Ohio Homebuyers’ Protection Act Compliance Toolkit

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Ohio Homebuyers' Protection Act Compliance Toolkit

The Ohio Homebuyers’ Protection Act, SB 185, is effective on January 1, 2007. In general, it applies to loan applications taken on or after January 1, 2007. For example, SB 185 requires new disclosures be provided "at application," so this requirement does not seem to attach to loans applied for prior to the effective date of the bill. However, certain other requirements may be held to apply to loans that were "in the pipeline" as of the effective date, so best practices dictate complying with all aspects of SB 185 where possible, even if the loan application was received prior to the effective date.

SB 185 was developed over the course of the 2006 legislative session in Ohio, with significant input from consumer advocacy groups and, to a lesser extent, the financial services industry. Parts of the new law cover only mortgage brokers and other registrants and licensees under the Ohio Mortgage Broker Act, other parts in addition cover “nonbank mortgage lenders,” and other portions of the law cover all types of residential mortgage lenders in Ohio.

SB 185 is not just a “predatory lending” law, although certain sections of the law are for “high-cost home loans.” Though the Ohio General Assembly passed the law out of concern for consumer protection in the mortgage lending industry, the legislature did not stop at merely regulating mortgage brokers and nonbank mortgage lenders. Rather, SB 185 contains “something for everyone” – that is, new or revised statutory sections covering not only mortgage brokers and mortgage lenders, but also appraisers, title agents, escrow or settlement agents, title companies and other settlement service providers and affiliations of these parties. Think of the law in terms of three “C’s” – it is comprehensive, complex and challenging.

Compliance issues for lenders have grown significantly more complicated due to the numerous abutting and overlapping state and federal laws, ordinances, and regulatory schemes throughout the country. In addition to these numerous complex laws, three federal agencies – the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), and the National Credit Union Administration (NCUA) – have issued preemption orders negating the impact of state legislation on certain federally regulated lenders. As a result of these actions and the promise of more to come, the regulatory environment is growing increasingly challenging for mortgage lenders and brokers. SB 185 is a reflection of this trend.

Coverage of Act

The new Ohio law covers seven major areas that directly impact residential mortgage lending in Ohio: (1) enhanced procedures and requirements for mortgage broker registration and licensing, (2) new restrictions and limitations on mortgage broker conduct, including new duties on mortgage brokers, (3) new statutory duties on “nonbank mortgage lenders,” (4) revisions to Ohio law on prepayment fees or penalties in certain residential mortgage loans, (5) revisions to Ohio’s existing Predatory Lending Act, (6) significant amendments to laws covering title insurance agencies, settlement agents and appraisers, and (7) inclusion of residential mortgage lending involving nonbank mortgage lenders, mortgage brokers and loan officers into Ohio’s Consumer Sales Practices Act.

Compliance Guidelines

There are several basic rules of interpretation that should guide any compliance plan under SB 185:

1. It is primarily a consumer protection statute and will be construed broadly to favor and protect customers.

2. Good faith, fairness and favorable customer relationships are more important than ever.

3. Complying with SB 185 requires a renewed awareness of federal laws, such as the Home Ownership and Equity Protection Act of 1994 (HOEPA) and other parts of TILA and Regulation Z, as well as RESPA.

4. Federal and Ohio law differ in this area, and compliance tests for each may need be established separately. For example, as to the amended Ohio Predatory Lending Act, it is not safe to conclude that a lender that does not make high-cost home loans under federal law (such as HOEPA or "Section 32" loans) need not worry about SB 185. In addition, there are numerous new or amended RESPA-like state law disclosure requirements that require similar, but different, disclosures to be provided to consumers.

5. Definitions drive much of the coverage of SB 185. Much of the law applies to “residential mortgages,” which are very specifically defined. A new entity, known as a “nonbank mortgage lender,” is regulated in various parts of the Act, even as banks and their affiliates are exempted. Some terms in SB 185 are defined by reference to federal laws, however, most are original to Ohio.

