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HF 1004

as introduced - 85th Legislature (2007 - 2008) Posted on 12/15/2009 12:00am

KEY: stricken = removed, old language.
underscored = added, new language.
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A bill for an act
relating to mortgages; prohibiting predatory lending practices; amending
Minnesota Statutes 2006, sections 58.13, subdivision 1; 58.137, subdivision
1; 58.15; 58.16.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA:

Section 1.

Minnesota Statutes 2006, section 58.13, subdivision 1, is amended to read:


Subdivision 1.

Generally.

No person acting as a residential mortgage originator
or servicer, including a person required to be licensed under this chapter, and no person
exempt from the licensing requirements of this chapter under section 58.04, shall:

(1) fail to maintain a trust account to hold trust funds received in connection with a
residential mortgage loan;

(2) fail to deposit all trust funds into a trust account within three business days of
receipt; commingle trust funds with funds belonging to the licensee or exempt person; or
use trust account funds for any purpose other than that for which they are received;

(3) unreasonably delay the processing of a residential mortgage loan application,
or the closing of a residential mortgage loan. For purposes of this clause, evidence of
unreasonable delay includes but is not limited to those factors identified in section 47.206,
subdivision 7
, clause (d);

(4) fail to disburse funds according to its contractual or statutory obligations;

(5) fail to perform in conformance with its written agreements with borrowers,
investors, other licensees, or exempt persons;

(6) charge a fee for a product or service where the product or service is not actually
provided, or misrepresent the amount charged by or paid to a third party for a product
or service;

(7) fail to comply with sections 345.31 to 345.60, the Minnesota unclaimed property
law;

(8) violate any provision of any other applicable state or federal law regulating
residential mortgage loans including, without limitation, sections 47.20 to 47.208;

(9) make or cause to be made, directly or indirectly, any false, deceptive, or
misleading statement or representation in connection with a residential loan transaction
including, without limitation, a false, deceptive, or misleading statement or representation
regarding the borrower's ability to qualify for any mortgage product;

(10) conduct residential mortgage loan business under any name other than that
under which the license or certificate of exemption was issued;

(11) compensate, whether directly or indirectly, coerce or intimidate an appraiser for
the purpose of influencing the independent judgment of the appraiser with respect to the
value of real estate that is to be covered by a residential mortgage or is being offered as
security according to an application for a residential mortgage loan;

(12) issue any document indicating conditional qualification or conditional approval
for a residential mortgage loan, unless the document also clearly indicates that final
qualification or approval is not guaranteed, and may be subject to additional review;

(13) make or assist in making any residential mortgage loan with the intent that the
loan will not be repaid and that the residential mortgage originator will obtain title to
the property through foreclosure;

(14) provide or offer to provide for a borrower, any brokering or lending services
under an arrangement with a person other than a licensee or exempt person, provided that
a person may rely upon a written representation by the residential mortgage originator that
it is in compliance with the licensing requirements of this chapter;

(15) claim to represent a licensee or exempt person, unless the person is an employee
of the licensee or exempt person or unless the person has entered into a written agency
agreement with the licensee or exempt person;

(16) fail to comply with the record keeping and notification requirements identified
in section 58.14 or fail to abide by the affirmations made on the application for licensure;

(17) represent that the licensee or exempt person is acting as the borrower's agent
after providing the nonagency disclosure required by section 58.15, unless the disclosure
is retracted and the licensee or exempt person complies with all of the requirements of
section 58.16;

(18) make, provide, or arrange for a residential mortgage loan that is of a lower
investment grade if the borrower's credit score or, if the originator does not utilize credit
scoring or if a credit score is unavailable, then comparable underwriting data, indicates
that the borrower may qualify for a residential mortgage loan, available from or through
the originator, that is of a higher investment grade, unless the borrower is informed that
the borrower may qualify for a higher investment grade loan with a lower interest rate
and/or lower discount points, and consents in writing to receipt of the lower investment
grade loan.

