Banking Law

Our federal solons are busy concocting sweet treats for the voters in an election year, the kind that melt in your mouth, give you a brief sugar high, then bring you crashing back down to earth smack dab in the midst of an economic cycle that will work its way out the painful way regardless of your wishful thinking. In California, activist legislators are getting down to more serious business: micromanaging the subprime mortgage meltdown in a manner sure to make a painful situation downright excruciating. From today's Housing Wire:

While Federal efforts at mortgage reform seem to have stalled, Housing Wire has learned that California Assemblyman Ted Lieu is set to introduce sweeping reform to statewide mortgage legislation.

His bill, AB1830 ? the Subprime Lending Reform Act ? will seek to outlaw negative amortization mortgages and stated income lending, while placing tough new restrictions on when yield spread premium would be allowed.

Via an anonymous source, who suggested the bill could be unveiled as early as Thursday, HW obtained an advance copy of proposed changes to California?s Financial Code as part of AB1830, which would amend the state?s current law regulating so-called "covered loans" ? conforming loans where rates are eight percentage points above the yield on US Treasuries, or loans with points and fees that exceed 6 percent.

The proposed bill seeks to extend the state?s regulatory authority to loans where the APR is as little as three percentage points above the Treasury yield, and to non-traditional mortgages as well, including interest-only and option ARM products.

In addition to outlawing option ARM mortgages altogether, the bill would essentially eliminate stated-income lending for high-cost, subprime and non-traditional mortgages ? the bill?s language says stated income applications must be ?verified,? which really means they aren?t stated at all. The bill would also outlaw YSP as a method of compensation for high-cost, subprime and non-traditional mortgages.

The use of YSP in all other mortgages (including, ostensibly, prime originations) would be limited by establishing a rate ceiling of 200 basis points above par, and only permitting the use of YSP whenever it is the broker?s sole form of compensation on a loan.

For high-cost mortgages in particular, the bill would outlaw balloon payments and prepayment penalties, as well as requiring full borrower documentation. The bill would also require certification of third-party counseling ?on the advisability of the loan transaction? from a HUD-approved agency prior to origination.

AB1830 would also prohibit brokers, lenders and servicers from engaging in direct marketing designed to get a consumer to refinance out of an existing subprime or non-traditional loan within 12 months of closing on a purchase or prior refinance, although borrowers may still inquire regarding refinancing opportunities.

AB 1830 sounds fairly consistent with the overreaching legislation introduced or already enacted in other states. I've been badgered to comment in depth on the various state laws, especially Maine's, which appears to be particularly odd, and I might do so once I work through the current stack of Marvel comics that I haven't been able to read. However, my banking and thrift clients have mostly national charters, and all of them, state and federal, are consistent in their response: we won't make any loans covered by any such law. FDIC-insured institutions were not the culprits in the subprime mortgage lending fiasco. Again: even Barney Frank admits it. Whether it's amping up state law restrictions or tightening HOEPA at the federal level, the effect will be to further restrict residential mortgage credit. Banning or severely restricting the use of yield spread premiums, as opposed to requiring an adequate disclosure of them, is another brilliant idea that will further reduce the availability of credit. Banning all option ARMs also seems draconian, but I'm merely a shill for the Dark Lord Sauron, so what do you expect?

There's an old adage that "bad facts make bad law." Substitute "brains" for "facts" and you've got another truism.