8/12/08

Margaret Camp Portfolio Manager/Senior Counsel, Wolters Kluwer Financial Services

Effective April 24, 2008 a sweeping piece of legislation, Kentucky HB 552 affected all mortgage loan companies, brokers, originators, processors, and exempt companies and governed a broad range of topics in the mortgage lending arena including, but not limited to, lending practices, licensing, and exemptions from licensing. The Kentucky Legislature enacted the law as an emergency measure.

Kentucky HB 552 established, as part of the borrower education initiatives created by or through the Kentucky Housing Corporation, a Kentucky Homeownership Protection Center (the “Center”). The Center is designed to assist homeowners with their mortgage loans.

Kentucky HB 552 Sec. 2 and 3 [uncodified] are new sections added to Financial Institutions Generally, Ky. Rev. Stat. §§286.015 through 286.685. Sec. 2 requires, at the time of closing and together with the final signed loan documents if the Center is operational, the lender to provide to the borrower any brochure, pamphlet, or other brief document prepared or approved by the Kentucky Housing Corporation that describes the services provided by the Center. Sec. 3 prohibits any person in the course of a mortgage transaction from improperly influencing the development, report, result, or review of a real estate appraisal sought in connection with a mortgage loan.
Kentucky HB 552 substantially amends various provisions of Mortgage Loan Company and Mortgage Loan Broker Act, Ky. Rev. Stat. §§286.8-010 through 286.8-990 ("KY-MLA"), pertaining to mortgage loan brokers, mortgage loan companies, mortgage loan originators (aka loan officers), and mortgage loan processors.

Of significance, KY-MLA §286.8-010 is revised to amend the definition of “mortgage broker,” “mortgage loan originator,” and “mortgage loan processor." As revised, the term mortgage loan broker now only applies to entities and not individuals. The revised definitions of these terms are as follows:

1. Mortgage loan broker: Any person who for compensation or gain, or in the expectation of compensation or other gain, received directly or indirectly holds himself or herself out as being able to serve as an agent for any person in an attempt to obtain a loan that will be secured by a mortgage on residential real property; 
   
   
2. Mortgage loan originator: An individual who: (1) Provides services to one and not more than one mortgage loan company or mortgage loan broker; (2) Is subject to the supervision and control of that mortgage loan company or mortgage loan broker; and (3) In exchange for compensation by that mortgage loan company or mortgage loan broker, performs any one or more of the following acts in the mortgage lending process: 

1. Solicits, places, negotiates, originates, or offers to make a mortgage loan for a mortgage loan company or mortgage loan broker; 
   
   
2. Obtains personal and financial information from a borrower or prospective borrower;
    
3. Assists a borrower or prospective borrower with the preparation of a mortgage loan or related documents; 
   
   
4. Explains, recommends, discusses, or quotes rates, terms, and conditions of a mortgage loan with a borrower or prospective borrower, whether or not the borrower or prospective borrower makes or completes an application; or 
   
   
5. Explains any term or aspect of any disclosure or agreement given at or after the time a mortgage loan application is received.

3. Mortgage loan processor: An individual who works under the instruction of a mortgage loan originator and performs only clerical functions such as gathering information, requesting information, word processing, sending correspondence, or assembling files, and may or may not perform any of the duties or responsibilities of a mortgage loan originator in the mortgage loan lending process.

Revised KY-MLA §286.8-020 sets forth the exemptions to KY-MLA. “Affiliates” of banks, bank holding companies, trust companies, credit unions, savings and loan associations, service corporation subsidiary of a savings and loan association, insurance company, real estate investment trust, an institution of the farm credit system organized under the Farm Credit Act, and any wholly-owned subsidiary of such entities are no longer exempt from KY-MLA. The listed entities themselves and their wholly-owned subsidiaries, their mortgage loan originators, and mortgage loan processors continue to be exempt.

“Affiliates” of a consumer loan or finance company under Consumer Loans, Ky. Rev. Stat. §§286.4-410 through 286.4-991 ("KY-SLA") are also no longer exempt from licensure.

The de minimus exemption from KY-MLA licensure has been eliminated. Now, any person making less than 5 loans per year is no longer exempt.

