By: Timothy A. Raty, Sr. Regulatory Compliance Specialist
“Understanding what not to do sometimes is just as
important as what you can do.” (Bill Belichick)
In 1968, the Uniform Laws Commission (“ULC”), a non-profit, unincorporated association, published a model Uniform Consumer Credit Code (“UCCC”) for the purpose of abolishing “the crazy-quilt, patchwork welter of prior laws on consumer credit and replace them by a single new comprehensive law providing a modern, theoretically and pragmatically consistent structure of legal regulation[.]” The UCCC has, to date, been adopted in eleven states (see https://www.uniformlaws.org/committees/community-home?communitykey=0f8dc75f-b418-4378-9641-486bb12813ff&tab=groupdetails) and the territory of Guam.
Article 3 of the UCCC (“Uniform Consumer Credit Code – Regulation of Agreements and Practices”) is meant to govern “a sale of an interest in land or a loan secured by an interest in land . . . if the . . .loan is otherwise a . . . consumer loan” and typically promulgates most of the disclosure requirements applicable to such loans. According to UCCC § 1.301(15), a “consumer loan” is defined (in part) as a loan in which the principal loan amount does not exceed $25,000 or the debt is secured by an interest in land.
Each jurisdiction which has adopted the UCCC modifies it to meet their own preferences, including exceptions to the definition of “consumer loan.” In Colorado, Guam, Oklahoma, and Wyoming a specific type of exception is made. While a “consumer loan” (or the state’s functional equivalent of such) includes “debt . . . secured by an interest in land”, it does not include loans “primarily secured by an interest in land.”
Although this appears to be a blatant contradiction in terms, a “loan primarily secured by an interest in land” is properly defined to refer to a specific class of debt secured by an interest in land. Defining this class and how mortgage loans fit into it is essential in determining whether any of the Article 3 disclosures (required to be given in connection with “consumer loans”) should be given in connection with a mortgage loan or not (since a “loan primarily secured by an interest in land” is not a “consumer loan” and, thus, exempt from such requirements).
Definition and History
Which mortgage loans are considered a “loan primarily secured by an interest in land” and which are not will differ by jurisdiction. Guam generally defines this class as a loan in which “the value of [the] collateral is substantial in relation to the amount of the loan” and the finance charge does not exceed 10% per year (14 Guam Code Ann. § 3104[2][b]). Oklahoma and Wyoming generally define this class similarly, albeit the finance charge cannot exceed 13% or 18% per year, respectively (see Okla. Stat. Ann. tit. 14A, § 3-105 & Wyo. Stat. Ann. § 40-14-305). Wyoming also includes first mortgage loans which are not precomputed into this class of loans (Ibid. § 40-14-305[b]).
Colorado’s definition tends to cause the sale of antacids to increase:
“‘Loan primarily secured by an interest in land’ means a consumer loan secured by a mobile home or primarily secured by an interest in land if, at the time the loan is made the value of the collateral is substantial in relation to the amount of the loan, and:
(I) The rate of the finance charge does not exceed twelve percent per year calculated according to the actuarial method on the unpaid balances of the principal on the assumption that the debt will be paid according to the agreed terms and will not be paid before the end of the agreed term; or
(II) Notwithstanding the rate of the finance charge, and other than a precomputed loan as defined in subsection (35) of this section, the loan is secured by a first mortgage or deed of trust lien against a dwelling to:
(A) Finance the acquisition of that dwelling; or
(B) To refinance, by amendment, payoff, or otherwise an existing loan made to finance the acquisition of that dwelling, including a refinance loan providing additional sums for any purpose whether or not related to acquisition or construction. . . .” (Colo. Rev. Stat. Ann. § 5-1-301[26][a])
So convoluted is Colorado’s definition that even the Colorado Attorney General has had to issue a memorandum to explain when a loan is “primarily secured by an interest in land” and whether or not it is excluded from the definition of “consumer loan” (see Colo. Att’y Gen. Memorandum dated March 13, 2002; available at: https://coag.gov/office-sections/consumer-protection/consumer-credit-unit/uniform-consumer-credit-code/general-information/administrative-interpretations-and-opinion-letters/). Even then, this memorandum practically compounds the nausea by nuancing Colorado’s statutory requirements to the point of “adding” criteria which are not readily evident from the statutory language (e.g., a refinance of a loan “made to finance the acquisition of that dwelling” includes a refinance of a refinance loan).
