Articles
FAQs
Non-Real Estate loan Miscellaneous
Real Estate Loan Miscellaneous
Allowable Loan Fees
Question: Is the state’s 21% usury cap on interest rates based on the loan’s interest rate or APR, which takes into account loan fees? We recently closed a small, short-term loan with an APR in excess of 21% but interest rate was under 21%. If the 21% is based on the loan’s APR, how do we correct this situation?
Answer: Iowa Code chapter 537.2401 establishes the usury cap of 21% based on the closed-end consumer loan’s Annual Percentage Rate, which takes into account the loan’s interest rate and other finance charges assessed in connection with the loan. If the loan’s APR exceeds 21%, the closed-end consumer loan violates this Iowa code section. The bank has two options at this point: reduce the interest rate or refund the fees that are finance charges to reduce the loan’s APR below the 21%.
Question: We are switching to a new loan software platform and creating our loan templates. The software is giving us a warning that the “rate lock extension fee” we charge the borrower when the borrower requests to extend the expiration date of their rate lock agreement is not permitted by Iowa Code chapter 535.8. Is this true? Are we able to recoup the cost we incur when extending a rate lock for a borrower with an investor?
Answer: Iowa Code Chapter 535.8 outlines permissible fees a state bank may charge in connection with making a mortgage loan. It contains an enumerated list of allowable fees, which are reflected on the IBA tool, Allowable Fees under the Iowa Code Guide. The manner in which this code section was originally written only permitted a state bank to charge a fee to a consumer mortgage borrower if the fee was included in the allowable list. If the fee did not appear on the list, it could not be charged. This code section was revised in 2016 after the Dodd Frank Act set a federal limit on the total amount of “points and fees” that could be assessed on a consumer mortgage loan in the Ability to Repay/Qualified Mortgage rules. A new provision was added to chapter 535.8, paragraph 2, that stipulates if the loan’s total points and fees does not exceed the amount described in 12 CFR 1026.43(e) – the General QM Points and Fees limit – the loan is not subject to the list of enumerated “allowable” fees in chapter 535.8. What this means is, if the loan’s total points and fees (as defined in Reg. Z at §1026.32(b)(1)) plus the rate lock fee the bank is wishing to charge, is below the General QM points and fees threshold, the state bank may charge a rate lock fee even if the fee is not expressly permitted in chapter 535.8.
Question: Can a modification fee be charged when modifying an existing consumer home loan?
Answer: A “modification fee” is not expressly allowed per the Iowa Code for consumer purchase or refinance home loans. However, as long as the total points and fees assessed over the life of the loan are under the threshold as provided in Reg. Z for Qualified Mortgage loans, it is acceptable to charge a modification fee. Thus, at the time of modification the bank will need to recalculate the points and fees charged in connection with the modification along with those charged at origination and over the life of the loan. The Bankers Compliance Resource page of the IBA website has a Points and Fees Guide to help banks determine what fees are included as points and fees. Additionally, if the bank is going to charge a modification fee, it must be listed in the modification agreement. When the borrower signs the modification agreement, they will be agreeing to pay the fee.
Question: My bank wants to implement “an application fee” for small, unsecured consumer loans. My understanding is that unless we charge this application fee to ALL applicants, per Reg. Z the fee is a finance charge and will increase the loan’s APR. If the loan amount is fairly small, it’s likely the application fee will bump the loan’s APR above 21% – Iowa’s usury rate cap. However, one of our loan officers indicated there was a change in Iowa law and we can actually exceed the 21% APR usury cap now and not violate Iowa law. Is that true?
Answer: The change your loan officer is referring to was House File 263. This bill, passed during the 2019 Legislative Session and was effective July 1, 2019. It revised a provision in the Iowa Consumer Credit Code (ICCC) related to allowable fees that may be charged in connection with a consumer credit transaction. Chapter 537.2501(j) was revised to read:
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- For a consumer loan where the amount financed does not exceed three thousand dollars and the term of the loan does not exceed twelve months, a bank, credit union incorporated pursuant to state or federal law, or a federally chartered or out-of-state chartered savings bank or savings and loan association may charge an … application fee not to exceed the lesser of ten percent of the amount financed or thirty dollars. The fee permitted pursuant to this paragraph may be charged solely to applicants who are approved or to all applicants. The fee permitted pursuant to this paragraph shall not be charged in connection with a loan used for the purchase of a motor vehicle, or for a loan where the borrower’s dwelling is used as security.
