Indiana ranks among the top 10 states in the country for fraudulent house flipping, according to FBI statistics compiled in 2006. Responding to the problem on the national level involving Fannie Mae and Freddie Mac, the Federal Housing Administration responded by implementing laws restricting the kinds of loans Freddie Mae and Freddie Mac would be permitted to purchase from non-national banks. Indiana, foreseeing the problem, enacted its own law in 2005 that prohibited what were defined as "high cost loans" that were the signature of fraudulent home flipping. Though the FHA waived federal restrictions in February 2010 for one year to spark the housing market, the Indiana laws remain in effect. The Indiana law uses several thresholds to determine high cost loans and require that buyers are informed of that fact.
The Indiana Home Loan Practices Act creates thresholds which set off alarm bells that the sale of a home might be fraudulent at worst and questionable at best. There are two basic parts to the threshold test, each comprised of subsections. The tests include the trigger rate test, the Benchmark Rate and the Points and Fees test.
Trigger Rate Test
The trigger rate test varies with the kind of loan--fixed, variable or other type like a balloon loan. For fixed rate loans, the trigger rate is the interest rate in effect on the loan's closing date; for variable loans the rate must be indexed at no greater rate than that specified in the loan agreement. Other loans are treated on a case-by-case basis. Any of the loans must not exceed the "benchmark test," which corresponds to the yield on the value of Treasury securities on the 15th of the month preceding the month in which the application is received, plus either 8 percent for first liens, generally referred to as the mortgage and 10 percent for junior liens, better known as second mortgages.
The Points and Fees Test
Again, the alarm bells ring if the total points and fees exceed 5 percent of the loan principal more than $40,000 or 6 percent of the loan principal less than $40,000. Points and fees include prepaid finance charges, prepaid interest, optional credit insurance and other unnecessary products hoisted on unsuspecting buyers, like excludeable brokerage compensation.
The law also requires clear disclosure of any prepayment penalties or the choice to elect another plan that does not penalize prepayment; that the mortgage is a high cost home loan as defined by state law; and a notice to borrower that: "You should be aware that you might be able to obtain a loan at a lower cost. You should compare loan rates, costs, and fees. mortgage loan rates and closing costs and fees vary based on many factors, including your particular credit and financial circumstances, your employment history, the loan-to-value requested, and the type of property that will secure your loan. the loan rate, costs, and fees could also vary based on which creditor or broker you select. If you accept the terms of this loan, the creditor will have a mortgage lien on your home. You could lose your home and any money you have paid if you do not meet your payment obligations under the loan.
There is quite a long list of prohibitions under the Indiana Home Loan Practices Act including refinancing of special/subsidized loans, encouraging default, arbitrary acceleration of payments, prepayment penalties exceeding 2 percent of the amount prepaid within the first 24 months, balloon payments on loans less than 10 years and negative amortization. The law also requires that the borrower must first be offered a loan without a prepayment penalty and that once a loan has been established that the payment is posted on the day it is paid.
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