AN ACT CONCERNING MORTGAGE PRACTICES.

This bill creates the crime of residential mortgage fraud. It provides that a person who commits a single act of residential mortgage fraud is guilty of a class D felony (up to a $ 5,000 fine, up to five years in prison, or both), while a person who commits two or more acts is guilty of a class C felony (up to a $ 10,000 fine, up to 10 years in prison, or both).

1. modifies the interest rate that makes a home loan “nonprime”;

2. extends, by one year, the banking commissioner's authority to adjust interest rate parameters for nonprime loans;

3. allows the commissioner to deem certain mortgage professional license applications abandoned and keep the application fee;

4. applies an existing prohibition against increasing the interest rate after default in certain loans to all residential mortgage loans; and

5. makes minor and technical changes.

1. makes a single act of residential mortgage fraud a class D, rather than C felony, and more than one act a class C, rather than B felony;

2. requires misstatement, misrepresentation, or omission to be in writing with regards to residential mortgage fraud and provides that attempting to do these things do not qualify as fraud;

3. defines the term person, with regard to residential mortgage fraud and APR, with regard to nonprime loans;

4. restores provisions (a) allowing the commissioner to increase both the interest rate parameters used to identify nonprime loans and (b) restricting the total of all increases the commissioner authorizes to a particular percentage to . 5%;

5. eliminates a provision requiring lenders to disclose, at the time of closing, the date on which the interest rate was set; and

6. changes some effective dates and makes other minor and conforming changes.

EFFECTIVE DATE: October 1, 2009, except for a technical provision and the provisions on abandoned licenses and high cost loans, which are effective on passage.

Under the bill, a person commits residential mortgage fraud when, for financial gain and with the intent to defraud, the person:

1. knowingly and in writing makes any material misstatement, misrepresentation, or omission during the mortgage lending process with the intention that a lender or broker, a borrower or any other person that is involved in the mortgage lending process will rely on it;

2. knowingly uses or facilitates the use or attempts to use or facilitate the use of any written misstatement, misrepresentation, or omission during the mortgage lending process with the intention that a mortgage lender, borrower or any other person that is involved in the mortgage lending process relies on it;

3. receives or attempts to receive proceeds or any other funds in connection with a residential mortgage closing that the person knew or should have known resulted from an act or acts constituting residential mortgage fraud; or

4. conspires with or solicits another to engage in an act or acts constituting residential mortgage fraud.

The bill defines a “person” as (1) a mortgage broker, lender, or loan originator or (2) any other individual who makes more than three individual mortgage loans or who purchases or sells more than three residential properties in a consecutive 12-month period. It defines the “mortgage lending process” as the process through which an individual seeks or obtains a residential mortgage loan, including solicitation, application, origination, negotiation of terms, underwriting, signing, closing and funding of a residential mortgage loan and services coinciding with the mortgage loan, including the appraisal of the residential property. It defines residential property as it is defined in the mortgage lending statutes.

The bill specifies that the residential mortgage fraud is considered to be committed in the county in which:

1. the residential real property for which the mortgage loan is being sought is located or

2. any act was performed in furtherance of residential mortgage fraud.

1. any person alleged to have engaged in an act that constitutes residential mortgage fraud had control or possession of any proceeds of the fraud;

2. the closing occurred, if a closing occurred; or

3. a document containing a deliberate misstatement, misrepresentation or omission is filed with an official registrar.

The bill provides that, in a prosecution for residential mortgage fraud, it is sufficient to show that the party accused did the act with the intent to deceive or defraud. The bill specifies that it is unnecessary to show that any particular person was harmed financially in the transaction or that the person to whom the deliberate misstatement, misrepresentation, or omission was made relied on it.

In order to secure a fine levied against a person convicted of residential mortgage fraud, the bill subjects to a judgment lien in favor of the state all real and personal property of every kind used or intended for use in the course of, derived from, or realized through, the act. The lien must comply with the statutes governing postjudgment procedures and be subordinate to any security interest in the property recorded prior to the date the lien is recorded.

Additionally, the bill allows courts to order restitution to any person who has suffered a financial loss due to any act or acts constituting residential mortgage fraud.

The bill protects from civil liability a person who has furnished information regarding suspected residential mortgage fraud to a regulatory or law enforcement agency, as long as there is no fraud, bad faith, or malice.

