Georgia Bankers Association

April 19, 2002

To:       GBA Members
From:   Joe Brannen
Re:       Summary of H.B. 1361, Governor Barnes’ Predatory Lending Bill

As promised in your LegisFax from last Monday, following is a summary of the major provisions of the Governor’s predatory lending statute that was passed by the General Assembly on the last day of their 2002 session. Our thanks to Don Lampe of Womble, Carlyle, Sandridge & Rice for preparing this summary. GBA will be hosting a seminar in early June to help educate our members on this complex new statute, so be looking for information about that seminar soon.

Introductory Note: The Georgia Fair Lending Act (“GFLA”), H.B. 1361, if signed by the Governor as expected, will affect all residential mortgage lenders doing business in Georgia. The statute, like other state and local laws on predatory lending, is threshold-based. That is, if a residential mortgage loan carries an interest rate or fees above certain percentages, the loan becomes a “high-cost home loan” and is subject to various limitations, restrictions and prohibitions. The Georgia law roughly follows the North Carolina “predatory lending” statute (SB 1149), but is more strict for lenders than the North Carolina law. Although GFLA refers to the federal Home Ownership and Equity Protection Act of 1994 (“HOEPA”), which is a part of the Truth-in-Lending Act (“TILA”), GFLA is more strict and more comprehensive than HOEPA. In addition, the “anti-flipping” provisions of GFLA apply broadly to all “home loans” that are refinanced with “covered home loans” and the Act contains other restrictions on all “home loans.” GFLA also imposes special remedies and penalties, including significant new prior notice requirements in foreclosures.

Effective Date: October 1, 2002

Transactions Covered: All residential mortgage loans made in Georgia by any lender, including “home loans, “covered home loans,” and “high-cost home loans.”

Key Definitions:

“Home loan” – loan secured by mortgage/deed to secure debt on real estate in Georgia occupied by borrower as principal dwelling (including manufactured housing) not exceeding the FNMA conforming size limit for single-family dwelling, including open-end, purchase money, and refinancing loans, but excluding reverse mortgage, bridge, and business-purpose loans.
“Covered home loan” – (1) APR on first mortgage exceeds greater of 4% over prime or 2% above comparable FNMA or FHLMC loan rate, APR on junior mortgage exceeds greater of 5.5% over prime or 3% above comparable FNMA or FHLMC loan rate, OR (2) “points and fees” exceed 3% of total loan amount (excluding 2 “bona fide discount points”).
“High-cost home loan” – (1) APR exceeds HOEPA threshold, OR (2) “points and fees” exceed 5% of total loan amount (may exclude 2 “bona fide discount points”).
“Creditor” – anyone who extends consumer credit or who purchases or is assigned a home loan; also includes mortgage brokers (including tablefunding mortgage brokers).
“Points and fees” – all finance charges (except interest) and all reasonable real-estate related charges (as per HOEPA/Reg Z) plus broker compensation (including yield-spread premiums unless disclosed and used to pay listed third party closing costs), premiums paid in cash or financed for various types of credit insurance, maximum prepayment penalties, and all prepayment penalties paid on loan made by the same lender or an affiliate.
“Bona fide discount point” – loan discount point knowingly paid by the borrower for express purpose of reducing, and which in fact does result in, bona fide reduction of interest rate, when the “undiscounted” rate does not exceed by more than 1% the required net yield for 90-day standard commitment from Fannie or Freddie.

Prohibitions on All Home Loans:

No financing of credit insurance premiums or debt cancellation fees.
No encouraging defaults.
No late payment charge unless payment 10 or more days late and limited to 5% of late payment.
No creditor or servicer may charge “payoff” fee.
“Flipping” – when creditor makes a “covered home loan” that refinances an existing home loan within 5 years that does not provide a “reasonable, tangible net benefit to the borrower under all the circumstances”; presumed to be “flipping” if covered home loan refinances existing home loan within 5 years if government or non-profit loan.

High–Cost Home Loan Limitations:

Prepayment penalty limited to 2% of loan amount prepaid in first 12 months and 1% of loan amount prepaid in second 12 months; none permitted after 24 months from closing.
No balloon payments (unless due to seasonal or irregular income of borrower).
No loan to borrower without reasonable ability to repay; presumption that can repay if total monthly debts (including loan) do not exceed 50% of monthly gross income as verified by tax returns, payroll receipts and other third-party verification.
In effect, mandatory arbitration prohibited.
Home ownership counseling required.
Special disbursement and payment requirements for home improvement loans.
Notice of intent to foreclose required prior to advertisement.
Special right to cure and reinstate (and required notices).
No negative amortization, default interest, advance payments, or “call” provisions.
No modification, renewal, extension or amendment fees.
Specific statutory notice regarding high-cost loan.

Special Disclosure Requirements:

To exclude attorneys’ fees from “points and fees” calculation, borrower must be given right to select attorney.
For high-cost home loans, special notice of preservation of claims and defenses.

Remedies and Penalties: Remedies vary by violation but include –

Actual damages (includes consequential and incidental damages).
Statutory damages equal to two times interest paid and forfeiture of interest due.
Punitive damages.
Costs and attorneys’ fees.
Equitable relief (with limitations on borrower’s duty to tender).
Rescission – right to cancel high-cost loan for 5 years from loan closing.

Remedies are cumulative and non-exclusive; statute of limitations is 4 years after date of last scheduled payment or 5 years after first scheduled payment (whichever is earlier).\

Preemption of Local Laws: No municipality or county permitted to enact “doing business” (debarment) laws or ordinances.