REPORT TITLE:
Mortgage Loan Balance


DESCRIPTION:
Prohibits financial institutions from requiring a mortgagor to
pay down the mortgage loan balance when real estate values
decline below that required by underwriting guidelines.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        
THE SENATE                              S.B. NO.           882
TWENTIETH LEGISLATURE, 1999                                
STATE OF HAWAII                                            
                                                             
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                   A  BILL  FOR  AN  ACT


RELATING TO THE PRESERVATION OF AFFORDABLE HOUSING. 


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

 1      SECTION 1.  The legislature finds that financial
 
 2 institutions may require a borrower to pay down the mortgage loan
 
 3 balance when property values decline to a point where they no
 
 4 longer meet underwriting guidelines.  While this reduces the risk
 
 5 on the part of the financial institution, it becomes a barrier to
 
 6 our State's economic recovery.  The legislature further finds
 
 7 that requiring a mortgagee to pay down the mortgage loan balance,
 
 8 especially on an affordably priced home, creates a hardship for
 
 9 the borrower, possibly causing the mortgagee to become delinquent
 
10 in payments.  
 
11      The purpose of this Act is to prohibit financial
 
12 institutions from requiring a mortgagor to pay down the mortgage
 
13 loan balance when the real estate value declines below that
 
14 required by underwriting guidelines.
 
15      SECTION 2.  Section 412:5-302, Hawaii Revised Statutes, is
 
16 amended to read as follows::
 
17      "§412:5-302  Limitations on loans and extensions of credit
 
18 to one borrower.  (a)  No bank shall permit a person to become
 
19 indebted or liable to it, either directly or indirectly on loans
 

 
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 1 and extensions of credit, in a total amount outstanding at any
 
 2 one time in excess of twenty per cent of the capital and surplus
 
 3 of the bank.
 
 4      (b)  This section applies to all loans and extensions of
 
 5 credit made by a bank and its subsidiaries.  It does not apply to
 
 6 loans and extensions of credit made by a bank or its subsidiaries
 
 7 to its affiliates or subsidiaries.
 
 8      (c)  The limitations set forth in this section shall not
 
 9 apply to:
 
10      (1)  A bank's eligible acceptances as described in section
 
11           412:5-204(b);
 
12      (2)  A bank's purchase or discount of another bank's
 
13           acceptances of the kinds described in section 13 of the
 
14           Federal Reserve Act;
 
15 -    (3)  A bank's deposits with a Federal Reserve Bank, Federal
 
16           Home Loan Bank or another depository institution made
 
17           in compliance with this chapter;
 
18      (4)  A bank's sale of federal funds to another depository
 
19           institution with a maturity of one business day or
 
20           under a continuing contract;
 
21      (5)  Loans and extensions of credit secured by the interest-
 
22           bearing obligations of the United States or those for
 
23           which the faith and credit of the United States are
 

 
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 1           distinctly pledged to provide for the payment of the
 
 2           principal and interest thereof or of the State or any
 
 3           county or municipal or political subdivision of this
 
 4           State, issued in compliance with the laws of this
 
 5           State, where the market value of the security shall be
 
 6           at any time not less than one hundred five per cent of
 
 7           the face amount of the loans and extensions of credit;
 
 8      (6)  Loans and extensions of credit to the extent secured by
 
 9           a pledge or security interest in a deposit account in
 
10           the lending bank; and
 
11      (7)  Loans and extensions of credit arising from the
 
12           discount of negotiable or nonnegotiable credit sales
 
13           contracts which carry a partial recourse endorsement or
 
14           limited guarantee by the person transferring the credit
 
15           sales contracts, if the bank's respective file or the
 
16           knowledge of its officers of the financial condition of
 
17           each maker of such credit sales contract is reasonably
 
18           adequate, and an officer of the bank certifies in
 
19           writing that the bank is relying primarily upon the
 
20           responsibility of each maker for payment of such credit
 
21           sales contract and not upon any partial recourse
 
22           endorsement or limited guarantee by the transferor.
 
23           Under these circumstances, such credit sales contract
 

 
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 1           will be considered a loan and extension of credit to
 
 2           the maker of the credit sales contract rather than the
 
 3           seller of the credit sales contract.
 
