Citations Affected: IC 23-2; IC 24-4.8; noncode.
Synopsis: Predatory lending. Restricts certain lending acts and
practices. Establishes the mortgage fraud unit under the attorney
general to investigate and bring actions against a lender who engages
in mortgage fraud. Preempts regulation of covered acts and practices
by political subdivisions. Increases mortgage recording fees. Allocates
increased revenue to the Indiana housing finance authority, attorney
general, and county recorders. Allows the securities commissioner to
enter orders of recission, restitution, and disgorgement, including
interest at the rate of 8% to loan brokers.
Effective: July 1, 2003; January 1, 2004.
January 21, 2003, read first time and referred to Committee on Insurance and Financial
February 20, 2003, amended, reported favorably _ Do Pass.
March 3, 2003, read second time, amended, ordered engrossed.
A BILL FOR AN ACT to amend the Indiana Code concerning trade
regulations and consumer sales and credit and to make an
SECTION 1. IC 23-2-5-10, AS AMENDED BY P.L.14-2000,
SECTION 53, IS AMENDED TO READ AS FOLLOWS [EFFECTIVE
JULY 1, 2003]: Sec. 10. (a) Whenever it appears to the
commissioner that a person has engaged in or is about to engage in
an act or a practice constituting a violation of this chapter or a rule
adopted or an order issued under this chapter, the commissioner
may investigate and may issue:
(1) with a prior hearing if there exists no substantial threat of immediate irreparable harm; or
(2) without a prior hearing if there exists a substantial threat of immediate irreparable harm;
orders and notices the commissioner determines to be in the public interest, including cease and desist orders, orders to show cause, and notices. After notice and hearing, the commissioner may enter an order of rescission, restitution, or disgorgement, including interest at the rate of eight percent (8%) per year, directed to a
person who has violated this chapter or a rule or order under this
(b) Upon the issuance of an order or notice without a prior hearing by the commissioner under subsection (a)(2), the commissioner shall promptly notify the respondent:
(1) that the order or notice has been issued;
(2) of the reasons the order or notice has been issued; and
(3) that upon the receipt of a written request the matter will be set down for a hearing to commence within forty-five (45) business days after receipt of the request unless the respondent consents to a later date.
If a hearing is not requested and not ordered by the commissioner, an order remains in effect until it is modified or vacated by the commissioner. If a hearing is requested or ordered, the commissioner, after notice of an opportunity for hearing, may modify or vacate the order or extend it until final determination.
(c) The commissioner may deny, suspend, or revoke the license of a licensee or the registration of a registrant if the licensee or the registrant:
(1) fails to maintain the bond required under section 5 of this chapter;
(2) is insolvent;
(3) has violated any provision of this chapter;
(4) has knowingly filed with the commissioner any document or statement containing any false representation of a material fact or omitting to state a material fact or if a representation becomes false after the filing but during the term of a license or certificate of registration as provided in subsection
(e); (g); or
(5) has been convicted, within ten (10) years before the date of the application, renewal, or review, of any crime involving fraud or deceit.
(b) (d) The commissioner may not enter a final order denying,
suspending, or revoking the license of a licensee or the registration of
a registrant without prior notice to all interested parties, opportunity for
a hearing, and written findings of fact and conclusions of law.
However, the commissioner may by summary order deny, suspend, or
revoke a license or certificate of registration pending final
determination of any proceeding under this section. Upon the entry of
a summary order, the commissioner shall promptly notify all interested
parties that it has been entered, of the reasons for the summary order,
and that upon receipt by the commissioner of a written request from a
party, the matter will be set for hearing to commence within fifteen
(15) business days after receipt of the request. If no hearing is
requested and none is ordered by the commissioner, the order remains
in effect until it is modified or vacated by the commissioner. If a
hearing is requested or ordered, the commissioner, after notice of the
hearing has been given to all interested persons and the hearing has
been held, may modify or vacate the order or extend it until final
(c) (e) IC 4-21.5 does not apply to a proceeding under this section.
(d) (f) If:
(1) a licensee desires to have a previously unregistered employee begin engaging in origination activities; or
(2) an individual who was previously registered under this chapter is employed by another licensee who desires to have the registrant engage in origination activities;
the employer licensee shall, within fifteen (15) days after the employee first conducts origination activities, submit to the commissioner, on a form prescribed by the commissioner, notice of the registrant's employment. If the employee has not previously been registered, the licensee shall submit evidence that the employee has completed the education requirements of section 21 of this chapter.
