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TO AMEND THE CODE OF LAWS OF SOUTH CAROLINA, 1976, BY ADDING CHAPTER 23 TO TITLE 37 RELATING TO CONSUMER PROTECTION SO AS TO ENACT THE SOUTH CAROLINA HIGH-COST AND CONSUMER HOME LOANS ACT; TO DEFINE THE SUBJECT LOANS; TO PROHIBIT PROVISIONS IN A HIGH-COST HOME LOAN AGREEMENT FOR ACCELERATION, BALLOON PAYMENT, NEGATIVE AMORTIZATION, INTEREST INCREASE, ADVANCE PAYMENTS FROM LOAN PROCEEDS, AND ADDITIONAL FEES IN CERTAIN CIRCUMSTANCES; TO PROVIDE FOR APPLICATION OF SOUTH CAROLINA LAW TO HIGH-COST HOME LOAN AGREEMENTS; TO REQUIRE A HIGH-COST HOME LOAN LENDER TO PROVIDE ADDITIONAL DISCLOSURES TO THE BORROWER AND TO ENSURE THAT THE BORROWER IS REASONABLY ABLE TO MEET HIS LOAN OBLIGATIONS; TO PROHIBIT THE FINANCING OF CERTAIN FEES IN CONNECTION WITH MAKING A HIGH-COST HOME LOAN AND THE CHARGING OF POINTS AND FEES IN CONNECTION WITH THE REFINANCING OF AN EXISTING HIGH-COST HOME LOAN; TO REGULATE THE PAYMENT OF A HOME IMPROVEMENT CONTRACTOR FROM THE PROCEEDS OF A HIGH-COST HOME LOAN; TO PROVIDE THAT A BAD-FAITH VIOLATION OF THE HIGH-COST HOME LOAN PROHIBITIONS OR RESTRICTIONS IS AN UNFAIR OR DECEPTIVE TRADE PRACTICE SUBJECT TO CHAPTER 5 OF TITLE 39; TO PROVIDE FOR ENFORCEMENT BY THE ADMINISTRATOR OF THE DEPARTMENT OF CONSUMER AFFAIRS, ATTORNEY GENERAL, COMMISSIONER OF BANKING, DIRECTOR OF THE CONSUMER FINANCE DIVISION OF THE STATE BOARD OF FINANCIAL INSTITUTIONS, OR A PARTY TO THE LOAN; TO PROVIDE FOR ESTABLISHMENT OF GOOD FAITH BY A HIGH-COST HOME LOAN LENDER; TO PROVIDE CERTAIN RESTRICTIONS AND PROHIBITIONS IN THE MAKING OF A CONSUMER HOME LOAN, INCLUDING THE PROHIBITION OF "FLIPPING" A LOAN AND ENCOURAGING DEFAULT OF A PREVIOUS LOAN; TO PROVIDE THAT A VIOLATION OF THE CONSUMER HOME LOAN RESTRICTIONS OR PROHIBITIONS IS AN UNFAIR OR DECEPTIVE TRADE PRACTICE; TO PROVIDE FOR ENFORCEMENT BY THE ADMINISTRATOR OF THE DEPARTMENT OF CONSUMER AFFAIRS, ATTORNEY GENERAL, COMMISSIONER OF BANKING, DIRECTOR OF THE CONSUMER FINANCE DIVISION OF THE STATE BOARD OF FINANCIAL INSTITUTIONS, OR A PARTY TO THE CONSUMER HOME LOAN; TO PROVIDE FOR PENALTIES AND REMEDIES, INCLUDING ATTORNEY'S FEES; TO AMEND SECTION 37-10-103, RELATING TO PREPAYMENT OF MISCELLANEOUS LOANS, SO AS TO PROVIDE FOR PREPAYMENT WITHOUT PENALTY OF A CONSUMER HOME LOAN OF LESS THAN ONE HUNDRED FIFTY THOUSAND DOLLARS; AND TO AMEND SECTION 37-1-109, AS AMENDED, RELATING TO CHANGING DOLLAR AMOUNTS USED IN THE CONSUMER PROTECTION CODE, SO AS TO REFLECT THE DOLLAR AMOUNT FOR PREPAYMENT OF A CONSUMER HOME LOAN WITHOUT PENALTY.