For purposes of this section, "investment grade" refers to a system of categorizing
residential mortgage loans in which the loans are: (i) commonly referred to as "prime" or
"subprime"; (ii) commonly designated by an alphabetical character with "A" being the
highest investment grade; and (iii) are distinguished by interest rate or discount points
or both charged to the borrower, which vary according to the degree of perceived risk
of default based on factors such as the borrower's credit, including credit score and
credit patterns, income and employment history, debt ratio, loan-to-value ratio, and prior
bankruptcy or foreclosure;

(19) make, publish, disseminate, circulate, place before the public, or cause to be
made, directly or indirectly, any advertisement or marketing materials of any type, or any
statement or representation relating to the business of residential mortgage loans that is
false, deceptive, or misleading;

(20) advertise loan types or terms that are not available from or through the licensee
or exempt person on the date advertised, or on the date specified in the advertisement.
For purposes of this clause, advertisement includes, but is not limited to, a list of sample
mortgage terms, including interest rates, discount points, and closing costs provided by
licensees or exempt persons to a print or electronic medium that presents the information
to the public;

(21) use or employ phrases, pictures, return addresses, geographic designations, or
other means that create the impression, directly or indirectly, that a licensee or other
person is a governmental agency, or is associated with, sponsored by, or in any manner
connected to, related to, or endorsed by a governmental agency, if that is not the case; deleted text begin or
deleted text end

(22) violate section 82.49, relating to table fundingdeleted text begin .deleted text end new text begin ;new text end

new text begin (23) make, provide, or arrange for a residential mortgage loan without verifying
the borrower's reasonable ability to pay the principal and interest on the loan, and pay
real estate taxes and home insurance. For loans in which the interest rate may vary, the
reasonable ability to pay must be determined based on the maximum monthly payment
that could be due during the first seven years of the loan term, which amount must be
calculated with reference to the maximum interest rate allowable under the loan assuming
no default by the borrower and assuming a fully indexed rate and a repayment schedule
which achieves full amortization over the life of the loan. For all residential mortgage
loans, the borrower's income and financial resources must be verified by tax returns,
payroll receipts, bank records, or other similarly reliable documents. A statement by
the borrower to the residential mortgage originator or exempt person of the borrower's
income and resources is not sufficient to establish the existence of the income or resources
when verifying the reasonable ability to pay;
new text end

new text begin (24) engage in "churning." As used in this section, "churning" means to make,
provide, or arrange for a residential mortgage loan to a borrower that refinances an existing
residential mortgage loan when the new loan does not benefit the borrower considering all
of the circumstances, including the terms of both the new and refinanced loans, the cost
of the new loan, the effect of the loan on current and future equity in the home, and the
borrower's other financial and life circumstances.
new text end

new text begin A court must presume that churning has occurred if: (i) the refinanced loan was
originated within 24 months preceding the date the new loan was originated; (ii) the
interest rate on the new loan exceeds the interest rate of the refinanced loan; and (iii) the
refinanced loan is not in foreclosure or in imminent risk of being in foreclosure. For
purposes of determining whether the interest rate of the new loan exceeds the interest rate
of the refinanced loan under the provision: (A) in the case of a new loan or a refinanced
loan in which the interest rate may vary, the interest rate is determined based on the
maximum interest rate allowable under the loan that could be charged during the next five
years from the date of origination of the new loan and assuming no default or further
default by the borrower; and (B) in the case of multiple new loans or multiple refinanced
loans, the interest rate is determined by combining the loan balances and required
payments. In order to rebut this presumption of churning, the residential mortgage
originator or exempt person making the loan must demonstrate by clear and convincing
evidence that the borrower received a substantial and definite benefit from the new loan;
new text end

new text begin (25) whenever the residential mortgage originator informs a borrower, orally or in
writing, of the anticipated or actual periodic payment amount for a first-lien residential
mortgage loan, the residential mortgage originator must inform the borrower that an
additional amount will be due for taxes and insurance and, if known, disclose to the
borrower the amount of the anticipated or actual periodic escrow payments. A residential
mortgage originator need not make this disclosure concerning a refinancing loan if the
residential mortgage originator knows that the borrower's existing loan that is anticipated
to be refinanced does not have an escrow account. Compliance with federal laws requiring
disclosure of a periodic payment amount constitutes compliance with this paragraph but
only for purposes of the particular disclosure required under federal law; or
new text end

new text begin (26) make, provide, or arrange for a residential mortgage loan, other than a reverse
mortgage pursuant to United States Code, title 15, chapter 41, if the borrower's compliance
with any repayment option offered pursuant to the terms of the loan will result in negative
amortization during any six-month period.
new text end

Sec. 2.

