Pennsylvania Banking Department Proposes Regulation to Protect Mortgage Borrowers Proposal Includes Additional Disclosures, Evaluating Borrowers' Ability to

Repay



    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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