R.I. Law Could Create Crisis

The Mortgage Bankers Association recently issued letters to members of the Rhode Island State Legislature expressing concerns with and recommendations for the legislation pieces.

In one of the letters, the trade group said it is against passage of S. 2851, the Rhode Island Home Loan Protection Act, because it would “create an uncertain legal and regulatory environment for the mortgage lending industry” in the state.

The bill, although well intentioned, “will have the unintended consequence of creating a ‘crisis of credit availability and affordability’ by establishing an uncertain legal environment under which the mortgage lending industry will find it impossible to conduct business in the state,” MBA wrote.

One of three main areas of S. 2851 concerning mortgage bankers are the threshold limits based on the interest rate or the points and fees on the loan which trigger a host of restrictions, limitations and prohibitions. Additionally, because coverage and determination of the thresholds are based on at least 14 legal definitions new to Rhode Island statutes, mortgage originators will be subjected to an entirely new and non-standard set of compliance programs.

The difficulty of compliance and the severity of the penalties will prompt high-cost lenders to exit the market, the group added.

Other areas of concern include ambiguous and untested prohibitions, according to the letter.

For example, the legislative piece prohibition of flipping extends beyond loans with exorbitant costs and the predatory lending practices described in the bill’s legislative findings because it covers all Rhode Island refinancings, according to the letter. Secondly, the standard to determine whether flipping has occurred is based on the benefit to the borrower.

“This is a purely subjective test, which must be applied on a case-by-case basis,” MBA said. “There are no objective factors or ‘safe harbors’ in the bill, and compliance-oriented lenders will be at risk of legal ‘second guessing’ in all refinancing transactions in Rhode Island. As has been the case under similar provisions in other states, some lenders will restrict refinancing transactions or exit that part of the business entirely.”

A third area worrying mortgage bankers is the impact to the secondary market, as not only do Fannie Mae and Freddie Mac refuse to purchase high-cost mortgages as defined under state laws, but “subjective standards, coupled with express assignee liability imposed in the bill, will mean that non-Fannie Mae or Freddie Mac purchasers of mortgage loans may decline to purchase home loans originated in Rhode Island or limit the types of loans purchased,” MBA said.

MBA also told legislators that it opposed the enactment of S. 2843, S. 2319 and H. 7815, which would require the individual licensure of mortgage loan originators doing business in Rhode Island.

Not only would the new licensing regime created by these bills result in diminished competition among Rhode Island lenders, many of the nonbank lenders will find it difficult to comply with the new law, MBA said — noting that greater regulatory burdens would increase costs of doing business, and, in turn, severely curtail and limit consumer access to affordable mortgage products.

Requiring licensure of individual loan officers and support staff working within a licensed mortgage banking company ignores “the accountability that mortgage banking companies have for their loan officers and employees due to the economic regulation of the marketplace and the periodic audits by the states themselves,” MBA said.

In addition to redundancy, such requirement further fuels burdens due to inadequate funding state regulatory agencies receive to process licensing applications with increasing onerous requirements, the group added.

To promote greater accountability among both mortgage bankers and brokers, the MBA suggested that the exempt categories provided for in the legislation extend to mortgage lending companies that are FHA-, Fannie Mae- or Freddie Mac-approved, or that maintain a net worth of at least $5 million or total assets equal to or above $25 million.

In a recent letter of memorandum, the trade group said originators working for mortgage bankers in New York should not be subject to the same oversight as mortgage broker originators.

Mortgage brokers “do not have capital at risk in a transaction and their responsibility for a loan typically ends when a loan closes and they receive their payment,” the letter said.

“Accountability through state licensing of loan originators can be best accomplished without adding excessive costs and burdens to the U.S. residential finance system by exempting from loan originator licensing those individuals who are employed by institutions that have national oversight through FHA, Fannie Mae or Freddie Mac or are of a certain size that they have an inherent accountability,” MBA said. “If the exempt categories are extended in the manner outlined above in the legislation, MBA would be supportive of the passage of S. 2843, S. 2319 and H. 7815.”