During the past several years the state attorneys general have aggressively pursued the mortgage industry, including companies such as Household International, parent company of Household Finance Corporation and Beneficial Finance Corporation ($484 million); Associates First Capital/Citigroup Inc., New York ($225 million); First Alliance Mortgage Co., Irvine, California ($60 million); and, most recently, Ameriquest Mortgage Co., Orange, California. [??] Iowa Attorney General Tom Miller stated that Citigroup Inc. and Household International (now a part of HSBC North America Holdings Inc., Prospect Heights, Illinois,) became "two of the best companies" in subprime lending after they reached settlements and changed their practices a few years ago, according to American Banker. As a result of the Ameriquest settlement announced on Jan. 23, 2006, Miller expects Ameriquest to become "one of the best" as well, according to American Banker. [??] The terms of the recent settlement agreement between Ameriquest and the 49 state attorneys general (AGs) requires significant new mortgage lending practices that have been agreed to by Ameriquest. Such new lending practices are binding only upon Ameriquest, but may provide a window into potential future AG litigation in the mortgage banking industry.
The attorneys general for all 49 states seem convinced the lending reforms included in the Ameriquest settlement agreement can be a road map for the creation of uniform national standards above and beyond existing federal and state laws and regulations. The disturbing feature of legislating by AG litigation is that simply complying with all applicable federal and state laws and regulations may not be enough.
The requirements from the settlement agreement, which were in most instances implemented by Ameriquest long before the settlement was reached, were not required under federal or state laws, but were designed to improve and enhance Ameriquest's ability to better serve its customers. The most important of such best practices are outlined below.
Disclosure of loan terms
The following disclosures to potential borrowers must be made, in addition to all other federal and state laws and regulations. These disclosures must be made orally if the loan application is verbal, and in writing no later than three days after written application:
1. Fixed-rate mortgage (FRM): "The loan we have been discussing is a [insert term of the loan] year fixed-rate loan for $ [insert loan amount]. The interest rate is [insert interest rate] percent. The monthly payment is $ [insert monthly payment], which does [or does not] include escrows for property taxes or insurance. Your loan does [or does not] include a prepayment penalty."
2. Discount points for FRM: "This loan includes payment of [insert number] discount points, a fee you pay at closing that reduces the interest rate on your loan and also the amount of your monthly payment, but increases the total amount of your loan. You may be eligible for a loan with fewer discount points."
3. Adjustable-rate mortgage (ARM): "The loan we have been discussing is an adjustable-rate loan for $ [insert loan amount], with an initial interest rate of [insert initial interest rate] percent. Your initial monthly payment would be $ [insert initial monthly payment], which does [or does not] include escrows for property taxes or insurance. Your loan does [or does not] include a prepayment penalty. Because this is an adjustable-rate loan, the initial interest rate and monthly payment I quoted you are only guaranteed for the first [insert length of initial fixed rate period] of the loan. After that, your interest rate can increase by up to [insert rate-adjustment cap] percent each year. But your interest rate can never be higher than [insert lifetime cap] percentage points over your initial interest rate." [Note: If the salesperson has not previously discussed a specific fixed-rate mortgage proposal with the potential borrower, the salesperson should also provide an additional oral statement in substantially the following form. …