The New York State Banking Department (the "NY Banking Department") has promulgated a new regulation governing "high cost" mortgage loans originated within the State ("NY Regulation").1 The NY Regulation, which is scheduled to go into effect on October 1, 2000, imposes standards for loan originators that, in certain instances, afford consumers a greater level of protection than does the Home Ownership Equity Protection Act ("HOEPA"). Originators and loan brokers must comply with its provisions in order to avoid liability under the regulation.

This Memorandum summarizes the constraints imposed upon loan originators and brokers by the NY Regulation and, where applicable, compares them to existing law. It further highlights the possible impact on assignees of loans subject to the NY Regulation.

  • Applicability: The NY Regulation applies to closed-end refinancings and home improvement loans and, in contrast to HOEPA, purchase money mortgages used to buy a home and open-ended home equity lines of credit. The NY Regulation exempts federally insured or guaranteed loans, and does not apply to loans secured by property outside New York State.
  • High Cost Loan Definition: HOEPA defines a high cost loan as a loan in which the APR exceeds the yield on US treasury securities with a comparable period of maturity by more than 10 percentage points. Under the NY Regulation, the threshold for a high cost mortgage loan is reduced to 8 percentage points for first lien loans and 9 percentage points for junior liens, in either case, in excess of the yield on US treasury securities with a comparable period of maturity. HOEPA also defines high cost loans as those for which the total non-discount points and fees payable at or before loan closing exceed 8 percent of the loan amount, whereas the NY Regulation imposes a 5 percent threshold.

In addition to covering loans beyond the scope of HOEPA, the NY Regulation prohibits the following practices and provisions in connection with the origination of high cost loans:

  • Refinancing: A lender may not charge a borrower points and fees2 in connection with a new high cost loan if (1) the proceeds of the loan are used to refinance an existing high cost loan under the circumstances described below, and (2) the last financing was within two years of the current refinancing. Lenders are not prohibited from charging points and fees for any additional proceeds received by a borrower in connection with a refinancing (as long as such points and fees reflect the lender’s typical point and fee structure for high cost refinance loans). The rule applies (1) if the existing high cost loan was made by the lender or its affiliate and the new high cost loan does not involve use of a mortgage broker, or (2) if the new high cost loan involves the use of a mortgage broker. This provision of the new regulations is problematic because it does not provide an exception for borrowers seeking to refinance existing high cost loans at a lower rate if the lower rate exceeds the high cost loan threshold.
  • Call provisions: No high cost loan may include a provision that permits the lender to unilaterally accelerate the indebtedness unless repayment of the loan is accelerated as a result of default, a due-on-sale provision or bankruptcy.
  • Balloon payments: Under the NY Regulation, high cost loans may only require a balloon payment within seven years following origination.3 HOEPA prohibits balloon payments for mortgages that do not have a term of at least five years.
  • Negative amortization: No high cost loan may contain a payment schedule with regular periodic payments that cause the principal balance to increase.4
  • Post-default interest rate: No high cost loan may contain a provision that increases the interest rate after default.
  • Mandatory arbitration clauses: No high cost loan may contain a mandatory arbitration clause that is oppressive, unfair, unconscionable, or that does not preserve and protect the consumer’s rights.
  • Financing of points, fees or charges:
    • For loans other than refinancings, a lender may not require a borrower to finance any portion of the points, fees or charges payable to the lender or third parties.
    • For loans other than refinancings, a lender may not finance any portion of such points, fees or charges in an amount exceeding 5 percent of the principal amount of a closed end high cost loan, or of the maximum line of credit amount for an open-end high cost loan.
    • For refinancings, a lender may not finance points, fees or charges in an amount exceeding 5 percent of the additional proceeds received by the borrower.5
    • A lender may not finance voluntary unemployment insurance in connection with making a high cost loan unless the underwriting for the loan is based on the borrower’s tax return or current pay stub.
    • With respect to low income borrowers to whom the NY Regulation’s requirements concerning repayment ability (described below) apply, a lender may not finance voluntary credit, disability, unemployment and/or life insurance, and/or fire and miscellaneous property insurance in excess of the 5 percent limit unless the borrower’s scheduled monthly payments do not exceed 50 percent of the borrower’s verified gross monthly income.
    • A lender making a high cost loan may not finance any prepayment fees or penalties payable by the borrower in a refinancing if the lender or its affiliate originated the loan being refinanced.
  • Advance payments: No high cost loan may include terms under which more than two periodic payments are consolidated and paid in advance from the loan proceeds.
  • Modification or deferral fees: A lender may not charge fees to modify, renew, extend or amend a high cost loan, or to defer a payment due under a high cost loan if, thereafter, the loan will remain a high cost loan or, if not, the APR has not been reduced by at least two percentage points.6
  • Repayment ability: For borrowers below a certain income threshold, a lender may not make a high cost loan without due regard for the borrower’s ability to repay the loan.7 A borrower is presumed to be able to make a scheduled monthly payment if it does not exceed 50 percent of the borrower's verifiable monthly income. If the payment exceeds this threshold, the lender may be required to demonstrate the basis upon which it determined that the borrower could afford to repay the loan.
  • Home improvement contracts: A lender may not pay the proceeds of a high cost loan directly to a home improvement contractor. Loan proceeds may only be paid directly to the borrower, by an instrument payable jointly to the borrower and the contractor or, at the election of the borrower, through a third party escrow agent pursuant to the terms of a written agreement signed by the borrower, the lender and the contractor prior to the disbursement of funds.
  • Loan "Packing": A lender may not sell high cost loans with credit insurance or unrelated goods and services without the borrower’s informed consent where (1) the broker or lender solicits their sale, (2) the broker or lender receives compensation for their sale, and (3) the charges for such insurance or goods and services are financed as part of the principal amount of the loan.8

