II

106TH CONGRESS

2D SESSION S. 2405

To prohibit predatory lending practices with respect to home loans, and

for other purposes.

IN THE SENATE OF THE UNITED STATES

APRIL 12, 2000

Mr. SCHUMER introduced the following bill; which was read twice and referred

to the Committee on Banking, Housing, and Urban Affairs

A BILL

To prohibit predatory lending practices with respect to home

loans, and for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Predatory Lending De5 terrence Act’’.

6 SEC. 2. DEFINITIONS.

7 In this Act—

8 (1) the terms ‘‘affiliate’’ and ‘‘subsidiary’’ have

9 the same meanings as in section 2 of the Bank

10 Holding Company Act of 1956 (12 U.S.C. 1841);
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1 (2) the terms ‘‘appropriate Federal financial su2 pervisory agency’’ and ‘‘regulated financial institu3 tion’’ have the same meanings as in section 803 of

4 the Community Reinvestment Act of 1977 (12

5 U.S.C. 2902); and

6 (3) the terms ‘‘consumer’’, ‘‘creditor’’, and

7 ‘‘open end credit plan’’ have the same meanings as

8 in section 103 of the Truth in Lending Act (15

9 U.S.C. 1602).

10 SEC. 3. THRESHOLDS.

11 Section 103(aa)(1) of the Truth in Lending Act (15

12 U.S.C. 1602(aa)(1)) is amended—

13 (1) in subparagraph (A), by striking ‘‘10 per14 centage’’ and inserting ‘‘8 percentage’’; and

15 (2) in subparagraph (B), by striking clauses (i)

16 and (ii), and inserting the following:

17 ‘‘(i) 4 percent of the total loan

18 amount, if the total loan amount is not

19 less than $20,000; or

20 ‘‘(ii) the lesser of 5 percent of the

21 total loan amount or $800, if the total loan

22 amount is less than $20,000, excluding

23 from the amount of points and fees—

24 ‘‘(I) not more than 2 bona fide

25 loan discount points payable by the
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1 consumer in connection with the loan

2 transaction, if the interest rate from

3 which the interest rate on the loan

4 will be discounted does not exceed by

5 more than 1 percentage point the re6 quired net yield for a 90-day standard

7 mandatory delivery commitment for a

8 reasonably comparable loan from ei9 ther the Federal National Mortgage

10 Association or the Federal Home

11 Loan Mortgage Corporation, which12 ever is greater; and

13 ‘‘(II) not more than 1 bona fide

14 loan discount point payable by the

15 consumer in connection with the loan

16 transaction, if the interest rate from

17 which the interest rate on the loan

18 will be discounted does not exceed by

19 more than 2 percentage points the re20 quired net yield for a 90-day standard

21 mandatory delivery commitment for a

22 reasonably comparable loan from ei23 ther the Federal National Mortgage

24 Association or the Federal Home
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1 Loan Mortgage Corporation, which2 ever is greater.’’.

3 SEC. 4. PROHIBITIONS AND LIMITATIONS REGARDING

4 HIGH COST HOME LOANS.

5 (a) IN GENERAL.—Section 129 of the Truth in Lend6 ing Act (15 U.S.C. 1639) is amended—

7 (1) in the section heading, by inserting ‘‘HIGH

8 COST’’ after ‘‘CERTAIN’’;

9 (2) by striking subsections (c) through (k);

10 (3) by redesignating subsection (l) as subsection

11 (n); and

12 (4) by inserting after subsection (b) the fol13 lowing:

14 ‘‘(c) PROHIBITION ON BALLOON PAYMENTS.—

15 ‘‘(1) IN GENERAL.—A mortgage referred to in

16 section 103(aa) may not contain terms under which

17 any scheduled payment is more than twice the

18 amount of the average of all other regular periodic

19 payments.

20 ‘‘(2) CONSTRUCTION.—Paragraph (1) does not

21 prohibit a payment schedule adjusted for the sea22 sonal or irregular income of the consumer.

23 ‘‘(d) PROHIBITION ON NEGATIVE AMORTIZATION.—

24 A mortgage referred to in section 103(aa) may not contain

25 terms under which the repayment schedule of regular peri-
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1 odic payments does not cover the full amount of interest

2 due, causing the principal balance to increase.

