Virtually every jurisdiction in the U.S. has predatory lending laws that restrict certain lending practices. Each state has it’s own predatory lending laws, but Cleveland’s provides a perfect example.
The laws in Cleveland dealing with predatory lending can be found in Part 6, Title III, Chapter 659 of the codes. The most important section is 659.02 which prohibits predatory lending as follows:
a) Prohibited Conduct. Subject to the limitations of division (b) of this section:
1) Issuing Predatory Loans. No person or business entity shall make, issue, or arrange a predatory loan, or assist others in doing so. A person who, when acting in good faith, falls to comply with this division will not be deemed to have violated this division if the person establishes that the compliance failure was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid such errors, and within 60 days after the discovery of the compliance failure and prior to the institution of any action under this Chapter or the receipt of written notice of compliance failure, the borrower is notified of the compliance failure, appropriate restitution is made, and whatever adjustments are necessary are made to the loan to either, at the choice of the borrower, (i) make the predatory loan satisfy the requirements of this Chapter, or (ii) change the terms of the loan in a manner beneficial to the borrower so that the loan will no longer be considered a predatory loan subject to the provisions of this Chapter. Examples of a bona fide error include clerical, calculation, computer malfunction and programming, and printing errors. An error of legal judgment with respect to a person’s obligations under this Chapter is not a bona fide error.
(2) Lending Without Home Loan Counseling. No person or business entity shall make, issue or arrange, or assist others in making, issuing or arranging, any loan that is secured by owner-occupied residential real property located within the City of Cleveland on which there is situated a dwelling for not more than four families, a condominium unit, or a cooperative unit in which either:
A. the annual percentage rate at consummation will exceed by more than eight (8) percentage points for first lien loans, or by more than ten (10) percentage points for subordinate-lien loans, the yield on Treasury securities having comparable periods of maturity to the loan maturity as of the fifteenth day of the month immediately preceding the month in which the application for the extension of credit is received by the creditor; or
B. the total points and fees payable by the consumer at or before loan closing will exceed the greater of eight (8) percent of the total loan amount, or $400; the $400 figure shall be adjusted annually on January 1 by the annual percentage rate change in the consumer price index that was reported on the preceding June 1, unless that person or business entity first receives notice from a counselor employed by a housing counseling agency approved by the Department of Housing and Urban Development that the borrower has received counseling describing the loan transaction and its impact on the borrower based upon the information provided by borrower and lender to the counselor at the time counseling is provided to the borrower.
(3) Payments to Home Improvement Contractors. A home improvement contractor may not receive directly and solely from the lender, the proceeds of a loan that is secured by owner-occupied residential real property located within the City of Cleveland on which there is situated a dwelling for not more than four families, a condominium unit, or a cooperative unit in which, at any time over the life of the loan for a fixed interest rate loan, or at the time a loan is consummated for a variable interest rate loan, the annual percentage rate of the loan equals or exceeds by more than four and one half (4 1/2) percentage points in the case of a mortgage that is a first lien when it is made, or equals or exceeds by more than six and one half (6 1/2) percentage points in the case of a mortgage that is junior when it is made, the yield on Treasury securities having comparable periods of maturity to the loan maturity as of the fifteenth day of the month immediately preceding the month in which the application for the extension of credit is received by the creditor.
(4) Incorporating Governmental Financial Assistance Funds. All persons shall be barred from promoting, utilizing, packaging, or in any other way incorporating funds from any of the programs administered by the City in combination with any predatory loan. Any contract, lease, grant or other agreement entered into by the City with any person or business entity shall contain a provision requiring that the person or business entity, in the administration of governmental housing assistance funds, abide by the provisions of this division as though its administration of such funds was directly subject to the provisions of this division.
(b) Activities of Certain Financial Institutions Exempted.
