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HB 1222 Rate-Spread and High-Cost Loans

October 1, 2009
Mortgage Lending
Bill Law

Full Session Law

This bill made technical and clarifying changes to anti-predatory lending laws for high-cost and rate-spread mortgages. The law became effective October 1, 2009.

High-Cost Loans

For high-cost loans, the bill clarified the definition of points and fees to include costs paid by the borrower "at or before closing".

Rate-Spread Loans

After the updates made through this bill, a rate-spread home loan is a loan that meets all of the following criteria:

  • The annual percentage rate (APR) exceeds the "average prime offer rate" at the time the rate was set by at least 1.5% for first-lien mortgages, or 3.5% for subordinate mortgages. The average prime offer rate is a rate published by the Federal Reserve Board based on average rates offered to consumers for low-risk transactions.
  • The APR exceeds the "conventional mortgage rate" at the time the rate was set by at least 1.75% for first-lien mortgages, or 3.75% for subordinate mortgages. The conventional mortgage rate is published by the Federal Reserve System's Board of Governors.
  • The APR exceeds the yield on U.S. Treasury securities with comparable periods of maturity by at least 3% for first-lien mortgages, or 5% for subordinate mortgages.

In addition, the loan principal must be within the conforming loan size limit for a single-family dwelling, set by Fannie Mae, and the property must be the borrower's principal dwelling. Loans for equity lines of credit, construction loans, reverse mortgages, and bridge loans with terms of 12 months or less do not qualify.

The following protections apply to rate-spread home loans:

  • The borrower's ability to repay must be considered in making the loan
  • Prepayment penalties are prohibited

If the lender violated these provisions while acting in good faith, the lender can avoid legal liability if either of the following are established:

  • That within 90 days of the closing and before any action was instituted against the lender, the lender notified the borrower of the failure, made appropriate restitution, and offered to change the loan terms.
  • That the compliance failure was the result of an unintentional, bona fide error that occurred despite reasonable procedures for avoiding such errors; and within 120 days after discovering the error and prior to the institution of any action against the lender, the lender notified the borrower, made appropriate restitution, and offered to change the loan terms.

The mortgage broker who brokered a non-complying rate-spread loan is jointly and severally liable with the lender.