Historically, this classification was included in the original 1968-version of the UCCC as Section 3-105, but it was repealed by subsequent amendments and is not included in the current version of the UCCC (1974). Of the seven states which adopted the 1968-version, only the three listed above (plus Guam) have retained this exemption as of 2020. The reasons for creating this classification in the first place are not readily clear. While the ULC does an exceptional job in publishing commentary with its model laws and has done so with the 1974-version of the UCCC, no online copies of the 1968-version (along with its commentaries) are readily available which would lend insight into such reasons.
However, an Opinion Letter from Idaho Attorney General W. Anthony Park (D) in 1971 provides the following (at that time, Idaho Code Ann. § 28-33-105 incorporated the classification):
“. . . The Comment to the Model Act makes it clear that these two sections [which include UCCC § 3-105] were to be read together so as to exclude the classic home mortgage from all provisions of the Uniform Consumer Credit Code except those on disclosure and debtor’s remedies. . . .” (Idaho Att’y Gen. Op. dated July 1, 1971, as quoted in ¶ 99,303 LOAN SECURED BY REAL ESTATE AS UCCC CONSUMER LOAN, [JULY 01, 1971], Consumer Cred. Guide P 99303)
Known Unknown: Substantial Collateral Value
While the criteria used to classify a loan as “a loan primarily secured by an interest in land” are fairly objective, there is one key criterion which is not: the value of the collateral in relation to the amount of the loan must be substantial.
This is clearly a reference to a loan-to-value (“LTV”) ratio, but what is not clear is when such ratio is considered “substantial”. Based on what we know of the reasons for UCCC § 3-105 (1968) – which is that the classification was intended to exempt classic home mortgage loans from being considered a “consumer loan” – we can extrapolate that a loan must have a high LTV ratio to be so classified (conversely, it must have a low LTV ratio to be considered a “consumer loan”). But is there a precise ratio at which the value is considered “substantial”?
As mentioned previously, the ULC’s commentary to the original 1968-version of the UCCC (which could provide some insight on this matter) is not readily available. Case law and other secondary sources also do not provide much in the way of guidance. There are only four cases where the clause “made the value of the collateral is substantial in relation to the amount of the loan” is quoted (see Whitby v. Lime Fin. Servs., Ltd., No. 09-CV-01565-PAB, 2009 WL 4016634, at *1 [D. Colo. Nov. 18, 2009]; Empire Sav., Bldg. & Loan Ass’n v. Otero Sav. & Loan Ass’n, 640 P.2d 1151 [Colo. 1982]; Walker v. Nationwide Fin. Corp. of Idaho, 102 Idaho 266, 629 P.2d 662 [1981]; Barnes v. Helfenbein, 1976 OK 33, 548 P.2d 1014 [1976]) and these primarily focus on determining the rate of the finance charge rather than “fleshing-out” the “substantial” criterion.
Only the Oklahoma Supreme Court provides any help on this matter. In Ibid., the Court had to determine whether a specific loan with a face value of $600,000 (in reality, $500,000 was owed by the borrower) was considered a “consumer loan” or was exempt as “a loan primarily secured by an interest in land”. The Court ultimately decided that it was so exempt:
“To be automatically exempted from the category of a ‘consumer loan’ under s 3-105, the value of the collateral must be substantial in relation to the amount of the loan . . . [h]ere the value of the collateral was substantial . . .” (Barnes v. Helfenbein, 1976 OK 33, 548 P.2d 1014, 1017 [1976])
Unfortunately, the value of the collateral was not established in this case, thus the LTV ratio is not known, but can be estimated based on the facts outlined. The borrower obtained the $600,000 loan in order to payoff a $423,000 loan which was in default, even though, according to the Court, the borrower had received offers to purchase the subject property which would have “yielded a profit in excess of $300,000.00” (Ibid. 1015). Eventually, the borrower defaulted on the new $600,000 loan and the subject property was sold at a foreclosure auction for $810,000. An estimate can be made, then, that the value of the subject property was somewhere between $723,000 and $810,000, thus the LTV ratio would be between 74.07 and 82.99% (using the face value of the promissory note as the loan value).