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Note, the ability to charge this approved “application fee” is limited to loans in an amount of $3,000 or less with a term not to exceed 12 months. The amount of the fee is also limited to the lesser of $30 or ten percent of the amount financed. The ICCC 21% usury cap has not been removed. However, a special provision was added to Chapter 38 of the Iowa Attorney General’s Iowa Administrative Code rules that implement the ICCC indicating that lender who charges this application fee only to approved applicants when making loans pursuant to Iowa Code section 537.2501(1)(j), and whose annual percentage rate exceeds the 21% cap stipulated by the ICCC, must include an additional clear and conspicuous statement with the disclosures required by TILA at the time the loan is made. That statement must read:
“This loan includes an application fee which is included in the calculation of the APR required by the Federal Truth in Lending Act. This application fee is not included in the calculation of the finance charge required by the Iowa Consumer Credit Code. You have a right to request from your lender the calculation of the finance charge for this loan under the Iowa Consumer Credit Code.”
The Iowa attorney general’s office has indicated this statement can be added as an addenda to the TILA disclosure or in the “Other Terms” section of a combined note and disclosure statement. If this statement is provided to the consumer and loan’s APR exceeds the 21% due to the application fee, it is not considered a violation of Iowa’s 21% usury cap in this limited situation. For example, if the applicant requested a loan for $2,500 for a term of 6 months and the bank’s fees include a $10 doc prep fee plus an $25 application fee (10% of the loan amount) for applicants that are approved, the APR would be 21.0953% when considering both the application fee and the doc prep fee as finance charges under Reg. Z. Prior to the law change, the bank would not have been able to charge both fees as this would exceed the 21% usury rate. However, with the law change, since the application fee can be excluded as a finance charge under Iowa law, for purposes of the usury rate, the APR is only 18.8755% when including only the doc prep fee as a finance charge. Thus, the bank would be able to charge both fees and not violate state law. The bank must be prepared to calculate the APR without the application fee if the borrower requests this information.
Question: Please clarify when a deferral fee and dishonored check fee for NSF loan payments be assessed on loans originated prior to July 1, 2017 – the date on which these two fees became permissible under Iowa law.
Answer: The deferral fee can be assessed on all existing or new loans subject to the Iowa Consumer Credit Code beginning on or after July 1, 2017. The fee must be disclosed and agreed to by the borrower. To do this, the bank and borrower could execute a modification agreement which includes language that states in return for the ability to defer an installment payment, the borrower agrees to pay the bank a fee of up to $30 per deferred installment.
The same is not true of the dishonored check fee. The Iowa Division of Banking (IDOB) has provided guidance indicating the dishonored check fee can only be charged on contracts that are entered into on or after the date the fee was authorized under state law and is not permitted on loans contracted dated before July 1, 2017, when the fee was not authorized by state law. The bank would be changing “its course of dealing” with existing consumer loan customers if it began charging a dishonored check fee on existing loans. Unlike the deferral fee where the borrower expressly consents to the fee via the modification agreement, the dishonored check fee is assessed via a notice process. To assess the dishonored check fee, Iowa Code 554.3512 requires the bank to post a notice of a returned check fee – just like you would see in Casey’s or any other retail outlet – in the “usual place of payment” (the bank lobby) or in the billing statement stating that a dishonored check fee will be assessed for any loan payment that is made by check, draft or similar payment and returned unpaid. Banks using coupon books should consider adding the notice to their coupon book as well.
Cure Notices/Periods
Question: Which types of loans are banks required to send a Notice to Cure?
Answer: Loans secured by agricultural real estate, a borrower’s homestead, and consumer loans are subject to Notice to Cure when the loans are in default as defined by the loan documents. The cure periods vary depending on the type of credit and collateral securing the loan.
