Predatory Lending Laws May Hurt Entire Subprime Loan Mkt
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Tuesday February 11, 3:57 pm ET
By David Feldheim and Agnes T. Crane, Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--As state and local governments across the U.S. consider legislation to curb predatory lending practices, the home loan industry is increasingly concerned that these laws could end up strangling the entire subprime home loan market.
New York and Georgia have both been in the limelight recently over anti- predatory lending laws aimed at curtailing abusive and deceptive lending practices. These tend to take place in the subprime market where borrowers with problematic credit records turn for home financing.
But with more than 20 other states preparing similar laws, the concern is now that the resulting patchwork of laws could cripple mortgage securitization in these states.
What's more, the high cost of compliance and potential liability could also scare lenders out of the market completely, according to mortgage industry officials attending the ABS West 2003 conference last week in Phoenix.
The proliferation of laws to protect the high-risk borrowers could result in shutting them out of the market - and that "could eliminate sub-prime borrowing altogther," said one banker.
Such laws "don't solve the problem," said an analyst with a major investment bank, "they just make lending more difficult and the result is that lending actually decreases."
Lenders Pull Out Of Georgia
In Georgia, state lawmakers are scrambling to amend the Georgia Fair Lending Act as lenders have pulled out of the state since the law went into effect last year. All three major credit rating agencies have said they won't rate bonds that include home loans from the Southern state.
The most controversial aspect of the state's law is the so-called "assignee liability" clause that holds the original lender as well as the trusts and investors who buy the loan when it is securitized liable if the law is violated.
The rating agencies argue that it is impossible to assess the risk to investors who hold a Georgia home loan due to the subjective nature of the law. Additionally, punitive damages are unlimited in the case of a lawsuit.
Several other jurisdictions already have adopted anti-predatory laws or are in the process of doing so. One such state is Colorado, which has adopted a rule that bans mortgages with "unconscionable" fees, but without defining the term.
Ratings agencies are mainly concerned with investor liability, thus the focus on Georgia's law. But other issues could be equally harmful to the subprime home loan market, industry officials said.
Rising Costs A Key Issue
One such issue emerging as a prime factor of concern is the inexorable rise in costs, such as the need for increased "due diligence" to which the new laws are contributing.
Trustees of securitized issues, for example, can also be sued under some of the anti-predatory laws, noted Christopher Gething of Goldman, Sachs & Co. But at the moment, trustees are only paid a "pittance" for their role in the securitization, he said.
Shari Kushner, general counsel for C-BASS, LLC, an issuer of asset-backed mortgage securities, said that her company is trying to avoid headline risk and wants to "box their financial risk." To this end, she said, her company is no longer buying high-cost loans.
Ronald Morrison, general counsel for IMPAC Companies, a purchaser of mortgages, said it is not just fees that one has to be alert to. But, he added, there are no objective standards that the legal counsel can look at.
New laws from Cleveland and Toledo are also raising concerns, with Morrison saying that IMPAC was moving quickly to get out of its Toledo loans. He added that he was hopeful that New Jersey, which is presently working on predatory lending rules, will have learned some lessons from Georgia.
Ivan Gjaja, head of ABS research at Salomon Smith Barney, said that over half of subprime real estate loans were securitized in 2002. If the securitization channel is cut off, he said, lending to the subprime market would be limited to those banks that could carry such loans on their balance sheets.
Such an eventuality could mean that the very laws being adopted by municipalities to protect the lower-income borrower could actually end up shutting him out of the market entirely.
Federal Law The Answer?
Some industry officials believe a federal law that would preempt the state and local legislation is the answer.
Consumer groups, however, have already voiced their opposition to a bill that's being considered in Congress, saying it fails to adequately protect borrowers vulnerable to deceptive lending practices. The Association of Community Organizations for Reform Now, which has been lobbying for tougher anti-predatory lending laws for the past four years, says the federal bill under consideration is not acceptable and that the existing federal law contains "big loopholes."
Although the Federal Home Ownership and Equity Protection Act was designed to guard against predatory lending practices, it isn't as restrictive as the new state initiatives nor is it as plaintiff-friendly. -By David Feldheim, Dow Jones Newswires; 201-938-2018 |