(e) (g) If a material fact or statement included in an application
under this chapter changes after the application has been submitted, the
applicant shall provide written notice to the commissioner of the
change. The commissioner may revoke or refuse to renew the license
or registration of any person who:
(1) is required to submit a written notice under this subsection and fails to provide the required notice within two (2) business days after the person discovers or should have discovered the change; or
(2) would not qualify for licensure or registration under this chapter as a result of a change in material fact or statement.
SECTION 2. IC 24-4.8 IS ADDED TO THE INDIANA CODE AS A NEW ARTICLE TO READ AS FOLLOWS [EFFECTIVE JANUARY 1, 2004]:
ARTICLE 4.8. INDIANA FAIR LENDING ACT
Chapter 1. Consumer Protections
Sec. 1. (a) Except as provided in subsection (c), this article does not apply to a bank, trust company, savings and loan, savings bank, or credit union that is chartered under the laws of Indiana to the extent federal law precludes, preempts, or has been determined to preclude or preempt this article to a federally chartered bank, trust company, savings and loan, savings bank, or credit union.
(b) Any federal preclusion or preemption under subsection (a) applies to a state chartered entity only as it applies to the same type of federally chartered entity.
(c) The requirements of this article apply to a mortgage broker who originates or brokers a loan that is initially funded by any state or federally chartered bank, trust company, savings and loan, savings bank, or credit union.
Sec. 2. (a) The definitions in this section apply throughout this article.
(b) "Affiliate" means any entity that controls, is controlled by, or is under common control with another entity, as determined under the Federal Bank Holding Company Act (12 U.S.C. 1841 et. seq.), as amended. The term does not include an entity whose predominant business is providing tax deferred defined contribution pension plans to public employees in accordance with Sections 403(b) and 457 of the Internal Revenue Code.
(c) "Bridge loan" means temporary or short term financing with a maturity of less than eighteen (18) months that requires payments of interest only until the entire unpaid balance is due and payable.
(d) "Covered loan" means a consumer credit mortgage loan transaction other than an open end credit plan or a reverse mortgage in which:
(1) the borrower is a natural person;
(2) the debt is incurred by the obligor primarily for personal, family, or household purposes;
(3) the loan is secured by a mortgage on residential real property or by collateral that has a mortgage lien interest in residential real property, and the residential real property is or will be occupied by the obligor as the obligor's principal dwelling; and
(4) the terms of the loan provide:
(A) that the loan transaction, including a residential mortgage transaction (as defined in 12 CFR 226.2(a)(24), as amended from time to time) at the time the loan is consummated is considered a mortgage under section 152 of the Home Ownership and Equity Protection Act of 1994, Pub. L. No. 103-325, 15 U.S.C. 602(aa), as amended from time to time, and regulations adopted by the Federal Reserve Board, including 12 CFR 226.32, as amended from time to time; or
(B) for total points and fees payable by the borrower at or
before the loan closing, exceed six percent (6%) of the total
(e) "Lender" means any individual or entity that in any twelve (12) month period originates one (1) or more covered loans. The individual or entity to which the covered loan is initially payable, either on the face of the note or contract or by agreement when there is no note or contract, is considered to be the lender.
(f) "Mortgage broker" means a person, except for an employee or exclusive agent of a lender, who, for compensation, brings an obligor and a lender together to obtain a covered loan.
(g) "Municipality" means a county, city, town, or township.
(h) "Ninety (90) day period" means the period beginning on the day notice is provided under section 3 of this chapter and ending ninety (90) days later.
(i) "Obligor" means each obligor, co-obligor, cosigner, or guarantor obligated to repay a covered loan.
(j) "Political subdivision" means a municipality, school district, public library, local housing authority, fire protection district, public transportation corporation, local building authority, local hospital authority or corporation, local airport authority, special service district, special taxing district, or any other type of local governmental corporate entity.
(k) "Servicer" has the same meaning provided in Section 2605(i)(2) of the Real Estate Settlement Procedures Act of 1974, 12 U.S.C. 2601 et. seq., as amended.
(l) "Total points and fees payable by the borrower at or before the loan closing" means points and fees (as defined in 12 CFR 226.32(b)(1), as amended from time to time).