Mortgage Escrow Deposits
Question: With the change in Iowa Code section 524.905(2) effective July 1, 2022 that makes the payment of interest on borrower funds held in a real estate escrow optional instead of mandatory, if the bank elects to discontinue the payment of interest on escrow funds, is the bank required to send a notice to the borrowers of this change? Does it need to be an advance notice?
Answer: The answer depends on the manner in which your bank maintains escrow accounts.
- If your bank has entered into a contract with the borrower that states that you will pay interest (which is rare), first check with your bank legal counsel to determine if your bank can unilaterally change the terms of the contract. If you are able to amend the contract to remove the provision related to the payment of interest on these escrow balances, your bank will need to notify the affected borrowers within the timeframe listed in the contract terms.
- If your bank established a savings account in the borrower’s name to deposit escrow funds and provided a TISA disclosure to the borrower at account opening, then the Reg. DD change-in-terms requirements apply as this change adversely impacts the customer. Therefore, 30-day advance notice of change is required by Reg. DD. The bank would need to continue to pay interest through this timeframe.
- The most common method of maintaining loan escrow accounts is one in which the bank maintains one master general ledger account and then performs sub-accounting for each loan. Reg. DD rules for change-in-term notices do not apply as the escrow “account” is not a deposit account established under Reg. DD. In addition, Reg. X (which implements RESPA) escrow rules do not include a change-in-terms provision other than a short-year statement that can be used in certain circumstances (such to change the annual computation year start date or at loan payoff). Reg. X also does not require upfront disclosure of whether or not interest is paid on escrow balances. Thus, Reg. X’s escrow rules would not require a change in terms notice to discontinue paying interest either.
However, from a ”clear and conspicuous” standard, the bank may elect to notify borrowers interest will no longer be paid on escrow balances due to the change in Iowa law. For escrow accounts subject to Reg. X, if interest is only paid at the time of the annual analysis, the bank could include a message with (but not on) the annual analysis statement; such as on a cover letter. If interest is paid more frequently (such as monthly or quarterly), the bank may want to consider notifying the consumer sooner than the time of annual analysis in order to avoid consumer confusion or consumer harm in delaying notice until the annual escrow statement, taking into consideration the amount of interest earned on the escrow balance and the cost of the notifications.
Mortgage Issues
Question: How long is a mortgage enforceable under Iowa law?
Answer: Iowa Code Chapter 614.21-1 outlines the mortgage maturity rules. It states, “An action to foreclose or enforce any real estate mortgage, bond for deed, trust deed, or contract for the sale or conveyance of real estate, after 20 years from the date thereof, as shown by the record of such instrument, shall be barred, unless either of the following:
- The record of such instrument shows that less than ten years have elapsed since the date of maturity of the indebtedness or part thereof, secured thereby, or since the right of action has accrued.
- The record shows an extension of the maturity of the instrument or of the debt or a part thereof, and that ten years from the expiration of the time of such extension have not yet expired.
Thus, a mortgage is enforceable for a period of 20 years from the date it is executed by the mortgagor if no maturity date is provided on the instrument. If the mortgage does state a maturity date, it is enforceable for a period of ten years beyond the stated maturity date. Also note, if the mortgage’s stated maturity date has been extended, the mortgage can be enforced for ten years beyond the extended maturity date.
Keep in mind a law passed during the 2020 Iowa legislature, that was effective on July 1, 2020, states the signing of the original mortgage authorizes the lender to file an extension on behalf of the borrower without the borrower’s signature on the extension. This law did not change the 10/20-year time frames discussed above but did change the process of executing mortgage extensions.
Question: Can you please explain Iowa’s mortgage release rules? Do the requirements differ if the mortgage is open- versus closed-end?
Answer: Yes, the rules do differ based upon whether the mortgage has as open-end clause. Iowa Code Chapter 655.1 was revised in 2018 requiring a mortgage be released by the creditor within 30 days of payment in full on the debt secured by the mortgage. However, a provision was added to this code section that states, “…if the mortgage secures a revolving line of credit, future advances, or other future obligations, the mortgagee is not required to file a satisfaction upon payment in full unless the mortgagor makes a written request to the mortgagee that the mortgage be released and, if such written request is made, the mortgagee shall file the release within thirty days after payment in full or such written request is made whichever occurs later.”
