Correction: Fitch Revises Rating Criteria in Wake of Predatory Lending Legislation.

Business Editors

NEW YORK--(BUSINESS WIRE)--May 1, 2003

(This is an amended version of a press release issued yesterday.)

Fitch Ratings has announced its changes to its policies for addressing securitizations which contain residential loans that are subject to predatory lending legislation. Policies include application of additional credit enhancement as appropriate, which ranges from 52% to .001%, additional representations and warranties and a compliance review.

Fitch has previously indicated and confirms that it will not rate residential mortgage backed securities (RMBS) transactions which contain residential mortgage loans that are originated in jurisdictions which contain legislation that may result in unlimited purchaser or assignee liability for predatory lending practices of an originator, broker or servicer. Accordingly, the criteria announced today addresses only those transactions which Fitch will continue to rate, either because the transaction does not contain any loans subject to such legislation or the loans are subject to legislation which limits any recovery against a purchaser or assignee.

Fitch is concerned that the interpretation and implementation of new predatory lending legislation poses great challenges for issuers due to assignee and purchaser liability. These new laws have the potential to result in losses suffered by securityholders in residential mortgage backed securities (RMBS) structured finance transactions.

In order to identify the potential size of the risk presented in any particular RMBS transaction, Fitch expects the applicable documents to contain the following representation and warranty: 'All loans are originated in compliance with state, local, and federal laws.' If there are no high cost loans in the transaction, Fitch also expects the applicable documents to contain the following representation and warranty: 'No loan is a 'high cost' loan, a 'covered' loan or any other similarly designated loan as defined under any state, local, or federal law, which law contains provisions which may result in liability to the purchaser or assignee of such loan'.

On a jurisdiction by jurisdiction basis, Fitch may decide to rate RMBS transactions which contain residential mortgage loans which subject purchasers or assignees to liability, if such liability is reasonably limited. If the issuer specifies to Fitch that there are high cost loans in the proposed transaction, Fitch expects the representation and warranty from the issuer to identify the loans by: 1) type (high cost, covered, etc.), 2) quantity, 3) aggregate dollar amount, and, 4) jurisdiction. For example, Fitch expects the representation and warranty to read as follows: 'No loan is a 'high cost' loan, a 'covered' loan or any other similarly designated loan as defined under any state, local or federal law, which law contains provisions which may result in the liability (of) the purchaser or assignee of such loan, except that there are (quantity) equal to (total dollar amount) of (high cost/covered/other designation) loans originated in (jurisdiction).' In addition, each loan in the pool must be individually identified on the loan file that is transmitted to Fitch -- both by type and jurisdiction.

In the event of a breach of any such representation or warranty, Fitch will expect a repurchase of the affected loan at the applicable repurchase price. The repurchase price should be equal to: 1) the outstanding indebtedness of the loan (including, but not limited to late fees), plus accrued interest, plus, 2) reasonable attorneys' fees and costs and all other damages which may be incurred by an RMBS transaction under any applicable predatory or abusive lending law. Since the repurchase of the loan will not necessarily insulate an RMBS transaction from assignee or purchaser liability, credit enhancement levels may be adjusted for those RMBS transactions which contain loans originated in jurisdictions with laws that contain such provisions.

In cases where high cost, covered or similarly designated loans in a particular jurisdiction are subject to limited assignee liability, Fitch has stated that it will rate transactions containing loans from those jurisdictions; however, each of those loans may be subject to additional credit enhancement. The additional credit enhancement is calculated by determining a severity of loss and a frequency of loss for each such loan. The severity is determined simply by analyzing the maximum amount of recovery a borrower is entitled to under the applicable legislation. Statutes are not always clear as to the maximum calculation of the recovery. For example, under the Georgia Fair Lending Act (GFLA), recoveries are limited to the sum of the remaining indebtedness outstanding on a loan plus reasonable attorney's fees. Since 'remaining indebtedness' can be interpreted to include not only the principal balance of the loan but also any late fees incurred, which may equal up to 10% of the loan balance, Fitch assumes a worst case scenario. Fitch expects that a court would not deem attorneys' fees to be reasonable if such fees were more than 100% of the remaining indebtedness of the loan. Therefore, Fitch expects the loss severity applied to each high cost loan in Georgia to be 210%.

In calculating a projected frequency, Fitch determines the likelihood of an RMBS transaction being subject to assignee liability legislation. Fitch has identified the following items in assigning its frequency factors:

1) The number of 'prohibited acts' enumerated under the statute and whether those prohibited acts are applied to all residential mortgage loans or a subset thereof;

2) Whether any safe harbor provisions exist under the statute that may protect the assignee from additional risk, such that the RMBS issuer may be subject to no liability or limited liability;

3) The potential to incorrectly categorize a loan.

