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Predatory Lending Law Review

INDIANA GENERAL ASSEMBLY PRODUCES CONSENSUS PREDATORY LENDING LAW

By Douglas R. Brown
General Counsel, Indiana Association of Mortgage Brokers

Unfortunately, both nationally and in Indiana, predatory lending is increasingly attracting the attention of the news media, consumer advocacy groups and federal and state legislators. At the same time, national and regional economic factors (high unemployment, high personal bankruptcy rates and high foreclosure rates) have created an increasingly fertile environment for predatory lending legislation to take root.

In light of these trends, the INAMB Board of Directors, for the past several sessions of the Indiana General Assembly, has wisely elected to deal proactively with the issue of predatory lending.

Rather than "stonewalling" the issue, the INAMB has conducted a responsible and productive debate with all concerned. In doing so, the INAMB has gained the trust and good will of a great many legislators and consumer advocates alike. Equally importantly, the INAMB has helped educate legislators that our industry is providing a very valuable service to the citizens of Indiana and is, consequently, worthy of recognition and protection. It was in this spirit that a compromise on Indiana House Bill 1229 was ultimately reached and a historic Indiana predatory lending law was agreed to by all relevant parties. The following is a summary of some of the more salient points of the new law:

1. Triggers:
Like under the federal Home Owners Equity Protection Act, Indiana's new act imposes various restrictions on lending practices relating to "high cost loans", which are loans that have a rate or "points and fees" exceeding certain "triggers". The rate trigger is the same as provided in HOEPA. The "points and fees" trigger is 6 for loans below $40 thousand, and 5 for loans $40 thousand and above. However, the bill's definition of "points and fees" is different than that utilized in HOEPA. Like HOEPA, the new act excludes prepayment penalties from the calculation. However, unlike HOEPA, it also excludes all "bona fide discount points" (discount points actually recovered by the borrower, in the form of rate savings, over not more than 4 years). While it does include direct and indirect broker compensation in the calculation, it specifically excludes up to 1.5 yield spread premium points so long as no more than 2 prepayment penalty points are charged. (However, this should not be confused with a "cap" of any sort. It in no way limits direct or indirect broker compensation, but rather simply defines at what level the loan will be considered a "high cost loan" subject to application of the law).

Consequently, on loans below $40 thousand, brokers may charge "points and fees" equaling 7.5%, plus bona fide discount points, before triggering the "high cost loan" protections. Similarly, on loans $40 thousand and above, brokers may charge "points and fees" equaling 6.5%, plus bona fide discount points, without triggering application of the law. By way of comparison, last year's Indiana Senate bill, which was agreed to by the lending industry at the end of last year's legislative session, contained a points and fees trigger of 6 across the board (which excluded indirect broker compensation, but included bona fide discount points), a structure which most observers believe was considerably less advantageous to INAMB's members than the new act.

2. Homeowner Protection Unit and Homeowner Education:
INAMB has long acknowledged that increased enforcement is necessary to run the "bad apples" out of the business. The new act establishes a Homeowner Protection Unit, within the Indiana Attorney General's Office, to investigate mortgage fraud, predatory lending and other violations of Indiana's mortgage lending laws and to prosecute appropriate enforcement actions. Violations of the new act can result in civil penalties of up to $10,000 per occurrence. The act also establishes funding for homeowner education to assist borrowers in better understanding mortgage financing and the direct and indirect costs of home ownership.

3. No Class Actions or Local Ordinances:
Unlike prior versions, the new act prohibits all class actions to enforce the law, and prohibits local governments from passing local ordinances restricting predatory lending (as has occurred in any number of U.S. cities).

4. No Punitive Damages:
Unlike prior versions, the new act excludes punitive damages for violations of the law. However, Violations of the new act can result in civil liability to the borrower for actual damages, statutory damages (2 times actual damages) and attorney fees.

5. No Broker License or Registration Fee Increases:
Unlike prior versions, the new act provides no broker license or registration fee increases.

6. No "Flipping" or "Churning" Restrictions Generally:
Unlike prior versions, the bill does not attempt to address "flipping" or "churning" generally. It does prohibit charging a fee on the principle balance of any high cost loan paid off with the proceeds of a new high cost loan within 4 years of the closing of the original high cost loan.

7. Warnings:
A prescribed warning, including one encouraging home ownership counseling, must be provided on all "high cost loans".

8. General Prohibitions:
Under the new act, the following are prohibited with respect to all Indiana mortgage loans:

9. High Cost Loan Prohibitions:
Once a loan triggers one of the "high cost loan" triggers, the following are prohibited:

10. Miscellaneous Provisions: The new act:

In light of the intense and sometimes industry crippling legislative initiatives undertaken in other states, as well as the much more restrictive language found in prior versions of the Indiana legislation, I feel very strongly that it was in the INAMB's, it's members' and the industry's short and long term interests to agree to these terms. Doing so has resulted in a fair and balanced act, and will hopefully put these issues to rest for a considerable period of time. While the potential certainly exists that there will be future efforts to strengthen these restrictions, suffice it to say that many legislators have now grown weary of dealing repeatedly with these issues and look forward to a long hiatus from predatory lending legislation. When future initiatives occur, I believe that we will be well equipped and strongly positioned to defend against them, and our efforts to do so will be further enhanced by the responsible manner in which the INAMB has addressed the issues in this and prior legislative sessions.

I would like to thank all of the officers and directors of the INAMB, and specifically President Margaret Huddleson, for their tireless efforts on behalf of the INAMB and its members in achieving this historic legislation. Countless hours were spent establishing INAMB's position on the myriad of issues involved, and in discussing INAMB's views with legislators, legislative staff members and association members. Some observers have predicted that Indiana's new act will likely become model legislation as other states attempt to grapple with this complex problem without unduly hampering or hindering the mortgage lending industry's efforts to make home loans widely available at a fair cost. This legislative is the finest example I have witnessed of how smart, hardworking, well- intentioned professionals can work cooperatively with legislators and opposing parties to achieve a fair and balanced law. INAMB's officers and directors should be commended for the responsible, forthright and forward thinking manner in which they tackled this difficult task.

The INAMB is also fortunate to have the benefit of the great wisdom and experience of my partner, Fred Garver. I can confidently say that there has never been, in the history of the Indiana General Assembly, a lobbyist who was held in higher regard by legislators, their staffs or his fellow lobbyists. Without Fred, this and the many other legislative achievements of the INAMB over the past decade simply would not have occurred.

One final but important point: The Indiana mortgage broker community owes Representative Woody Burton and Senator Murray Clark a great thank you! They have championed a fair and balanced outcome since the beginning, and are great friends of our industry.

Douglas R. Brown is a partner in, and Executive Committee member of, the Indianapolis, Indiana law firm of Stewart & Irwin, P.C. His practice is concentrated in the representation of national, regional and local mortgage lenders. He has served for many years as General Counsel of the Indiana Association of Mortgage Brokers.