REPORT TITLE:
Prepayment Penalties


DESCRIPTION:
Prohibits mortgage prepayment penalties.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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THE SENATE                              S.B. NO.           
TWENTIETH LEGISLATURE, 2000                                
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO FINANCIAL INSTITUTIONS AND MORTGAGE PREPAYMENT
   PENALTIES. 


BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 1      SECTION 1.  Section 412:1-109, Hawaii Revised Statutes, is
 
 2 amended by adding a new definition to be appropriately inserted
 
 3 and to read as follows:
 
 4      ""Early termination penalty" means a financial penalty or
 
 5 obligation incurred by a mortgagor upon the complete satisfaction
 
 6 of a mortgage amount prior to the pre-set termination date."
 
 7      SECTION 2.  Section 412:5-302, Hawaii Revised Statutes, is
 
 8 amended to read as follows:
 
 9      "§412:5-302  Limitations on loans and extensions of credit
 
10 to one borrower.  (a)  No bank shall permit a person to become
 
11 indebted or liable to it, either directly or indirectly on loans
 
12 and extensions of credit, in a total amount outstanding at any
 
13 one time in excess of twenty per cent of the capital and surplus
 
14 of the bank.
 
15      (b)  This section applies to all loans and extensions of
 
16 credit made by a bank and its subsidiaries.  It does not apply to
 
17 loans and extensions of credit made by a bank or its subsidiaries
 
18 to its affiliates or subsidiaries.
 
19      (c)  The limitations set forth in this section shall not
 

 
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 1 apply to:
 
 2      (1)  A bank's eligible acceptances as described in section
 
 3           412:5-204(b);
 
 4      (2)  A bank's purchase or discount of another bank's
 
 5           acceptances of the kinds described in section 13 of the
 
 6           Federal Reserve Act;
 
 7      (3)  A bank's deposits with a Federal Reserve Bank, Federal
 
 8           Home Loan Bank or another depository institution made
 
 9           in compliance with this chapter;
 
10      (4)  A bank's sale of federal funds to another depository
 
11           institution with a maturity of one business day or
 
12           under a continuing contract;
 
13      (5)  Loans and extensions of credit secured by the interest-
 
14           bearing obligations of the United States or those for
 
15           which the faith and credit of the United States are
 
16           distinctly pledged to provide for the payment of the
 
17           principal and interest thereof or of the State or any
 
18           county or municipal or political subdivision of this
 
19           State, issued in compliance with the laws of this
 
20           State, where the market value of the security shall be
 
21           at any time not less than one hundred five per cent of
 
22           the face amount of the loans and extensions of credit;
 
23      (6)  Loans and extensions of credit to the extent secured by
 

 
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 1           a pledge or security interest in a deposit account in
 
 2           the lending bank; and
 
 3      (7)  Loans and extensions of credit arising from the
 
 4           discount of negotiable or nonnegotiable credit sales
 
 5           contracts which carry a partial recourse endorsement or
 
 6           limited guarantee by the person transferring the credit
 
 7           sales contracts, if the bank's respective file or the
 
 8           knowledge of its officers of the financial condition of
 
 9           each maker of such credit sales contract is reasonably
 
10           adequate, and an officer of the bank certifies in
 
11           writing that the bank is relying primarily upon the
 
12           responsibility of each maker for payment of such credit
 
13           sales contract and not upon any partial recourse
 
14           endorsement or limited guarantee by the transferor.
 
15           Under these circumstances, such credit sales contract
 
16           will be considered a loan and extension of credit to
 
17           the maker of the credit sales contract rather than the
 
18           seller of the credit sales contract.
 