Be it enacted by the General Assembly of the State of South Carolina:
SECTION 1. Title 37 of the 1976 Code is amended by adding:
Section 37-23-10. This chapter may be cited as the 'South Carolina High-Cost and Consumer Home Loans Act'.
Section 37-23-20. For purposes of this chapter:
(1) 'Affiliate' means a company that controls, is controlled by, or is under common control with another company, as described in the Bank Holding Company Act of 1956 (12 U.S.C. Section 1841 et seq.), as amended.
(2) 'Annual percentage rate' means the annual percentage rate for the loan calculated according to the provisions of the federal Truth-in-Lending Act (15 U.S.C. Section 1601, et seq.), and the regulations promulgated under it by the Federal Reserve Board, both as amended.
(3) 'Bona fide loan discount points' means loan discount points knowingly paid by the borrower for the purpose of reducing, and which in fact result in a bona fide reduction of, the interest rate or time-price differential applicable to the loan, provided the amount of the interest rate reduction purchased by the discount points is reasonably consistent with established industry norms and practices for secondary mortgage market transactions.
(4) 'Consumer home loan' means a loan in which:
(a) the borrower is a natural person;
(b) the debt is incurred by the borrower primarily for personal, family, or household purposes; and
(c) the loan is secured by a mortgage on real estate upon which is located or is to be located a structure designed principally for occupancy of from one to four families and that is or is to be occupied by the borrower as the borrower's principal dwelling.
(5) 'Flipping' a consumer home loan means the making of a consumer home loan that refinances an existing consumer home loan of the borrower when the new loan is made within less than twelve months of the previous loan and does not have a reasonable, tangible net benefit to the borrower, considering all the circumstances, including the terms of both the new and refinanced loans, the cost of the new loan, and the borrower's circumstances.
(a) A presumption of reasonable, tangible net benefit to the borrower occurs when:
(i) the borrower's monthly payment to pay the new debt will be lower than the total of all monthly obligations being financed, taking into account costs and fees;
(ii) there is a beneficial change for the borrower in the duration of the loan;
(iii) the borrower receives a reasonable amount of cash in excess of and in relation to the costs and fees as part of the refinancing;
(iv) there is a change from an adjustable rate loan to a fixed rate loan, taking into account costs and fees; or
(v) at the time the home loan is consummated, the borrower's total monthly debts, including amounts due under the home loan, do not exceed fifty percent of the borrower's monthly income as verified by tax returns, payroll receipts, or other third-party income verification.
(b) A reasonable, tangible net benefit to the borrower may arise from considerations other than those giving rise to the presumption of subitem (a).
(6) 'High-cost home loan' means a loan, other than an open-end credit plan or a reverse mortgage transaction, in which the:
(a) principal amount of the loan does not exceed the conforming loan size limit for a single-family dwelling as established from time to time by the Federal National Mortgage Association;
(b) borrower is a natural person;
(c) debt is incurred by the borrower primarily for personal, family, or household purposes;
(d) loan is secured by either:
(i) a security interest in a residential manufactured home, as defined in Section 37-1-301(24), that is to be occupied by the borrower as the borrower's principal dwelling; or
(ii) a mortgage on real estate upon which there is located or there is to be located a structure designed principally for occupancy of from one to four families and which is or is to be occupied by the borrower as the borrower's principal dwelling; and
(e) terms of the loan exceed one or more of the thresholds as defined in item (11) of this section.
(7) 'Lender' includes, but is not limited to, a mortgage broker or a mortgage banker originating a loan in a table-funded loan transaction in which the broker or banker is identified as the original payee of the note.
(8) 'Obligor' means each borrower, co-borrower, cosigner, or guarantor obligated to repay a loan.