3 ‘‘(e) PROHIBITION ON PREPAID PAYMENTS.—A

4 mortgage referred to in section 103(aa) may not contain

5 terms under which more than 2 periodic payments re6 quired under the loan are consolidated and paid in ad7 vance from the loan proceeds provided to the consumer.

8 ‘‘(f) CONSIDERATION OF ABILITY TO REPAY; MAN9 DATORY CREDIT COUNSELING.—No creditor may extend

10 a mortgage referred to in section 103(aa) unless—

11 ‘‘(1) at the time at which the loan is con12 summated, the total monthly debts of the obligor, in13 cluding amounts owed under the loan, do not exceed

14 50 percent of the monthly gross income of the obli15 gor, as verified by the credit application, the finan16 cial statement of the obligor, a credit report, finan17 cial information provided to the creditor by or on be18 half of the obligor, or any other reasonable means;

19 and

20 ‘‘(2) the creditor has first received certification

21 that the consumer has received counseling on the ad22 visability of the loan transaction from a counselor

23 approved by the United States Department of Hous24 ing and Urban Development, a State housing financ25 ing agency, or other appropriate regulatory agency.
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1 ‘‘(g) REQUIREMENTS FOR PAYMENTS UNDER HOME

2 IMPROVEMENT CONTRACTS.—A creditor shall not make a

3 payment to a contractor under a home improvement con4 tract from amounts extended as credit under a mortgage

5 referred to in section 103(aa), other than—

6 ‘‘(1) in the form of an instrument that is pay7 able to the consumer or jointly to the consumer and

8 the contractor; or

9 ‘‘(2) at the election of the consumer, by a third

10 party escrow agent in accordance with terms estab11 lished in a written agreement signed by the con12 sumer, the creditor, and the contractor before the

13 date of payment.

14 ‘‘(h) PROHIBITION ON CALL PROVISIONS.—

15 ‘‘(1) IN GENERAL.—A mortgage referred to in

16 section 103(aa) may not contain terms that permit

17 the creditor, in the sole discretion of the creditor, to

18 accelerate repayment of the indebtedness.

19 ‘‘(2) CONSTRUCTION.—Paragraph (1) does not

20 apply when repayment of the loan has been acceler21 ated by default, pursuant to a due-on-sale provision,

22 or pursuant to some other provision of the loan doc23 uments unrelated to the payment schedule.

24 ‘‘(i) PROHIBITION ON MODIFICATION OR DEFERRAL

25 FEES.—No creditor may charge a consumer any fee or
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1 other charge to modify, renew, extend, or amend a mort2 gage referred to in section 103(aa), or to defer any pay3 ment due under the terms of any such mortgage.

4 ‘‘(j) PROHIBITION ON MANDATORY ARBITRATION.—

5 A mortgage referred to in section 103(aa) may not contain

6 terms that require arbitration of disputes or that limit in

7 any way the right of the consumer to seek relief through

8 the judicial process.

9 ‘‘(k) PROHIBITION ON FINANCING OF FEES OR

10 CHARGES.—No creditor may extend a mortgage referred

11 to in section 103(aa) that directly or indirectly finances—

12 ‘‘(1) any prepayment fees or penalties payable

13 by the consumer in a refinancing transaction, if the

14 creditor or an affiliate of the creditor is also the

15 creditor with respect to the obligation being refi16 nanced;

17 ‘‘(2) any points or fees; or

18 ‘‘(3) any other charges payable to third parties.

19 ‘‘(l) PROHIBITION ON BENEFIT FROM REFINANCING

20 EXISTING LOAN WITH NEW LOAN.—No creditor may

21 charge a consumer points and fees or other charges in con22 nection with the extension of a mortgage referred to in

23 section 103(aa) if the proceeds of the loan are used to

24 refinance an existing mortgage referred to in section

25 103(aa) that is held by the same creditor.
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1 ‘‘(m) SECURITIZATION.—Any person that purchases

2 (in whole or in part) an interest in a mortgage referred

3 to in section 103(aa) shall exercise due diligence before

4 such purchase in determining whether the requirements

5 of this section have been met with respect to the mort6 gage.’’.