KY-MLA §286.8-020(11) prohibits a person from holding both a claim of exemption and a KY-MLA license.

KY-MLA §286.8-030 is amended to require registration of mortgage loan originators or mortgage loan processors in accordance with KY-MLA §286.8-255 and makes it unlawful for a mortgage loan company or mortgage loan broker to employ or use an unregistered mortgage loan originator or mortgage loan processor.

KY-MLA §286.8-032 makes some technical changes to the license application for mortgage loan companies or mortgage loan brokers and further requires a mortgage loan company or mortgage loan broker to notify the Executive Director of the Office of Financial Institutions (“Executive Director”) of a change in the location or name of its business or the addition of any branch or branches in writing at least 10 days prior to the change. On or after January 1, 2009, every mortgage loan company and mortgage loan broker must maintain an agent for service of process in Kentucky. The name, address, telephone number, and electronic mail address of the agent for service of process must be filed with the application. The Executive Director must be notified in writing at least 5 days prior to any change in the status of an agent for service of process. The Executive Director may deem an application abandoned when an applicant fails to provide or respond to a request for additional information.

Revised KY-MLA §286.8-034 requires a license fee of $450 for the principal office and $250 for each branch originating mortgages to be paid if the applicant applies for a license on or between November 1 and June 30 of the following calendar year (previously July 1 and December 31) or $150 for the principal office and $100 for each branch office if the applicant applies for a license on or between July 1 and October 31 of the same calendar year (previously January 1 and June 30). A license issued between January 1 and October 31 of the same calendar year expires on December 31 of the same calendar year. A license issued between November 1 and December 31 of the same calendar year expires on December 31 of the following calendar year.

The application, fees and any required information must be received by the Executive Director on or before November 30 (previously June 20) prior to the December 31 (previously June 30) expiration date. The Executive Director may reinstate the license within 31 days of the expiration of the license if the licensee pays the filing fee and a reinstatement fee of $250. A license will not be reinstated when the application, fees, or any required information is received on or after February 1 of the following year that the renewal application was due.
KY-MLA §286.8-090 regarding denial, suspension, or revocation of license or registration is amended to add certain prohibited activities that justify disciplinary action from the Executive Director.

KY-MLA §286.8-110 regarding prepayment penalties is revised. Now, no prepayment penalty may be assessed against the borrower following the third anniversary date of the mortgage or 60 days prior to the date of the first interest rate reset, whichever is less. No prepayment penalty may exceed 3% for the first year, 2% for the second year, and 1% for the third year of the outstanding balance of the loan, but in no event may a prepayment penalty be assessed against a borrower refinancing with the mortgage loan company that funded the mortgage.

Revised KY-MLA §286.8-160 sets forth the recordkeeping requirements for mortgage loan companies and mortgage loan brokers. The time period for record retention will be set by rule or order of the Executive Director; however the period will not be longer than 5 years after a mortgage loan application is completed, whether approved or rejected, or on mortgage loans paid in full, whichever is longer. Records must be held for longer than 5 years where federal law prescribes or supersedes KY-MLA. The required records may be kept electronically.

Any person who ceases operating as a mortgage loan company or mortgage loan broker must, prior to discontinuing business in the residential mortgage lending process, notify the Executive Director of the physical location of the records. These records must be made accessible to the Executive Director upon 5 business days' written notice. A custodian of records must also be designated and the Executive Director notified of the name, physical address, electronic mail address, and telephone number of the custodian of records. Records may be maintained out of state so long as they are made accessible to the Executive Director upon 5 business days' written notice. The Executive Director may approve a written request for the destruction of records required to be preserved under KY-MLA prior to the minimum retention period.

KY-MLA §286.8-220 makes it unlawful for any person to use prescreened trigger lead information derived from a consumer report to solicit a consumer who has applied for a mortgage loan with another mortgage loan company or mortgage loan broker, when the person:

1. Fails to state in the initial solicitation that the person is not affiliated with the mortgage loan company or mortgage loan broker with which the consumer initially applied; 
   
   
2. Fails in the initial solicitation to conform to state and federal law relating to prescreened solicitations using consumer reports, including the requirement to make a firm offer of credit to the consumer; 
   
   
3. Uses information regarding consumers who have opted out of the prescreened offers of credit or who have placed their contact information on the state or federal do-not-call registry; or 
   
   
4. Solicits a consumer with an offer of certain rates, terms, and costs with the knowledge that the rates, terms, or costs will be subsequently changed to the detriment of the consumer.