(9) 'Points and fees' means:
(a) items required to be disclosed pursuant to Sections 226.4(a) and 226.4(b) of Title 12 of the Code of Federal Regulations, as amended, except interest or the time-price differential;
(b) compensation paid directly by the borrower to a mortgage broker not otherwise included in subitem (a) of this item;
(c) the maximum prepayment fees and penalties that may be charged or collected pursuant to the terms of the loan documents unless the lender provides the borrower the option of a similar loan product without a prepayment fee. Interest that may accrue in advance of payment in full of a loan made under a local, state, or federal government-sponsored mortgage insurance or guaranty program, including a Federal Housing Administration program, is not considered a prepayment fee or penalty;
(d) 'points and fees' does not include:
(i) taxes, filing fees, recording, and other charges and fees actually paid or to be paid to public officials for determining the existence of or for perfecting, releasing, or satisfying a security interest;
(ii) bona fide and reasonable fees actually paid to a person, other than a lender or an affiliate of the lender or to the mortgage broker or an affiliate of the mortgage broker, who has received no direct or indirect compensation for the following: fees for tax payment services, fees for flood certification, fees for pest infestation and flood determinations, appraisal fees, fees for inspections performed before closing, credit reports, surveys, attorney's fees if the borrower has the right to select the attorney, notary fees, escrow charges, and flood insurance premiums not otherwise included pursuant to subitem (a) of this section;
(iii) premiums for insurance against title defects, loss of or damage to property, or liability arising out of the ownership or use of property, if the following conditions are met:
(A) the insurance coverage may be obtained from a person of the borrower's choice and this fact is disclosed; or
(B) the coverage is obtained from or through the creditor or its affiliate and the premium for the initial term of insurance coverage is disclosed. If the term of insurance is less than the term of the transaction, the term of insurance must be disclosed also. The premium may be disclosed on a unit-cost basis only in open-end credit transactions, closed-end credit transactions by mail or telephone under Section 226.17(g) of Title 12 of the Code of Federal Regulations, and certain closed-end credit transactions involving an insurance plan that limits the total amount of indebtedness subject to coverage;
(iv) premiums or other charges paid at or before closing for credit life, accident, health, or loss-of-income insurance or debt-cancellation coverage that provides for cancellation of all or part of the consumer's liability in the event of the loss of life, health, or income or in the case of accident, written in connection with the credit transaction;
(v) commissions and other compensation paid to licensed real estate brokers and agents; or
(iv) charges for items listed in Section 226.4(c)(7) of Title 12 of the Code of Federal Regulations, as amended from time to time.
(10) 'Table-funded transaction' means a settlement at which a mortgage loan is funded by an advance of loan funds to a lender who closes the loan in his name followed by an assignment of the loan from the person identified as the lender in the loan documents to the person advancing the initial loan funds.
(11) 'Thresholds' means:
(a) without regard to whether the loan transaction is a 'residential mortgage transaction' as the term 'residential mortgage transaction' is defined in Section 226.2(a)(24) of Title 12 of the Code of Federal Regulations, as amended, the annual percentage rate of the loan at the time the loan is consummated is a rate such that the loan is considered to be a 'mortgage' pursuant to Section 152 of the Home Ownership and Equity Protection Act of 1994 (Pub. Law 103-25, [15 U.S.C. Section 1602(aa)]), as amended, and regulations adopted pursuant to it by the Federal Reserve Board, including Section 226.32 of Title 12 of the Code of Federal Regulations;
(b) the total points and fees payable by the borrower at or before the loan closing exceed five percent of the total loan amount if the total loan amount is twenty thousand dollars or more, or the lesser of eight percent of the total loan amount or one thousand dollars if the total loan amount is less than twenty thousand dollars, except that the following discount points and prepayment fees and penalties are excluded from the calculation of the total points and fees payable by the borrower:
(i) up to and including two bona fide loan discount points payable by the borrower in connection with the loan transaction, but only if the interest rate from which the loan's interest rate is discounted does not exceed by more than one percentage point the conventional mortgage rate;
(ii) up to and including one bona fide loan discount point payable by the borrower in connection with the loan transaction, but only if the interest rate from which the loan's interest rate is discounted does not exceed by more than two percentage points the conventional mortgage rate;
(iii) prepayment fees and penalties charged or collected pursuant to the terms of the loan documents, not exceeding one percent of the amount prepaid, provided the loan documents do not permit the lender to charge or collect prepayment fees or penalties more than thirty months after the loan closing;
(iv) fees or charges payable or paid by a party in connection with a local, state, or federal government-sponsored mortgage insurance or guaranty program including, but not limited to, Federal Housing Administration, Veterans Administration, and South Carolina Housing Finance and Development Authority programs; or
(c) the loan documents permit the lender to charge or collect prepayment fees or penalties more than thirty months after the loan closing or that exceed, in the aggregate, more than two percent of the amount prepaid.