(1) Division (a) of this section is not applicable in the following circumstances:
A. With respect to a lender duly licensed as may be required under State law, solely because of the presence of a loan provision described in divisions (f)(2)(B), (C) or (H) of Section 659.01, provided that such provision(s) are made in conformity with the requirements of federal law pursuant to the Alternative Mortgage Transaction Parity Act, 12 U.S.C. § 3803 and provided that any such loan is not otherwise predatory as defined in division (f) of Section 659.01; or
B. In the case of a loan made pursuant to the Ohio’s Mortgage Loan Act, R.C. § 1321.51 et seq., solely because the loan contains any provision authorized by such act, provided that any such loan is not otherwise predatory as defined in division (f) of Section 659.01.
(2) Divisions (a)(1) and (a)(2) of this section are not applicable with respect to a State chartered bank, bank and trust company, savings bank, private bank, national bank, or a State or federally chartered savings and loan association, a federally chartered savings bank, a State or federally chartered credit union.
(3) This section shall apply to affiliates of the entities enumerated in division (b)(2) of this section, except insofar as such affiliates are themselves one of those financial institutions.
(Ord. No. 45-03. Passed 1-13-03, eff. 1-15-03)
Section 659.03 states the notice that must be given to all home improvement loan customers as follows:
(a) No person or business entity that knowingly funds a home improvement loan under the circumstances described in this section shall fail to furnish the notice described in this section. At least three (3) business days prior to closing, every lender who knowingly funds a home improvement loan shall furnish a notice along with any home improvement loan for any work to be performed on owner-occupied residential real estate located within the City of Cleveland on which there is situated a dwelling for not more than four families, a condominium unit, or a cooperative unit and which loan is secured by that real estate, shall furnish a notice to the borrower. That notice shall be furnished as a separate document, printed in 16 point font, with the signature line at the top of the page, and shall be in substantially the same form as the following, as may be amended from time to time by the Department of Consumer Affairs:
IMPORTANT NOTICE TO CUSTOMERS OF HOME IMPROVEMENT CONTRACTORS
I received this notice on this date:
———————————————(date)
———————————————signature of home owner(s)
If you need a loan to pay for home improvements:
BE CAREFUL. A lender will probably want to take a mortgage on your house.
You should not borrow more than you can afford or more than you need. The loan you are being offered may be a predatory loan. You may be eligible for a different loan which charges significantly less interest or fees. Be very cautious about consolidating your debt with a home mortgage. Beware that if you default on this loan you could lose your house! In certain cases, it is now the law in Cleveland that before you sign a home loan you must receive housing counseling assistance.
For the name, address and phone number of a housing counseling or legal services agency in your neighborhood, turn this notice over to see the list of agencies printed on the reverse side.
(b) For purposes of division (a) of this section, a “home improvement loan” shall not include a loan commonly known as a “home equity line of credit”.
(Ord. No. 45-03. Passed 1-13-03, eff. 1-15-03)
Section 659.99 states the penalties of failing to comply with the predatory lending laws as follows:
(a) Whoever violates Section 659.02 is guilty of a misdemeanor of the first degree. Each day in which a borrower is assessed with interest on the principal loan amount of a predatory loan shall constitute a separate offense.
(b) Whoever violates Section 659.03 or Section 659.04 is guilty of a misdemeanor of the fourth degree.
(c)(1) No person or business entity shall be awarded a contract with the City if the person or business entity or any of its affiliates makes predatory loans or violates Section 1349.27 of the Revised Code. Every contract with the City shall contain a provision requiring that the person or business entity with which the City is contracting must certify that neither the person or business entity nor any of its affiliates has made predatory loans or has violated Section 1349.27 of the Revised Code. Nothing in this section shall affect the validity of any contract entered into in connection with any debt obligations issued by or on behalf of the City, regardless of whether the contract was awarded in compliance with this section. Any other contract awarded in violation of this section shall be voidable at the option of the City.
(2) The Finance Director may suspend the ineligibility of a person or business entity in order to allow execution of a contract with the person or entity upon written application by the head of the City department affected by the proposed contract, setting forth facts sufficient in the judgment of the Finance Director to establish:
A. that the public health, safety or welfare of the City requires the goods or services of the person or business entity; and
B. that the City is unable to acquire the goods or services at comparable price and quality, and in sufficient quantity from another source or other sources.
(Ord. No. 737-02. Passed 4-22-02, eff. 4-25-02)
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