Freddie Nixes Georgia High Cost Loans

Strict assignee liability clause in new state regulation blamed

October 7, 2002

By CHRISTY ROBINSON

The GAFLA intends to restrict high-interest loans targeted mainly at the elderly and poor, and other abusive home loan practices.

Based on this legislation, the Freddie Mac revision is two-pronged. The government-sponsored housing enterprise will not purchase any mortgage secured by a primary residence with one to four units in Georgia if it has a note date on or after Oct. 1 and the terms equal or exceed the annual percentage rate or the points and fees threshold for “high-cost home loans” as defined by GAFLA.

The second part states that Freddie Mac will keep purchasing “covered home loans” under GAFLA, as long as they aren’t “high-cost home loans” and otherwise meet the mortgage giant’s requirements.

For now, there is no delivery requirement change, but Freddie will still conduct additional reviews post-purchase of mortgages secured by Georgia property. “High cost home loans” as defined by GAFLA, or any mortgage in violation of any law or regulation, will be subject to immediate repurchase, the announcement said.

The company is supportive of such regulation, but sees the Georgia revision more as a necessity to protect itself, said Sharon McHale, director of public relations at Freddie Mac.

“The Georgia one is exceptional. It contains a strict assignee liability clause,” making anyone in the process who touches a bad loan liable, she said.

Anti-predatory lending efforts on more local levels in Georgia were rattling cages before GAFLA was finally enacted. DeKalb County passed a predatory lending ordinance in June 2001, stating that the county would not do business with any bank or affiliate deemed to be engaged in predatory lending.

The ordinance stated abusive practices, including excessive fees, high interest rates, costly and unnecessary insurance policies, large balloon payments, broker fees tied to interest rates, and repeated refinancing that steadily increased a borrower’s debt.

“Whereas, predatory lenders target vulnerable consumers, particularly the elderly, vulnerable borrowers, the poor and uneducated, and use an array of practices to strip home equity from their home,” was among the grievances.

However, on Nov. 2, the ordinance was declared unconstitutional, null and void by a senior judge on the county’s superior court after a lawsuit was filed by the American Financial Services Association (AFSA). Judge Edward D. Wheeler struck down the ordinance “because DeKalb County’s ordinance regulates lending conduct in a field preempted by Georgia state law,” and because it violated the uniformity clause of the state constitution, according to information from the Mortgage Bankers Association of America.

Similarly, the city of Atlanta had been receiving complaints that its elderly and fixed-income residents were losing their incomes because their signed loan documents had unscrupulous terms that they misunderstood or did not understand.

In response, the city council approved an ordinance in September 2001 similar to DeKalb County’s. It sought to “prevent the lenders engaged in predatory lending and those persons providing referrals and services to those lenders from enjoying the privilege of doing business with our city,” and to enforce other citizen protections, the document stated.

That ordinance also hit a roadblock, when in November the city received a restraining order, applied for by AFSA.

On the national level, the Federal Reserve on Sept. 27 of this year published its annual adjustment of the dollar amount that triggers additional disclosure requirements under the Truth in Lending Act for mortgage loans with rates or fees that exceed a certain amount. The Reserve adjusted the fee-based trigger from $480 for this year to $488 for 2003, effective Jan.1.

The Home Ownership and Equity Protection Act of 1994 prohibits credit terms such as balloon payments and requires additional disclosures when total points and fees payable by the borrower exceed the fee-based trigger, or 8% of the total loan amount, whichever is larger, the announcement said.

Like Georgia, states are forming their own regulations against predatory lending. For now, it’s on this level that the predatory harness will have to be mounted, said Don Baylor, legislative director at the Association for Community Organizations for Reform Now — or ACORN — in New York.

“Federal legislation to date hasn’t been sufficient,” he said. “Nothing progressive is going to go through right now.”

With Georgia’s particularly strict regulations, however, Freddie Mac will have to pull back. Its system isn’t equipped to identify which loans are prohibited by the new act, so instead it will cease buying all high-cost loans as defined by GAFLA, McHale said.

She said she isn’t certain what percentage of the company’s purchases from Georgia were high cost, but it was small. Nevertheless, the company possibly will be looking into what system changes it can make to detect which of these loans would be safe to purchase again.

Christy Robinson is the editor of MortgageDaily.com. She received a bachelor’s degree in news-editorial journalism from The University of Texas at Arlington. Her work has previously been published in The Dallas Morning News.