As a result, if the mortgage has an open-end feature and secures a revolving line of credit or the mortgagor and mortgagee intend to use the mortgage for future credit obligations, the creditor is not required to the release the open-end mortgage within 30 days of payment in full of the debt secured by the mortgage, unless the mortgagor (borrower) requests in writing the creditor release the mortgage. This change in the Iowa Code negates the need for the practice many creditors have used in the past in which they keep $1 advanced on a line of credit in order to keep the mortgage filing in place.
Question: How long does a bank have to release a mortgage once the debt has been paid in full?
Answer: Generally, Iowa Code §655.3 states that if a holder of a mortgage fails to discharge the mortgage within 30 days after a request for discharge, the mortgagee is liable to the mortgagor (property owner) for all actual damages caused by such failure, including reasonable attorney fees.
However, effective July 1, 2018, an additional provision was added to this section of the Iowa Code which provides, if the mortgage secures a revolving line of credit, future advances or other future obligations, the mortgagee is NOT required to file a release upon payment in full unless the mortgagor/borrower makes a written request to the mortgagee that the mortgage be released. When such written request is made, the mortgagee must file the release within 30 days after payment in full or the date the written request occurs, whichever is later. Closed-end mortgages still need to be released within 30 days of payment in full.
Question: Is there anything a bank or consumer can do if they have been unsuccessful in obtaining a mortgage release for a paid off loan?
Answer: Iowa Code §535B.11(5) provides for a penalty of $50 per day if the mortgage is not released after the following steps have been followed. The mortgagee must execute and deliver a release after payoff and within forty-five days after receipt of correct payment. If the mortgagee fails to execute and deliver a release of lien to the mortgagor or the mortgagor’s designated representative, the mortgagor or the mortgagor’s designated representative may notify in writing the Iowa Finance Authority and any other official to whom the mortgagee is primarily subject. The administrator shall promptly mail by certified mail to the mortgagee a notice stating that the mortgagee must both release the mortgage and deliver the release to the administrator within fifteen days of receipt of said notice or face a penalty as provided in this section. If the mortgagee fails to make the release and deliver it to the administrator, the administrator may assess a penalty not to exceed fifty dollars for each day of delinquency after the fifteen days.
The penalty provisions were also amended with the July 1, 2018 changes related to the failure to release mortgages within the 30-day time frame. It added a $500 penalty to existing provisions mandated by section 655.1. However, a new section was added to 655.6 of the code providing limitations for liability if all the following apply:
- The mortgagee established reasonable procedures to achieve compliance with its obligations under section 655.3.
- The mortgagee complied with that procedure good faith.
- The mortgagee was unable to comply with its obligations because of circumstances beyond its control.
The Title Guaranty Division of the Iowa Finance Authority (the Division) has the authority to file releases for loans that have been paid in full assuming certain criteria have been met. This authority was given to the Division through Iowa Code Section 16.92, as interpreted through Iowa Administrative Code Rule 265 in Chapter 9.20. In its simplest form, once a loan has been paid in full, and more than thirty days has passed without a release, the bank or mortgagor needs to send a completed release request form and the required proof of payment to the Division. The Division then uses the information from the form to draft a letter to the mortgage servicer telling them that they have thirty days to execute a mortgage release. If the mortgage servicer does not object within this time frame with an adequate objection (adequate to the Division) or provide a release, the Division will execute and record a certificate of release. Once this release has been filed, it can be relied upon to serve as a valid release of the mortgage. The Division does require that the closer forward a check to cover the recording fees of the release that is being requested. The informational forms the Division requires are available from the Division on their website at Mortgage Release Certificate Program – Iowa Finance Authority.
Non-Real Estate loan Miscellaneous
Question: When the bank takes a security interest in a vehicle title, and the vehicle is jointly owned, do both owners need to sign the Application for Notation of Security Interest form for the bank to properly secure its lien on the vehicle title?