Sec. 3. A covered loan is subject to the following limitations:
(1) A covered loan may not require a scheduled payment that is more than twice as large as the average of earlier scheduled monthly payments unless the a payment becomes due and payable at least one hundred twenty (120) months after the date of the loan. This prohibition does not apply when the payment schedule is adjusted to account for the seasonal or irregular income of the obligor or if the loan is a bridge loan connected with or related to the acquisition or construction of a dwelling intended to become the obligor's principal dwelling.
(2) A covered loan may not contain a call provision that permits the lender, in the lender's sole discretion, to accelerate the indebtedness. This prohibition does not apply
when repayment of the loan has been accelerated:
(A) by default;
(B) under a due on sale provision;
(C) where there is fraud or material misrepresentation by an obligor in connection with the loan; or
(D) where there is any action or inaction by the obligor that adversely affects the lender's security for the loan or any rights of the lender in the security for the loan.
(3) A covered loan may not require a payment schedule with regular periodic payments that cause the principal balance to increase. This does not prohibit negative amortization as a consequence of a temporary forbearance or restructure sought by the obligor.
(4) A covered loan may not require any increase in the interest rate as a result of a default. This provision does not apply to periodic interest rate changes in a variable rate loan otherwise consistent with the loan agreement, provided the change in the interest rate is not occasioned by the default or a permissible acceleration of the indebtedness.
(5) A covered loan may not include terms under which more than two (2) periodic payments required under the loan are paid in advance from the loan proceeds provided to the obligor.
(6) Prepayment fees are subject to the following limitations:
(A) A prepayment fee or penalty is permitted only during the first thirty-six (36) months after the date of execution of a covered loan.
(B) A lender may not include a prepayment penalty fee in a covered loan unless the lender offers the obligor the option of choosing a loan product without a prepayment fee. The terms of the offer must be in writing and initialed by the borrower. The offer must be clearly labeled in large bold type and must include the following disclosure:
"LOAN PRODUCT CHOICE
I was provided with an offer to accept a product both with and without a prepayment penalty provision. I have chosen to accept the product with a prepayment penalty.".
(C) A prepayment fee or penalty may not be charged on a refinancing of a covered loan if the covered loan being refinanced is owned by the refinancing lender at the time of the refinancing.
home and any equity you have in it if you do not meet
your mortgage loan obligations.
Property taxes and homeowner's insurance are your responsibility. Not all lenders provide escrow services for these payments. You should ask your lender about these services.
Your payments on existing debts contribute to your credit ratings. You should not accept any advice to ignore your regular payments to your existing creditors.".
(b) A lender or mortgage broker has met its obligation to provide the disclosure described in subsection (a) if the consumer provides the lender or mortgage broker with a signed acknowledgment of receipt of a copy of the notice set forth in subsection (a).
(c) A lender who originates a covered loan may not extend credit to an obligor based on the obligor's collateral without regard to the obligor's ability to repay, including the obligor's current or expected income, current obligations, and employment.
(d) A lender will be presumed to have violated subsection (c) if the lender makes a covered loan without verifying or documenting the obligor's repayment ability.
(e) Any expected income from any source other than the obligor's equity in the property securing the covered loan, including regular salary or wages, gifts, expected retirement payments, or income from self employment may be considered when evaluating the obligor's ability to repay. A lender may verify and document an obligor's income and current obligations through any reliable source that provides the lender with a reasonable basis for believing there are sufficient funds to support the covered loan. Reliable sources include, but are not limited to, credit reports, tax returns, pension statements, and payment records for employment income.
(f) In the case of a loan based on the borrower's statement of the borrower's income, the reasonable basis for believing there are sufficient funds to support the covered loan may be the income stated by the consumer, as well as other information in the possession of the person originating the loan after the solicitation of all information that the person customarily solicits in connection with loans of that type. A lender may not knowingly or willfully originate a covered loan as a loan based on the borrower's statement of the borrower's income with the intent to evade this
(g) A lender may not, within two (2) years after having made a covered loan, charge an obligor points or fees in connection with the covered loan if the proceeds of the covered loan are used to refinance an existing covered loan for which points and fees were charged. However, points and fees may be charged on any proceeds of a covered loan that are in excess of the amount refinanced on the existing covered loan.