7 SEC. 5. ADDITITIONAL DEFINITIONS.

8 Section 103 of the Truth in Lending Act (15 U.S.C.

9 1602) is amended by adding at the end the following:

10 ‘‘(cc) AFFILIATE.—The term ‘affiliate’ has the same

11 meaning as in section 2(k) of the Bank Holding Company

12 Act of 1956 (12 U.S.C. 1841(k)).

13 ‘‘(dd) BONA FIDE LOAN DISCOUNT POINTS.—The

14 term ‘bona fide loan discount points’ means loan discount

15 points knowingly paid by the consumer that results in a

16 reduction of the interest rate or time-price differential ap17 plicable to the subject loan, if the amount of the interest

18 rate reduction purchased by the discount points is reason19 able, as determined by the Board.

20 ‘‘(ee) POINTS AND FEES.—The term ‘points and

21 fees’—

22 ‘‘(1) means—

23 ‘‘(A) finance charges (other than interest

24 or the time-price differential), as defined by

25 rule or regulation of the Board;
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1 ‘‘(B) real estate related fees, as defined by

2 rule or regulation of the Board, but only if the

3 creditor receives direct or indirect compensation

4 in connection with the charge, or the charge is

5 paid to an affiliate of the creditor;

6 ‘‘(C) all compensation paid directly or indi7 rectly to a mortgage broker, including a broker

8 that originates a loan in its own name in a

9 table funded transaction, that is not otherwise

10 included under subparagraph (A) or (B);

11 ‘‘(D) all premiums financed by the cred12 itor, directly or indirectly, for any credit life in13 surance, credit disability insurance, or credit

14 unemployment insurance, or any other life or

15 health insurance (other than insurance pre16 miums calculated and paid on a monthly basis);

17 and

18 ‘‘(E) all prepayment fees or penalties in19 cluded in the loan documents; and

20 ‘‘(2) does not include—

21 ‘‘(A) taxes, filing fees, recording and other

22 charges and fees paid or to be paid to public of23 ficials for determining the existence of or for

24 perfecting, releasing, or satisfying a security in25 terest; or
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1 ‘‘(B) fees paid to a person other than the

2 creditor or an affiliate of the creditor, or to the

3 mortgage broker or an affiliate of the mortgage

4 broker, with respect to—

5 ‘‘(i) flood certification;

6 ‘‘(ii) pest infestation determinations;

7 ‘‘(iii) appraisals;

8 ‘‘(iv) inspections performed prior to

9 consummation of the transaction;

10 ‘‘(v) credit reports;

11 ‘‘(vi) surveys;

12 ‘‘(vii) attorneys’ fees (if the consumer

13 has the right to select the attorney from

14 an approved list or otherwise) or notary

15 fees;

16 ‘‘(viii) escrow charges, if otherwise not

17 included under subparagraph (A); or

18 ‘‘(ix) title and flood insurance pre19 miums, subject to the rules and regulations

20 of the Board.

21 ‘‘(ff) OBLIGOR.—The term ‘obligor’ means each con22 sumer, coconsumer, cosigner, or guarantor obligated to

23 repay a subject loan or other debt.

24 ‘‘(gg) TABLE FUNDED TRANSACTION.—The term

25 ‘table funded transaction’ means a settlement at which a
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1 mortgage loan is funded by an advance of loan funds in

2 which there is a subsequent assignment of the loan from

3 the person identified as the creditor in the loan documents

4 to the person advancing the funds.

5 ‘‘(hh) TOTAL LOAN AMOUNT.—The term ‘total loan

6 amount’ has the meaning given the term by rule or regula7 tion of the Board.’’.

8 SEC. 6. PROHIBITIONS AND LIMITATIONS REGARDING ALL

9 MORTGAGE LOANS.

10 (a) IN GENERAL.—The Truth in Lending Act (15

11 U.S.C. 1601 et seq.) is amended by inserting after section

12 129 the following new section:

13 ‘‘SEC. 129A. REQUIREMENTS AND LIMITATIONS FOR ALL

14 MORTGAGES.

15 ‘‘(a) PROHIBITION ON PREPAYMENT PENALTIES.—

16 A residential mortgage transaction may not include terms

17 under which a consumer must pay a prepayment penalty

18 for paying all or part of the principal before the date on

19 which the principal is due.

20 ‘‘(b) LIMITATIONS WITH RESPECT TO DEFAULT.—

21 ‘‘(1) NO ENCOURAGEMENT OF DEFAULT.—A

22 creditor may not recommend or encourage default on

23 an existing loan or other debt prior to or in connec24 tion with a residential mortgage transaction that re-
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1 finances all or a portion of that existing loan or

2 debt.