Answer: No. Section 321.50 of the Iowa code describes the requirements for notation of security interest in motor vehicle titles. This section states that an application for security interest must be signed by the owner or by one owner of a vehicle owned jointly by more than one person. Therefore, one owner can sign the Application for Notation of Security Interest on behalf of all owners of the vehicle. Here is the full text:
A security interest in a vehicle subject to registration under the laws of this state or a mobile home or manufactured home, except trailers whose empty weight is two thousand pounds or less, and except new or used vehicles held by a dealer or manufacturer as inventory for sale, is perfected by the delivery to the county treasurer of the county where the certificate of title was issued or, in the case of a new certificate, to the county treasurer where the certificate will be issued, or an application for certificate of title which lists the security interest, or an application for notation of security interest signed by the owner or by one owner of a vehicle owned jointly by more than one person, or signed through electronic means as determined by the department, or a certificate of title from another jurisdiction which shows the security interest, and payment of a fee of ten dollars for each security interest shown.
Real Estate Loan Miscellaneous
Question: Can you tell me where in the Iowa Code it states that state-chartered banks are required to obtain a written title opinion by an attorney for purchase money (and refinance of purchase money) loans?
Answer: The final title opinion requirement is found in the Iowa Administrative Code – section 9.2(4):
9.2(4) Evidence of title. The state bank shall obtain, when lending for the purpose of acquisition or for the purpose of refinance of acquisition when a new mortgage, deed of trust, or similar instrument is filed, one of the following:
- A written legal opinion by an attorney admitted to practice in the state in which the real estate is located showing marketable title in the mortgagor and describing any existing liens and stating that the state bank’s mortgage, deed of trust, or similar instrument is a lien on the real estate. An Iowa title guaranty certificate issued by the Iowa title guaranty division of the Iowa finance authority satisfies this requirement.
- Title insurance written by an insurance company licensed to do business in the state in which the real property is located describing any existing liens and insuring the title to the real property and the validity and enforceability of the mortgage, deed of trust, or similar instrument as a lien on the real property.
This Iowa Administrative Code provision is applicable to consumer-, business-, and agricultural-purpose loans made to either consumers or business entities. Notice, it requires a state-chartered bank to obtain either a written legal opinion by an attorney licensed in the state where the real property is located OR title insurance written by a company licensed in the state where the real property is located. However, the state of Iowa does NOT license title insurance companies, so there are NO title agents that meet this standard in Iowa. If the bank is securing a loan with a property located outside of Iowa, it can obtain title insurance on that property from an insurer licensed in that state and comply with this code section.
It is also important to understand a written title opinion is only required when the loan purpose is to acquire property (or refinance the acquisition) AND when taking a new mortgage or similar collateral interest in the property. So, a loan for another purpose other than acquisition (or refi) – such as home improvement or for operating expenses – would NOT trigger the requirement even though it is secured by real property.
The Administrative Code does however include a provision providing some flexibility, often referred to as the “basket provision” in section 9.2(6):
9.2(6) Exempted transactions. In addition to the exemptions set forth in subrule 9.2(5), it may be appropriate, in light of all relevant credit considerations, including community reinvestment factors, for state banks, in certain instances, to originate or purchase real estate loans that do not meet the requirements of this rule. State banks shall be allowed to make such loans; however, the aggregate amount of all real estate loans that fall into this category shall not exceed aggregate capital as reflected on the state bank’s most recent consolidated report of condition, unless prior approval to exceed this limitation has been obtained from the superintendent. These exempted loans must be identified by the board of directors by name and outstanding balance and must be reviewed by the board no less frequently than annually. Examiners, during the course of their examinations, will determine whether these exempted loans are adequately documented and appropriate in light of overall safety and soundness considerations. No real estate loans to directors, officers, or principal shareholders or their related interests shall be allowed in the exempted category of this subrule.
As a result, a state-charted bank could obtain title insurance on properties located in Iowa instead of a written title opinion, however the aggregate total of these loans cannot exceed the bank’s capital, and the loans must be reported and reviewed by your board at least annually. Loans made to directors, officers and shareholders are not eligible for the basket provision. Also keep in mind the bank’s loan policy would have to permit use of the basket provision.
