Home Improvement Financing - AARP

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A Model State Law

In three volumes

FINANCIAL PROTECTION

Home Improvement Financing

Volume I Model State Law

HOME IMPROVEMENT .INANCING

Volume I

A MODEL STATE LAW

by Margot Saunders, Attorney Elizabeth Renuart, Attorney National Consumer Law Center

Sharon Hermanson, Project Officer AARP Public Policy Institute

October 2000

The Public Policy Institute, formed in 1985, is part of Public Affairs at AARP. One of the missions of the Institute is to foster research and analysis on public policy issues of importance to older Americans. This publication represents part of that effort. The views expressed therein are for information, debate, and discussion, and do not necessarily represent formal policies of AARP. ? 2000, AARP. Reprinting with permission only. Stock Number: D17165 AARP, 601 E Street, NW, Washington, DC 20049

A MODEL LAW

ACKNOWLEDGMENTS

This model state law is the result of a consensus process involving experts from across AARP and other organizations. It required a level of communication and purpose that went well beyond the normal review and comment process. The authors of this report wish to acknowledge the following individuals for their review: Lynn Drysdale, Attorney, Florida Legal Services, Inc.; Debra Bierman, Attorney, Bet Tzedel Legal Services; Karen Brown and Bill Brennan, Attorneys, Home Defense Project, Atlanta Legal Aid., Inc.; Addison Parker, Attorney, Appalachian Research and Defense Fund of Kentucky, Inc.; Dan Hedges, Attorney, Mountain State Justice (West Virginia); Kathleen Keest, Assistant Attorney General (Iowa); Ira Rheingold, Attorney, Legal Assistance Foundation of Chicago; Alan White and Irv Ackelsberg, Attorneys, Community Legal Services, Inc. (Pennsylvania); and Carolyn Carter, Attorney, National Consumer Law Center. For their support and review of the project, the following AARP staff deserve special thanks: George Gaberlavage, Associate Director, AARP Public Policy Institute; DaCosta Mason, Consumer Issues Team Leader, AARP State Legislation Department; Nina Simon, Attorney, AARP Foundation Litigation; and Jean Davis, Attorney, AARP Foundation Litigation. For their preparation of materials, special thanks go to Gabriel Montes, Senior Administrative Associate, AARP Public Policy Institute, and Linda Walker, Associate Editorial Specialist, AARP State Legislation Department.

2 Volume I - Home Improvement .inancing: A Model State Law

Contents Volume I Home Improvement .inancing

Model State Law

INTRODUCTION .................................................................................................................................5 Section 1. APPLICATION, PURPOSES, CONSTRUCTION ..............................................................7 Section 2. DEFINITIONS .................................................................................................................... 7 Commentary: Definitions .....................................................................................................................8 Section 3. LICENSING...................................................................................................................... 10 Commentary: Licensing .................................................................................................................... 11 Section 4. REQUIRED TERMS AND DISCLOSURES .................................................................... 12 Commentary: Required Terms and Disclosures ............................................................................... 14 Section 5. PROHIBITED TERMS ..................................................................................................... 14 Commentary: Prohibited Terms ........................................................................................................ 15 Section 6. ALLOWED CHARGES .................................................................................................... 15 Commentary: Allowed Charges ........................................................................................................ 16 Section 7. COMPLETION CERTIFICATE BY LENDERS AND

RELEASE BY SUB-CONTRACTORS ........................................................................................ 17 Commentary: Completion Certificate by Creditors and Release by Sub-Contractors ...................... 17 Section 8. PROHIBITED PRACTICES ............................................................................................. 18 Commentary: Prohibited Practices ................................................................................................... 19 Section 9. OBLIGATIONS OF ASSIGNEES, HOLDERS AND

HOME IMPROVEMENT CREDITORS ........................................................................................ 20 Commentary: Obligations of Assignees, Holders and Home Improvement Creditors ...................... 20 Section 10. RIGHTS AND OBLIGATIONS OF THE PARTIES IN DISPUTE ..................................... 20 Commentary: Rights and Obligations of the Parties in Dispute ........................................................ 23 Section 11. OBLIGATION OF GOOD FAITH AND FAIR DEALING ................................................... 24 Commentary: Obligation of Good Faith and Fair Dealing .................................................................. 24 Section 12. LIMITATIONS ON ACTIONS .......................................................................................... 24 Commentary: Limitations on Actions ................................................................................................ 24 Section 13. ENFORCEMENT .......................................................................................................... 25 Commentary: Enforcement ............................................................................................................... 25 Section 14. SEVERABILITY ............................................................................................................. 26 Commentary: Severability ................................................................................................................. 26

A MODEL LAW

Propelled by the elimination of the tax deduction for interest on consumer loans (accomplished through the Tax Reform Act of 1986) and rapidly accumulating homeowner equity, home equity loans have become a major source of consumer finance. At the end of 1997, the outstanding home equity debt of U.S. homeowners was an estimated $420 billion. In a recent AARP study,* 31 percent of persons eighteen and older reported that they had ever taken out a home improvement or home equity loan; 50 percent of respondents aged 50-64 reported they had done so. For some people with high incomes and financial sophistication, borrowing against one's home may be appropriate. However, homeowners with substantial equity but limited incomes, too often find themselves the victims of predatory home equity loans.

INTRODUCTION

Predatory mortgage lenders often target older homeowners, who frequently have substantial equity in their homes. Nearly 80 percent of older Americans are homeowners, and 80 percent of these older homeowners own their homes free and clear. According to the latest American Housing Survey, two-thirds of older homeowners had at least $50,000 in home equity. Moreover, older homeowners are more likely to live in homes in need of repair, and less likely than younger homeowners to do the home repair work themselves.

Many predatory loans are initiated by fraudulent home improvement contractors who, working as agents of subprime (i.e., less than prime, or `A') mortgage lenders, offer and arrange financing secured by the borrower's home. Predatory practices by fraudulent home improvement contractors include 1) obtaining the borrower's consent for a loan with excessively high rates and fees, often through deception or coercion, and/or 2) receiving the loan proceeds directly or indirectly from the lender without providing any services to the homeowner, or without providing services commensurate with the amount of the payment. Moreover, the lender may still demand full payment from the borrower.

Currently, each state and territory has a distinct set of laws that regulate credit extended to finance home improvements. In most states, general laws such as retail installment sales acts, small loan acts, industrial loan acts, second mortgage acts, and general interest and usury laws govern home improvement financing. Other states have statutory schemes modeled after the Uniform Consumer Credit Code (UCCC). A few states (including New Jersey, Pennsylvania, Michigan, California, Florida, and Maryland) have specific home improvement statutes designed to protect consumers.

The Home Improvement Financing Model Act is designed to address the predatory practices that arise when a home improvement contractor either directly extends credit, or arranges for credit, to finance home improvements or repairs. The Model Act addresses credit assigned from a home improvement contractor, broker or other creditor, as well as the refinancing of home improvement credit. It requires anyone extending home improvement credit to be licensed by the state and to meet certain minimum requirements. The Model Act also prohibits certain charges and practices associated with home financing and places responsibility upon the creditor to ensure that the home improvements are completed to the satisfaction of the borrower. In addition, the Model Act prohibits creditors from taking a security interest in a home with an open-end credit arrangement.

* Consumer Behavior Study. (1999). AARP. The study was conducted by Princeton Survey Research Associates. 1504 respondents at least 18 years of age were asked questions on a wide range of consumer issues, including home repair and financing.

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