Topic: High Risk and High-Cost Mortgage Loans
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We would like to waive our upfront costs for HELOC borrowers. However, some borrowers use the account as a short-term bridge loan and pay the loan off when their home sells, usually in the first year of the loan. Would we violate the Illinois Interest Act if we charge those waived costs on payoff of these loans?
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No, we do not believe you would be violating the Illinois Interest Act if you charge HELOC borrowers for waived, upfront costs on an early payoff, if agreed to in the loan agreement, but such charges could implicate the restrictions on prepayment penalties under Regulation Z and the Illinois High Risk Home Loan Act for…
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Are there any laws or regulations that would prevent us from raising the default rate on our commercial loans from 18% to 22%? Also, is there a maximum default rate we can charge on consumer loans? We are not aware of any prohibitions other than the Military Lending Act’s annual percentage rate (APR) cap of 36% for active-duty service members and their dependents.
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No, we do not believe there is any law or regulation that would prevent you from charging a 22% default rate on a commercial loan, provided your customer agreed to the rate in your loan agreement. Additionally, Illinois does not impose a maximum default rate charged on consumer loans, but courts have held that default…
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We are processing a commercial adjustable-rate mortgage (ARM) loan in our LaserPro system. The loan is to two individuals to purchase an investment property. The system is giving us a critical warning that states “this loan contains a deep discount feature. Please adjust the periodic interest rate cap to avoid creating a deep discount feature.” Is there an Illinois rule concerning deep discounts when it comes to ARM loans?
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We are not aware of any federal or Illinois law prohibiting “deep discount features” for commercial ARM loans. We recommend reaching out to LaserPro for an explanation of the error. The Illinois Banking Act permits banks to charge any “interest, fees, and other charges . . . subject only to the provisions of [subsection 4(1)]…
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Can our bank charge prepayment penalties on all types of commercial loans? If allowed, can we include a demand clause as well? Are there any interest rate limits? Is any collateral prohibited?
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Commercial Loan Prepayment Penalties and Demand Clauses Yes, we believe you may charge prepayment penalties on all types of commercial loans. Regulation Z and the Illinois High Risk Home Loan Act impose restrictions on prepayment penalties for certain consumer loans, but these restrictions do not apply to commercial transactions. Similarly, we believe that you may…
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Our bank partners with a third-party originator that refinances home mortgage loans. We underwrite these refinancings and purchase the loans from the third-party after the closing. Do we need to complete a “Tangible Net Benefit Form” when purchasing these loans, even though we are not considered the lender when the loan closes? Because we prepare closing documents on behalf of the third-party originator, should we be completing the “Tangible Net Benefit Form” for them? Also, would we be violating any law or regulation if we refinance a mortgage without completing a “Tangible Net Benefit Form” to remove a borrower due to a divorce? If this occurs, would we be protected if we keep the divorce decree on file to show that the refinance was justified?
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Because the Illinois Fairness in Lending Act applies to any entity that “assists” with a refinancing, we recommend working with your third-party originator to ensure that their refinancings result in a tangible net benefit to the borrower if you will be assisting in the refinancings and receiving related fees. The Illinois Fairness in Lending Act…
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Do we need to complete a “Net Tangible Benefit Form” under the Illinois Fairness in Lending Act and Illinois High Risk Home Loan Act when refinancing a home loan, even if we are not the original creditor? Does the Illinois Fairness in Lending Act’s net tangible benefit requirement apply to all financial institutions in Illinois, or does the collateral property’s location matter? If we decide to refinance a home loan that we did not originate, how can we ensure that the refinance is beneficial when we have limited knowledge of the original loan? Typically, we are not aware of the original loan’s interest rate when considering a refinancing application.
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While you are not required to use a particular form, we recommend conducting some kind of net tangible benefit analysis when refinancing mortgage loans secured by a borrower’s principal residence to ensure you are complying with the Illinois Fairness in Lending Act and Illinois High Risk Home Loan Act (if the loan is considered “high…
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A borrower died and their mortgage loan is now in default. The deceased borrower’s spouse resides in the home and is in title to the property but is not a borrower on the loan. We are aware that we cannot file a foreclosure action until the loan is 120 days delinquent. Are we required to send a notice of acceleration after the third missed payment, and can you provide a sample of such a notice?
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Whether a notice of acceleration is required generally depends on the terms of your loan agreement. However, if the mortgage loan is a “high risk home loan” as that term is defined in the Illinois High Risk Home Loan Act, you are required by statute to deliver a notice to the borrower informing them of…
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Is there an Illinois law requiring a “Net Tangible Benefit Form” when refinancing a mortgage? If so, does this apply only to banks of a certain size? The new software we are using is asking for this.
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Two Illinois laws require, in certain circumstances, an analysis of whether a refinancing would result in a tangible net benefit, which may be why your software requires the completion of a “Net Tangible Benefit Form” when refinancing a mortgage. Both laws apply to all institutions, regardless of size. The Illinois Fairness in Lending Act prohibits…
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The Illinois High Risk Home Loan Act states that certain bona fide discount points can be excluded from the points and fees calculation when determining whether a loan meets the definition of “high risk home loan,” provided that any interest rate reduction purchased with the discount points is “reasonably consistent with established industry norms and practices for secondary mortgage market transactions.” What does this phrase mean?
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The High Risk Home Loan Act does not elaborate on the meaning of “reasonably consistent with established industry norms and practices for secondary mortgage market transactions.” However, the phrase is used in Regulation Z’s Official Interpretations, which do provide further guidance on the meaning of this term. Regulation Z’s Official Interpretations state that to satisfy…
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We want to offer a HELOC with interest-only payments and no annual fees. Are there any restrictions on interest-only loans or other compliance issues that we should be aware of?
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No, we are not aware of any Illinois or federal law that would generally prohibit interest-only HELOCs, although you should be aware that such a HELOC may result in a prohibited balloon payment if the HELOC qualifies as a high-risk or high-cost mortgage. Subsection 4(1) of the Interest Act expressly permits savings banks to collect…