Question: Iowa Code section 535.8(5) seems to require that the bank provide an interest rate reduction fee notice when the bank charges the consumer a fee to buydown the interest rate. However, my loan processing system doesn’t seem to consistently provide this notice. When is it required?
Answer: Iowa code section 535.8(5) requires, in certain circumstances, the bank to provide a written interest rate reduction notice describing in plain language the specific terms which the loan would have – both with the interest rate reduction fee (often referred to as “discount points”) and without it. A “loan” under this section refers to a loan being used to purchase real property which is a single-family or two-family dwelling to be occupied by the borrower. This includes refinancing a contract for sale, refinancing a purchase loan or the assumption of a prior loan.
However, section 535.8(2) states if the total points fees charged in connection with the loan fall under the points and fees threshold allowed for a Qualified Mortgage under § 1026.43(e)(3), the loan is NOT subject to subsection 5. Therefore, if the bank is making a dwelling-secured, consumer loan as defined above that is under Reg. Z’s QM points and fees threshold, the bank is not required to provide the interest rate reduction fee notice. It is also important to note subsection 2, which provides the ability to forego the notice if under the points and fees threshold, only applies to financial institutions as defined in section 537.1301 (i.e., any bank incorporated under the provisions of any state or federal law including credit unions, savings and loan associations and savings banks). Therefore, non-financial institutions, such as mortgage companies would be required to provide the interest rate reduction notice regardless of whether the loan’s points and fees are above or below the QM threshold.
Question: Our bank was recently criticized during an audit for failing to provide the prepayment notice required by Iowa Code chapter 537.3203. Our note does not include a prepayment penalty so I am not sure what this exception is referring to. Can you shed some light on this matter?
Answer: Chapter 537 of the Iowa Code is the Consumer Credit Code (ICCC). It covers consumer-purpose loans, subject to a finance charge, for personal, family or household use, not secured by a first lien on real property, in an amount under the ICCC annual threshold. Chapter 537.3203 of the ICCC details a state law provision related to required notices for consumer borrowers. It requires the creditor to provide the consumer with a written copy of the credit transaction if the writing requires or provides for the signature of the consumer. The notice must be clear and conspicuous and warn the consumer that the consumer should not sign before reading it, that the consumer is entitled to a copy of it, and, except in the case of a consumer lease, that the consumer is entitled to prepay the unpaid balance at any time without penalty and may be entitled to receive a refund of unearned charges. This code section also provide a model notice for this purpose, which most often is found directly above the signature on a consumer note:
NOTICE TO CONSUMER
- Do not sign this paper before you read it.
- You are entitled to a copy of this paper.
- You may prepay the unpaid balance at any time without penalty and may be entitled to receive a refund of unearned charges in accordance with law.
Question: We are being told affidavits related to real estate transaction must be prepared by an attorney. Is that true? Is there an Iowa Code section that addresses this?
Answer: That is true when it comes to affidavits related to identity, payment of spousal or child support, or issues related to clearing title associated with real estate transactions. Actually, this stems from a Supreme Court rule found in 37.5 that was effective February 2002:
Rule 37.5 Limited real estate practice.
37.5(1) Purpose. The purpose of this rule is to authorize nonlawyers to select, prepare, and complete certain legal documents incident to residential real estate transactions of four units or less. The preparation of documents beyond that authorized by this rule may constitute the unauthorized practice of law.
37.5(2) Scope of practice authorized. Except to the extent authorized by this rule, the selection, preparation, and completion of legal documents in connection with real estate transactions by nonlawyers constitutes the unauthorized practice of law unless the nonlawyer is acting on his or her own behalf as a buyer or seller.
- Upon written request of a buyer or seller, a nonlawyer may select, prepare, and complete form documents for use incident to a residential real estate transaction of four units or less. Such documents are limited to:
- Purchase offers or purchase agreements, provided the parties are given written notice that these are binding legal documents and competent legal advice should be sought before signing.
- Groundwater hazard statements.
- Declaration of value forms.
- Nonlawyers cannot select, prepare or complete:
- Deeds.
- Real estate installment sales contracts.
- Affidavits of identity or nonidentity.
- Affidavits of payment of spousal or child support.
- Any other documents necessary to correct title problems or deficiencies.