 4      (d)  In computing the total loans and extensions of credit
 
 5 made by a bank to any person, all loans and extensions of credit
 
 6 by the bank to the person and to any partnership, joint venture,
 
 7 or unincorporated association of which the person is a partner or
 
 8 a member shall be included unless the person is a limited
 
 9 partner, but not a general partner, in a limited partnership, or
 
10 unless the person is a partner in a limited or general
 
11 partnership, or a member of a joint venture or unincorporated
 
12 association, if such partner or member, by law, by the terms of
 
13 the partnership, joint venture, or membership agreement, or by
 
14 the terms of an agreement with the bank, is not to be held liable
 
15 to the bank for the debts of the partnership, joint venture or
 
16 association.  In computing the total loans and extensions or
 
17 credit made by a bank to any firm, partnership, joint venture, or
 
18 unincorporated association, all loans and extensions of credit to
 
19 its individual partners or members shall be included unless such
 
20 individual partner is a limited partner, but not a general
 
21 partner, in a limited partnership, or unless such individual
 
22 partner or member, by law, by the terms of the partnership, joint
 
23 venture, or membership agreement, or by the terms of an agreement
 

 
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 1 with the bank, is not to be held liable to the bank for the debts
 
 2 of the partnership, joint venture, or association.
 
 3      (e)  Alternatively, a bank may, with the prior approval of
 
 4 the commissioner, comply with the lending limits applicable to
 
 5 national banking associations, as and to the same extent it
 
 6 would, at the time, be so required by federal law or regulation
 
 7 if it were a national banking association.  In monitoring a
 
 8 bank's compliance with the national banking association lending
 
 9 limits, the commissioner shall give substantial weight to the
 
10 Office of the Comptroller of the Currency's regulations and
 
11 opinions interpreting the national banking association lending
 
12 limits and will regard them as strong evidence of safe and sound
 
13 banking practices. 
 
14      (f)  No bank shall require a mortgagor to pay down a
 
15 mortgage loan balance when real estate values for the mortgaged
 
16 property decline below that required by the bank's underwriting
 
17 guidelines."
 
18      SECTION 3.  Section 412:6-302, Hawaii Revised Statutes, is
 
19 amended to read as follows:
 
20      "§412:6-302  Requirements and limits for certain loans.  (a)
 
21 Not less than fifty per cent of the amount of loans and
 
22 extensions of credit made by a savings bank shall be in loans and
 
23 extensions of credit secured by real estate.
 

 
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 1      (b)  The aggregate amount loaned by any savings bank for the
 
 2 following types of loans, whether secured or unsecured, shall not
 
 3 exceed the following limits:
 
 4      (1)  Commercial loans:  fifteen per cent of the savings
 
 5           bank's total assets.  For purposes of this section
 
 6           "commercial loan" means any loan primarily for
 
 7           business, corporate, commercial, or agricultural
 
 8           purposes where the savings bank substantially relies on
 
 9           the borrower's general credit standing for repayment of
 
10           the loan and, if the loan is secured by real property,
 
11           does not primarily rely on the value of or income or
 
12           projected income from the security for repayment of the
 
13           loan; and
 
14      (2)  Education loans:  ten per cent of the savings bank's
 
15           total assets.  For purposes of this section, "education
 
16           loan" means any loan the proceeds of which are used to
 
17           pay for tuition, fees, books, and other expenses
 
18           related to primary, secondary, vocational and
 
19           undergraduate and postgraduate college or university
 
20           education.
 
21      (c)  A savings bank may reclassify or apportion a loan from
 
22 one category to another in this section.
 
23      (d)  No savings bank shall require a mortgagor to pay down
 

 
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                                     S.B. NO.           882
                                                        
                                                        

 
 1 the mortgage loan balance when real estate values for the
 
 2 mortgaged property decline below that required by the savings
 
 3 bank's underwriting guidelines." 
 
 4      SECTION 4. Section 412:7-302, Hawaii Revised Statutes, is
 
 5 amended to read as follows:
 
 6      §412:7-302  Requirements and limits for certain loans.  (a)
 
 7 Not less than sixty per cent of the amount of loans and
 
 8 extensions of credit made by a savings and loan association shall
 
 9 be in loans and extensions of credit secured by real estate.
 