Revised KY-MLA §286.8-255 requires mortgage loan processors, including third-party processors, as well as mortgage loan originators to register with the Office of Financial Institutions and comply with the provisions of the KY-MLA applicable to registrants, including but not limited to educational requirements of KY-MLA §286.8-260. The initial registration fee and the renewal fee are each $50. A certificate of registration issued between January 1 and October 31 of the same calendar year will expire on December 31 of the same calendar year. A certificate of registration issued between November 1 and December 31 of the same calendar year will expire on December 31 of the following calendar year.

As revised, KY-MLA §286.8-270 sets forth the following duties of mortgage loan brokers:

1. A mortgage loan broker must exercise good faith and fair dealing, must act in the best interest of the borrower, and must not compromise a borrower's right or interest in favor of another's right or interest; 
   
   
2. A mortgage loan broker must disclose to borrowers all material facts of which the mortgage loan broker has knowledge that might reasonably affect the borrower's rights, interests, or ability to receive the borrower's intended benefit from the residential mortgage loan; and 
   
   
3. A mortgage loan broker must provide a written accounting to a borrower for all the borrower's money and property received by the broker.

The mortgage loan broker is permitted to contract for the collection of a fee for services rendered from the borrower or lender if the fee has been properly disclosed to the borrower in advance of providing such services.

Kentucky HB 552 establishes the Kentucky Residential Mortgage Fraud Act, Ky. Rev. Stat. §286.8-990 (“KY-RMFA”) which sets forth conduct considered to be fraudulent under KY-RMFA. A KY-RMFA violation involving a mortgage loan is a Class D felony for the first or second offense and a Class C felony for each subsequent offense. Real and personal property may also be forfeited to the State of Kentucky and civil fines may be assessed of not less than $1,000 nor more than $5,000. Any person who knowingly engages in the business of residential mortgage lending regulated by KY-MLA without first securing a license or registration is guilty of a Class A misdemeanor.

New uncodified KY-MLA Sections 24 and 25 set forth powers of the Executive Director to file administrative complaints and levy civil penalties for violations of KY-MLA.
New uncodified KY-MLA Section 26 makes it unlawful for any licensee or person holding a claim of exemption to originate a mortgage loan if the total net income generated by the licensee or person exceeds $2,000 or 4% of the total loan amount, whichever is greater.

New uncodified KY-MLA Section 27 requires that, effective January 1, 2010, any person applying for a license, registration, or certain claims of exemption to pass a written examination prior to being issued a license, registration, or claim of exemption. An individual who fails to appear for the examination as scheduled or fails to pass the examination must reapply for an examination and remit all required fees and forms before being rescheduled for another examination.

New uncodified KY-MLA Section 30 permits the Executive Director to enter an emergency order suspending, limiting, or restricting the license, claim of exemption, or registration of any mortgage loan broker, mortgage loan company, mortgage loan originator, or mortgage loan processor without notice or hearing if it appears upon grounds satisfactory to the Executive Director that the mortgage loan broker, mortgage loan company, mortgage loan originator, or mortgage loan processor has engaged or is engaging in unsafe, unsound, and illegal practices that pose an imminent threat to the public interest. KY-MLA Section 30 also sets forth the circumstances that are considered sufficient grounds for an emergency order.

Kentucky HB 552 amends the Kentucky Predatory Lending Law, Ky. Rev. Stat. §360.100 ("KY-HIGHCOST"). The definition of “high-cost home loan” is amended to include loans where the total points and fees payable by the borrower at or before the loan closing exceed the greater of $3,000 or 6% of the total loan amount. Mortgage insurance premiums paid to government entities such as HUD, VA or Rural Housing are not considered part of the “total points and fees.”

