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USFN 25th Anniversary

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"Homeowner Protection Act" Enabled

by Charles A. Leppert
Gray & End, LLP — USFN Member (WI)

Wisconsin has recently enacted legislation designed to protect consumers from predatory lending, which is being referred to as the Homeowner Protection Act (the Act). The Act becomes effective on February 1, 2005 and first applies to loans for which applications were received by the lender on or after that date. The Act will be added as a subchapter to Section 428 of the Wisconsin Statutes and be subtitled “Responsible High Cost Mortgage Lending.”

The predatory lending provisions of the Act apply to lenders who originate “covered loans” as defined in the Act. With certain exceptions involving refinancing and prepayment penalties, the Act doesn’t apply to an assignee of a mortgage or a servicer of a loan unless the servicer was the originating lender. A covered loan closely mirrors the definition of loans governed by the federal Home Ownership Equity Protection Act (HOEPA). Generally, covered loans are closed end mortgage loans, excluding reverse mortgages, made to persons for primarily personal, family or household purposes, and are secured by residential property that is the person’s principal dwelling. In addition, a covered loan must have an annual percentage rate at consummation that exceeds by more than 10 percent the yield on Treasury Securities, or the total points and fees payable by the customer at closing must exceed 6 percent of the total loan amount. Total points and fees do not include reasonable fees paid to affiliates or non-affiliates of the lender for bona fide services. It should be noted that the 6 percent limitation on total points and fees under the Act is less than the 8 percent restriction under HOEPA.

The Act is primarily intended to govern loan originations. For example, there are prohibitions and restrictions on what the loan documents may provide with respect to balloon payments, call provisions, negative amortization, increases in interest rates after default, and advanced payments. The originating lender cannot make covered loans to customers based solely on the customer’s collateral without regard to the customer’s ability to repay the loan, and the lender is prohibited from knowingly making false or misleading statements in any document. There are some restrictions relating to the refinancing of  covered loans, which generally apply to a covered loan that refinances a covered loan made to the same customer by the same lender. Likewise, there are some restrictions on prepayment penalties applicable to covered loans in the context of a refinancing of a covered loan, if the covered loan is held by a refinancing lender. Lastly, at least three business days before making a covered loan, the lender must give the customer a disclosure notice in the form provided in the Act.

The Act does not provide for a private right of action for violations. The Wisconsin Department of Financial Institutions (DFI) is authorized by the Act to promulgate rules, perform investigations, hold hearings, and issue orders to administer and enforce the provisions of the Act. The Act authorizes the DFI to punish violators with fines, penalties, and with suspensions or revocations of licenses. However, the Act may not apply to federally or state chartered banks and lending institutions to the extent that federal law preempts or prohibits the Act from applying to federally chartered institutions. It is expected that the DFI will promulgate rules clarifying certain provisions in the Act prior to its effective date.

Editor’s Note: A copy of the Act (2003 Wisconsin Act 257) is available here.


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