Minnesota Statutes 2006, section 58.137, subdivision 1, is amended to read:


Subdivision 1.

Financed interest, points, finance charges, fees, and other
charges.

A residential mortgage originator making or modifying a residential mortgage
loan to a borrower located in this state must not include in the principal amount of any
residential mortgage loan all or any portion of any lender fee in an aggregate amount
exceeding five percent of the loan amount. This subdivision shall not apply to residential
mortgage loans which are insured or guaranteed by the secretary of housing and urban
development or the administrator of veterans affairs or the administrator of the Farmers
Home Administration or any successor.

"Lender fee" means interest, points, finance charges, fees, and other charges payable
new text begin in connection with the residential mortgage loan: (1) new text end by the borrower to any residential
mortgage originator or to any assignee of any residential mortgage originatornew text begin ; (2) by the
borrower to any third party that is not a residential mortgage originator or an assignee of a
residential mortgage originator for appraisal, title insurance, or closing services, except for
the cost of title insurance for which the borrower is the insured; or (3) by the lender to a
mortgage broker
new text end . Lender fee does not includenew text begin : (1) new text end recording fees, mortgage registration
taxes, passthroughs, or other amounts that are paid by any person to any government
entitydeleted text begin ,deleted text end new text begin or new text end filing officedeleted text begin ,deleted text end new text begin ; new text end or deleted text begin other third party that is not a residential mortgage originator
or an assignee of a residential mortgage originator. Lender fee also does not include
deleted text end
new text begin (2) new text end any amount that is set aside to pay taxes or insurance on any property securing the
residential mortgage loan.

"Loan amount" means: (1) for a line of credit, the maximum principal amount of
the line of credit; and (2) for any other residential mortgage loan, the principal amount
of the residential mortgage loan excluding all interest, points, finance charges, fees, and
other charges. A residential mortgage originator shall not charge, receive, or collect any
excess financed interest, points, finance charges, fees, or other charges described in this
subdivision, or any interest, points, finance charges, fees, or other charges with respect
to this excess.

Sec. 3.

Minnesota Statutes 2006, section 58.15, is amended to read:


58.15 DISCLOSURE REQUIREMENTS FOR new text begin CERTAIN new text end RESIDENTIAL
MORTGAGE ORIGINATORS.

Subdivision 1.

Nonagency disclosure.

If a residential mortgage originator or
exempt person new text begin other than a mortgage broker new text end does not contract or offer to contract to act
as an agent of a borrower, or accept an advance fee, it must, within three business days
of accepting an application for a residential mortgage loan, provide the borrower with a
written disclosure as provided in subdivision 2.

Subd. 2.

Form and content requirements.

The disclosure must be a separate
document, 8-1/2 inches by 11 inches, must be signed by the borrower and must contain the
following statement in 14-point boldface print:

Originator IS NOT ACTING AS YOUR AGENT IN CONNECTION WITH
OBTAINING A RESIDENTIAL MORTGAGE LOAN. WHILE WE SEEK TO
ASSIST YOU IN MEETING YOUR FINANCIAL NEEDS, WE CANNOT
GUARANTEE THE LOWEST OR BEST TERMS AVAILABLE IN THE
MARKET.

Subd. 3.

Electronic application disclosure requirement.

In case of an electronic
residential mortgage application, the disclosure requirements of this section may be
satisfied by providing the disclosure statement as a separate screen if the disclosure must
be acknowledged by the borrower before an application is accepted.

Subd. 4.

Exemption from disclosure requirement.

If the Department of
Housing and Urban Development adopts and implements a disclosure requirement deleted text begin for
persons offering mortgage origination services
deleted text end that the commissioner determines to be
substantially similar to the disclosure required in subdivision 2, deleted text begin licensees and exempt
persons complying
deleted text end new text begin compliancenew text end with the HUD disclosure shall be considered new text begin sufficient new text end to
deleted text begin have complied withdeleted text end new text begin satisfynew text end the requirements of deleted text begin subdivisions 1 anddeleted text end new text begin subdivisionnew text end 2.

Sec. 4.

