- Summary of Senate Bill 185, Ohio Home Ownership Protection Act
- June 22, 2006
- Law Firm: Bricker & Eckler LLP - Office
On May 24, 2006, the Ohio General Assembly passed new legislation to address various newspaper reports of alleged “predatory” lending practices throughout the state of Ohio. This latest legislative effort comes four years after the Ohio General Assembly enacted the Mortgage Brokers Licensure Act (Senate Bill 76) and Predatory Lending legislation (House Bill 386).
The primary focus of the legislation was to give the Ohio Attorney General direct enforcement authority over certain lending activities. The new law will be effective January 1, 2007.
Applicability. Senate Bill 185’s provisions apply most to “nonbank mortgage lenders” and to mortgage brokers, who are licensed under R.C. 1322. The bill exempts state and federally-chartered depository institutions and their affiliates. However, it is unclear how this exemption applies to covered loan activity.
“Affiliate” is defined as, “as an entity that controls or is controlled by, or is under common control with, a bank, savings bank, savings and loan association, credit union, or credit union service organization and that the board of governors of the federal reserve system, the comptroller of the currency, the office of thrift supervision, the federal deposit insurance corporation, or the national credit union administration has the authority to examine, supervise, and regulate, including with respect to the affiliate’s compliance with applicable consumer protection requirements.” R.C. 1322.02(C)(1)(a).
Enforcement. SB 185 allows the Attorney General and local county prosecutors to enforce directly the Ohio Mortgage Broker Act. R.C. 1321.541. Previously, enforcement was the sole responsibility of the Department of Commerce, Division of Financial Institutions. The Attorney General is also given expanded enforcement authority to enforce activities governed under R.C. Ch. 1345, the Ohio Consumer Sales Practices Act, and activities under Ohio’s “HOEPA” provisions of R.C. Ch. 1349.
Consumer Sales Practices Act (“CSPA”). With certain qualifications, SB 185 eliminates the exemption for mortgage lending in Ohio’s Consumer Sales Practices Act. The CSPA is Ohio’s consumer protection statute and generally prohibits all acts that the Attorney General, or a court, find to be “unfair, deceptive, or unconscionable.” R.C. 1345.01(A). Such acts are broadly defined. State and federally-chartered depository institutions and their affiliates remain exempt. R.C. 1345.01(K).
However, the general “unconscionable acts” section of the CSPA will continue to exempt mortgage lending. R.C. 1345.03(C). In its place, the law defines sixteen specific mortgage lending activities and practices that are deemed “unconscionable.” R.C. 1345.031.
CSPA Rulemaking as a Next Step. Ohio’s CSPA primarily is found in administrative rules promulgated by the Ohio Attorney General, and not in statute. Similarly, the next step before enforcement of the new legislation is to enact administrative rules expanding upon the statutory provisions for mortgage lending.
In promulgating rules under the CSPA applicable to mortgage lending, the Attorney General shall consult with the Superintendent of the Division of Financial Institutions, Ohio Department of Commerce, and give “due consideration to state and federal statutes, regulations, administrative agency interpretations, and case law.” R.C. 1345.05(B)(2).
Rescission. Any violation found within the 16 listed types of offenses in R.C. 1345.031 will allow a consumer to “rescind the transaction or recover the consumer’s damages.” R.C. 1345.09(A).
Rescission may be limited, however, in connection with residential mortgage transactions, to a consumer in an individual action and for no reason other than for violations of the federal Truth in Lending Act. R.C. 1345.09(C)(2). The statute is unclear as to whether R.C. 1345.031 or TILA controls.
Tangible Net Benefit. Included on the list of unconscionable lending acts, which apply to all loans (and not simply high cost loans), is making a loan that does not provide a “reasonable, tangible net benefit” to the borrower. R.C. 1345.01(B)(12). “Unconscionable” arbitration clauses, attorneys’ fees clauses, and liquidated damages clauses in contracts are prohibited. R.C. 1345.031(C)(1). Also on the list:
“Recommending or encouraging a consumer to default on a mortgage or any consumer transaction or revolving credit loan agreement.” R.C. 1345.031(B)(6).
“Knowingly taking advantage of the inability of the consumer to reasonable protect the consumer’s interest because of the consumer’s known physical or mental infirmities or illiteracy.” R.C. 1345.031(B)(13).
“Entering into the consumer transaction knowing there was no reasonable probability of payment of the obligation by the consumer.” R.C. 1345.031(B)(14).
Assignee Exemption. SB 185 exempts secondary market assignees from the definition of supplier under the CSPA. R.C. 1345.01(C). However, it is unclear as to what effect a remedy might cause if an originating Broker in a table-funded loan violates the provisions of the new law. If the underlying loan is rescinded pursuant to R.C. 1345.09, this would affect the secondary market.
To protect assignees, the bill also states that, “no claim may be asserted by the Attorney General or any consumer against an assignee or purchaser of a mortgage loan unless the violation was committed by the assignee or purchaser, or the assignee or purchaser is affiliated by common control with the seller of the loan at the time of such assignment or purchase.” R.C. 1349.091(A) & (B).
“Good Faith” Lender Duty. While the legislature avoided imposing a “fiduciary duty” upon lenders, the new law includes a new duty among the prior statutory provisions.
Non-bank mortgage lenders shall not engage in a “transaction, practice, or course of business that is not in good faith or fair dealing, or that operates a fraud on any person, in connection with the attempted or actual making, purchase, or sale of any mortgage loan.” R.C. 1349.41(B).
