Already faced with enormous challenges, the mortgage industry must now get ready to deal with major changes to the legal landscape in Pennsylvania. On July 8, 2008, Gov. Rendell signed five bills that include an overhaul of Pennsylvania’s longstanding licensing scheme for first and second mortgage lending, substantial revisions to Pennsylvania’s usury law, and changes to Pennsylvania’s pre-foreclosure notice requirements. Although portions of one of the new laws became effective immediately upon signing, the new laws have effective dates ranging from Aug. 6 to Nov. 4, 2008, as indicated below.
PA Mortgage Banking Licensing Laws Rewritten
House Bill 2179 (p/n 4020), now known as Act 2008-56, repeals much of Pennsylvania’s “Mortgage Bankers and Brokers and Consumer Equity Protection Act” (“MBBA”) and all of Pennsylvania’s “Secondary Mortgage Loan Act” (“SMLA”), and replaces them with one, consolidated “Mortgage Loan Industry Licensing and Consumer Protection Law” (“MLILCP”). The MLILCP takes effect Nov. 4, 2008.
The main purpose of the legislation is to tighten regulation of individuals that solicit mortgage loans, increase education requirements for mortgage professionals, and otherwise empower the Pennsylvania Department of Banking (“DOB”) to take a stronger supervisory approach. However, for no apparent or compelling reason, the MLILCP takes the further step of doing away with the well-accepted licensing law structure that has existed under the MBBA and the SMLA, and imposes an entirely new regulatory law scheme.
Mortgage Originator Licensing. The MLILCP establishes a new licensing category of “mortgage originator.” A “mortgage originator” is defined as an individual not otherwise licensed who solicits or accepts mortgage loan applications or negotiates them in other than a clerical or ministerial capacity, and personally has direct contact with consumers. A mortgage originator may not engage in the mortgage loan business unless he or she is employed and supervised by a licensed mortgage broker, mortgage lender or mortgage loan correspondent, and must be assigned to a licensed location of the employer licensee. The MLILCP exempts bank employees from licensing as a mortgage originator. Employer licensees must maintain a list of all current and former originators they employ, and if they suspect illegal activity, must provide the DOB with written notification and proposed corrective measures. Presumably, the DOB will begin mortgage originator licensing under the MLILCP in 2009.
New Education and Test Requirements. The MLILCP substantially expands the current education requirements for mortgage licensees. Education requirements now have to be satisfied to maintain a license, but under the MLILCP will also have to be satisfied for a new license to be obtained. In addition, the MLILCP’s education requirements will apply to second mortgage lenders who previously were not subject to any education requirements under the SMLA.
To obtain a new license, an individual mortgage originator license applicant—and for all other license applications, a director, partner or ultimate equitable owner of at least 10 percent of the licensee—must have successfully completed a minimum of 12 hours of professional education instruction and passed a new testing program regarding the first and secondary mortgage loan business and various relevant federal and state laws. This is the first time a test has been a part of a Pennsylvania mortgage licensing procedure. To maintain a license, a mortgage broker, mortgage lender or mortgage loan correspondent must demonstrate to the DOB that at least one person from each licensed office who is not a mortgage originator and all mortgage originators employed by the licensee, have attended at least six hours of continuing education each year.
Licensing Scope Expanded. Whether or not intended, the MLILCP’s consolidation of the MBBA’s and SMLA’s licensing requirements expands the coverage of Pennsylvania’s mortgage banking laws in several ways. First, the MBBA contained an exemption from licensing for a person who originated less than three first mortgage loans in a calendar year, and the SMLA contained an exemption from licensing for a person who originated two or fewer secondary mortgage loans in a calendar year. Accordingly, a person could previously make up to four mortgage loans without the need for licensing. Under the MLILCP, it appears that a person who makes more than two mortgage loans in a calendar year consisting of all first or second mortgage loans, or any combination thereof, will be required to be licensed.
Second, and of even more significance, the MLILCP appears to have eliminated the previous exemptions from licensing that applied to many secondary mortgage loans. The SMLA contained exemptions from licensing for (i) loans to be repaid in 90 days or less, (ii) loans resulting from the sale of a dwelling that are made by the seller, (iii) loans not subject to Pennsylvania’s general usury law, and (iv) loans made under any other Pennsylvania law. Most notably, the general usury exemption rendered Pennsylvania’s SMLA inapplicable to second mortgage loans in excess of $50,000. Since the MLILCP does not contain this SMLA exemption, there appears to be no dollar amount above which second mortgage loans are exempt from MLILCP coverage.