Minnesota Statutes 2006, section 58.16, is amended to read:


58.16 deleted text begin RESIDENTIAL MORTGAGE ORIGINATORSdeleted text end new text begin MORTGAGE
BROKERS
new text end ; STANDARDS OF CONDUCT FOR AGENCY OR ADVANCE FEE
TRANSACTIONS.

Subdivision 1.

Compliance.

Residential mortgage originators who solicit or receive
an advance fee in exchange for assisting a borrower located in this state in obtaining a
loan secured by a lien on residential real estate, or who offer to act as an agent of the
borrower located in this state in obtaining a loan secured by a lien on residential real estate
shall be considered to have created a fiduciary relationship with the borrower and shall
comply with the requirements of subdivisions 2 to 7new text begin in addition to any duties imposed
upon fiduciaries by statute or common law
new text end .

new text begin Subd. 1a. new text end

new text begin Mortgage broker fiduciary duties. new text end

new text begin A mortgage broker shall be
considered to have created a fiduciary relationship with the borrower in all cases and shall
comply with the duties imposed upon fiduciaries by statute or common law.
new text end

Subd. 2.

Contract provisions.

(a) A residential mortgage originator who engages
in the activities described in subdivision 1 shall enter into a written contract with each
borrower and shall provide a copy of the written contract to each borrower at or before
the time of receipt of any fee or valuable consideration paid for mortgage origination
services. The written contract must:

(1) specifically describe the services to be provided by the residential mortgage
originator and if the originator collects an advance fee, the dates by which the services
will be performed;

(2) specifically identify whether the residential mortgage originator may receive
compensation from sources other than the borrower in connection with the loan
transaction;

(3) state the total amount of commission or compensation that the borrower agrees
to pay for the residential mortgage originator's services, or the basis on which the
compensation will be computed;

(4) state the maximum rate of interest to be charged on any residential mortgage
loan obtained;

(5) contain a statement that notifies the borrower of the right to cancel the contract
according to subdivision 3 and disclose the cancellation rights and procedures provided in
subdivision 3; and

(6) disclose, with respect to the 12-month period ending ten business days before the
date of the contract in question, the percentage of the mortgage originator's customers for
whom loans have actually been funded as a result of the residential mortgage originator's
services.

(b) If an advance fee is solicited or received the contract must also:

(1) identify the trust account into which the fees or consideration will be deposited;

(2) set forth the circumstances under which the residential mortgage originator will
be entitled to disbursement from the trust account; and

(3) set forth the circumstances under which the borrower will be entitled to a refund
of all or part of the fee.

Subd. 3.

Cancellation.

A borrower who pays an advance fee, or who enters into
a contract for residential mortgage services as set forth in subdivisions 1 and 2, has an
unconditional right to rescind the contract for residential mortgage origination services at
any time until midnight of the third business day after the day on which the contract is
signed. Cancellation is evidenced by the borrower giving written notice of cancellation
to the residential mortgage originator at the address stated in the contract. Notice of
cancellation, if given by mail, is effective upon deposit in a mailbox properly addressed
to the originator with postage prepaid. Notice of cancellation need not take a particular
form and is sufficient if it indicates by any form of written expression the intention of the
borrower not be bound by the contract. No act of a borrower or a residential mortgage
originator is effective to waive the right to rescind as provided in this subdivision.

Subd. 4.

Trust account.

The residential mortgage originator shall deposit in a trust
account within three business days all fees received before the time a loan is actually
funded. The trust account must be in a financial institution located within the state of
Minnesota, and, with respect to advance fees, the account must be controlled by an
unaffiliated accountant, attorney, or bank.

Subd. 5.

Records.

The residential mortgage originator shall maintain a separate
record of all fees received for services performed or to be performed as a residential
mortgage originator. Each record must set forth the date the funds are received; the person
from whom the funds are received; the amount received; the date of deposit in the escrow
account, the account number, the date the funds are disbursed and the check number of
the disbursement, and a description of each disbursement and the justification for the
disbursement.

Subd. 6.

Monthly statement.

The residential mortgage originator shall provide to
each borrower at least monthly a detailed written accounting of all disbursements of the
borrower's funds from the trust account.

Subd. 7.

Disclosure of lenders.

The residential mortgage originator shall provide
to each borrower at the expiration of the contract a list of the lenders or loan sources to
whom loan applications were submitted on behalf of the borrower.