New York State Banking Department Releases Details of Mortgage Lending Reform Bill

NEW YORK, NY (08/05/2008)(readMedia)-- The New York State Banking Department today reported details of the mortgage lending reform bill signed today by Governor David A. Paterson. This legislation targets the subprime lending crisis by providing assistance to homeowners currently at risk of losing their homes and by establishing further protections in the law to mitigate the possibility of similar crises in the future.

"This is a broad, comprehensive piece of legislation that both helps existing borrowers facing foreclosure and establishes strong underwriting standards and duties of care going forward to assure that this type of mortgage crisis doesn't happen again, protecting borrowers, lenders and investors," said Richard H. Neiman, Superintendent of Banks, State of New York. "This legislation, which is one of the strongest in the nation, builds on and complements our existing wide-ranging efforts on multiple fronts - including homeownership counseling, enhanced enforcement, and bringing borrowers and lenders face-to-face in an effort to avoid unnecessary foreclosures."

Elements of the Bill to Assist Borrowers Currently Facing Foreclosure -- The immediate focus of the bill is on existing homeowners facing foreclosure.

• Pre-foreclosure Notice: This provision of the bill requires lenders to send a notice to borrowers of high cost home loans, subprime home loans and non traditional home loans at least 90 days before the lender may commence legal action against the borrower. The notice would advise borrowers that they are at risk of losing their home, and that, if they are experiencing financial difficulty, they should consider contacting a housing counselor to help reach a resolution with their lender. The lender would be required to list in the notice the names and telephone numbers of at least five HUD-approved housing counselors or other housing counseling agencies designated by the Division of Housing and Community Renewal (DHCR) serving the region where the borrower resides.

Effective Date: September 1, 2008

• Mandatory Settlement Conference: This provision of the bill requires a court in a residential foreclosure action to schedule an early settlement conference with the parties to a foreclosure action within 60 days of when the plaintiff files a proof of service of the complaint. The plaintiff, or its counsel, must appear with the authority to dispose of the matter. For those borrowers who cannot afford an attorney, the court may appoint one. This provision also applies to foreclosure proceedings that were commenced before September 1, 2008, where a final order has not been issued.

Effective Date: August 5, 2008

• Affirmative Allegation of Ownership: This provision of the bill requires the plaintiff in an action to foreclose a high-cost or subprime home loan to make an affirmative allegation in the complaint that (i) the plaintiff is the holder of the note and mortgage at the time the action is commenced, or has been delegated the authority to institute an action against the homeowner by the holder of the note and mortgage, and (ii) the mortgage complies with the underwriting standards in § 6-m of the Banking Law, as well as the pre-foreclosure notice requirements.

Effective Date: Actions commenced on or after September 1, 2008

• Rescue Scams: This provision of the bill targets foreclosure rescue scams operated by those who seek to take advantage of homeowners in default. Among other things, this provision of the bill would prohibit consultants from: (1) performing any services for the homeowner without a written contract; (2) charging or accepting fees without first completing the service; and (3) taking power of attorney from a homeowner, except under very limited circumstances. The bill also establishes strict standards for contracts, and provides homeowners with the right to cancel the consulting contract within five business days of consummation.

Effective Date: September 1, 2008

Elements of the Bill to Prevent Similar Future Crises -- There are additional elements in the bill that are designed to prevent future crises.

• Extending predatory lending prohibitions to a new class of Subprime Loans in new Banking Law § 6-m: The bill provides for strict underwriting standards for a new class of mortgages called "subprime home loans." These standards are in a new section of the Banking Law, § 6-m, to distinguish them from the state's existing anti-predatory lending law, § 6-l, which governs "high-cost" mortgages.

A "subprime home loan"is defined under § 6-m as a home loan with a fully-indexed annual percentage rate (APR) that exceeds by more than 175 basis points for a first-lien loan, or by more than 375 basis points for a subordinate-lien loan, the average commitment rate for loans in the northeast region with a comparable duration as published in the weekly Freddie Mac Primary Mortgage Market Survey (PMMS) in the week prior to the week in which the lender received a completed loan application. Freddie Mac publishes rates for loans with 4 different durations - 15- and 30-year fixed rate mortgages, and so-called 5/1 and 1/1 adjustable rate mortgages, i.e. loans with an initial rate that is fixed for either 5 years or 1 year, and which adjusts annually thereafter. A home loan would trigger the new standards if the principal amount is equal to or below the conforming loan size limit established by FNMA.