Mortgage Loan Payoff Procedure. The payoff procedure that previously only applied to second mortgage loans covered by the SMLA will now also apply under the MLILCP to first mortgage loans. The MLILCP requires a mortgage lender upon payment in full to cancel any insurance, stamp any note “paid in full” or “cancelled,” and within 60 days return the loan agreement or note to the consumer. In implementing these new requirements, lenders and servicers should remain mindful of payoff-related requirements in other Pennsylvania law that will continue to apply. See 21 P.S. §721-6.
Possible New Fee and Interest Restrictions for First Mortgages. Perhaps the most dramatic and potentially problematic result of the MLILCP’s consolidation of the MBBA and the SMLA is what appear to be new restrictions on the fees that may be charged on first mortgage loans. While retaining the SMLA’s fee structure for second mortgage loans, the MLILCP appears to impose similar fee restrictions on first mortgage loans. Whereas the MBBA did not restrict the fees a licensee could charge beyond requiring compliance with Pennsylvania’s general usury law, the MLILCP now specifies which fees a licensee may charge on first mortgage loans. These fees include fees for title examination, credit reports, appraisals, notaries, tax service and other fees actually related to the processing of a mortgage loan application or making a mortgage loan, when such fees are actually paid or incurred by the licensee. In addition, a licensee can charge on first mortgage loans fees prescribed by law that are actually paid to public officials for determining the existence of or for perfecting, releasing or satisfying any security interest. The MLILCP also applies to first mortgage loans, the SMLA’s empowerment to charge a fee for a dishonored check.
The MLILCP authorizes “application fees” to be charged on first and second mortgage loans. For second mortgage loans, the MLILCP retains the SMLA provision that limits an application fee to not more than 3 percent of the original principal amount of the loan, and provides that an application fee is “fully earned” when the loan is made. An SMLA licensee is not permitted to charge to all applicants a non-refundable “application fee” to cover its overhead processing costs, other than the 3 percent application fee that can only be charged on closed loans. Accordingly, if the SMLA provisions that the MLILCP incorporates continue to be interpreted as they have been under the SMLA, the MLILCP could prevent lenders from charging a fee labeled an “application fee” on first mortgage loans, unless it is akin to the SMLA’s 3 percent application fee and charged only on closed loans. Perhaps the DOB will provide guidance on that issue.
The MLILCP also incorporates the SMLA provision that allows a delinquency charge of $20 or 10 percent of each payment, whichever is greater, for a payment that is more than 15 days late. However, the MLILCP only makes that provision applicable to second mortgage loans. For first mortgage loans, the MLILCP allows lenders to make loans under Pennsylvania’s general usury law. While that law is generally interpreted to permit reasonable late charges on first mortgage loans, it contains no express authorization for late charges. Thus, the similar absence of any express authority in the MLILCP for the imposition of late charges on first mortgage loans creates the unfortunate possibility that a borrower might challenge a lender’s ability to impose late charges on first mortgage loans. While it seems doubtful that such a challenge would succeed, the fact that the MLILCP even leaves open the potential for such a challenge, together with the other ambiguities in the MLILCP discussed above, raises questions as to the soundness of the approach taken in consolidating two well-settled statutory schemes.
In addition to imposing an express requirement that the payment and acceptance of a broker’s fee comply with the federal Real Estate Settlement Procedures Act (“RESPA”), the MLILCP includes an overall requirement that licensees comply with applicable federal law, and lists in particular RESPA, the Truth-in-Lending Act (“TILA”) and the Equal Credit Opportunity Act. Such a provision might have the unfortunate effect of serving as an invitation to plaintiff’s lawyers to try to seek “piggyback” state law damages in the event of federal law violations. Those efforts should fail.
For revolving lines of credit, the MLILCP makes the SMLA provisions regarding interest computation methods applicable to both first and second mortgage loans. In addition, the SMLA’s prohibition on compounding of interest will now be applicable to both first and second open-end mortgage loans.
