2017-05-10 47639 by Neil Garfield

Lots of loans have provisions that are illegal. As far as I know the only illegal provision of a loan that
could make debt, note and mortgage go away, i.e., becomes void in its entirety (versus the provision
containing the illegal language), or that entitles the borrower to recover all his payments or more is a
usury statute in a state where the statute specifically provides that remedy. Thus negative amortization
is illegal in many states (see below). But depending upon the statute, and the case law of each state, my
opinion is that the provision in the note that contains the offending language is probably void as being
against public policy. But be careful what you wish for. What happens next?

Hat Tip to Gene Stunkel, whose question got me thinking

see 2008 chart: http://www.ncsl.org/research/financial-services-and-commerce/mortgage-
lending-practices-state-statutes.aspx
Unless there is a remedy for reformation or declaratory and supplemental relief available,
cancelling the negative amortization provision could mean that payments go up to full
amortization. But that rewards the pretender lender for trapping the consumer into an
unaffordable loan. If a court were to rule that way the court would be reforming the instrument
to violate the Truth in Lending Act (TILA) and probably state lending statutes as well ---
especially deceptive lending laws.
The counter argument is that if the negative amortization provision is contained in the note then
the only way to keep the note enforceable (clearly a preference by the court) and within
provisions of the applicable statute is to reduce principal down to the point where the negative
amortization payment is equal to payments under a fully amortized loan.
As for Florida's Fair Lending Act banning negative amortization here is what it says:
494.0078Short title; purposes.
(1)This act shall be known as the Florida Fair Lending Act.
(2)(a)The Legislature finds that abusive mortgage lending has become a problem in this
state even though most high-cost home loans do not involve abusive mortgage practices. One
of the most common forms of abusive lending is the making of loans that are equity-based
rather than income-based. The financing of points and fees in these loans provides immediate
income to the originator and encourages creditors to repeatedly refinance home loans. As long
as there is sufficient equity in the home, an abusive creditor benefits even if the borrower is
unable to make the payments and is forced to refinance. The financing of high points and fees
causes the loss of equity in each refinancing and often leads to foreclosure.
(b)Abusive lending has threatened the viability of many communities and caused decreases
in home ownership. While the marketplace appears to operate effectively for conventional
mortgages, too many homeowners find themselves victims of overreaching creditors who
provide loans with unnecessarily high costs and terms that are unnecessary to secure
repayment of the loan. The Legislature finds that as competition and self-regulation have not
eliminated the abusive terms from home-secured loans, the consumer protection provisions of
this act are necessary to encourage fair lending.
494.00791Prohibited acts.
(1)PREPAYMENT PENALTIES.
(a)A high-cost home loan may not contain terms that require a borrower to pay a
prepayment penalty for paying all or part of the loan principal before the date on which the
payment is due.
(2)DEFAULT INTEREST RATE.A high-cost home loan may not provide for a higher
interest rate after default on the loan.
(3)BALLOON PAYMENTS.A high-cost home loan having a term of less than 10 years may
not contain terms under which the aggregate amount of the regular periodic payments would
not fully amortize the outstanding principal balance.
(4)NEGATIVE AMORTIZATION.A high-cost home loan may not contain terms
under which the outstanding principal balance will increase at any time over the
course of the loan because the regular periodic payments do not cover the full
amount of the interest due.

(6)EXTENDING CREDIT WITHOUT REGARD TO THE PAYMENT ABILITY OF THE

BORROWER.A lender making a high-cost home loan shall not engage in any pattern or
practice of extending high-cost home loans to borrowers based upon the borrowers collateral
without regard to the borrowers ability to repay the loan, including the borrowers current
and expected income, current obligations, and employment.
(9)REFINANCING WITHIN AN 18-MONTH PERIOD.
(a)A lender, its affiliate, or an assignee shall not refinance any high-cost home loan to the
same borrower within the first 18 months of the loan when the refinancing does not have a
reasonable benefit to the borrower considering all of the circumstances, including, but not
limited to, the terms of both the new and refinanced loans, the cost of the new loan, and the
borrowers circumstances.
(b)A lender or assignee shall not engage in acts or practices to evade this requirement,
including a pattern or practice of arranging for the refinancing of the lenders or assignees
own loans by affiliated or unaffiliated lenders or modifying a loan agreement, whether or not
the existing loan is satisfied and replaced by the new loan, and charging a fee.
Anyway, here is a chart that was done in 2008. Claims under such laws may well be limited by
statutes of limitation.