If the Banking Superintendent determines that federal regulators have adopted different thresholds for determining underwriting standards for subprime loans or the provisions of the new law have had an unduly negative effect on the availability or price of mortgage financing in New York, the Superintendent may adopt other rates that are necessary to achieve parity between New York and nationally-chartered institutions or to alleviate those unduly negative effects.

Effective Date: Loans consummated on or after September 1, 2008

• Underwriting Standards and Prohibitions: This provision of the bill provides for the following underwriting standards and prohibitions, among others:
  • no negative amortization (which will eliminate certain option adjustable rate mortgages where one or more options cause the loan balance to increase)
  • no prepayment penalties
  • no loan flipping (making a refinancing loan where the borrower receives no tangible net benefit)
  • no payments to mortgage brokers except for services actually rendered and reasonably related to the value of the services, and, in particular, no abusive yield spread premiums. The mortgage broker, at the time of the application, must disclose the exact amount of the total compensation the broker will receive from any source, including the borrower and the lender and any compensation it receives over that amount must be credited to the borrower to pay for closing costs (i.e., the borrower may use a yield spread premium to offset upfront costs, as long as any compensation to the broker from the lender that exceeds the amount of broker compensation agreed to by the borrower is credited to the broker)
  • lender must require the escrow of taxes and insurance, although the borrower may opt out of escrow after one year
  • lender must disclose, if known, the amount of the initial taxes and insurance payments.
  • no teaser rates of less than six months' duration

Effective Date: Loans consummated on or after September 1, 2008

• Ability to Pay Standard: The bill establishes an ability to pay standard for making and arranging subprime home loans. Under this provision of the bill, lenders would have to make a reasonable and good faith determination of whether the borrower has the ability to repay the loan, including the principal, interest, taxes, insurance, assessments, points and fees, based upon the borrower's income, employment status and other financial resources. The lender must take reasonable steps to verify the accuracy of the information provided by the borrower, using reasonable methods such as tax returns, payroll receipts, and bank records. This does not prevent a lender or mortgage broker from using commercially recognized underwriting standards and methodologies, including automated underwriting systems, provided the standards and methodologies comply with § 6-m of the Banking Law.

Effective Date: Loans consummated on or after September 1, 2008

• Duty of Care for Mortgage Brokers: This provision of the bill establishes a general duty of care for mortgage brokers with regard to all home loans. Among other things, this provision would require brokers to: (1) act in the borrower's interest; (2) act with reasonable care, skill and diligence; (3) act with good faith and fair dealing; (4) disclose all material facts known to the broker that might reasonably affect the borrower's rights and interests; (5) disclose all compensation; and (6) present a range of loans for which the borrower likely qualifies and which are most appropriate for the borrower's existing circumstances.

Effective Date: Loans consummated on or after September 1, 2008

• Registration of Servicers: The bill requires mortgage loan servicers to be registered with the Banking Department in order to engage in the business of mortgage loan servicing. The bill authorizes the Superintendent of Banks to adopt regulations on (i) providing for disclosures to borrowers on the basis for any interest rate resets, (ii) the provision of payoff statements; and (iii) the timing of the crediting of payments made by borrowers. By registering servicers, the state can help ensure that servicers are conducting their business in a manner acceptable to the Superintendent. There is a one-year delay in the effective date of this provision, to give the Banking Department time to do the necessary rulemaking to establish registration procedures and conduct of business of servicers.

Effective Date: July 1, 2009

• Mortgage Fraud: This provision of the bill defines and criminalizes the act of mortgage fraud and makes it easier for prosecutors to prosecute these cases. While today prosecutors may prosecute these cases under different theories such as criminal enterprise, scheme to defraud and larceny, the aim of this provision is to make it easier for prosecutors to target these particular types of frauds. As the magnitude of the fraud increases, so would the criminal penalty, and the prosecutor may aggregate the dollar amounts of the fraud to charge more serious offenses.

Effective Date: November 1, 2008

The New York State Banking Department is the regulator for all state-chartered banking institutions, virtually all of the United States offices of international banking institutions, all of the State's mortgage brokers, mortgage bankers, check cashers, money transmitters and budget planners. The aggregate assets of the depository institutions supervised by the Banking Department are more than $1.8 trillion.

In addition to regulating banking institutions, the Banking Department is active in informing and educating all New Yorkers on banking matters. To contact the Banking Department, please call 1-877-BANK-NYS or visit our Web site at www.banking.state.ny.us.

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