(h) A lender may not finance, directly or indirectly, into a covered loan or finance to the same obligor within thirty (30) days of making a covered loan, any individual or group credit life, credit accident and health, credit disability, or credit unemployment insurance product on a prepaid single premium basis sold in conjunction with a covered loan. Any individual or group credit life, credit accident and health, credit disability, or credit unemployment insurance premium calculated and paid on a monthly or other periodic basis may not be considered financed by the lender. This prohibition does not include contracts issued by a government agency or private mortgage insurance company to insure the lender against loss caused by an obligor's default.
(i) A lender may not replace or consolidate a zero (0) interest rate or other subsidized low rate loan made by a governmental or nonprofit lender with a covered loan within the first ten (10) years of the subsidized low rate loan unless the current holder of the loan consents in writing to the refinancing. For purposes of this subsection, a "subsidized low rate loan" is a loan that carries a current interest rate at least two (2) percentage points below the current yield on treasury securities with a comparable maturity. If the loan's current interest rate is either a discounted introductory rate or a rate that automatically steps up over time, the fully indexed rate or the fully stepped up rate, as appropriate, should be used instead of the current rate to determine whether a loan is a subsidized low rate loan.
(j) A lender may not pay a contractor under a home improvement contract from the proceeds of a covered loan other than by an instrument payable to the obligor or jointly to the obligor and the contractor or, at the election of the obligor, through a third party escrow agent in accordance with terms established in a written agreement signed by the obligor, the lender, and the contractor before the disbursement of funds to the contractor.
(k) A lender may not recommend or encourage default on an
existing loan or other debt before or in connection with the closing
or planned closing of a covered loan that refinances all or any part
of the existing loan or debt.
(l) A lender may not charge a fee for informing or transmitting to a person the balance due to pay off a covered loan or to provide release upon prepayment. A lender must provide a payoff balance not later than seven (7) business days after the request is received by the lender.
(m) A person may not knowingly and intentionally make, propose, or solicit fraudulent, false, or misleading statements on any mortgage document or any document related to a mortgage, including a mortgage application, real estate appraisal, or real estate settlement or closing document. For purposes of this subsection, "fraudulent, false, or misleading statements" does not include mathematical errors, inadvertent transposition of numbers, typographical errors, or any other bona fide error.
Sec. 5. A servicer of a covered loan shall report at least quarterly both the favorable and unfavorable payment history information of the obligor on payments due to the lender on a covered loan to a nationally recognized consumer credit reporting agency. This subsection does not prevent a servicer from agreeing with the obligor not to report specified payment history information in the event of a resolved or unresolved dispute with an obligor and does not apply to covered loans held or serviced by a lender for less than ninety (90) days.
Chapter 2. Enforcement and Mortgage Fraud Unit
Sec. 1. (a) The attorney general may enforce this article for any violation occurring within five (5) years after the making of the covered loan.
(b) As used in this chapter, "fraud" means an act or practice as part of a consumer credit mortgage transaction involving real property located in Indiana in which a lender:
(1) knowingly or intentionally makes a material misrepresentation to a borrower;
(2) knowingly or intentionally conceals or obscures material information from the borrower regarding the terms or conditions of the transaction;
(3) knowingly or intentionally consummates the credit mortgage transaction with the knowledge that the borrower will be unable to successfully fulfill the terms or conditions of the mortgage loan based upon the borrower's finances at the time of the consummation;
Sec. 4. (a) The attorney general and an investigator of the unit may do any of the following when investigating alleged fraud in connection with mortgage lending:
(1) Issue and serve a subpoena for the production of records, including records stored in electronic data processing systems, for inspection by the attorney general or the investigator.
(2) Issue and serve a subpoena for the appearance of any person before the attorney general to provide testimony under oath.
(3) Apply to a court with jurisdiction to enforce a subpoena described in subdivision (1) or (2).
(b) The attorney general may make recommendations to the general assembly for appropriate legislation to address fraud in connection with mortgage lending.
(c) The unit shall maintain an education program to inform consumers of mortgage loans about fraud in connection with mortgage lending. The unit shall cooperate with the agencies listed in section 1(f) of this chapter to develop and implement the education program required by this subsection.
Sec. 5. The attorney general may bring an action to enjoin a violation of this article. A court in which the action is brought may:
(1) issue an injunction;
(2) order a person to make restitution;
(3) void or limit the application of obligations that violate this article;
(4) order a person to reimburse the state for reasonable costs of the attorney general's investigation and prosecution of the violation of this article; and
(5) impose a civil penalty of not more than fifteen thousand dollars ($15,000) per violation.