In addition to the restrictions governing the terms of a high cost loan, the NY Regulation sets forth requirements to which loan originators must adhere prior to closing such a loan, as described below.

  • Disclosures: Disclosures required by Part 38 of the General Regulations of the Banking Board9 must be provided no later than three days prior to closing, irrespective of whether funds are actually disbursed. Additionally, the loan originator must provide the borrower with a statement advising the borrower that the high cost loan may increase the number of payments and/or the aggregate amount paid by the borrower during the term of the loan if either is likely to be the case. Finally, a statement advising the borrower that less expensive credit may be available must appear in conspicuous type above the borrower’s signature line on the loan application.10
  • Counseling: A lender may not close a high cost loan without disclosing the availability of loan counselors and providing a list of counselors to the borrower at least three days before the loan closing.
  • Reporting Requirements: A lender must report borrowers’ favorable and unfavorable credit history to a nationally recognized credit agency at least once per year during the period in which the lender holds or services the loan.
  • Disclosure of Referrals: A lender or mortgage broker that makes ten or more high cost loans per year must submit to the New York Banking Department an annual statement setting forth the names and addresses of any home improvement company that is an affiliate, and of the three attorneys, three consultants and three home improvement contractors who provided the greatest number of referrals of high cost loans, if any.11
  • Unfair and Deceptive Practices

The NY Regulation includes a list of practices which are deemed prima facie evidence that a lender or broker that engages in them should not be licensed or registered by the New York State Banking Department. The list is entitled "unfair and deceptive acts or practices"; however, there is no indication that the heading is intended to imply that the regulation confers civil redress to borrowers under New York’s Deceptive Practices Act. Set forth below are the practices that support revocation of the licenses of lenders that employ them:

    • Making loans that demonstrate a pattern and practice of violating the provisions of the new regulation.
    • Engaging in unfair, deceptive or unconscionable practices in the course of advertising, brokering or making high cost loans in New York.
    • Brokering or making high cost loans with terms that so exceed the borrower’s financial capacity to repay as to be unconscionable.12
    • Brokering or making high cost loans in which the broker or lender charges and retains fees paid by the borrower (1) for services not actually performed; (2) for which the fees charged are not reasonably related to the value of services actually performed; or (3) which are otherwise unconscionable.
    • Brokering or making a high cost loan in which, considering the loan transaction as a whole, the points, fees and other finance charges so exceed the customary points, fees and finance charges incurred by mortgagors in the State of New York as to be unconscionable.
    • "Flipping" (e.g., refinancing an existing mortgage loan when the borrower derives little or no benefit from doing so) high cost loans.
    • "Packing" high cost loans without the informed consent of the borrower.
    • Encouraging default on existing debt prior to a high cost loan refinancing.
    • Advertising that refinancing existing debt with a high cost loan will reduce the borrower’s monthly payments without disclosing, if such a result is likely, that the number of monthly payments or the aggregate amount paid by the borrower will increase over the term of the high cost loan.
  • Liability

The NY Regulation does not specify penalties for violation of its provisions. However, the Superintendent of Banks of the State of New York has substantial powers under the New York Banking Law to issue cease and desist orders and to impose substantial civil penalties upon mortgage bankers and brokers (and exempt organizations, including banking institutions) who are found to violate the NY Regulations.13 The NY Regulation provides that a lender or assignee has no liability for failure to comply with its provisions if, within sixty days after discovering an error and before any action is instituted, the lender or assignee (1) notifies the borrower of the error, and (2) either (a) makes whatever modifications are necessary to correct the error or (b) adjusts the amount of the loan or reimburses fees, as applicable, so that it is no longer a high cost loan under the NY Regulation. The lender’s or assignee’s ability to correct errors is limited to mistakes that are unintentional and bona fide (e.g., clerical errors), and any such correction only assures such lender or assignee that it may not be held liable under the NY Regulation. Since the cure provisions apply to assignees, it may be inferred that the NY Regulation was intended to somehow bind assignees of high cost loans. However, there is no express provision imposing liability on assignees of high cost loans with respect to which a lender or mortgage broker committed violations of the NY Regulation and we have been informally advised by the NY Banking Department that none was intended.

The greatest risk to secondary market participants under the NY Regulation is that they may inadvertently finance or acquire a loan which was originally made in violation of the NY Regulation. Although the NY Regulation itself does not provide for any private remedy, it is enforceable by the NY Banking Department under its authority under the New York State Banking Law, and it is possible that courts may infer a private right of action or a defense to collection with respect to high cost mortgage loans covered by the NY Regulation. In such event, by analogy to the provisions of the NY Regulation, the holder of such a high cost mortgage loan, including an assignee, may be able to mitigate damages by agreeing to alter the terms of such loan so that it would not have originally been subject to the NY Regulation.

Abbreviated Summary Of New Part 41 Of The General Regulations Of The Banking Board (Restrictions And Limitations On High Cost Home Loans) ("NY Regulation")

See Clients and Friends Memo from Cadwalader, Wickersham & Taft dated July 31, 2000 for a complete discussion of the NY Regulation.

Comparison of NY Regulation and HOEPA

 

NY Regulation

HOEPA

Definition of High Cost Loan

APR exceeds the yield on US treasury securities with comparable maturity by more than 8% for first liens and 9% for junior liens, or total

points and fees exceed 5% of total loan amount.

APR exceeds the yield on US treasury securities with comparable maturity by more than 10%, or total points and fees exceed 8% of total loan amount or $451 (for loans made in 2000).

Applicability

Closed-end refinancings, home improvement loans, purchase money mortgages used to buy a home, home equity lines of credit.

Consumer credit transactions secured by a consumer’s principal dwelling but not obtained for purchase or construction of a residence.

Limitations:

  • No unilateral call provisions.
  • No balloon payment within 7 years of loan origination.
  • No negative amortization.
  • No post-default rate increase.
  • No unconscionable mandatory arbitration clause.
  • No prepayment from the loan proceeds of more than two periodic payments.
  • No modification, extension or renewal fees.

Prohibited Acts and Practices:

  • Lending without disclosure of counseling options.
  • Requiring a borrower to finance points, fees or charges.
  • Financing points and fees in excess of 5% of the loan amount (for non-refinanced loans).
  • Financing points and fees in excess of 5% of the additional proceeds from a refinanced loan.
  • Charging points and fees for a high cost refinancing within 2 years of origination if the new loan involves a broker or the original loan was made by the lender or its affiliate.