19      (d)  In computing the total loans and extensions of credit
 
20 made by a bank to any person, all loans and extensions of credit
 
21 by the bank to the person and to any partnership, joint venture
 
22 or unincorporated association of which the person is a partner or
 
23 a member shall be included unless the person is a limited
 

 
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 1 partner, but not a general partner, in a limited partnership, or
 
 2 unless the person is a partner in a limited or general
 
 3 partnership, or a member of a joint venture or unincorporated
 
 4 association, if such partner or member, by law, by the terms of
 
 5 the partnership, joint venture or membership agreement, or by the
 
 6 terms of an agreement with the bank, is not to be held liable to
 
 7 the bank for the debts of the partnership, joint venture or
 
 8 association.  In computing the total loans and extensions or
 
 9 credit made by a bank to any firm, partnership, joint venture, or
 
10 unincorporated association, all loans and extensions of credit to
 
11 its individual partners or members shall be included unless such
 
12 individual partner is a limited partner, but not a general
 
13 partner, in a limited partnership, or unless such individual
 
14 partner or member, by law, by the terms of the partnership, joint
 
15 venture, or membership agreement, or by the terms of an agreement
 
16 with the bank, is not to be held liable to the bank for the debts
 
17 of the partnership, joint venture or association.
 
18      (e)  Alternatively, a bank may, with the prior approval of
 
19 the commissioner, comply with the lending limits applicable to
 
20 national banking associations, as and to the same extent it
 
21 would, at the time, be so required by federal law or regulation
 
22 if it were a national banking association.  In monitoring a
 
23 bank's compliance with the national banking association lending
 

 
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 1 limits, the commissioner shall give substantial weight to the
 
 2 Office of the Comptroller of the Currency's regulations and
 
 3 opinions interpreting the national banking association lending
 
 4 limits and will regard them as strong evidence of safe and sound
 
 5 banking practices.
 
 6      (f)  All banks are prohibited from imposing early
 
 7 termination penalties."
 
 8      SECTION 3.  Section 412:6-302, Hawaii Revised Statutes, is
 
 9 amended to read as follows:
 
10      "§412:6-302  Requirements and limits for certain loans.  (a)
 
11 Not less than fifty per cent of the amount of loans and
 
12 extensions of credit made by a savings bank shall be in loans and
 
13 extensions of credit secured by real estate.
 
14      (b)  The aggregate amount loaned by any savings bank for the
 
15 following types of loans, whether secured or unsecured, shall not
 
16 exceed the following limits:
 
17      (1)  Commercial loans:  fifteen per cent of the savings
 
18           bank's total assets.  For purposes of this section
 
19           "commercial loan" means any loan primarily for
 
20           business, corporate, commercial, or agricultural
 
21           purposes where the savings bank substantially relies on
 
22           the borrower's general credit standing for repayment of
 
23           the loan and, if the loan is secured by real property,
 

 
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 1           does not primarily rely on the value of or income or
 
 2           projected income from the security for repayment of the
 
 3           loan; and
 
 4      (2)  Education loans:  ten per cent of the savings bank's
 
 5           total assets.  For purposes of this section, "education
 
 6           loan" means any loan the proceeds of which are used to
 
 7           pay for tuition, fees, books, and other expenses
 
 8           related to primary, secondary, vocational and
 
 9           undergraduate and postgraduate college or university
 
10           education.
 
11      (c)  A savings bank may reclassify or apportion a loan from
 
12 one category to another in this section.
 
13      (d)  All savings banks are prohibited from imposing early
 
14 termination penalties."
 
15      SECTION 4.  Section 412:7-302, Hawaii Revised Statutes, is
 
16 amended to read as follows:
 
17      "§412:7-302  Requirements and limits for certain loans.  (a)
 
18 Not less than sixty per cent of the amount of loans and
 
19 extensions of credit made by a savings and loan association shall
 
20 be in loans and extensions of credit secured by real estate.
 
21      (b)  The aggregate amount loaned by any savings and loan
 
22 association for the following types of loans, whether secured or
 
23 unsecured, shall not exceed the following limits:
 

 
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 1      (1)  Commercial loans:  twelve and one-half per cent of the
 
 2           savings and loan association's total assets.  For
 
 3           purposes of this section "commercial loan" means any
 
 4           loan primarily for business, corporate, commercial, or
 
 5           agricultural purposes where the savings and loan
 
 6           association substantially relies on the borrower's
 
 7           general credit standing for repayment of the loan and,
 
 8           if the loan is secured by real property, does not
 
 9           primarily rely on the value of or income or projected
 
10           income from the security for repayment of the loan;
 