Higher Penalties; Summary. The MLILCP significantly increases penalties for violations from $2,000 for each offense to $10,000. The mortgage industry as a whole will benefit if the MLILCP provisions designed to better police the industry and empower the DOB to eliminate bad players are able to achieve their objectives. At the same time, the potential ambiguity and confusion created by the less-than-ideally drafted consolidation of two separate and distinct statutory schemes into one law could result in exposure to liability, unless courts are willing to protect industry players that make a good faith effort to comply.
PA Usury Law Amended
The next most significant of the five new bills is Senate Bill 483 (p/n 2163), now known as Act No. 2008-57, which changes Pennsylvania’s general usury law (formally titled the “Loan Interest and Protection Law” and popularly known as “Act 6”) (the “Act 6 Amendments”). Given the increased scrutiny that plaintiff’s lawyers have placed on lending activity, those representing the lending industry need to be aware of the changes made to Act 6, a law that has undergone little change since its enactment in 1974. The Act 6 Amendments become effective Sept. 5, 2008.
Increased Coverage for Residential Mortgage Loans. The key change made by the Act 6 Amendments is to substantially expand the law’s coverage by increasing the number of loans covered by Act 6’s definition of a “residential mortgage.” Previously, a “residential mortgage” was defined as a loan in a principal amount of up to $50,000 secured by a lien upon real property containing two or fewer residential units. 41 P.S. §101. As amended, the term “residential mortgage” will soon cover such loans with a principal amount up to $217,873 (with that amount to be adjusted annually for inflation by the DOB). This expanded coverage will have a number of consequences.
First, Act 6 establishes a rate cap on “residential mortgages” that is tied to the “Monthly Index of Long Term United States Government Bond Yields.” While this rate cap is preempted by federal law for most first lien mortgage loans secured by residential real property, a greater number of second mortgage and other mortgage loans to which the federal preemption does not apply will now be subject to the Act 6 “residential mortgage” rate cap.
Second, Act 6 contains disclosures and limitations that affect variable rate mortgages. 41 P.S. §301(e). In the past, the relatively small number of loans within the scope of Act 6 minimized the potential impact of these disclosures and limitations. Now, with the scope of Act 6 expanded, lenders may want to give renewed consideration to whether or not the Act 6 variable rate disclosures and limitations apply or are preempted by federal law.
Third, Act 6 requires that TILA and RESPA disclosures be provided for “residential mortgages.” 41 P.S. §401. This provision, together with the broader scope established by the Act 6 Amendments, may provide another opportunity for plaintiff’s lawyers to try to piggyback extra penalties under state law onto allegations that those federal statutes have been violated. We hope a court would reject any such effort.
Fourth, the Act 6 Amendments expand the universe of loans that will be subject to the existing foreclosure notice and procedures that apply under Act 6 to “residential mortgages.” These provisions require an advance notice, establish procedures for a right to cure, and limit the availability of attorney’s fees both at the time of closing and in connection with a foreclosure. 41 P.S. §§403, 404, 406.
Fifth, the existing Act 6 prohibition on prepayment penalties, 41 P.S. §405, will now apply to many more loans.
Broad Exception for Business Loans. Act 6 generally establishes a 6 percent interest rate cap on loans of $50,000 or less, except for residential mortgages. 41 P.S. §201. Exempt from this rate cap are several categories of loans, including business loans in excess of $10,000 that are accompanied by a business purpose affidavit. 41 P.S. §301(f)(v). Also, loans to a corporation are exempt from this rate cap because corporations cannot plead usury as a defense. 41 P.S. §301(f)(iii).
The Act 6 Amendments remove the above exemptions and replace them with a broad exemption for “business loans of any principal amount.” Since it is not clear that a business purpose affidavit will still be necessary to rely on the new exemption, it seems prudent for lenders to continue to obtain an affidavit to avoid second guessing as to whether the new exemption applies.
Increased Enforcement Authority. Finally, the Act 6 Amendments establish a new remedy in the form of a fine of $10,000 per offense, which may be imposed by the DOB. The DOB will now have the power to examine documents and conduct investigations. The DOB will also have the power to subpoena any person or entity, question witnesses under oath, and have uncooperative witnesses found in contempt of court by making an application to the Commonwealth Court or a lower court. In addition to a fine, the DOB can revoke or refuse to issue a license under its jurisdiction; remove an individual responsible for a violation of the law; obtain a ceaseand- desist order; and require the subject to pay the costs associated with the enforcement action.