Under the first frequency factor, loans subject to a high number of prohibitive acts (e.g. 'high cost' or 'covered' loans) result in an increased likelihood of a violation. These loans are subject to a higher frequency than loans which are subject to a low number of prohibitive act violations (e.g. 'home' loans).

The second frequency factor accounts for the availability of 'safe harbor' clauses. For example, under the GFLA and other pending legislation, if 'reasonable due diligence' has been performed by the assignee or purchaser in connection with its acquisition of a loan, the assignee or purchaser of such loan may not be liable for damages -- or may be liable for a limited amount of damages to the borrower -- even though the loan is predatory under the particular legislation. Fitch believes that assignee 'safe harbor' clauses may reduce the ability of a borrower to recover from an assignee or purchaser of a loan. Therefore, if the legislation contains safe harbor provisions which limit the exposure of the RMBS transaction to the borrower and if Fitch is comfortable that the safe harbor provisions are available to the RMBS transaction, the additional frequency assigned to a particular loan in that jurisdiction may be significantly reduced.

Finally, a third frequency risk must be addressed. This frequency factor addresses the risk that a loan was originated and presumed to be a 'home loan' (generally less likely to be a predatory loan) and was labeled as such on the data tape provided to Fitch. Due to potential errors, such as APRs being calculated incorrectly for loans in certain categories, lenders may unintentionally code a loan as a 'home loan' that is later determined to be a 'high cost' or 'covered' loan -- which may ultimately subject the RMBS issuer to assignee liability. In order to protect against this risk, Fitch may assign an added frequency factor to loans originated in jurisdictions with laws that contain assignee or purchaser liability provisions.

As an example of the effect of such increased credit enhancement, a standard subprime transaction is examined. The assumed 'AAA' credit enhancement is currently 20%. If all of the loans were originated in Georgia and are 'high cost' loans under the GFLA, the required enhancement will range from 52.5% to 5.25% for loans on which no credit has been given for reasonable due diligence to a range of 5.25% to .05% for loans on which credit has been given for reasonable due diligence. If all of the loans were originated in Georgia and are 'home loans' under the GFLA, the required enhancement will range from 7.875% to .80% for loans on which no credit has been given for reasonable due diligence to a range of .08% to .01% for loans on which credit has been given for reasonable due diligence. Ranges for increased credit enhancement for 'high cost' loans in prime transactions range from 1.30% to .25% for loans on which no reasonable due diligence credit has been given, and range from .25% to .01% for loans on which reasonable due diligence credit has been given. Credit enhancement increases for all 'home loans' in prime transactions range from .02% to .01%.

Each loan's additional credit enhancement for predatory lending risk is subject to the following considerations: applicable law by jurisdiction, by product type (subprime vs. prime), strength of the originator/issuer's compliance procedures, and underwriting or due diligence review by the relevant parties (originator and/or investment bank).

As the RMBS market evolves in response to predatory lending legislation, Fitch will consider proposals which may mitigate the frequency or severity assumptions made by Fitch. For example, indemnification from a highly rated entity in favor of the RMBS transaction to cover losses suffered (by virtue of a successful predatory lending claim or a settlement with respect to such claim) in connection with mortgage loans included in an RMBS transaction. A demonstration of enhanced processes and procedures which prove to minimize losses to an RMBS transaction may also result in decreasing the potential additional credit enhancement.

These processes and procedures are expected to address two concerns. The first concern is whether a compliance review on the loans has been completed indicating that the loans are, in fact, in compliance with applicable law. The second concern is that the loan data as presented to Fitch is, in fact, a correct representation of the loans. As indicated previously, there is a concern that a loan indicated as not a high-cost loan may, in fact, actually be a high-cost loan -- as a result of a mistake by the originator. These two concerns may be addressed if certain procedures are in place. If Fitch is comfortable that these concerns have been addressed, the additional credit enhancement allocated to the subject mortgage loans may be reduced. Fitch believes that steps I and II delineated below will aid in addressing these concerns.

I. An enhanced review of the originator / sponsor's compliance program will be performed once per year by Fitch to address heightened concerns on new and changing predatory legislation;

II. An enhanced review by Fitch of the due diligence practices in connection with the transfer of loans to the RMBS transaction;

It is expected that the implementation for all Fitch-rated RMBS transactions of: 1) Fitch's calculation of the extra credit enhancement required for loans subject to predatory lending legislation 2) the inclusion of the representations and warranties indicated above, and, 3) the commencement of the review of such processes and procedures as indicated in steps I and II above, will all be effective as of June 1, 2003, if applicable.

Fitch will continue to monitor anti-predatory lending legislation and provide the market with timely commentary on its rating approach.