Fitch Ratings Addresses New Mexico Predatory Lending Legislation.

Business Editors

NEW YORK--(BUSINESS WIRE)--Jan. 15, 2004

On April 11, 2003, Governor Richardson signed SB 449, The Home Loan Protection Act (the Act), a law addressing predatory lending issues in New Mexico -- the relevant provisions of which became effective on Jan. 1, 2004. Since a lender or an assignee of any 'high-cost home loan' may be subject to unlimited liability under the Act, Fitch will not rate RMBS transactions containing high-cost home loans originated in New Mexico as of Jan. 1, 2004.

Fitch has previously indicated that it will not rate residential mortgage-backed securities (RMBS) transactions that contain loans which are originated in jurisdictions that have enacted legislation that may result in unlimited purchaser or assignee liability for predatory lending practices of an originator, broker or servicer (see press release dated May 1, 2003, 'Fitch Revises its Rating Criteria in the Wake of Predatory Lending Legislation,' available on the Fitch Ratings web site at 'www.fitchratings.com'). Under the Act, a 'home loan' is a loan, limited to the FNMA conforming size limit, which is secured by a borrower's owner-occupied primary residence and is either: 1) a 1-4 family real property, or 2) a manufactured home. A 'high-cost home loan' is defined under the Act as a home loan that meets either of the following two thresholds: 1) an APR that exceeds 7% (first mortgage) or 9% (subordinate mortgage) over the comparable yield on Treasury securities, or 2) (i) if the total principal amount of the loan is equal to $20,000 or more, the total points and fees on the loan exceed 5% of the total principal amount of the loan, or (ii) if the total principal amount of the loan is less than $20,000, the total points and fees exceed the lesser of a) 8% of the total principal amount of the loan, or b) $1,000. High-cost home loans do not include reverse mortgages or bridge loans.

The Act describes a variety of prohibited terms and practices for high-cost home loans. In an action brought by a borrower, if a court finds that a violation of the Act has occurred, punitive damages may be awarded if the violation is found to be reckless or malicious. Since punitive damages are not limited, an assignee of any high-cost home loan may be subject to unlimited assignee liability under the Act, unless the assignee can avail itself of the safe harbor provisions of the Act described below. In order for Fitch to rate RMBS transactions that contain loans originated in New Mexico as of Jan. 1, 2004, Fitch will require representations and warranties which state that: 1) all mortgage loans are originated in compliance with state, local, and federal laws and that 2) no loan in the transaction originated in New Mexico is a high-cost home loan as defined in the Act.

Section 11 of the Act provides a safe harbor which limits the exposure of an assignee or purchaser of any high cost home loan for liability arising from the actions of the original creditor if, as proven by a preponderance of the evidence: (1) there are in place at the time of the purchase or assignment of the loan, policies that expressly prohibit its purchase or acceptance of assignment of any high-cost home loan; and (2) there is a requirement by contract that a seller or assignor of home loans to the purchaser or assignee represents and warrants to the purchaser or assignee that either (a) it will not sell or assign any high-cost home loan to the purchaser or assignee or (b) that the seller or assignor is a beneficiary of a representation and warranty from a previous seller or assignor to that effect; and (3) the assignee or purchaser exercises reasonable due diligence at the time of purchase or assignment of home loans or within a reasonable period of time thereafter intended by the purchaser or assignee to prevent the purchaser or assignee from purchasing or taking assignment of any high-cost home loan. Fitch will not rate any transactions containing loans originated in New Mexico after the effective date of the Act where the seller or purchaser cannot provide adequate evidence that the particular transaction will have the benefits of the aforementioned safe harbor because of its concern that a lender may originate a high cost loan in error, thereby subjecting the transaction to unlimited liability.

The Act is unclear as to what is considered 'reasonable due diligence' in New Mexico under the safe harbor provision of the Act. In order to rate RMBS transactions which contain any loans originated in New Mexico after the Act's effective date, Fitch must receive an acceptable certification from a third party unaffiliated with the originator of the loans that such third party has conducted a review of the New Mexico loans subject to the Act and indicating the results of such review. Under this process, after a pool of loans has been identified to Fitch, the third party should determine based on information gathered directly from the loan documents if a loan is subject to the Act. From the pool of New Mexico loans subject to the Act, a random sample may be taken which should be the greater of a) 5 loans or b) 10% of the loans in the pool. If the review performed on such sample uncovers any loan that has been determined to be a high-cost home loan under the Act, a review must be performed on every New Mexico loan in the pool which is subject to the Act. Due to the unlimited liability that can be assessed against an RMBS transaction that contains high-cost home loans originated in New Mexico, Fitch takes comfort that a process to uncover high-cost home loans originated in New Mexico has occurred only if the aforementioned certificate has been produced.

Section 6 of the Act, which addresses servicing practices related to defaulted loans, places certain duties on 'the creditor or the creditor's assignee' prior to foreclosure of any home loan which is a high-cost home loan at the time of origination. A violation of Section 6 could lead to unlimited liability under Section 9, if punitive damages are awarded for a violation found to be reckless or malicious. The safe harbor in Section 11 protects an assignee from a violation by the original creditor, not from a separate violation by the assignee or its agent -- such as a servicer. If Fitch has received comfort that the pool is unlikely to contain any high-cost home loans and has approved the loan servicers and their ability to implement the foreclosure procedures, Fitch believes that any violation of the foreclosure procedures is unlikely to be reckless or malicious. This precludes an award of punitive damages -- thereby limiting assignee liability for violations of Section 6 by a servicer acting on behalf of an RMBS transaction.

As stated previously, Fitch will rate, without additional credit enhancement that might otherwise be assessed against other originators, residential mortgage-backed securities (RMBS) transactions containing any home loans subject to the Act which were originated by OTS-regulated federally-chartered savings associations and their operating subsidiaries as well as by OCC-regulated national banks and their operating subsidiaries. (See press releases dated Aug. 21, 2003, 'Fitch Ratings Addresses Preemption Statements From The OTS & OCC' and Jan. 15, 2004, 'Fitch Ratings Addresses Preemption Statement From The OCC', also available at 'www.fitchratings.com'). Based on a recent state regulation placing New Mexico state-chartered banks on the same footing as OTS-regulated federal savings associations, Fitch will also rate, without additional credit enhancement that might otherwise be assessed against other originators, RMBS transactions containing any home loans subject to the Act which were originated by New Mexico state-charted banks (see New Mexico Regulation Title 12, Chapter 16, Part 76 issued December 17, 2003). Fitch is aware that some jurisdictions may seek to challenge the preemption determinations of the Office of Thrift Supervision (OTS) and Office of the Comptroller of the Currency (OCC) and will monitor those actions and, in the event of a successful action, respond accordingly.

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