Discussion Scenario: Connecticut Abusive Home Loan Lending Practices Act
Ian and Rebecca Davidson were struggling financially and were growing more and more concerned about their ability to make their monthly mortgage payments. Ever since Rebecca lost her job at the car dealership, the Davidsons were spending more each month than they were taking in. One option, they both agreed, was to refinance their mortgage before they ended up in foreclosure.
And then one day a near miracle occurred â they saw a television advertisement for Nasturtium Capital that offered refinancings for people just like them at rates far below the one they paid on their current mortgage. They jotted down the number, called the next morning, and set up a meeting for the following Saturday.
They met that day with Sean Caulfield, a mortgage loan originator, who explained to them the various loan options that Nasturtium offered. When the Davidsons expressed a particular interest in the loan they saw advertised, Caulfield told them that it was a 15-year variable-rate mortgage with a low introductory rate. He also disclosed that the APR for the loan was 10.25%, only 6.75 percentage points above the APOR, which was âbasically a steal!â according to Caulfield.
In addition, Caulfield gave them:
The amount of the regular monthly payment
A statement that the interest rate and monthly payments could increase and the maximum monthly payment, and
A statement that they were not required to complete the agreement, which met Connecticutâs disclosure requirement
They then discussed loan term specifics. Among the terms were the following:
A provision requiring a prepayment penalty of 3% if the loan was repaid in the first year, a penalty of 2% if the loan was repaid in the second year, and a penalty of 1% if the loan was repaid in the third year.
A provision that would allow the Davidsons to convert their payment schedule to one that permitted lower payments in the event of a financial emergency. The Davidsons particularly liked this provision because of the flexibility it gave them, but asked Caulfield how this type of arrangement would be possible. Caulfield shrugged, explaining that the payments would just leave out a portion of the interest due, and the Davidsons could âcatch upâ with the payments when they were able.
A provision allowing Nasturtium to call the loan due in the event of a collapse in real estate prices similar to the one that occurred in 2008. The calculation was complicated, but essentially it gave Nasturtium the right to call the loan due if the value of the property fell below 85% of the outstanding loan balance.
The Davidsons decided to fill out a loan application. In listing their income, they used the amount of income they had before Rebecca lost her job. They did so because Rebecca had received a call on Friday from her former employer telling her that business had picked back up and that they hoped to be able to rehire her. Using the income provided in the application, Caulfield did a back-of-the-envelope calculation and determined that the Davidsonâs monthly mortgage payment was only about 35% of their combined gross monthly income.
1. If Nasturtium advertises that refinancing an existing debt with a high-cost loan will reduce the borrowerâs total monthly debt, what else must the company disclose?
2. List two disclosure obligations that Sean Caulfield has under the Connecticut Abusive Home Loan Lending Practices Act.
3. List two terms in Ian and Rebeccaâs loan that violate the Connecticut Abusive Home Loan Lending Practices Act.
4. Did Sean Caulfield properly calculate and verify the Davidsonsâ monthly gross income? Explain why or why not.
