S.230
Introduced by Senator Bloomer of Rutland County
Date:
Subject: Banking; consumer protection; predatory lending
Statement of purpose: This bill proposes to protect Vermont residents against predatory lending practices, and prevent those lenders from enjoying the privilege of doing business in the state.
AN ACT RELATING TO PREDATORY LENDING
It is hereby enacted by the General Assembly of the State of Vermont:
Sec. 1. 8 V.S.A. § 10405 is added to read:
§ 10405. PREDATORY LENDING
(a) Issuing Predatory Loans. No person shall make, issue, or arrange a
predatory loan, or assist others in doing so.
A person who, when acting in good faith, fails to comply with this
subsection will not be deemed to have violated this subsection if the person
establishes that either:
(1) Within 30 days of the loan closing and prior
to the institution of any action under this section, the borrower is notified
of the compliance failure, appropriate restitution is made, and whatever
adjustments are necessary are made to the loan to either, at the choice of the
borrower, make the predatory loan satisfy the requirements of this section, or
change the terms of the loan in a manner beneficial to the borrower so the loan
will no longer be considered a predatory loan subject to the provisions of this
section; or
(2) The compliance failure was not intentional
and resulted from a bona fide error, notwithstanding the maintenance of
procedures reasonably adapted to avoid such errors, and within 60 days after the
discovery of the compliance failure and prior to the institution of any action
under this section or the receipt of written notice of compliance failure, the
borrower is notified of the compliance failure, appropriate restitution is
made, and whatever adjustments are necessary are made to the loan to either, at
the choice of the borrower, make the predatory loan satisfy the requirements of
this section, or change the terms of the loan in a manner beneficial to the
borrower so the loan will no longer be considered a predatory loan, subject to
the provisions of this section.
Examples of a bona fide error include clerical, calculation, computer
malfunction and programming, and printing errors. An error of legal judgment with respect to a person’s obligations
under this section is not a bona fide error.
(b) Lending without Due Regard to
Repayment. No lender shall make, issue
or originate any threshold or high cost loan if the lender does not reasonably
believe at the time the loan is consummated that the borrower or borrowers
(when considered collectively in the case of multiple borrowers) will be able
to make the scheduled payments to repay the obligation, based upon a
consideration of the current and expected income, current obligations,
employment status, and other financial resources (other than the borrower’s
equity in the dwelling which secures repayment of the loan). A borrower shall be presumed to be able to
make the scheduled payments to repay the obligation if, at the time the loan is
consummated, or at the time of the first rate adjustment in the case of a lower
introductory interest rate: the
borrower’s scheduled monthly payments on the loan (including principal,
interest, taxes, insurance and assessments), combined with the scheduled
payments for all other debt, do not exceed 50 percent of the borrower’s
documented and verified monthly gross income; and, provided, the borrower has
sufficient “residual income” as defined in the guidelines established in 38
C.F.R. § 36.4337(e) and VA form 26-6393 to pay essential monthly expenses
after paying the scheduled payments and any additional debt. This subsection applies only to borrowers
whose income, as reported on the loan application which the lender relied upon
in making the credit decision, is no greater than 120 percent of the
median family income for Vermont (as defined by the Director of the U.S. Office
of Management and Budget). For the
purposes of this section, the median family income shall be derived from the
most recent estimates made available by the U.S. Department of Housing and
Urban Development, at the time the application is received. For purposes of determining median income,
only the income of the borrower or borrowers shall be considered.
(c) Enforcement.
(1) The commissioner may enforce violations of
this section under subchapter 6 of chapter 201 of this title.
(2) Private Right of Action. Any individual who becomes obligated on a
predatory loan may bring an action for damages or equitable relief in superior
court against any person who violates this section. Judgment shall be entered for actual damages, but in no case less
than the amount of home equity the individual lost as a result of the predatory
loan, as determined by the court, rescission of the predatory loan in accordance
with the rescission provisions of the federal Truth in Lending Act, reasonable
attorney’s fees and court costs.
(3) Nothing in this section limits the rights of
the injured person to recover damages or seek equitable relief under any other
applicable law or legal theory.