(12) 'Total loan amount' means the same as the term 'total loan amount' means in Section 226.32 of Title 12 of the Code of Federal Regulations, as amended, and is calculated in accordance with the Federal Reserve Board's Official Staff Commentary to that section.
Section 37-23-30. A high-cost home loan agreement may not contain:
(1) A call provision that permits the lender, in its sole discretion, to accelerate the indebtedness. This item does not apply when repayment of the loan is accelerated by default, or pursuant to a due-on-sale provision or some other provision of the loan documents unrelated to the payment schedule.
(2) A balloon payment provision that contains a scheduled payment more than twice as large as the average of earlier scheduled payments. This provision does not apply when the payment schedule is adjusted to the seasonal or irregular income of the borrower.
(3) A negative amortization provision with a periodic payment schedule that causes the principal balance to increase.
(4) A provision that increases the interest rate after default. This provision does not apply to interest rate changes in a variable rate loan otherwise consistent with the provisions of the loan documents, so long as the change in the interest rate is not triggered by the event of default or the acceleration of the indebtedness.
(5) Terms under which more than two periodic payments required pursuant to the loan are consolidated and paid in advance from the loan proceeds provided to the borrower.
(6) Charges to a borrower for fees to modify, renew, extend, or amend a high-cost home loan or to defer a payment due pursuant to the terms of a high-cost home loan.
(7) Unless otherwise permitted by applicable federal law, contain as a part of the loan agreement a choice of law provision identifying a state other than South Carolina.
Section 37-23-40. The lender of a high-cost home loan may not:
(1) make a high cost loan unless the lender or a mortgage broker has given the following notice, or substantially similar notice, in writing to the borrower within a reasonable time of determining that the loan results in a high-cost loan, but not later than the time the notice is required pursuant to 12 CFR 226.31(c), as amended. A lender or broker has met its obligation to provide this disclosure if the borrower provides the lender or broker with a signed acknowledgement of receipt of a copy of the following notice:
You are not required to complete this agreement merely because you have received these disclosures or have signed a loan application.
If you obtain this loan, the lender will have a mortgage on your home.
YOU COULD LOSE YOUR HOME, AND ANY MONEY YOU HAVE PUT INTO IT, IF YOU DO NOT MEET YOUR OBLIGATIONS UNDER THIS LOAN.
You are borrowing $_______ (optional credit insurance is ______ or is not ______ included in this amount).
The annual percentage rate on your loan will be: _______ percent. Your regular ________ (frequency) payment will be: $_______.
[Your interest rate may increase. Increases in the interest rate could increase your payment. The highest amount your payment could increase is to $______.]'
(2) make a high-cost home loan unless the lender reasonably believes at the time the loan is consummated that one or more of the obligors, when considered individually or collectively, is able to make the scheduled payments to repay the obligation based upon a consideration of their current and expected income, current obligations, employment status, and other financial resources other than the borrower's equity in the dwelling that secures repayment of the loan. An obligor is presumed to be able to make the scheduled payments to repay the obligation if, at the time the loan is consummated, the obligor's total monthly debts, including amounts owed pursuant to the loan, do not exceed fifty percent of the obligor's monthly gross income as verified by a financial statement signed by the obligor and by third-party verification, which may include a credit report and, in the case of employment income, by payment records or verification by the employer, such as a pay stub. A presumption of inability to make the scheduled payments to repay the obligation does not arise solely from the fact that, at the time the loan is consummated, the obligor's total monthly debts, including amounts owed under the loan, exceed fifty percent of the obligor's monthly gross income;
(3) directly or indirectly finance:
(a) prepayment fees or penalties payable by the borrower in a refinancing transaction if the lender or an affiliate of the lender is the noteholder of the note being refinanced; or
(b) points and fees exceeding five percent of the total loan amount;
(4) charge a borrower points and fees in connection with a high-cost home loan if the proceeds of the high-cost home loan are used to refinance an existing high-cost home loan held by the same lender as noteholder;
(5) pay a contractor pursuant to a home-improvement contract from the proceeds of a high-cost home loan other than:
(a) by an instrument payable to the borrower or jointly to the borrower and the contractor; or
(b) at the election of the borrower, through a third-party escrow agent in accordance with terms established in a written agreement signed by the borrower, the lender, and the contractor before the disbursement.
