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Minnesota Legislature

Office of the Revisor of Statutes

HF 1004

1st Committee Engrossment - 85th Legislature (2007 - 2008) Posted on 12/22/2009 12:38pm

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 58.02, by adding subdivisions; 58.13,
subdivision 1; 58.137, subdivision 1; 58.15; 58.16, subdivision 1, by adding a
subdivision.

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

Section 1.

Minnesota Statutes 2006, section 58.02, is amended by adding a subdivision
to read:


new text begin Subd. 27. new text end

new text begin Investment grade. new text end

new text begin When used in reference to residential mortgage loans,
"investment grade" refers to a system of categorizing residential mortgage loans in which
the pricing or terms 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.
new text end

Sec. 2.

Minnesota Statutes 2006, section 58.02, is amended by adding a subdivision to
read:


new text begin Subd. 28. new text end

new text begin Prime loan. new text end

new text begin "Prime loan" means a residential mortgage loan that is
of the highest investment grade and which is commonly designated by an alphabetical
character of "A."
new text end

Sec. 3.

Minnesota Statutes 2006, section 58.02, is amended by adding a subdivision to
read:


new text begin Subd. 29. new text end

new text begin Subprime loan. new text end

new text begin "Subprime loan" means a residential mortgage loan
that is of less than the highest investment grade, and which is commonly designated by
an alphabetical character of "A-" to "D."
new text end

Sec. 4.

Minnesota Statutes 2006, section 58.02, is amended by adding a subdivision to
read:


new text begin Subd. 30. new text end

new text begin Fully indexed rate. new text end

new text begin "Fully indexed rate" equals the index rate prevailing
at the time a residential mortgage loan is originated, plus the margin that will apply after
the expiration of an introductory interest rate.
new text end

Sec. 5.

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


Subdivision 1.

Generally.

new text begin(a)new text end 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, new text beginexcept as
otherwise provided in paragraph (b),
new text end 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 loandeleted text begin.deleted text endnew text begin;new text end

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

(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 beginor
deleted text end

(22) violate section 82.49, relating to table fundingdeleted text begin.deleted text endnew 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, homeowner's insurance, and private mortgage insurance if it is required in
connection with the loan. For loans in which the interest rate may vary, the reasonable
ability to pay must be calculated based on a rate that is fully indexed according to the
terms of the loan 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 have a reasonable, tangible net
benefit to 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 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; (iii) the new
loan is a subprime loan; and (iv) 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 a rate that is fully indexed according to the terms of the loan
and a repayment schedule which achieves full amortization over the life of the loan; 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) the first time a residential mortgage originator orally informs a borrower of the
anticipated or actual periodic payment amount for a first-lien residential mortgage loan
which does not include an amount for payment of property taxes and hazard insurance,
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 payments for property taxes and hazard insurance. This
same oral disclosure must be made each time the residential mortgage originator orally
informs the borrower of a different anticipated or actual periodic payment amount change
from the amount previously disclosed. 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; 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

new text begin (b) Paragraph (a), clauses (22) through (25), do not apply to a state or federally
chartered bank, savings bank, or credit union, or to a person making, providing, or
arranging a residential mortgage loan originated or purchased by a state agency or a
tribal or local unit of government. This paragraph supersedes any inconsistent provision
of this chapter.
new text end

Sec. 6.

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 endby 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 beginor new text endfiling officedeleted text begin,deleted text endnew text begin; new text end or deleted text beginother 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 endany 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. 7.

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


58.15 DISCLOSURE REQUIREMENTS FOR new text beginCERTAIN new text endRESIDENTIAL
MORTGAGE ORIGINATORS.

Subdivision 1.

Nonagency disclosure.

If a residential mortgage originator or
exempt person new text beginother than a mortgage broker new text enddoes 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 beginfor
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 beginlicensees and exempt
persons complying
deleted text endnew text begin compliancenew text end with the HUD disclosure shall be considered new text beginsufficient new text endto
deleted text begin have complied withdeleted text endnew text begin satisfynew text end the requirements of deleted text beginsubdivisions 1 anddeleted text endnew text begin subdivisionnew text end 2.

Sec. 8.

Minnesota Statutes 2006, section 58.16, subdivision 1, is amended to read:


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.

Sec. 9.

Minnesota Statutes 2006, section 58.16, is amended by adding a subdivision to
read:


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