We do not have a reference that covers every difference between the Illinois and federal laws, though our analysis below touches on some of those differences. Essentially, the laws have very similar definitions of what is considered a “high-cost” or “high risk” mortgage loan (except for the differing thresholds of 6.0% versus 6.5%), but there are significant differences as to the requirements that apply to loans classified as “high-cost” or “high risk” under each law.

There are some loans that will be subject to the Illinois High Risk Home Loan Act (which sets a 6.0% threshold) but that will not be subject to the federal high-cost mortgage regulations (which set a 6.5% threshold). Such a loan would be considered a “high risk” loan under the Illinois law, but it would not be considered a “high-cost” loan under the federal regulations. While the Illinois law’s requirements are similar to the federal regulations’ requirements, they are not always exactly the same. While we do not yet have a comprehensive list of all of the differences, one example is that the Illinois law has a complete prohibition on negative equity loans (where the loan amount exceed the value of the property securing the loan). 815 ILCS 137/70. While the upcoming federal rules impose certain home ownership counseling requirements on loans with negative amortization features (where the loan principal balance increases throughout the life of the loan), we are not aware of any provision that would prohibit negative equity loans. 12 CFR 1026.36(k) (effective January 10, 2014).

Summary of Federal and Illinois Changes to “High-Cost” and “High Risk” Mortgage Rules

The Dodd-Frank Act expanded the definition of “high-cost mortgage” (effective when the implementing regulations become effective, currently scheduled for January 10, 2014), and the Illinois High Risk Home Loan Act was recently amended to similarly expand the definition of a “high risk home loan” (under Senate Bill 1692, to become effective on the effective date of the federal regulations). When those laws become effective, the definitions will expand to potentially encompass more loans than under current law:

• Scope: The definitions will expand from applying only to “home equity loans” (a non-purchase money loan secured by the borrower’s primary residence) to any “consumer credit transaction . . . that is secured by the consumer’s principal dwelling.”

• Interest rate:

• Dodd-Frank lowers the interest-rate trigger threshold (which could cause more loans to be considered high-cost/high risk) to 6.5% (for first lien loans) or 8.5% (for junior lien loans and for manufactured home loans of less than $50,000) over the average prime offer rate (§ 1431(a)). The Illinois law retains the current interest rate trigger of 6% (for first lien loans) or 8% (for junior lien loans) over the average prime offer rate.

• Both laws also move to using the “average prime offer rate” for comparison purposes, rather than the comparable U.S. Treasury yield.

• Points and fees: Under the current laws, a loan is a “high risk home loan” if the closing points and fees exceed the greater of 5% of the loan principal or an indexed amount (currently $947). The new laws expand the calculation to include all points and fees paid “in connection with the transaction,” with the exclusion of “bona fide loan discount points.” Dodd-Frank § 1431(a); SB 1692, page 4.

• Prepayment penalties: The new laws add a new trigger for certain prepayment penalties, if penalties are charged “more than 36 months after the transaction closing” or when the prepayment fees “exceed, in the aggregate, more than 2% of the amount prepaid.” Dodd-Frank § 1431(a); SB 1692, page 4.