Section 38-23-45. For all high cost loan transactions, the consumer must be given the following notice, or substantially similar notice, in writing to the consumer within a reasonable time after election to purchase credit insurance, but not later than the time the notice is required pursuant to 12 CFR 226.31(c), as amended. A lender or broker has met its obligation to provide this disclosure if the borrower provides the lender or broker with a signed acknowledgement of receipt of a copy of the following notice:
You are not required to complete this agreement merely because you have received these disclosures regarding optional credit insurance or have signed a loan application.
If you obtain this loan, the lender will have a mortgage on your home.
YOU COULD LOSE YOUR HOME, AND ANY MONEY YOU HAVE PUT INTO IT, IF YOU DO NOT MEET YOUR OBLIGATIONS UNDER THIS LOAN.
You are not required to purchase credit life, accident, health or loss-of-income credit insurance in order to obtain your loan. Your loan includes credit insurance premiums totaling $_________.
You have the right to cancel a credit insurance policy included in your loan and have premiums paid by your loan refunded or credited in accordance with the laws of South Carolina when you send a written notice to the insurer within thirty days from the date you receive your credit insurance policy or certificate.'
Section 37-23-50. (A) Except as provided in Section 37-23-60, the making of a high-cost home loan that violates Section 37-23-30 or 37-23-40 is unlawful as an unfair or deceptive act or practice in or affecting commerce in violation of the provisions of Chapter 5 of Title 39. A person seeking damages or penalties pursuant to this section shall elect to recover damages pursuant to either this chapter or Chapter 5 of Title 39, but not both.
(B) The provisions of this article apply to a person who in bad faith attempts to avoid the application of this article by:
(1) structuring a loan transaction as an open-end credit plan for the purpose and with the intent of evading the provisions of this article if the loan would be a high-cost home loan if it were structured as a closed-end loan;
(2) dividing a loan transaction into separate parts for the purpose and with the intent of evading the provisions of this article; or
(3) other subterfuge.
(C) The Administrator of the Department of Consumer Affairs, the Attorney General, the Commissioner of Banking, the Director of the Consumer Finance Division of the State Board of Financial Institutions, or any party to a high-cost home loan may enforce the provisions of this article.
Section 37-23-60. A lender of a high-cost home loan who acts in good faith but fails to comply with this article does not violate Section 37-23-30 or 37-23-40 if the lender establishes that either:
(1) within thirty days of the loan closing and before the institution of an action pursuant to this article, the lender notifies the borrower of the compliance failure, makes appropriate restitution, and makes necessary adjustments to the loan, at the choice of the borrower, either to:
(a) make the high-cost home loan satisfy the requirements of Section 37-23-30 or 37-23-40; or
(b) change the terms of the loan in a manner beneficial to the borrower so that the loan is no longer considered a high-cost home loan subject to the provisions of this article.
(2) the compliance failure was not intentional and resulted from a bona fide error, notwithstanding the maintenance of procedures reasonably adapted to avoid those errors, and within ninety days after the discovery of the compliance failure and before the institution of an action pursuant to this article or the receipt of written notice of the compliance failure, the lender notifies the borrower of the compliance failure, makes appropriate restitution and makes necessary adjustments to the loan, at the choice of the borrower, either to:
(a) make the high-cost home loan satisfy the requirements of Sections 37-23-30 and 37-23-40; or
(b) change the terms of the loan in a manner beneficial to the borrower so that the loan is no longer considered a high-cost home loan subject to the provisions of this article. Examples of a bona fide error include clerical, calculation, computer malfunction and programming, and printing errors. An error of legal judgment with respect to a person's obligations pursuant to this article is not a bona fide error. A person seeking damages or penalties pursuant to this section shall elect to recover damages pursuant to either this chapter or Chapter 5 of Title 39, but not both.
