The "Butterfly Effect” postulates that a small change in the initial condition of a system (in this case, the fluttering of little wings) can cause a chain reaction leading to large-scale alterations of events. While this phenomenon describes the impact the Dodd-Frank Act changes will have on state high-cost laws, I prefer to think of what’s coming as the “hummingbird” effect. That’s because hummingbirds are inexorably tied to the flowers they feed upon. They co-evolve. This is what is about to occur as federal and state laws co-evolve to create new compliance challenges for lenders.

How Can a Change in Federal Law Affect State Law?

Many state high-cost laws point to federal law and regulation. Usually the state high-cost law incorporates the federal law or regulation by reference and uses the phrase "as amended". But depending on how they are drafted, these state laws may, in some instances, preclude a lender from using the federally mandated requirements.

To complicate this issue, it is possible that only one section of the state high-cost law will reference "as amended" or reference the revised section of federal law or regulation. As a result, a lender must analyze each state-high cost law referencing federal law or regulation to determine how or if the requirements are changing. There are eight areas that could be affected:

Rate Calculation

Points and Fees Definition


Points and Fees Threshold


Prepayment Penalty Threshold

Rate Threshold

Total Loan Amount Definition

The “State” of Affairs: State-by-State

Here are just a few examples of what’s changing and what’s potentially conflicting on a state-by-state basis.

The Connecticut Abusive Home Loan Lending Practices Act appears to have only one change, and that is to the margin that is added to the index to determine the rate threshold.

In contrast, under the Georgia Fair Lending Act, a lender must use the revised federal rate calculation, thresholds and closed-end total loan amount definition; however, a lender must continue to use the Georgia defined points and fees and threshold.

Under the Indiana Home Loan Practices Act, a lender must use the revised federal high-cost rate threshold, but continue to use the Indiana defined "trigger rate".

Maine applies a unique "points and fees" threshold which includes a definition of "excluded points and fees."

The Maryland Covered Loan Provisions use rate and points and fees thresholds that are one percentage point less than federal law.

The New Jersey Home Ownership Security Act cross-references federal law on the timing of the conventional mortgage rate index look-up, replacing "as of the fifteenth day of the month immediately preceding the month in which the application…is received by the creditor" with "as of the date the interest rate is set." Lenders must update this aspect of the test in order to comply with New Jersey's definition of conventional prepayment penalty and bona fide discount point.

Under the South Carolina High Cost and Consumer Home Loans Act, a lender must follow the South Carolina defined rate calculation, points and fees definition, points and fees threshold and prepayment penalty threshold; but follow the revised federal rate threshold and revised federal total loan amount calculation.

Rhode Island is an island unto itself, except for the definition of points and fees, which incorporates only the revised federal points and fees definition concerning fees paid to the lender or lender's affiliate.

And the list goes on…

Why Does It Matter?

You may think the new qualified mortgage points and fees limit, effective for applications on and after Jan. 10, makes existing and revised  federal and state high-cost laws obsolete, or at least minimizes their significance—not at all. First of all, there will be non-QM loans made after the effective date. Second, even if a loan is a QM loan, it is still subject to the rate thresholds of federal and state high-cost law.

It is critical not to lose sight of the importance of the upcoming changes to state high-cost laws. If a lender does not apply the correct definition, calculation, or threshold on or after Jan. 10, a lender may erroneously think it is originating a loan that does not exceed the applicable state-high cost threshold. This can be a costly error, because mortgage loans in the following states that are designated as "high-cost" or "high-risk" as well as loans designated as federal "high-cost", are not eligible for purchase by Fannie Mae or Freddie Mac:




New Jersey


New Mexico


New York




Rhode Island



Hummingbirds and Automated Compliance

There are two other reasons that I associate hummingbirds with these issues.

The first is symbolic: the Aztecs wore hummingbird talismans. They believed these birds were emblematic of energy, vigor and productivity and that their sharp beaks would bring fighting skills to the wearer. Hummingbirds also symbolize flexibility: they are the only birds that can fly in all directions, even backwards.

As an attorney specializing in compliance, I look to the hummingbird for guidance and inspiration to create flexible automated compliance solutions. Because our industry is certainly going to need them.