The legislation does not define “good faith” or provide any safe harbor. Damages included under this section may include the borrowers’ reasonable attorney’s fees. R.C. 1349.41(C).
Mortgage Broker Duty. The bill requires Mortgage Brokers to:
safeguard and account for any money handled for the borrower, follow reasonable and lawful instructions from the buyer, act with reasonable skill, care, and diligence, and make reasonable efforts to secure a mortgage loan with lenders with whom the registrant, licensee, or person regularly does business to secure a loan with rates, charges, and repayment terms that are advantageous to the borrower.” R.C. 1322.081 (A).
A violation of this duty may carry punitive damages. R.C. 1322.081(D)(3). Wholesale lenders that carry a brokers’ license are exempt from this duty, but must meet the standard of care applicable to lenders. R.C. 1322.081(B).
High Cost Loans. For Ohio, the law lowers the current trigger for high cost “covered” loans from 8 percent to 5 percent of the total points and fees payable at closing, or 6 percent on loans with yield spread premiums. R.C. 1349.25 (D)(3)(b). The law maintains the federal definition of “points and fees.”
For transactions under an open-end credit plan, the definition “includes fees paid for the ability to access the line of credit and fees paid in order to utilize the maximum amount of credit available.” R.C. 1349.25(D)(2)(a). This may be a cause of concern for some lenders who may not know at closing what to expect as the borrower uses the line of credit at a later date.
The definition excludes fees paid to a federal or state agency to insure payment of some portion of a loan (i.e. FHA or VA loans). R.C. 1349.25(D)(2)(a).
Prepayment Penalties. No prepayment penalty may be charged by mortgage brokers, loan officers, and nonbank mortgage lenders on first mortgages of less than $75,000.00. This figure is tied to the Consumer Price Index, thus automatically increasing with inflation on the first day of each year. R.C. 1343.011(B)(2)(a) & (b). For loans above this threshold, prepayment penalties may continue to be charged at the rate of one-percent for five years. R.C. 1343.011(C).
On second mortgages, prepayment penalties may be charged at the rate of 2 percent in the first year, one percent in the second. R.C. 1321.57(G)(1)(a)(2). Previously, prepayment penalties were permitted at the rate of 3 percent, the first year, 2 percent the second year, and one percent the third.
Increased Disclosure. R.C. Chapter 1322 only applies to those required to be licensed. Lenders remain exempt.
If the loan applied for will exceed 90% of the value of the home, Mortgage Brokers shall provide the “Mortgage Loan Origination Disclosure Statement” which shall contain a disclaimer in at least 16-point font that the loan exceeds 90% of the home’s value, it may be difficult to refinance the loan, and, if sold, the borrower may owe more money than the sale of the home would bring. R.C. 1322.062(A)(1)(j).
In addition, along with the Good Faith Estimate, Mortgage Brokers are to deliver a statement to the borrower indicating that the Mortgage Broker does not “distribute all products in the marketplace and cannot guarantee the lowest rate.” The borrower is also to be informed that re-disclosure will occur upon “an increase in interest rate or if the disclosed statement/closing costs increase by more than 10% of the original estimate.” R.C. 1322.062(D).
SB 185 also requires all “material terms” to be re-disclosed if altered. The re-disclosure shall occur “not later than twenty-four hours after the change occurs, or twenty-four before the loan is closed, whichever is earlier.” R.C. 1322.064 (A) and (B). “Material” terms include a change in the type of loan, the term, the interest rate if the change is more than .15%, a change in monthly payment of more than 5%, escrow changes, or changes regarding private mortgage insurance. Re-disclosure shall also occur if the fee paid to the lender increases by 10% or $100.00, whichever is greater. R.C. 1322.064(A)(2).
Title Insurance Companies. The bill requires that a licensed Mortgage Broker, under R.C. 1322.02, make a disclosure to the borrower before providing also providing title services. R.C. 1322.075.
Title insurance agents are required to provide a new disclosure to borrowers where the lenders are issued title insurance simultaneously with the purchase of real estate. R.C. 3953.30(B). Title insurance shall be offered to the lender, borrower, and seller at time of closing. R.C. 3953.32. Title agents and agencies are also required to undergo an annual independent review of its accounts. R.C. 3953.33(A). For loans of $75,000 or less, title agents are prohibited from coercing the consumer to enter the loan, failing to disclose the consumer does not have to close on the loan, and making knowingly material misrepresentations. Violations of such are deemed a violation of the CSPA. R.C. 3953.35(A) & (B).
Continuing Education. Mortgage Brokers and their Loan Officers are required under the bill to complete 24 hours of continuing education in various categories, including the provisions of the CSPA. R.C. 1322.03(A)(5) and R.C. 1322.031(A)(4).
Appraisers. The law now requires appraisers to be licensed. R.C. 4763.19. It also prohibits knowingly bribing or coercing an appraiser for the purpose of corrupting his judgment. R.C. 1322.07(G).
Consumer Finance Education Board. The bill creates a diverse board of industry and consumer groups, and a governmental advisory board, to “investigate” business practices and assess credit needs of Ohioans. The board is to produce an annual report of its conclusions. R.C. 1349.71.
Financial Literacy Pilot Project. The Ohio Consumer Finance Education Board, in addition to many other duties, will conduct a pilot financial literacy project in the 5 Ohio counties with the highest foreclosure rates. In these counties, Mortgage Brokers shall advise borrowers who seek loans with origination fees of greater than 5% that the loan that the loan “may have attributes that are predatory.” In so doing, Mortgage Brokers must recommend a credit counseling program to those borrowers. Credit counselors are granted immunity from civil liability. R.C. 1349.72.