Page 15 - John Hundley 2008

Sharp Thinking

No. 10 Perspectives on Developments in the Law from The Sharp Law Firm, P.C. July 2008

High Risk Home Loan Act Poses Challenges

for Illinois Financial and Legal Communities

By Mandy Combs, Mcombs@lotsharp.com, 618-242-0246

With the decline in the housing market and a reported 42% increase in foreclosures since June 2007,
alleged violations of Illinois’ High Risk Home Loan Act, 815 ILCS 137, soon may become a matter of
serious attention for persons involved in real estate finance and legal matters in Illinois.

The Act was adopted in 2004 to protect borrowers who enter into designated high-risk home equity
loans. Significantly, any loan is a “home equity loan” for these purposes if it is secured by the
borrower’s primary residence and the proceeds are not used as purchase money for the
residence.

Such a loan is deemed “high risk” and subject to the Act if the total points and fees payable at or
before closing exceed the greater of 5% of the loan or $800. A loan also is “high risk” and subject to the
Act if the APR at origination exceeds by more than 6 percentage points (in the case of a first lien; 8
percentage points for junior mortgages) the yield reported for U.S. Treasury securities of comparable
th
maturity on the 15 of the month before the loan application.
To the extent the Act conflicts with any other Illinois financial regulation laws, except the
Interest Act, the Act “is superior and supersedes those laws”. Thus it is important to understand the
requirements in extending credit under the Act. Below is a summary of some of the key requirements.

One may not make a loan if he does not believe the borrower has the ability to make the scheduled
payments. A borrower is presumed able to repay if his monthly payments on the loan and all other
disclosed debts do not exceed 50% of his monthly gross income.

The lender must verify the borrower's ability to repay by obtaining a credit report and by requiring
the borrower to submit a personal income and expense statement, tax returns, pay stubs, accounting
statements and other data.

Such a loan may not finance points and fees in excess of 6% of the total loan.

The loan amount may not exceed the value of the property securing the loan.
A knowing violation of the Act is a violation of the Consumer Fraud &
Deceptive Business Practices Act, which provides for attorney fees.

The loan may not finance a single-premium credit life, credit disability, credit
unemployment, or other life or health insurance purchase.

Any late payment fee (1) cannot exceed 5% of the amount past due; (2) may be assessed only for a

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Sharp Thinking is an occasional newsletter of The Sharp Law Firm, P.C. addressing developments in the law which may be of interest. Nothing contained in Sharp
Thinking shall be construed to create an attorney-client relation where none previously has existed, nor with respect to any particular matter. The perspectives herein
constitute educational material on general legal topics and are not legal advice applicable to any particular situation. To establish an attorney-client relation or to obtain legal
advice on your particular situation, contact a Sharp lawyer at the phone number or one of the addresses provided on page 2 of this newsletter.