11      (2)  Education loans:  five per cent of the savings and loan
 
12           association's total assets.  For purposes of this
 
13           section, "education loan" means any loan the proceeds
 
14           of which are used to pay for tuition, fees, books, and
 
15           other expenses related to primary, secondary,
 
16           vocational and undergraduate and postgraduate college
 
17           or university education;
 
18      (3)  Unsecured construction loans:  five per cent of the
 
19           savings and loan association's total assets.  For
 
20           purposes of this section, "unsecured construction loan"
 
21           means any loan to provide financing for what is
 
22           expected to be residential real estate and where the
 
23           savings and loan association relies primarily on the
 

 
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 1           borrower's general credit and projected future income,
 
 2           if any, from such completed construction.
 
 3      (c)  A savings and loan association may reclassify or
 
 4 apportion a loan from one category to another in this section.
 
 5      (d)  All savings and loan associations are prohibited from
 
 6 imposing early termination penalties."
 
 7      SECTION 5.  Section 412:9-405, Hawaii Revised Statutes, is
 
 8 amended to read as follows:
 
 9      "§412:9-405  Loans and extensions of credit fully secured by
 
10 real property.  (a)  For loans and extensions of credit fully
 
11 secured by real property other than unimproved raw land, a
 
12 depository financial services loan company may advance, directly
 
13 or indirectly, up to and including ninety-five per cent of the
 
14 appraised value or real property evaluation required under the
 
15 Federal Deposit Insurance Act and the rules and regulations of
 
16 the Federal Deposit Insurance Corporation of the real property
 
17 securing the loan and extension of credit.  The principal amount
 
18 of the loan and extension of credit shall be added together with
 
19 the outstanding balances of all prior liens on the real property
 
20 to determine the ninety-five per cent loan-to-value ratio.
 
21      (b)  For loans and extensions of credit fully secured by
 
22 mortgages on unimproved raw land, the maximum loan-to-value ratio
 
23 shall not exceed seventy per cent of the appraised value or real
 

 
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 1 property evaluation required under the Federal Deposit Insurance
 
 2 Act and the rules and regulations of the Federal Deposit
 
 3 Insurance Corporation of the unimproved raw land.  Parcels of
 
 4 land with direct access by road and served by electric power
 
 5 shall not be deemed unimproved raw land.
 
 6      (c)  Notwithstanding the provisions of subsections (a) and
 
 7 (b), depository financial services loan companies, which make
 
 8 loans fully secured by real property in excess of twenty per cent
 
 9 of their capital and surplus, shall obtain appraisals of the real
 
10 property securing those loans.
 
11      (d)  All financial services loan companies are prohibited
 
12 from imposing early termination penalties."
 
13      SECTION 6.  Section 412:10-409, Hawaii Revised Statutes, is
 
14 amended to read as follows:
 
15      "§412:10-409  Real estate mortgage loans.  (a)  The amount
 
16 of any credit union loan secured by a mortgage on real property
 
17 shall be limited to the following percentages of the appraised
 
18 value of the property:
 
19      (1)  Ninety per cent of the value of any residential real
 
20           property; and
 
21      (2)  Eighty per cent of the value of any non-residential
 
22           real property.
 
23 The principal amount of the loan shall be added together with the
 

 
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 1 outstanding balances of all prior liens on the real property to
 
 2 determine the loan to value ratio.
 
 3      (b)  The amount of a loan secured by residential real
 
 4 property may be increased by the unencumbered share or deposit
 
 5 balances of the borrowing member that are pledged to the loan.
 
 6      (c)  Loans secured by real property other than residential
 
 7 real property shall provide for the regular reduction of
 
 8 principal.
 
 9      (d)  For loans secured by real property, the credit union
 
10 may require the borrower to make regular deposits for the payment
 
11 of insurance, taxes and other expenses assessed against the
 
12 property.
 
13      (e)  All credit unions are prohibited from imposing early
 
14 termination penalties."
 
15      SECTION 7.  New statutory material is underscored.
 
16      SECTION 8.  This Act shall take effect upon its approval.
 
17 
 
18                       INTRODUCED BY:  ___________________________