Additional Requirements:

  • Banking Department disclosures provided to borrower at least 3 days before closing.
  • Disclosure at or before application that refinancing may cause the number of monthly payments or amount paid to increase.
  • Annual reporting requirement by lenders of borrower payment history to credit agency.
  • Brokers/lenders making 10 or more high cost loans annually must report referral sources.
  • Statement on loan application advising borrower that less expensive financing may be available.

Unfair and Deceptive Acts or Practices:

  • Making loans that demonstrate a pattern or practice of violation of the NY Regulation.
  • Unfair, deceptive or unconscionable practices in advertising, making or brokering loans.
  • Brokering or making an unconscionable refinancing.
  • Selling insurance products or unrelated goods and services without borrower’s informed consent.
  • Recommending or encouraging default on an existing loan or debt.
  • Advertising that refinancing will reduce borrower’s monthly payments without disclosing possible increase in number of monthly payments or amount paid.

Footnotes

1 New Part 41 of the General Regulations of the Banking Board (Restrictions and Limitations on High Cost Home Loans). Although not stated, the NY Regulation is issued under authority of Article 12-D of the New York Banking Law.

2 The definition of points and fees in the NY Regulation is identical to the one set forth in HOEPA, which specifically excludes application fees, regardless of whether credit is actually extended, and discount points.

3 Exceptions include (1) payment schedules adjusted to account for a borrower’s seasonal or irregular income; (2) "bridge" loans made in connection with the acquisition or construction of a dwelling that will become the borrower’s principal dwelling; and (3) open-end high cost home loans.

4 Exceptions include negative amortization resulting from a temporary forbearance sought by the borrower and open-end high cost home loans.

5 For refinancings, the 5 percent threshold does not apply to or include appraisal fees, credit report fees, mortgage recording costs, tax, fire and miscellaneous property insurance, voluntary credit, disability, unemployment and/or life insurance, title report and title insurance charges.

6 This does not apply to modifications in connection with a default or a 60 day or more delinquency if such modification is part of a work-out.

7 This provision only applies to borrowers whose monthly income is 120% or less of the median income of the Metropolitan Statistical Area in which the borrower resides. It should be noted that, as discussed below, lack of regard to repayment ability may constitute an unfair and deceptive act or practice under the NY Regulation.

8 Such practices constitute deceptive practices unless the broker or lender provides the borrower with a specified disclosure in prescribed language and font size at least three days before the loan closing and the borrower signs an acknowledgment of receipt of the disclosure.

9 In addition to numerous application procedures and disclosures required to be made by mortgage brokers, licensed mortgage bankers must provide loan applicants required to pay a commitment fee or points to the lender prior to closing, or those seeking a purchase money mortgage for the acquisition of a dwelling, with a statement disclosing certain terms of the loan. These include estimates and amounts of application, credit report, property appraisal and lock-in fees, the amount of fees received or paid by the lender from or to third parties in instances in which the lender routinely assigns the commitments it issues, and the existence and terms of the prepayment penalty, if any. 3 NY CRR § 38.3.

10 The following statement must appear directly above the borrower’s signature line in twelve point or larger type: "The loan which may be offered to you is not necessarily the least expensive loan available to you and you are advised to shop around to determine comparative interest rates, points and other fees and charges."

11 The provision does not apply to referrals from consumers or from attorneys in their capacity as closing attorneys for lenders.

12 If a loan complies with the NY Regulation’s restriction on making high cost loans to low income borrowers with respect to repayment ability, the loan is presumed not to be unconscionable under the unfair and deceptive practices provision.

13 See NY Bank § 39 (issuance of orders regarding violation of law or unsafe or unsound practices); § 44 (civil penalties of as much as $250,000 per day for continuing, willful and knowing violations by banks and foreign banks); and § 598 (additional civil liabilities of mortgage bankers and brokers, and exempt organizations, including banking organizations, that include fines not to exceed $5,000 for each such violation, with an aggregate limit of $100,000).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.