Superintendent Neiman Addresses the Mortgage Bankers Association on the Subprime Legislative Proposal
March 20, 2008
Thank you, and good afternoon. I’m delighted to be here today and to have this opportunity to update you one of the key priorities for the Banking Department – the subprime legislative proposal.
As you all know, only too well, this is a time of unprecedented challenges in the mortgage market. Changes are occurring with lightening speed, as the subprime crisis continues to unfurl.
In New York, we’re taking action on many levels, to respond to homeowners in distress and stabilize the market.
There are so many efforts on the state level that I could spend all my time today talking about, including:
- our foreclosure prevention forums, where borrowers meet face-to-face with servicers to arrange modifications;
- our $2 million matching grant program to support consumer credit counseling;
- the new underwriting guidance for mortgage lending; and
- the nationwide mortgage loan originator licensing system (MLO) created by the states.
However, I’d like to focus today on the Governor’s proposal for new state-level subprime legislation. A program bill was just introduced on March 5th – you may have read it already. If you haven’t yet, I hope that you will do so very soon- we are genuinely interested in your feedback.
Industry, as well as consumers, can benefit from this proposal. Because setting good industry practices into law helps protect you from less scrupulous competitors.
But when it comes to legislation, we’re also concerned about competition in another sense. We’re concerned about having a level playing field. We don’t want to create laws that put our state-licensed mortgage banking institutions at a competitive disadvantage to national banks.
So in the current climate of aggressive assertion of preemption by federal regulators, legislation at the state level was not our first choice. Therefore, I continue to emphasize the compelling necessity for a national minimum standard, to apply to all institution types. I envision that such a national standard could function as a floor and be that leveling device.
But we have a responsibility at the state level to respond to the crisis to the fullest extent possible, while urging the federal government to act with us. This crisis is causing suffering right now. And without appropriate intervention, there are not enough stops in place to guard against similar problems in the future.
Therefore, our legislative proposal is designed to do two things:
- provide relief to existing homeowners in distress, and;
- restore consumer and investor confidence, by preventing this type of undisciplined lending behavior going forward.
A. ELEMENTS OF THE BILL: HELPING EXISTING BORROWERS
The immediate focus is on existing homeowners in distress, who are facing foreclosure. States can make a unique difference here. The changes we propose affect real property and other laws that are especially appropriate for action at the state level. And since foreclosure is a process as well as an event, we have targeted relief by stage.
1. Pre-foreclosure notice
First, we need relief for borrowers in the default stage, who have not yet had foreclosure proceedings initiated. Preventing foreclosure here means getting borrowers and their lender or servicer to connect with each other in time. But this process clearly needs help.
For example, the new report from the State Foreclosure Prevention Working Group highlighted that 7 out of 10 borrowers at-risk are not on track for any form of workout arrangement.
Our solution is to require a pre-foreclosure notice, including consumer counseling information, 60 days prior to the initiation of foreclosure proceedings. If the borrower reaches out to the lender within 30 days of receiving the notice, the lender will be precluded from initiating a foreclosure action for a period of 60 days. This will give proactive borrowers the opportunity to seek counseling and request a workout arrangement.
This requirement would apply to high-cost and other subprime loans. Those subprime borrowers have more limited financing options, and are especially in need of intervention at the pre-foreclosure stage.
2. Mandatory Settlement Conference
Once foreclosure proceedings have been initiated, it’s still not too late to find another solution. Our bill would create additional space for a resolution through a mandatory settlement conference. And here the relief is available whenever the home is occupied by the owner or a family member.
The court has to hold a settlement conference within 60 days of the answer date. If the homeowner appears without counsel, the court will assume that he or she wants to proceed as a poor person and the court will decide whether to appoint counsel.
3. Affirmative Allegation of Ownership
The third element concerns proof of the legal standing to initiate foreclosure. With the complex contractual relationships involved in mortgage securitization, we would require an affirmative allegation that the plaintiff is the owner or authorized designee of the note and mortgage holder. This applies to subprime loans, and would also include affirmation that the loan was made in compliance with the state’s anti-predatory lending statute.