6. Relationships between participants in the residential mortgage lending process in Ohio will need to be re-examined in light of the new law. SB 185 imposes, sometimes subtly or indirectly, new risks on various parties while creating new challenges as to responsibilities for compliance and allocation of risk. The relationships affected by SB 185 include relationships between (1) mortgage brokers and mortgage lenders, (2) mortgage lenders and loan purchasers or investors, (3) mortgage lenders and the providers of automated underwriting systems, (4) mortgage loan originators and vendors, such as document vendors, AVM providers and LOS providers, (5) mortgage loan originators and appraisers, and (6) mortgage loan originators and title insurance agents, closing agents and escrow agents.

Questions to Ask

Any participant in the residential mortgage market is now asking, how does the law apply to me? And what should I do? This Toolkit is designed to help with answers to these questions. Unfortunately, it is difficult under SB 185 to “compartmentalize” compliance into narrow categories of lender type, loan type or conduct. If you originate, broker, fund, purchase, underwrite, accept applications for, market, advertise, solicit, promote, evaluate collateral or provide title insurance or appraisals for any residential mortgage in Ohio on or after January 1, 2007, the Ohio Homebuyers’ Protection Act applies to you (and very likely to other parties with whom you do business). Every user of this Toolkit is encouraged to read every Chapter. For example, mortgage lenders will find that SB 185 amends the appraisal law in Ohio to require mortgage lenders to make special disclosures regarding AVM’s. (This is covered in Chapter 9). Title insurance agents are required to make consumer-protection disclosures that could be in conflict with disclosures required of mortgage brokers and mortgage lenders. The list goes on.

Special compliance concerns arise under SB 185 in a nearly infinite number of scenarios, considering how nearly all participants in the mortgage lending process are regulated. Examples of specific compliance concerns that arise under SB 185 include:

1. How should mortgage lenders and mortgage brokers work together under SB 185? How will mortgage brokers be able to keep up with extensive new post-loan-application disclosure requirements?

2. What if the mortgage lender offers “nontraditional” or exotic mortgage products in Ohio, such as I/O’s, POA’s, low doc or no doc, stated income or low-introductory rate loans? Can these products still be offered in Ohio without undue regulatory or legal risk and if so, what changes need to be made to marketing, underwriting and funding these types of loans?

3. Does the lender rely on automated underwriting systems and if so who will be responsible for complying with the new underwriting-related prohibitions in SB 185?

4. How will nonprime loans be affected by the changed “triggers” in the amended Ohio Predatory Lending Act? How will investors react to the amended law, in that a key rating agency has said that Ohio “high cost home loans” require credit enhancement? How are all lenders now affected by the amended law?

5. How will loan terms need to be changed, such as prepayment fees, late fees, default interest, credit insurance/DCC, arbitration clauses and provisions for attorney’s fees? Who will be responsible for making sure “standard” loan document forms do not violate SB 185?

6. How will compliance-oriented lenders be able to show that the borrower received a “reasonable tangible net benefit” in a refinancing transaction?

7. How will appraisal ordering, review and evaluation practices need to be changed?

Moving Forward

This Toolkit was designed to break down a complex law into more manageable components, and to identify areas where compliance is expected to be especially complicated or difficult. To the extent that certain areas are potentially open to interpretation, it is only with the passage of time and further guidance from regulators and the courts that some of these issues will become settled. All participants in the residential mortgage market in Ohio are advised to pay close attention to legal, regulatory and marketplace responses to the challenges of this law. For example, many of the regulations that implement the new law still are in proposed form as the publication date of this Toolkit. The outcome of rulemakings at several Ohio state agencies, including the Division of Financial Institutions (DFI), the Attorney General and the Department of Insurance, will impact compliance with SB 185. In any event, this Toolkit is not intended to be legal advice, but to serve as guidance to lenders and others who are developing compliance plans under the new law.

Brochure and Order Form for the Ohio Homebuyers' Protection Act Compliance Toolkit