Section 37-23-70. (A) A lender may not engage knowingly or intentionally in the unfair act or practice of 'flipping' a consumer home loan. This provision applies regardless of whether the interest rate, points, fees, and charges paid or payable by the borrower in connection with the refinancing exceed those thresholds specified in Section 37-23-20(11).
(B) A lender may not recommend or encourage default on an existing loan or other debt before and in connection with the closing or planned closing of a consumer home loan that refinances all or a portion of the existing loan or debt.
(C) Unless otherwise allowed under federal law, a consumer home loan agreement may not contain a choice of law provision identifying a state other than South Carolina.
(D) The making of a consumer home loan that violates subsection (A), (B), or (C) is a violation of the provisions of this article and unlawful as an unfair or deceptive act or practice in or affecting commerce in violation of the provisions of Chapter 5 of Title 39. A person seeking damages or penalties pursuant to this section shall elect to recover damages pursuant to either this chapter or Chapter 5 of Title 39, but not both.
(E) In a suit instituted by a borrower who alleges that the defendant violated this article, the presiding judge may, in the judge's discretion, allow reasonable attorney's fees to the attorney representing the prevailing party. The attorney's fees must be taxed as a part of the court costs and payable by the losing party, upon a finding by the presiding judge that:
(1) the party charged with the violation engaged wilfully in the act or practice, and there was unwarranted refusal by the party fully to resolve the matter that constitutes the basis of the suit; or
(2) the party instituting the action knew, or should have known, that the action was frivolous and malicious.
Section 37-23-80. A municipality or county may not enact any ordinance or law that regulates the terms of consumer home loans or high-cost home loans."
SECTION 2. A. Section 37-10-103 of the 1976 Code is amended to read:
"Section 37-10-103. With respect to a loan agreement which is secured in whole or in part by a first or junior lien on real estate under which the aggregate of all sums advanced or contemplated by the parties in good faith to be advanced will not exceed one hundred thousand dollars.
(1) The debtor has the right to prepay the debt in full at any time without penalty;
(2) The rate of the loan finance charge is a fixed, nonvariable rate. This subsection does not apply:
(a) If the borrower otherwise agrees; and either
(b) The loan is primarily for a business or agricultural purpose or is used for the construction of any improvements on the real estate which provides the security for the loan; or
(c) The creditor makes the loan in accordance with any regulation governing alternative mortgage loans promulgated by the State Board of Financial Institutions or a federal regulatory agency. The debtor may prepay in full at any time without penalty the debt represented by a personal, family, or household purpose loan agreement that is secured in whole or in part by a first or junior lien on real estate if the aggregate of all sums advanced will not exceed one hundred fifty thousand dollars."
B. Section 37-1-109(6) of the 1976 Code is amended to read:
"(6) The dollar amounts in the following sections of this title are subject to change in accordance with this section: 37-2-104(1)(e), 37-2-106(1)(b), 37-2-203(1), 37-2-407(1), 37-2-705 (1)(a) and (b), 37-3-104(1)(d), 37-3-203(1), 37-3-510, 37-3-511, 37-3-514, 37-5-103(2), (3), and (4), and 37-10-103."
SECTION 3. If any section, subsection, paragraph, subparagraph, sentence, clause, phrase, or word of this act is for any reason held to be unconstitutional or invalid, such holding shall not affect the constitutionality or validity of the remaining portions of this act, the General Assembly hereby declaring that it would have passed this chapter, and each and every section, subsection, paragraph, subparagraph, sentence, clause, phrase, and word thereof, irrespective of the fact that any one or more other sections, subsections, paragraphs, subparagraphs, sentences, clauses, phrases, or words hereof may be declared to be unconstitutional, invalid, or otherwise ineffective.
SECTION 4. This act takes effect January 1, 2004.
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