Prepayment penalties on a high-cost home loan are permitted only if the lender makes a written offer to the borrower for a loan without a prepayment penalty. The borrower must initial the written offer to indicate that the borrower has declined the offer and the lender must disclose the discount rate received in consideration for a high-cost home loan with a prepayment penalty. The prepayment penalty is also subject to the following restrictions:

1. No prepayment penalty may be assessed against the borrower following the third anniversary date of the mortgage or 60 days prior to the date of the first interest rate reset, whichever is less; and 
   
   
2. No prepayment penalty may exceed 3% for the first year, 2% for the second year, and 1% for the third year of the outstanding balance of the loan; but in no event may a prepayment penalty be assessed against a borrower refinancing with the mortgage loan company that funded the mortgage.

If the lender charges a late payment fee on a high-cost home loan, the loan documentation must specifically authorize a late payment fee. A lender may not charge the borrower a fee for the first request of each calendar year for a written payoff calculation. Thereafter, for each subsequent request in a calendar year, the lender may charge a reasonable fee not to exceed in excess of $10 or actual costs, whichever is greater, per request for a written payoff calculation on a high-cost home loan.

Other restrictions or prohibitions on high-cost home loans are as follows:

1. A lender may not make a high-cost home loan that does not require an escrow account for taxes and insurance; 
   
   
2. A lender may not process the application to make a high-cost home loan, if the proceeds will be used, in whole or in part, to repay the principal of an existing loan secured by the borrower's principal dwelling that is not a high-cost home loan, without first requiring the borrower to obtain housing counseling by a HUD-approved counselor; 
   
   
3. A lender may not make a high-cost home loan that allows the borrower, for any part or all of the term of the loan, to make payments that are applied only to interest and not to principal; 
   
   
4. A lender may provide timely notice to the borrower of any material change in the terms of a high-cost home loan if the change is made after an application has been taken but before the closing of the loan. Notice will be deemed timely if given not later than 3 days after the lender has learned of the change or 24 hours before the high-cost home loan is closed, whichever is earlier. If the lender discloses a material change more than 3 days after learning of the change but still 24 hours before the high-cost home loan is closed, it will not be liable for penalties or forfeitures if the lender cures in time for the borrower to avoid any damage; 
   
   
5. A lender may not make a high-cost home loan without verifying the borrower's income and financial resources through tax returns, payroll receipts, bank records, or other similarly reliable documents, whether provided directly by the borrower or through a third party with the borrower's permission; and 
   
   
6. A lender may not make a high-cost home loan without verifying the borrower's reasonable ability to pay all scheduled payments of principal, interest, real estate taxes, homeowner's insurance, and mortgage insurance premiums, as applicable. For loans in which the interest rate may vary, the reasonable ability to repay is to be determined based upon the criteria set forth in KY-HIGHCOST §360.100(2)(z).

Finally, Kentucky HB 552 creates new Section 32 that is added to the Consumer Protection Act, KY-HB 552 Section 32 [uncodified] (KY-CPA"), pertaining to the duties of high-cost home loan servicers. Specifically, a servicer must:

1. If a payment is received on a Saturday, a Sunday, or any day when the servicer's principal place of business is not open or after 1 p.m. on a business day, it will be considered promptly applied if applied on the next regular business day; 
   
   
2. Apply payments first to interest and principal currently due, then to late fees currently due, then to other fees and charges currently due, and then to additional principal, as applicable; 
   
   
3. Assess a fee within 30 days of the date on which the fee was accrued and disclose any assessed fee clearly and conspicuously in the next periodic statement provided to the borrower; 
   
   
4. Charge no late fee, if a payment is otherwise a full payment for the applicable period and is paid on its due date or within an applicable grace period, and the only delinquency or insufficiency of payment is attributable to any late fee or delinquency charge assessed on any earlier payment; and 
   
   
5. Make all payments from the escrow account held for the borrower for insurance, taxes, and other charges with respect to the property in a timely manner so as to ensure that no late penalties are assessed or other negative consequences result, regardless of whether the loan is delinquent unless there are not sufficient funds in the account to cover the payments, and disclose any payments from the escrow account clearly and conspicuously in the next periodic statement provided to the borrower.

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