rescinds the loan in accordance with 12 CFR 226.15 or 226.23 (relating to the right of rescission), as applicable. (2) A licensee lender shall fund a consummated loan in a reasonable time period after consummation of the loan or in accordance with any commitment or agreement with the applicant; provided that, if an applicant has a right of rescission under 12 CFR 226.15 or 226.23 (relating to the right of rescission), a licensee lender is not required to fund a consummated loan in accordance with this subsection until after the applicable recession period has ended. (3) Any post-closing underwriting or quality control review conducted by a licensee lender after the consummation of a loan shall not delay the funding of a loan or result in a failure or refusal to fund the loan in accordance with the provisions of this subsection. (4) A licensee shall disburse loan funds in accordance with any commitment or agreement with the applicant. (h) Licensee responsibility to provide documents. A licensee shall provide to an applicant or authorized representative of an applicant, unless prohibited by federal or state law, copies or originals of the documents associated with a loan that an applicant has paid for or signed, such as loan applications, appraisals, surveys, loan documents, disclosures and any fee agreement executed by the applicant and the licensee. (i) Payoff statement or statement of mortgage reinstatement. A licensee lender shall provide a borrower with payoff statements or statements of mortgage reinstatement, as applicable, for the borrower's loan within 7 business days of receipt of a written request by a borrower or a person authorized by the borrower. Section 46.3. Enforcement. Violations of the provisions of this chapter shall be violations of the MBBCEPA, SMLA and CDCA, as applicable. CONTACT: Heather Tyler (717) 783-4721
SOURCE Pennsylvania Department of Banking
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