However, this only illustrates the subjective nature of the “substantial criterion.” It is not clear what loan value should be used (e.g., in this Oklahoma case, is it the face value of the promissory note or is it the amount owed after the prepaid finance charges are satisfied through the loan proceeds?) and it is not clear what evaluation of the property should be used to determine the value (e.g., is it the value used in underwriting the loan? The tax assessor’s value? The purchase price of the property at a foreclosure auction? etc.). This compounds the problem, because one cannot identify what a “substantial” ratio is, especially when one cannot identify precisely what the numerical value of L and V are in an LTV ratio.
Among secondary sources, the only one which provides some clarification is the aforementioned Opinion Letter from Idaho’s then-Attorney General in 1971, which states the following:
“. . . The explicit language of these provisions clearly states that unless a loan is made subject to the UCCC by written agreement, a ‘consumer loan’ does not include a ‘loan primarily secured by an interest in land if at the time the loan is made the value of the collateral is substantial in relation to the amount of the loan.’ This language requires a determination that if the value of the real property collateral is substantial in relation to the value of the loan, a loan primarily secured by interest in land would not be a ‘consumer loan’ within the purview of the UCCC as it is enacted in Idaho. . . .” (Idaho Att’y Gen. Op. dated July 1, 1971, as quoted in ¶ 99,303 LOAN SECURED BY REAL ESTATE AS UCCC CONSUMER LOAN, [JULY 01, 1971], Consumer Cred. Guide P 99303)
Other than “clarifying” that it is the value of the loan which the value of the collateral should be compared to, there is again no guidance in determining when the LTV ratio meets the “substantial” criterion.
One law which could have lent some useful support is Kansas’ version of the UCCC. While it does not use the language found in UCCC § 3-105 (1968) for classifying “a loan primarily secured by an interest in land”, it does specifically exclude from the definition of “consumer loans” a first mortgage loan, unless the LTV “ratio of the loan at the time when made exceeds 100%” (Kan. Stat. Ann. § 16a-1-301[17]).
At first glance, one wonders if this was Kansas’ way of objectifying a subjective standard (and establishing that, to be “substantial”, the LTV ratio must exceed 100%). However, this criteria was added to Ibid. in 1999 (see 1999 Kansas Laws ch. 107, § 8) which, as far back as at least 1992, did not use an LTV ratio standard for exempting a loan from being considered a consumer loan (e.g., see 1992 Kansas Laws ch. 80, § 1). In other words, there is absolutely no connection between Kansas’ “consumer loan” definition exemptions and UCCC § 3-105 (1968).
Programming Disclosures
Due to the lack of objectivity to the “substantial” criterion in the UCCC § 3-105 (1968) exemption from the definition of “consumer loan”, it is impossible to determine, based solely on loan data, whether disclosures required by the UCCC in connection with “consumer loans” should be provided in connection with any particular mortgage loan or not.
Print conditions can always be added to disclosures so that they do not print for loans with an annual percentage rate below a given percent, or based on lien position, loan purpose, etc. However, before any of these criteria can be applied, a loan must first meet the criterion that the value of the collateral is substantial in relation to the amount of the loan. If it fails to meet this criterion, all the others regarding finance charges and lien position are irrelevant.
It is due to this lack of objectivity in a critical criterion that Docutech has not created any fields similar to “Subject to the Kansas Uniform Consumer Credit Code” (FI 23011) as a print condition for disclosures used for loans secured by an interest in land in Colorado, Oklahoma, and Wyoming (currently, we do not offer disclosures as a generic offering for Guam). Rather, we take a conservative approach and provide, by default, all UCCC “consumer loan” disclosures for all loans in these states, if such loans otherwise meet the definition of “consumer loan” (unless there are other, specific exemptions).