In response to current predatory lending practices and the varying state laws that have been promulgated regarding the problem, newcomer Dominion Bond Rating Services (DBRS) recently released rating criteria to address these issues.
An important feature in DBRS' criteria is how the rating agency considers different jurisdictions in determining the severity of potential liability of the holder of a high-cost loan. Taking into account jurisdictional differences makes the criteria "more exact, since the market will have a better sense of what the potential liability could be for investors," said Michael Nelson, senior vice president at DBRS.
DBRS requires that an issuer's representation and warranties for a U.S. mortgage transaction that it rates must state that no high-cost loan - based on each jurisdiction's definition - is included in the deal. If there are high-cost loans included in the pool, the issuer is required to specify which loan is considered high-cost, and to identify the applicable law the loan falls under.
In terms of loans originated in jurisdictions considered by DBRS to have limited assignee liability, a highly rated, creditworthy institution must provide the representations and warranties, and in so doing, no increase in the credit enhancement will be needed. Without the provision from such institution, the rating agency may assign additional loan-level credit enhancement for loans originated in such jurisdictions. For states that provide unlimited assignee liability for high-cost loans, the rating agency will not rate a transaction that has such loans.
The report on the rating criteria also notes that certain jurisdictions have laws potentially providing for unlimited assignee liability for direct violations by an assignee, mainly resulting from the intentional violation of provisions related to servicing procedures. Because a servicer of a deal effectively functions as an agent of the assignee - or the investor - the rating agency stated that it will not rate transactions that have loans originated in these jurisdictions unless it is comfortable that the servicer involved can properly service any loans that fall under these provisions.
In its report, DBRS also features a chart provided by law firm Hudson Cook that details assignee liability provisions contained in the different state and municipal anti-predatory lending laws. The chart provides the circumstances for assignee liability due to violations of the different statutes, both direct and indirect. The chart is aimed at helping investors figure out potential liability for owning high-cost loans, thus not limiting the perspective to the liabilities assumed from loan originators.
As a final note, DBRS commented on the current state of predatory lending issues. "While it would be beneficial for the market to have one federal standard that would incorporate existing HOEPA law as well as all state and local jurisdictional laws pertaining to predatory lending and high-cost issues (including assignee liability guidelines), such federal action may not occur in the near future," the rating agency said. Without the common federal law, DBRS said that it will continue offering commentary to the market on both the servicing and origination issues pertaining to assignee liability in U.S. mortgage deals by updating its rating criteria by jurisdiction.
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