State legislators beware! That was the theme of last week's panel discussion hosted by the American Securitization Forum on predatory lending legislation. With both New York and New Jersey set to implement laws similar to the recently amended Georgia Fair Lending Act, panelists warned that political one-upmanship and catering to consumer advocacy groups will ultimately increase the cost of borrowing for consumers.
The negative reaction from rating agencies as well as the lending community to the GFLA exemplifies "a bad thing that can happen" if states enact laws that expose mortgage lenders to "unquantifiable liability." Panelists feared similar situations were on the horizon. The most efficient outcome, all agreed, was federal legislation, preempting state law, which would govern behavior nationwide.
Citing a "disconnect" in the minds of legislators between consumer protections and their impact on secondary mortgage markets, Standard & Poor's Managing Director Frank Raiter said the rating-agency community applauds predatory lending legislation, but clear definitions and liabilities must be written into these laws for the capital markets to provide liquidity to the consumer. Raiter noted that S&P does not comment on laws that have not taken effect, nor does it influence state legislators as these laws are drafted. Once enacted, however, the market should be ready to assess the situation and respond if necessary.
Particularly, S&P asks that potential liabilities be defined and capped, so that enhancements can be included in securitization structures. These potential costs can be accounted for via a subordinated tranche within a transaction or an obligor guaranty, Raiter added.
From the lender perspective, Adam Bass, senior executive vice president of AmeriQuest Mortgage Co., said that his company has yet to re-enter the Georgia market, despite the amendments to the Georgia FLA, and would be forced to pull out of states that enact similar legislation. The results, according to Bass, are higher rates charged to underserved borrowers.
"Consumers and advocacy groups need to understand that capital flows and securitizations offer lower costs to consumers," Bass said. Noting that reduced competition among lenders never benefits consumers, he added that following the mass pullout from Georgia, mortgage rates offered by one, in-state federal savings bank increased 50 basis points. He added that unless amendments are written into the New Jersey predatory lending bill currently in the state congress, AmeriQuest would pull out of the state and
"close our New Jersey offices."
He compared the situation to proposed tort-reform laws and the plight of medical practitioners who are unable to afford the rising cost of malpractice insurance. "Like doctors who can't give care without insurance, we can't lend without the liquidity provided by securitization markets," Bass said.
This situation, however, looks as though it is developing in numerous states, according to Mike Williams, vice president at The Bond Market Association. Without provisions, he believes that "New York will see a similar reaction to Georgia," when its predatory lending legislation takes effect April 1 of this year.
New Jersey's proposed bill, with even more limiting provisions, was the result of a governor wanting to make a name for himself by signing what is perceived to be the most pro-borrower bill into law, Williams said. Calling it a game of "political one-upmanship," Williams theorized that Gov. [Jim] McGreevey, as a Democrat, had to top the New York Republican [George] Pataki with a seemingly more consumer-friendly bill.
New Mexico is the next state with similar legislation in the planning stages, following New York and New Jersey.
A federal pre-emption that would override state law is unlikely to develop any time soon. The only bill currently proposed with federal standards for predatory lending practices is the Ney Bill, which the BMA supports, Williams added. He speculated that the process to create federal law would take too long for the current 108th Congress to pass and, in the meantime, "states are too far along not to take the plunge."
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