DEPARTMENT OF REGULATORY AGENCIES

DIVISION OF REAL ESTATE

MORTGAGE LOAN ORIGINATORS

4CCR 725-3
[REPEALED] 
EFFECTIVE DATE 01-10-2014
3-1-4 PREPAYMENT PENALTIES

Pursuant to and in compliance with Title 12, Article 61 and Title 24, Article 4, C.R.S. as amended, notice of proposed rulemaking is hereby given, including notice to the Attorney General of the State of Colorado, and to all persons who have requested to be advised of the intention of the Board of Mortgage Loan Originators to promulgate rules.

Section 1.	Authority
Section 2.	Scope and Purpose
Section 3.	Definitions
Section 4.	Applicability
Section 5.	3-1-4 Prepayment Penalties
Section 6.	Enforcement

Section 1.	Authority

The statutory basis for this rule, entitled Prepayment Penalties, is § 12-61-910.3, C.R.S.

The notice proposes to update rule 3-1-4.  The rule addresses mortgage transactions that contain specific prepayment penalty terms.

Section 2.	Scope and Purpose

The Board has learned that some extended prepayment penalties lead to higher rates of foreclosure.  Specifically, prepayment penalties which extend past the adjustment date of a mortgage loan often severely restrict the ability of the borrower to refinance or sell their property.  Additionally, in higher rate environments, borrowers often have only two viable options: to absorb a much higher monthly payment or lose their home through foreclosure proceedings.  The Board updates this rule in order to address the high rate of foreclosures in Colorado resulting from particular prepayment penalties.

Pursuant to § 12-61-904.5(1), C.R.S., mortgage loan originators have a duty of good faith and fair dealing in all communications and transactions with a borrower.  This duty includes, but is not limited to, making a reasonable inquiry into a borrower’s ability to repay a loan and recommending or inducing a borrower to enter into only those transactions that have a reasonable, tangible net benefit to the borrower.  

The purpose of this rule is to establish a presumption that transactions which include a prepayment penalty that extends past the adjustment date of any teaser rate, payment rate, or interest rate included in the mortgage loan do not provide a reasonable, tangible net benefit to the borrower.

Section 3.	Definitions

1.	“Adjustable rate mortgage” means a mortgage in which the teaser rate, payment rate, or  interest rate changes periodically and, in some cases, may adjust according to corresponding fluctuations in an index.

2.	“Adjustment date” means the date the teaser rate, payment rate, or interest rate changes on an adjustable rate mortgage.

3.	“Interest rate” means the rate used to calculate a borrower’s monthly interest    payment. 

4.	“Payment rate” means the rate used to determine a borrower’s monthly payment.

5.	“Teaser rate” means a temporary and often low introductory rate on an adjustable rate mortgage. 

6.	“Prepayment Penalty” means a fee assessed pursuant to the terms of the loan on a borrower who repays all or part of the principal of a loan before it is due.  Prepayment penalties do not include interest payments of thirty (30) days or less that may be assessed pursuant to the terms of some FHA or VA loans.  Prepayment penalties for the purpose of this rule do not include termination fees of $500.00 or less that are associated with home equity lines of credit.

Section 4.	Applicability

This rule applies to mortgage loan originators as that term is defined in § 12-61-902(6), C.R.S.  This rule applies to all individuals required to be licensed pursuant to §§ 12-61-902 and 12-61-903, C.R.S. 

Section 5.	3-1-4 Prepayment Penalties.

1.	Mortgage loan originators who recommend or induce a borrower into a transaction that contains a prepayment penalty which extends past the adjustment date for any type of an adjustable rate mortgage shall be presumed to have violated their duty of good faith and fair dealing requirement pursuant to section 12-61-904.5, C.R.S.  This includes, but is not limited to:

a.	Prepayment penalties that extend past the adjustment date of any teaser rate used to calculate a borrower’s monthly mortgage payment;

b.	Prepayment penalties that extend past the adjustment date of any interest rate used to calculate a borrower’s monthly mortgage payment; 

c.	Prepayment penalties that extend past the adjustment date of any payment rate used to calculate a borrower’s monthly mortgage payment; and

d.	Prepayment penalties that extend past the adjustment date of any like tool or instrument, similar to the teaser rate, payment rate, or interest rate defined in this rule, used to calculate a borrower’s monthly mortgage payment.

2.	Information provided to consumers should clearly explain the ramifications of prepayment penalties.  Borrowers should be informed of the existence of any prepayment penalty, how it will be calculated, and when it may be imposed.  A prepayment penalty disclosure form may be prescribed by the Board, completion of which will constitute compliance with this section 5(2).

Section 6.	Enforcement

1.	Noncompliance with this rule, whether defined or reasonably implied in the rule, may result in the imposition of any of the sanctions allowable under Colorado law, including, but not limited to:

a.	Revocation;

b.	Refusal to renew a license;

c.	Imposition of fines; and 

d.	Restitution for any financial loss. [REPEALED]