3 ‘‘(2) NO HIGHER RATE.—

4 ‘‘(A) IN GENERAL.—A residential mort5 gage transaction may not include terms under

6 which the interest rate mortgage that applies

7 after default is higher than the interest rate

8 that applies before default.

9 ‘‘(B) CONSTRUCTION.—Subparagraph (A)

10 does not apply to interest rate changes on a

11 variable rate mortgage loan that result from a

12 change in the annual percentage rate.

13 ‘‘(c) PROHIBITION ON FINANCING OF INSURANCE

14 PREMIUMS.—

15 ‘‘(1) IN GENERAL.—A residential mortgage

16 transaction may not include terms under which any

17 credit life insurance, credit disability insurance,

18 credit unemployment insurance, or any other life or

19 health insurance premiums are financed, directly or

20 indirectly, under the extension of credit.

21 ‘‘(2) CONSTRUCTION.—For purposes of para22 graph (1), insurance premiums calculated and paid

23 by the consumer on a monthly basis shall not be

24 considered to be financed by the creditor, but only
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1 if the consumer has the option to cancel the insur2 ance coverage (and related premiums) at any time.

3 ‘‘(d) LIMITATION ON REFINANCING.—No creditor

4 may knowingly or intentionally engage in the act or prac5 tice of entering into a residential mortgage transaction

6 that refinances an existing mortgage unless the new exten7 sion of credit is of tangible net benefit to the consumer,

8 after consideration of—

9 ‘‘(1) the terms of both the new and refinanced

10 loans;

11 ‘‘(2) the cost of the new loan; and

12 ‘‘(3) and the ability of the consumer to repay

13 the new loan.’’.

14 (b) CLERICAL AMENDMENT.—Chapter 2 of the Truth

15 in Lending Act (15 U.S.C. 1631 et seq.) is amended in

16 the table of contents by inserting after the item relating

17 to section 129 the following:

‘‘129A. Requirements and limitations for all mortgages.’’.

18 SEC. 7. ENFORCEMENT.

19 (a) BOARD OF GOVERNORS OF THE FEDERAL RE20 SERVE SYSTEM.—In addition to any other applicable pen21 alties, any person that violates section 129 of the Truth

22 in Lending Act (15 U.S.C. 1639), as amended by this Act,

23 shall be subject to the penalties contained in subsections

24 (a) and (b) of section 8 of the Bank Holding Company

25 Act of 1956 (12 U.S.C. 1847), and the authority of the
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1 Board of Governors of the Federal Reserve System under

2 those subsections.

3 (b) UNFAIR OR DECEPTIVE ACTS OR PRACTICES.—

4 (1) IN GENERAL.—A creditor shall be deemed

5 to have engaged in an unfair or deceptive act or

6 practice under the Federal Trade Commission Act

7 (15 U.S.C. 41 et seq.) if it intentionally—

8 (A) structures a mortgage referred to in

9 section 103(aa) of the Truth in Lending Act

10 (15 U.S.C. 1602(aa)) as an open end credit

11 plan;

12 (B) provides misleading information to a

13 consumer or otherwise engages in fraudulent

14 behavior with respect to such a mortgage; or

15 (C) engages in any subterfuge in connec16 tion with such a mortgage intended to mis17 represent the specific terms or conditions of the

18 credit agreement.

19 (2) ENFORCEMENT.—All enforcement authority

20 of the Federal Trade Commission under the Federal

21 Trade Commission Act (15 U.S.C. 41 et seq.) shall

22 apply with respect to an act or practice described in

23 paragraph (1) in the same manner and to the same

24 extent that such authority otherwise applies to un25 fair or deceptive acts or practices under that Act.
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1 SEC. 8. EFFECT ON OTHER LAWS.

2 The extension of credit in the form of a mortgage

3 referred to in section 103(aa) of the Truth in Lending

4 Act (15 U.S.C. 1602(aa)), as amended by this Act, may

5 not be taken into consideration by the appropriate Federal

6 financial supervisory agency for purposes of assessing the

7 record of a regulated financial institution that is the cred8 itor or an affiliate or subsidiary of the creditor in such

9 transaction, in meeting the credit needs of its entire com10 munity for purposes of the Community Reinvestment Act

11 of 1977 (12 U.S.C. 2901 et seq.).

Æ