DEPARTMENT OF REGULATORY AGENCIES

DIVISION OF REAL ESTATE

MORTGAGE BROKERS

EMERGENCY RULE

4CCR 725-3

PREPAYMENT PENALTIES

Section 1.	Authority
Section 2.	Scope and Purpose
Section 3.	Definitions
Section 4.	Applicability
Section 5.	Rules Regarding Prepayment Penalties
Section 6. 	Effective Date

Section 1.	Authority

The Director of the Division of Real Estate adopts the following emergency rule entitled, Prepayment Penalties, according to her authority as found in §§ 12-61-904.5(2), 12-61-910.3, and 24-4-103(6), C.R.S.

Section 2.	Scope and Purpose

The Director finds that immediate adoption of this rule is imperatively necessary for the preservation of public health, safety or welfare and that compliance with the rulemaking requirements of § 24-4-103, C.R.S., applicable to non-emergency rules, would be contrary to the public interest.

The Director has learned that some extended prepayment penalties lead to higher rates of foreclosure.  Specifically, prepayment penalties which extend past the adjustment date of a mortgage loan often severely restrict the ability of the borrower to refinance or sell their property.  Additionally, in higher rate environments, borrowers often have only two viable options, to absorb a much higher monthly payment or lose their home through foreclosure proceedings.  The Director adopts this rule in order to address the high rate of foreclosures in Colorado resulting from particular prepayment penalties.

Pursuant to § 12-61-904.5(1), C.R.S, mortgage brokers have a duty of good faith and fair dealing in all communications and transactions with a borrower.  This duty includes, but is not limited to making a reasonable inquiry into a borrower’s ability to repay a loan and recommending or inducing a borrower to enter into only those transactions that have a reasonable, tangible net benefit to the borrower.  

The purpose of this rule is to clearly notify the mortgage industry that transactions do not contain a reasonable, tangible net benefit if they contain a prepayment penalty that extends past the adjustment date of any teaser rate, payment rate or interest rate included in a mortgage loan.

Without the immediate adoption of this emergency rule, the public’s interest is not served.  Wherefore, the Director, pursuant to § 24-4-103(6), C.R.S. has an obvious and stated need to adopt this rule.

Section 3.	Definitions

1.	“Adjustable rate mortgage” means a mortgage in which the teaser rate, payment rate or the interest rate changes periodically, according to corresponding fluctuations in an index or mortgage product guidelines.

2.	“Adjustment date” means the date the teaser rate, payment rate or interest rate changes on an adjustable-rate mortgage.

3.	“Interest rate” means the rate used to calculate a borrower’s monthly interest payment. 

4.	“Payment rate” means the rate used to determine a borrower’s monthly payment.

5.	“Teaser rate” means a temporary and often low introductory rate on an adjustable rate mortgage. 

6.	“Prepayment Penalty” means a fee assessed pursuant to the terms of the loan on a borrower who repays all or part of the principal of a loan before it is due.  Prepayment penalties do not include interest payments of thirty (30) days or less that may be assessed pursuant to the terms of some FHA or VA loans.

Section 4.	Applicability

This rule applies to all mortgage brokers as that term is defined in § 12-61-902(5), C.R.S. and includes those persons who broker a mortgage, offer to broker a mortgage, act as a mortgage broker, or offer to act as a mortgage broker.  

Section 5.	Rules Regarding Prepayment Penalties.

1.	Pursuant to § 12-61-904.5, C.R.S., individuals who broker a mortgage, offer to broker a mortgage, act as a mortgage broker, or offer to act as a mortgage broker are prohibited from recommending or inducing a borrower into a transaction that does not contain a reasonable, net tangible benefit.

2.	Mortgage brokers who recommend or induce a borrower into a transaction that contains a prepayment penalty which extends past the adjustment date for any type of an adjustable rate mortgage shall be presumed to have violated their duty of good faith and fair dealing requirement pursuant to section 12-61-904.5, C.R.S.  This includes, but is not limited to:

a.	Prepayment penalties that extend past the adjustment date of any teaser rate used to calculate a borrower’s monthly mortgage payment;

b.	Prepayment penalties that extend past the adjustment date of any interest rate used to calculate a borrower’s monthly mortgage payment; 

c.	Prepayment penalties that extend past the adjustment date of any payment rate used to calculate a borrower’s monthly mortgage payment; and

d.	Prepayment penalties that extend past the adjustment date of any like tool or instrument, similar to the teaser rate, payment rate or interest rate defined in this rule, used to calculate a borrower’s monthly mortgage payment.

3.	Individuals who violate this rule shall be subject to disciplinary action pursuant to § 12-61-905, C.R.S.  Disciplinary action includes, but is not limited to:

a.	Revocation;

b.	Refusal to renew a license;

c.	Fines; and 

d.	Restitution for any financial loss.

Section 6.	Effective Date

This emergency rule shall be effective December 26, 2007.