Sec. 6. (a) A person who violates an injunction issued under section 5 of this chapter must pay a civil penalty of not more than fifteen thousand dollars ($15,000) per violation.
(b) The court that issues an injunction under section 5 of this chapter retains jurisdiction over a proceeding seeking imposition of a civil penalty under this section.
(c) The attorney general, acting in the name of the state, has the exclusive right to petition for imposition of a civil penalty under this section.
(d) If a court determines that a person:
(1) has violated an injunction issued under section 5 of this
(2) must pay a civil penalty;
the court shall also require the person to reimburse the state for reasonable costs related to bringing an action under this section.
Sec. 7. A lender who commits an act of fraud in connection with a mortgage loan is not subject to a civil penalty under this chapter if the lender within ninety (90) days of the act of fraud and before any action under this chapter is instituted makes whatever adjustments are necessary to the loan to correct or remedy the fraudulent terms or conditions.
Sec. 8. (a) If a person suffers a pecuniary loss as a result of a violation of this article, the person may bring a civil action for the following:
(1) Actual damages.
(2) The costs of the action.
(3) A reasonable attorney's fee.
(b) An action under this section may not be brought, commenced, or maintained unless the action is filed within five (5) years after the date the person knew or by the exercise of reasonable diligence should have known of the violation of thisarticle.
(c) An award of actual damages under subsection (a)(1) has priority over a civil penalty imposed under this chapter.
Chapter 3. State Power to Regulate Lending
Sec. 1. (a) The state solely shall regulate the business of originating, granting, servicing, and collecting loans and other forms of credit in Indiana and the manner in which any business is conducted. This regulation preempts all other regulation of these activities by any political subdivision.
(b) Political subdivisions may not enact, issue, or enforce ordinances, resolutions, regulations, orders, requests for proposals, or requests for bids pertaining to financial or lending activities, including ordinances, resolutions, and rules disqualifying persons from doing business with a municipality that are based upon lending terms or practices, including interest rates and fees, or from imposing reporting requirements or any other obligations upon persons regarding financial services or lending practices or upon subsidiaries or affiliates that:
(1) are subject to the jurisdiction of the department of financial institutions;
(2) are subject to the jurisdiction or regulatory supervision of the Board of Governors of the Federal Reserve System, the
Office of the Comptroller of the Currency, the Office of Thrift
Supervision, the National Credit Union Administration, the
Federal Deposit Insurance Corporation, the Federal Trade
Commission, or the United States Department of Housing and
(3) originate, purchase, sell, assign, securitize, or service property interests or obligations created by financial transactions or loans made, executed, or originated by persons referred to in subdivision (1), (2), (4), or (5);
(4) are chartered by the United States Congress to engage in secondary market mortgage transactions; or
(5) are created by the Indiana housing finance authority.
Chapter 4. Revenue and Appropriations
Sec. 1. The fees assessed by the county recorder to record a mortgage are increased by three dollars ($3) per mortgage filing. The county recorder shall retain fifty cents ($0.50) of the fee increase. The revenue from this fee increase shall be distributed as follows:
(1) Fifty percent (50%) to the attorney general for use in mortgage fraud enforcement under section 3 of this chapter.
(2) Fifty percent (50%) to the Indiana housing finance authority under IC 5-20-1-3 for mortgage literacy training and programs under section 2 of this chapter.
Sec. 2. The fee allocation under section 1(2) of this chapter shall be distributed on a quarterly basis to the Indiana housing finance authority for the purpose of identifying, promoting, and funding mortgage literacy training and programs throughout the state. Such training and programs shall cover topics that include home buying and mortgage lending.
Sec. 3. The fee allocation under section 1(1) of this chapter shall be distributed on a quarterly basis to the mortgage fraud unit created within the office of the attorney general by IC 24-4.8-2-1(c).
Sec. 4. (a) An allocation of seventy-five thousand dollars ($75,000) consisting of the increased fees under this chapter shall be made to the legislative services agency before any fee revenue may be allocated to the mortgage fraud unit of the attorney general's office or the department of education. The seventy-five thousand dollar ($75,000) allocation shall be used to contract with the Kelly School of Business at Indiana University to conduct a study of the causes of the high rate of foreclosure in Indiana during 2001 and 2002.