TESTIMONY OF
SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION
BEFORE THE
NEW YORK STATE SENATE BANKS COMMITTEE
HEARING ON
EVALUATING THE GOVERNOR’S PROGRAM BILL TO ADDRESS MORTGAGE
FORECLOSURES AND SUBPRIME LENDING PRACTICES IN NEW YORK STATE
May 12, 2008
Chairman Farley and members of the Senate Banks Committee, my name is Larry Platt of
KLGates, and I am testifying on behalf of the Securities Industry and Financial Markets
Association
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(“SIFMA”). We greatly appreciate the opportunity to testify today regarding the
Governor’s Program Bill #44 proposed to address subprime lending and foreclosure procedures.
In my testimony, I will highlight some of our concerns with the residential mortgage loan servicing and loan origination provisions of this legislation. While this testimony is not a comprehensive tally of all of our concerns, it reflects our general belief that, perhaps unwittingly, this legislation will undermine the confidence of the capital markets in residential mortgage lending in the State of New York.
We have three concerns relating to the legislation’s loan servicing provisions. First, and most importantly, we are concerned that the practical effect of the foreclosure provisions of this legislation may well be perceived to nullify the underlying mortgage contract securing a residential mortgage loan. This attack on the sanctity of secured lending will hurt the very consumers whom the government hopes to help--both in the short run and the long run. As
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SIFMA brings together the shared interests of more than 650 securities firms, banks, and asset managers.
SIFMA’s mission is to promote policies and practices that work to expand and perfect markets, foster the development of new products and services, and create efficiencies for member firms, while preserving and enhancing the public's trust and confidence in the markets and the industry. SIFMA works to represent its members’ interests locally and globally. It has offices in New York, Washington D.C., and London. Its associated firm, the
Asia Securities Industry and Financial Markets Association, is based in Hong Kong.
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drafted, this legislation obligates a servicer to provide a borrower under a high cost or subprime loan with a 60 day notice prior to commencing foreclosure. The notice asks the borrower whether he or she is willing to work out a mutually agreeable resolution to avoid losing their home. If the borrower responds affirmatively within 30 days, the servicer must wait 60 days before commencing foreclosure. As a threshold issue, we are concerned that the wording of the letter may convey a false sense of hope to many borrowers. While loan servicers are more than willing and in fact are working with borrowers to help save homes, the fact is that this loss mitigation process does not work for all borrowers. There are not always mutually agreeable resolutions, and the language of any notice should not seem to promise more than can be delivered.
More importantly, though, the natural consequence of this legislation may be to accelerate foreclosures and forestall loss mitigation initiatives. Servicers already as a matter of practice, if not by contract, evaluate various alternatives to foreclosure such as repayment plans, forbearance, and loan modifications. Only when a servicer determines that there is no reasonable alternative to foreclosure does it commence the foreclosure process. By imposing a statutory 60 day moratorium, this legislation will discourage servicers from initiating any loss mitigation activities following a borrower's default.
Indeed, why should a servicer initiate an early consideration of alternatives to foreclosure if the servicer is required to start all over again and wait 60 days when it is ready to commence foreclosure? Imagine the customer confusion when a borrower gets the 60 day notice letter offering a chance for a mutually agreeable resolution after the servicer already unsuccessfully has sought to negotiate a mutually agreeable resolution. The servicer may determine that it is better to send the foreclosure notice as soon as a borrower defaults and delay any loss mitigation efforts until the 60 day moratorium begins.
The fact that the legislation does not limit the number of times a borrower may receive a 60 day free pass only exacerbates the problem. As drafted, a savvy borrower can engage in serial delinquencies and continually earn a 60 day foreclosure relief. In this way, a consumer unilaterally can convert twelve regularly scheduled monthly mortgage payments into four quarterly payments, without paying any additional interest. Responsible borrowers who fulfill their obligations will receive no such benefit.
In addition, the legislation obligates a court to hold a mandatory conference within 60 days after an answer is due by a defaulting borrower subject to a foreclosure action. The purpose of the mandatory conference is to hold settlement discussions, including but not limited to a resolution in which payment schedules or amounts are modified and for whatever purposes the court deems appropriate. For high cost loans and non-conventional home loans, the right to this conference does not arise until AFTER the expiration of the mandatory 60 day moratorium on foreclosure.
And during the pendency of the 60 day moratorium described above and this court conference, the borrower is not obligated to pay anything on the delinquent mortgage loan. In other words, for subprime loans, the legislation effectively imposes a minimum 120 day waiting period before the servicer can enforce the terms of the loan documents against the borrower and a clever delinquent borrower can extend this waiting period in perpetuity.