4. Rescue Scams
And finally, to assist existing homeowners in distress, we have included provisions to addresses foreclosure rescue scams. New York already prohibits equity stripping scams, but the ingenuity of crooks has outstripped that law. We want to protect homeowners from being further victimized, by prohibiting upfront fees and requiring a written contract for services from so-called “distressed property consultants.”
B. ELEMENTS IN THE BILL: PREVENTING FUTURE CRISES
I hope you see the value in these steps to address the more immediate aspects of the foreclosure crisis. But we also need to think long-term about preventing similar problems in the future.
There are six elements in the bill that look forward; the first two relate to expansion of Section 6-l of the Banking Law, which is New York’s anti-predatory lending statute.
1. Expansion of a covered transaction under 6-l
First, we would expand the definition of a covered transaction under the state’s anti-predatory lending law to include loan amounts up to $750,000. This change is especially critical for protecting borrowers in downstate, where home prices are typically higher.
The proposal would also create a new class of nonconventional loans- those with rates that are 3% or 5% above the corresponding Treasury, for first and second liens respectively.
2. Additional standards and prohibitions under 6-l
In addition to expanding the scope of coverage, amendments to the anti-predatory lending statute would also provide additional standards and prohibitions.
The five requirements for this expanded category of loans would do the following:
- prohibit prepayment penalties;
- prohibit yield spread premiums;
- prohibit option ARMs, when there is the possibility for negative amortization;
- require escrow for taxes and insurance, with the ability to opt out after the first year, and;
- require special disclosure about taxes and insurance to first-time home buyers.
I’m sure this group will have plenty of questions or comments about these proposed standards. And, let me assure you that your comments are important to us – you can provide critical input on the impact these standards may have on credit access, cost, and availability. I strongly encourage you to make your opinion known so you can be heard through this legislative process. Please feel free to submit written comments or request face-to-face meetings, either individually or thought your associations.
I suspect that a particular point of concern may be the suggestion to ban yield spread premiums. Our goal with that provision is to prevent steering.
If the broker’s compensation varies depending upon the rate the borrower receives, there is a potential conflict of interest between the broker’s profit motive and the customer’s desire for the best deal.
So if you believe that prohibiting yield spread premiums isn’t necessary to prevent steering, I encourage you to make the case. Show us alternate models for controlling the risk. I guarantee that we’ll listen and take your suggestions seriously.
We understand and appreciate that mortgage brokers provide a valuable service. They can expedite the approval process by processing credit documents and managing communications with the lender. Brokers may even be able to obtain the loan at a more favorable wholesale interest rate than the consumer would otherwise receive through the retail channel.
So we want to work you- to find ways to control conflicts of interest, while still keeping the wholesale lending industry active in the state.
3. Duty of care
To further address the potential for conflicts of interest to arise, we would establish a general duty of care on the part of mortgage brokers to their customers.
Among other things, this provision would require brokers to act in the borrower's interest; act with reasonable care, skill and diligence; act with good faith and fair dealing; and present loans that are most appropriate for the borrower.
4. Ability to pay standard
In addition to conflicts of interest, another major concern is the widespread disregard of the borrower’s ability to pay. We strongly believe in establishing an ability to pay standard for all mortgages, as lax underwriting was a key precipitating factor of the current crisis.
This bill would establish such an ability to pay standard, regardless of the principal amount. 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.
For subprime loans, the borrower's ability to pay would require verification by detailed documentation of all sources of income.
5. Registration of servicers
Mortgage servicing companies are important players in the mortgage financing process, and I don’t believe this proposal would be complete without including them. We are proposing that mortgage servicers in New York should be registered with the Banking Department.
6. Mortgage Fraud
And finally, we would criminalize the act of mortgage fraud, making it easier for prosecutors to prosecute these cases. As the magnitude of the fraud increases, so would the criminal penalty.
While many components of this bill are within complete control of the state, certain elements would benefit from minimum federal standards as well as more cooperation between state and federal regulators.
One of our overriding objectives in preparing this proposal is to strike the right balance between consumer protection and business realities. We recognize the need to assist current borrowers, protect future borrowers, and ensure continued access to affordable credit.
And now it’s time we hear from you. As I said earlier, we are interested in hearing your perspective on whether we’ve succeeded in striking that right balance, and also in your recommendations for improvement.