Under current law, loans must meet two interest rate provisions in order to be considered a nonprime. The bill eliminates one that specifies that nonprime loans are those where the difference between the annual percentage rate (APR) for the loan or extension of credit and the yield on United States Treasury securities having comparable periods of maturity is either 3% or more on first mortgage loans or 5% or more on second mortgage loans.

The bill instead specifies that a loan is nonprime if the difference, at the time of consummation, between the APR for the loan or extension of credit and the average prime offer rate for a comparable transaction, as of the date the interest rate is set, is greater than 1. 5% if the loan is a first mortgage loan or 3. 5% if the loan is a secondary mortgage loan. Under the bill “average prime offer” rate has the same meaning as it does in federal Truth in Lending regulations.

The other interest rate provision is mostly unchanged by the bill. Under current law, it provides that nonprime loans are also those where the difference between the APR for the loan and the conventional mortgage rate is either equal to or greater than 1. 75% if the loan is a first mortgage or 3. 75% if it is a second mortgage. The bill specifies that the difference is at the time of consummation. Current law specifies that the conventional mortgage rate is the most recent daily contract interest rate on commitments for fixed-rate mortgages published by the Board of Governors of the Federal Reserve System in its statistical release H. 15, or any publication that may supersede it, during the week in which the interest rate for the loan is set. The bill changes this to the week before the loan's interest rate is set and also eliminates the requirement for it to be the “most recent daily” contract interest rate.

The bill provides that, for the nonprime loans law, APR has the same meaning as under the Connecticut Abusive Home Loan Lending Practices Act.

Although the law sets interest rate parameters for identifying nonprime loans, it allows the banking commissioner to increase them after considering relevant factors. Under current law, the commissioner's authority expires on August 31, 2009. The bill extends this authority to August 31, 2010.

The bill expands the list of provisions that are prohibited in nonprime laws to include:

1. for a loan with a term of less than seven years, a payment schedule with regular periodic payments that when aggregated does not fully amortize the outstanding principal balance, except that this limitation does not apply to loans with maturities of less than one year if the loan's purpose is a bridge loan, as defined in federal regulation, connected with the acquisition or construction of a dwelling intended to become the borrower's principal dwelling;

2. a payment schedule with regular periodic payments that cause the principal balance to increase;

3. a payment schedule that consolidates more than two periodic payments and pays them in advance from the proceeds, unless such payments are required to be escrowed by a governmental agency;

4. default charges in excess of 5% of the amount in default; or

5. a call provision that permits the lender, in its sole discretion, to accelerate the indebtedness.

This last prohibition does not apply when repayment of the loan is accelerated by bona fide default pursuant to a due-on-sale clause provision or pursuant to another provision of the loan agreement unrelated to the payment schedule.

As under current law, if a nonprime loan contains any of these provisions, it is void and unenforceable.

The bill allows the commissioner to deem an application for a license as a mortgage lender, mortgage correspondent lender, mortgage broker, or mortgage loan originator abandoned if the applicant fails to respond to any request for information under the mortgage licensing statutes. Before doing this, the bill requires the commissioner to notify the applicant in writing that the application is deemed abandoned if the information is not submitted within 60 days. The bill allows the banking department to keep the application fee for abandoned applications, but provides that abandonment does not preclude the applicant from submitting a new application.

§§ 4, 6 & 8 — PROHIBITION AGAINST INCREASING INTEREST RATE AFTER DEFAULT

By law, a high-cost home loan cannot provide for an increase in the interest rate after default or default charges in excess of 5% of the amount in default. Similarly, nonprime loans cannot have a provision that increases the interest rate after default. The bill eliminates the (1) nonprime loan provision starting on October 1, 2009 and (2) high cost loan prohibition starting on the date of the bill's passage. Instead, starting October 1, 2009, the bill prohibits lenders from including in any mortgage loan a provision that increases the interest rate as a result of default.

The bill maintains for all loans current law's nonprime loan exception for an increase for a failure to comply with a provision to maintain an automatic electronic payment feature if the maintenance provision was provided in return for an interest rate reduction and the increase is no greater than the reduction.

Yea

Nay

(03/10/2009)

Yea

Nay

(04/15/2009)