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
"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
"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
"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
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
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
46.2. Proper conduct of lending and brokering in the mortgage loan
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.
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
CDCA -- The Consumer Discount Company Act (7 P. S. sections 6201-
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
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
(a) Advertising. A licensee may not engage in false or misleading
(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
(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
(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
(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
(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
(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
(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
SOURCE Pennsylvania Department of Banking