(d) Definitions. As
used in this section:
(1) “Predatory lender”:
(A) means a business entity that, through itself
or an affiliate, has made, issued or arranged, or assisted others in so doing,
within any 12‑month period, predatory loans that comprise either:
(i) five percent of the total annual number of
loans made, issued or arranged, or five percent of the total annual number of
loans which the business entity has assisted others in so making, issuing or
arranging; or
(ii) 10 individual loans; whichever is less.
(B) shall not include a business entity, or its
affiliates, that has submitted to the commissioner of banking, insurance,
securities, and health care administration a plan to discontinue the practice
of making predatory loans, if the plan ensures the prompt disengagement from
the practice of making predatory loans by the financial institution and its
affiliates within 90 days after the plan is submitted; provided, no more than
one plan may be submitted on behalf of any financial institution.
(2) “Predatory loan” means a threshold or high
cost loan that was made under circumstances that involve any of the following
acts or practices or that contain any of the following loan terms:
(A) Fraudulent or deceptive acts or practices,
including fraudulent or deceptive marketing and sales efforts to sell high cost
loans;
(B) “Loan Flipping”. “Loan flipping” means the making of a threshold or high cost loan
to a borrower that refinances an existing loan secured by residential property
in Vermont, when:
(i) More than 50 percent of the prior debt
refinanced bears a lower interest rate than the new loan;
(ii) The borrower’s payment of prepaid finance
charges and closing costs reduces the interest rate such that it will take more
than five years for the borrower to recoup the transaction costs; or
(iii) Refinancing a special mortgage originated,
subsidized or guaranteed by or through a state, tribal or local government, or
nonprofit organization, which bears either a below-market interest rate, or has
nonstandard payment terms beneficial to the borrower, such as payments that
vary with income, are limited to a percentage of income, or where no payments
are required under specified conditions, and where, as a result of the refinancing,
the borrower will lose one or more of the benefits of the special mortgage.
(C) “Balloon Payments”. A loan that contains a scheduled payment
that is more than twice as large as the average of earlier scheduled payments
or which contains a provision that gives the lender, in its sole discretion,
the right to accelerate the indebtedness in the absence of the default of the
borrower.
(D) “Negative Amortization”. A loan that contains a payment schedule with
regular periodic payments that cause the principal balance to increase.
(E) “Points and Fees”. The financing of points and fees in excess of four percentage
points of the total loan amount less the amount of such points and fees if the
loan amount is $16,000.00 or greater, or $800.00 if the loan is less than
$16,000.00.
(F) “Increased Interest Rate”. A loan which contains a provision that
increases the interest rate after default.
Interest rate increases do not constitute a predatory practice in a
variable rate loan where the increase is otherwise consistent with the
provisions of the loan documents, provided the event of default or the
acceleration of the indebtedness does not trigger the change in the interest
rate.
(G) “Advance Payments”. A loan which includes terms under which more
than two periodic payments required under the loan are consolidated and paid in
advance from the loan proceeds, provided the event of default or the
acceleration of the indebtedness does not trigger the change in the interest
rate.
(H) “Modification or Deferral Fees”. A loan which includes terms under which the
lender may charge a borrower any fees or other charges to modify, renew, extend
or amend a loan product or to defer any payment due under the terms of a loan
product.
(I) “Mandatory Arbitration”. A loan which contains a mandatory
arbitration clause that limits, in any way, the right of the borrower to seek
relief through a court of law or equity.
(J) “Prepayment Penalties”. A loan which imposes prepayment fees or
penalties on the borrower.
(K) “Financing of Credit Insurance”. The financing of any credit life, credit
disability, credit unemployment, or any other life or health insurance,
directly or indirectly, into one or more high cost loans.
(3) “Threshold loan” means a loan that is
secured by a residential real property located within Vermont on which there is
situated a dwelling for not more than four families or a condominium unit, or
is secured by a cooperative unit within Vermont, if, at any time over the life
of the loan, the annual percentage rate of the loan exceeds by at least 4 1/2
percentage points but less than 6 1/2 percentage points, in the case of a first
lien mortgage, or by at least 6 1/2 percentage points but less than eight
percentage points, in the case of a junior mortgage, the yield on Treasury
securities having comparable periods of maturity to the loan maturity as of the
15th day of the month immediately preceding the month in which the application
for the extension of credit is received by the creditor. However, a “threshold loan” shall not
include a loan that is made primarily for a business purpose unrelated to the
residential real property securing the loan or a loan which exceeds
$150,000.00.