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Aside from minimum four month grace period extended to delinquent borrowers, we are concerned that a servicer would be obligated to attend a court conference where there are no clear standards that apply. Judges, of course, routinely hold settlement conferences to try to extract a settlement between parties in a dispute, and they may well elect to do so in any judicial foreclosure. What is the point of obligating a judge to hold a settlement conference besides building in a further delay to the foreclosure process? A judge is not likely to influence a borrower to pay a delinquent debt. Perhaps the unstated purpose is to persuade a servicer to relinquish its contractual rights under the mortgage loan even if there is no legal requirement to do so. We believe that this process could undermine the faith of mortgage holders in the value of their security instrument if they are cajoled to modify loans for the greater community good by the imprimatur of official state action.
Our second loan servicing concern relates to the requirement for loan servicers to register with the New York Banking Department, much like mortgage brokers and mortgage lenders are required to be licensed in New York. We are not opposed to registration per se. We note, however, that it routinely takes 9 months or more for mortgage lenders to obtain licensing in
New York--which is three times the time it generally takes in other states. Unless there is a long lead time before the new registration requirements take effect, many servicers will have to withdraw from the New York market, robbing the state of valuable servicing capacity at a time when existing servicers are struggling to keep up with the demand for their loss mitigation services. We recommend that the state only enact an effective date that realistically reflects the
Department's reasonable capacity to process the applications for registration in an expeditious way.
The broad delegation of authority to the Banking Department to issue regulations regarding loan servicing is our third concern with the legislation’s loan servicing provisions. New York law already delegates broad authority to the Banking Department to issue regulations related to loan origination—authority that the Department aggressively and comprehensively has used. In the case of loan origination, however, the Department is simply implementing the broad statutory restrictions that the legislature has adopted. In this case, the legislature is not substantively regulating loan servicing; it merely is delegating broad authority to the Banking Department without any parameters or boundaries. It is our view that this legislation grants a broad delegation of authority acceding the legislature’s authority governing the loan servicing law in the State of New York.
Let me turn to the legislation's loan origination provisions, which creates a new category of loans that are subject to the stricter substantive restrictions to which high cost loans already are subject under existing New York law. The new category is called non conventional home loans, which is a proxy for subprime loans. This legislation relies on a quantitative test to determine whether a residential mortgage loan is a non-conventional home loan. We believe that the formula, which is derived from the federal Home Mortgage Disclosure Act, unfairly will capture a number of prime mortgage loans. This is important because we believe these provisions of the legislation may cause private industry to withdraw from the market to make, buy or securitize non conventional home loans, which will significantly impact those seeking to purchase their first home, to refinance their existing home, and basically anyone seeking a mortgage.
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Presently, there essentially is not a private market for high cost loans in New York because of the significant remedies that are available for violations without regard to the actual harm to a consumer. Intentional violations may results in a voiding of the loan. The court has the authority to impose what ever equitable relief that it may deem advisable, and assignees generally are financially responsible for a lender's violations, even if the assignee had no knowledge of or participation in the violation. There are lots of interesting theories advanced on why innocent assignees should be responsible for the acts, errors or omissions of a lender. None of them, however, answer the very practical question of why an assignee would risk its capital to buy a loan that can evaporate in its hands because someone else did something wrong. It likely won't, which means that subprime loans simply won't be available in the State of New York.
Moreover, an assignee in many cases can not determine through reasonable due diligence whether a violation may have occurred. For example, no loan can be made without a “tangible net benefit,” which is a subjective judgment on which reasonable people can disagree. No loan can be made without a verification of the borrower’s reasonable payment ability, “based on the best and most appropriate form of documentation.” Verification that is good enough but not the best form can lead to material assignee liability. A lender may not compensate a mortgage broker for the placement of a loan in process if the loan is more costly than that for which the consumer qualifies, which suggests that a violation will occur unless the borrower obtained the cheapest loan available in the market place—a determination this simply impossible to make.
These examples illustrate the risk of a responsible investor purchasing subprime loans.
This legislation also imposes new legal requirements for all mortgage loans. Of particular note is a provision that obligates lenders and servicers to comply with federal law or face state law penalties. Such a provision creates the possibility of double damages for the same violations and creates the very real possibility of disputes regarding the meaning of federal laws.
In summary, we believe that the proposed loan servicing provisions will undermine the initiation of loss mitigation efforts by loan servicers and the sanctity of the security instrument for loan holders. The extension of the state’s existing high cost loan provisions to subprime loans, particularly the imposition of assignee liability, is likely to impede if not eliminate the restoration of a subprime loan market in New York. We respectfully request that the Committee members and staff look more closely at the proposed bill in light of our comments. Thank you for the opportunity to appear before you today.
If you have any questions or need additional information, please contact Robert Reid,
Weingarten, Reid & McNally at 518-465-7330 or Nancy Donohoe Lancia, State Government
Affairs, SIFMA, 212-313-1233.
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