Stites & Harbison, PLLC

Kentucky Governor Steve Beshear signed House Bill 552 on Thursday, April 24th and thus ushered in a new era for mortgage industry professionals. The "emergency" bill took effect immediately upon being signed by the Governor. The bill, among other things, provides for the creation of a new Kentucky Homeownership Protection Center, which is being established for the purposes of centralizing mortgage related information for consumers, and providing access to counseling for consumers regarding mortgage related issues.

The bill also imposes various new requirements for mortgage loan companies, mortgage loan brokers, mortgage loan originators, mortgage loan processors, any lender making a "high-cost home loan," servicers of "high-cost home loans," and lenders making home solicitations for mortgage loans. Some of the more significant changes implemented by the bill are as follows:

The bill continues a recent trend of amendments narrowing the available exemptions from mortgage loan company licensing. Specifically, the "de minimis" exemption available to persons making fewer than five mortgage loans in a year has been deleted. Non-profit corporations engaged in housing are exempt from licensing, but must now submit a claim of exemption on an annual basis. The HUD exemption is now available only to mortgage loan companies that have funded twelve FHA loans in the previous year and held a mortgage loan company license, registration, or HUD exemption for five previous years.

The bill now requires that mortgage loan processors register with the Office of Financial Institutions, as well as mortgage loan originators. Although this requirement takes effect immediately, the Office of Financial Institutions indicates that it will not begin enforcing the expanded registration requirements until later this summer. Mortgage loan originators and mortgage loan processors are required to take professional education, and beginning in 2010, will also need to pass a test to maintain registration. Mortgage loan originators and mortgage loan processors must undergo criminal background checks, and must also advise the Office of Financial Institutions within 30 days of any change in employment.

The statute imposes new standards of conduct: brokers must exercise "good faith and fair dealing" and act "in the best interest of the borrower." Office of Financial Institutions representatives interpret this as imposing a fiduciary duty on brokers. Brokers must also furnish the borrower a written accounting of all broker compensation, and apparently may no longer represent lenders.

The bill prohibits the origination of mortgage loans if "total net income" received by the mortgage lender or broker, and its affiliates, exceeds the greater of $2,000 or 4% of the total loan amount. "Total net income" includes origination fees, discount points, administrative fees, yield spread premiums, and other fees, but does not include loan interest.

The bill prohibits any person from "improperly influencing" real estate appraisals.

The bill enacts the "Kentucky Residential Mortgage Fraud Act" which makes mortgage fraud a Class D felony for the first or second offense, or a Class C felony for each subsequent offense. Courts are empowered to order restitution to persons suffering a financial loss due to mortgage fraud.

At closing, lenders must disclose the availability of the new Kentucky Homeownership Protection Center.

Prepayment penalties are limited to 3% for the first year, 2% for the second year, and 1% for the third year. In addition, no prepayment penalty can be assessed following 60 days prior to the first interest rate reset, or the third anniversary, whichever first occurs.

Mortgage loan records must be preserved for five years, and may be kept in an electronically retrievable format.

The points and fees threshold for high-cost home loans under the Kentucky Fair Lending Act has been lowered to the greater of 6% of the total loan amount or $3,000, bringing more loans under the strict regulatory umbrella set aside for loans of this type.

Also, in connection with high-cost home loans, a mortgage lender may not charge a prepayment penalty unless that lender offers to the borrower an alternative mortgage loan product without a prepayment penalty. The new statute also establishes a "safe harbor" presumption that a borrower can repay the loan if the loan is approved by the FNMA automated underwriting system. Lenders must provide for a tax and insurance escrow in connection with high-cost home loans. Lenders may not offer interest-only high-cost home loans. Lenders must verify income and financial resources, and the borrower's ability to pay at the maximum margin permitted under the loan documents.

The statute creates a new provision of the Kentucky Consumer Protection Act that requires mortgage loan servicers to apply payments upon receipt; to apply payments to interest and principal currently due, and then late fees, and other fees; and to make all payments from escrow accounts on a timely basis. Violation of this provision will be actionable under the KCPA.

The statute requires that any lender or broker using prescreened trigger lead information (1) state that it is not affiliated with the lender or broker with which the borrower originally applied; (2) make a firm offer of credit in its initial solicitation; (3) refrain from contacting a borrower who has opted out of the prescreened offers or is on the federal or state do-not-call lists; and (4) refrain from soliciting the borrower with rates, terms and costs of the loan that could change to the borrower's detriment during the course of the loan.

Where mortgage loans are solicited in the borrower's home, the statute extends the rescission period from three to ten days under KRS 367.420.

To view the bill in its entirety, click here.

Richard A. Vance is a Member in the Louisville office where his practice focuses on all aspects of consumer finance, including compliance, licensing and litigation.