10      (b)  The aggregate amount loaned by any savings and loan
 
11 association for the following types of loans, whether secured or
 
12 unsecured, shall not exceed the following limits:
 
13      (1)  Commercial loans:  twelve and one-half per cent of the
 
14           savings and loan association's total assets.  For
 
15           purposes of this section "commercial loan" means any
 
16           loan primarily for business, corporate, commercial, or
 
17           agricultural purposes where the savings and loan
 
18           association substantially relies on the borrower's
 
19           general credit standing for repayment of the loan and,
 
20           if the loan is secured by real property, does not
 
21           primarily rely on the value of or income or projected
 
22           income from the security for repayment of the loan;
 
23      (2)  Education loans:  five per cent of the savings and loan
 

 
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                                     S.B. NO.           882
                                                        
                                                        

 
 1           association's total assets.  For purposes of this
 
 2           section, "education loan" means any loan the proceeds
 
 3           of which are used to pay for tuition, fees, books, and
 
 4           other expenses related to primary, secondary,
 
 5           vocational, and undergraduate and postgraduate college
 
 6           or university education;
 
 7      (3)  Unsecured construction loans:  five per cent of the
 
 8           savings and loan association's total assets.  For
 
 9           purposes of this section, "unsecured construction loan"
 
10           means any loan to provide financing for what is
 
11           expected to be residential real estate and where the
 
12           savings and loan association relies primarily on the
 
13           borrower's general credit and projected future income,
 
14           if any, from such completed construction.
 
15      (c)  A savings and loan association may reclassify or
 
16 apportion a loan from one category to another in this section.
 
17      (d)  No savings and loan association shall require a
 
18 mortgagor to pay down the mortgage loan balance when real estate
 
19 values for the mortgaged property decline below that required by
 
20 the savings and loan association's underwriting guidelines."
 
21      SECTION 5.  Section 412:9-202, Hawaii Revised Statutes, is
 
22 amended to read as follows:
 
23      "§412:9-202  Prohibitions.  Except as otherwise expressly
 

 
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 1 authorized by this chapter, a financial services loan company
 
 2 shall not:
 
 3      (1)  Employ its funds, directly or indirectly, in trade or
 
 4           commerce by buying or selling ordinary goods, chattels,
 
 5           wares, and merchandise, or by owning or operating
 
 6           industrial or manufacturing plants of any kind;
 
 7      (2)  Issue commercial letters of credit;
 
 8      (3)  Sell real estate, securities, or insurance; [or]
 
 9      (4)  Engage in any activity requiring a charter as a trust
 
10           company under article 8[.]; or
 
11      (5)  Require a mortgagor to pay down the mortgage loan
 
12           balance when real estate values for the mortgaged
 
13           property decline below that required by underwriting
 
14           guidelines."
 
15      SECTION 6.  Section 412:10-409, Hawaii Revised Statutes, is
 
16 amended to read as follows:
 
17      §412:10-409  Real estate mortgage loans.  (a)  The amount of
 
18 any credit union loan secured by a mortgage on real property
 
19 shall be limited to the following percentages of the appraised
 
20 value of the property:
 
21      (1)  Ninety per cent of the value of any residential real
 
22           property; and
 
23      (2)  Eighty per cent of the value of any non-residential
 

 
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 1           real property.
 
 2 The principal amount of the loan shall be added together with the
 
 3 outstanding balances of all prior liens on the real property to
 
 4 determine the loan to value ratio.
 
 5      (b)  The amount of a loan secured by residential real
 
 6 property may be increased by the unencumbered share or deposit
 
 7 balances of the borrowing member that are pledged to the loan.
 
 8      (c)  Loans secured by real property other than residential
 
 9 real property shall provide for the regular reduction of
 
10 principal.
 
11      (d)  For loans secured by real property, the credit union
 
12 may require the borrower to make regular deposits for the payment
 
13 of insurance, taxes, and other expenses assessed against the
 
14 property.
 
15      (e)  No credit union may require a mortgagor to pay down the
 
16 mortgage loan balance when real estate values for the mortgaged
 
17 property decline below that required by the credit union's
 
18 underwriting guidelines."
 
19      SECTION 7.  Statutory material to be repealed is bracketed.
 
20 New statutory material is underscored.
 
21      SECTION 8.  This Act shall take effect upon its approval.
 
22 
 
23                           INTRODUCED BY:  _______________________