State: Statutory Flipping Negative Prepay Financing Consumer High Debt to

Citation Banned Amortiz Credit Credit Income Ratio
ment Insurance Counsel Provision
ation Penalties Banned (Ability to
Banned Banned ing repay loan)
Provision

Arkansas Ark. Stat. Ann. X X X 3rd party Give due

23-53-101 et required regard
seq.
California Cal. Financial X X Disclosure Presumption
Code 4970 et at 55%
seq. and 4973
et seq.

Colorado Colo. Rev. Stat. X X Notification Give due

5-3.5-101 et regard
seq. and 38-40-
105

Connecticut Conn. Gen. Stat. X Notification Presumption

36a-746 et seq. at 50%
and 36a-521

D.C. D.C. Code Ann. X X Give due

26-1114. and regard
26-1151.01 et
seq.

Florida Fla. Stat. X X Notification Give due

494.0078 et regard
seq.

Georgia Ga. Code 7- X X X 3rd party Presumption

6A-1 et seq. required at 50%

Illinois Ill. Rev. Stat. ch. X X X Notification Presumption

815, 137/1 et at 50%
seq. and ch.
765, 77/70

Indiana Ind. Code 4-6- X X 3rd party Give due

12 and 24-9-1 et required regard
seq.

Kentucky Ky. Rev. Stat. X X X Notification Presumption

294.010 et seq. at 50%
and 360.100

Louisiana La. Rev. Stat.

Ann. 6:1096(G)
and 9:3572.6(C)
Maine Me. Rev. Stat. X X X X 3rd party Give due
Ann. tit. 9-A, required regard
2-509, tit. 9-B,
429; tit. 9-A,
8-103, 8-206-
A, tit. 9-A, 10-
102 and tit. 33,
506, 2007
Chapter 273,
2008 Chapter
471

Maryland Md. X X X 3rd party Presumption

Commercial required at 45%
Law Code 12-
127, 12-311, 12-
409.1 and 12-
1029

Massachusetts Mass. Gen. X X 3rd party Presumption

Laws Ann. required at 50%
ch.183C, 1 et
seq.

Michigan Mich. Comp. X X Notification

Laws 445.1631
et seq.

Minnesota 2007 Chapter 18 X Notification Requires

Minn. Stat. vertification
58.137

Missouri Mo. Rev. Stat.

375.937

Montana Mont. Code

Ann. 32-5-306

Nebraska Neb. Rev. Stat. X

45-702, 45-704
and 45-705

Nevada Nev. Rev. Stat. X X Give due

 598D.010 et
seq. regard

New Jersey N.J. Rev. Stat. X X 3rd party

46:10B-22 et required
seq.

New Mexico N.M. Stat. Ann. X X X X 3rd party Give due

58-21A-1 et required regard
seq.

New York N.Y. Banking X X X Notification Give due

Law 6-l regard

North N.C. Gen. Stat. X X 3rd party Presumption

Carolina 24-1.1E, 24- required at 50%
1.1F, 24-10.2
and 53-243.01
et seq.

Ohio Ohio Rev. Code X X X Give due

Ann. regard/
1322.062, Presumption
1322.07, at 50%
1322.08,
1345.01 et seq.
and 1349.25 et
seq.

Oklahoma Okla. Stat. tit. X Give due

14A, 3-204 regard
and tit. 59,
2081 et seq.

Pennsylvania Pa. Cons. Stat. Notification Presumption

63, 456.101 et at 50%
seq.

Rhode Island R.I. Gen. Laws X X X 3rd party Presumption

34-23-5 required at 50%
R.I. Gen. Laws
34-25.2-1 et
seq.
South S.C. Code Ann. X X X 3rd party Presumption
Carolina 37-23-10 et required at 50%
seq.

Tennessee Tenn. Code X X Presumption

Ann. 45-20- at 50%
101 et seq.

Texas Tex. Finance X X Give due

Code 343.001 regard
et seq. and Tex.
Gov. Code
2306.001 et
seq.

Utah Utah Code Ann. X X Notification

61-2d-101 et
seq.

Virginia Va. Code 6.1- X

422.1 and 6.1-
422

Washington Wash. Rev.

Code 31.04 et
seq.

West Virginia W. Va. Code X

31-17-1 et seq.

Wisconsin Wis. Stat. Ann. X X X Notification Give due

428.202 et seq. regard

Definitions of provisions:
Flipping: refinancing an existing mortgage loan with no benefit to the consumer; also referred
to as churning.
Negative amortization: payment terms under which the outstanding principal balance will
increase at any time over the course of the loan because the regular periodic payments do not
cover the full amount of interest due or terms under which the aggregate amount of the regular
periodic payments would not fully amortize the outstanding principal balance.