Fitch Responds to Illinois Interest Act Court Action.
If the Illinois Supreme Court decides that federal law (i.e., DIDMCA) prevails, then Fitch will not need to take any rating action on outstanding deals that include Illinois mortgage loans. In addition, no additional changes or credit enhancement will be necessary for new securitizations. However, if the court decides that the Illinois Interest Act prevails, then Fitch, at that time, will review the court's findings and inform investors as to which course of action Fitch may follow in regards to ratings on outstanding transactions. This course of action may include placing all outstanding transactions that include Illinois mortgage loans on Rating Watch Negative depending on the conditions and/or limitations, if any, in the court's decision. Pending the outcome of each review, Fitch may downgrade the classes of those transactions materially affected by this new, prevailing law. In addition, Fitch may increase credit enhancement for all future transactions that include Illinois mortgage loans impacted by the Illinois Interest Act.
The Illinois Interest Act states that 'in the case of a loan with an interest rate in excess of 8% per annum secured by residential real estate,' the percentage of the principal amount of the loan represented by all charges in excess of the stated interest rate 'shall not exceed 3% of such principal amount.' It is important to note that this explicitly includes all residential mortgages (other than government loans), whether first or second lien, purchase or non-purchase money.
In contrast, DIDMCA provides that 'the laws of any State expressly limiting the rate or amount of interest, discount points, finance charges or other charges which may be charged...shall not apply to any mortgage...which is secured by a first lien on residential property.' Hence, if DIDMCA prevails, then there will be no limitation on the points and fees that can be charged on first lien residential loans in Illinois; if the Illinois Interest Act prevails, then there will be a limit of 3% for points and fees on any residential loan, including first liens, with an interest rate greater than 8%.
Fitch will continue to monitor anti-predatory and other state lending legislation and provide the market with timely commentary on its rating approach.
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|Date:||Dec 16, 2004|
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