Other Mortgage Laws Amended
Department of Banking Code: Electronic Licensing. The legislature also amended the “Pennsylvania Department of Banking Code” (the “DOB Code”) that establishes procedures for the DOB. Effective as of July 8, 2008, Senate Bill 484 (p/n 2251), now known as Act 2008-58, allows the DOB to require licensees to use a national electronic licensing system and pay associated licensing processing fees. This national system is the result of the efforts of several national organizations, including the Conference of State Bank Supervisors. The DOB has indicated that all licensees will be required to use the new system starting Nov. 1, 2008.
Also effective as of July 8, 2008, the amendments to the DOB Code for the first time specifically empower the DOB to disclose to a third party the status of any pending license or license application, including “whether and to what extent a corporation, person or licensee is or has been subject to a fine, order or adjudication issued by the department.” In addition, they expand the DOB’s ability to request and receive criminal background checks on licensees.
Effective Aug.6, 2008, the amendments to the DOB Code establish new procedures for certain administrative proceedings. Specifically, the amendments require that notice of the DOB’s receipt of any application or notice relating to a financial institution charter, or an absorption, acquisition, consolidation or dissolution, be published in the Pennsylvania Bulletin, thereby triggering a comment period. The mandated 30-day comment period may be shortened or extended for good cause. Notice of any final action taken by the DOB on an application or notice must also be published in the Pennsylvania Bulletin. Any institution subject to a published DOB order or other determination is entitled to a hearing regarding the DOB’s action, and may request such hearing within 14 days of the publication or receipt of notice of the DOB’s final action.*
Act 91: Homeowner’s Emergency Assistance. The legislature also amended Pennsylvania’s Housing Finance Agency Law, in particular the portion popularly known as “Act No. 91” that deals with emergency financial assistance. Effective Sept. 5, 2008, Senate Bill 486 (p/n 1752), now known as Act 2008-60, requires the housing finance agency (“HFA”) to maintain a list of approved consumer credit counseling agencies and to publish that list on its website. The existing pre-foreclosure notice required to be sent by a mortgagee must now include an “itemized breakdown of the total amount past due,” and when a notice is sent to a mortgagor, the mortgagee will be required to simultaneously send a copy to the HFA. In lieu of sending a copy of each notice, a mortgagee can send a quarterly list of notices to the HFA. The amendments also clarify that a late application for emergency assistance (one filed beyond the 30-day period specified in the statute) will still be considered but will not stay foreclosure proceedings.
When determined to be in the best interest of the HFA and the mortgagor, the amendment allows the HFA to fund a compromised pay-off of the loan balance to which the mortgagee agrees in lieu of paying arrearages or ongoing assistance. Finally, the HFA is mandated to monitor foreclosure activity in Pennsylvania and, as appropriate, provide “recommendations for addressing any problems identified in this monitoring effort.”
Appraiser Governance Improvements. The legislature also amended PA’s Real Estate Appraisers Certification Act to expand and change the composition of the State Board of Certified Real Estate Appraisers and establish a new license category for “appraiser trainees.” Effective Sept. 5, 2008, Senate Bill 485 (p/n 2252), now known as Act 2008-59, requires such trainees to operate under the supervision of either a Certified Residential Appraiser or a Certified General Appraiser. The amendment increases the civil penalty from $1,000 to $10,000 that the Board may impose for violations of the Act. It also adds the Pennsylvania Attorney General and the Pennsylvania Secretary of Banking, or their respective designees, to the State Board of Certified Real Estate Appraisers.
Property Insurance Cap. Several days before signing the five bills discussed above, Gov. Rendell on July 4, 2008, signed House Bill 2428 (p/n 3875), now known as Act 2008-51, which enacted “The Mortgage Property Insurance Coverage Act.” Effective the date of signing, the new law prohibits all mortgage lenders from requiring borrowers to obtain property insurance coverage on owner-occupied private residential property that exceeds the replacement value of the buildings on the land securing the loan. It also prohibits all mortgage lenders from requiring borrowers to insure the value of the land.