From Oregon to New York, states are stepping up legislation to reign in mortgage lending practices. But some experts are warning that some of the states are going too far.
Industry and legal experts say brokers and loan originators working for federally chartered institutions are exempt from a new mortgage licensing requirement in Colorado. There was some initial confusion after the law was passed earlier this year about how it could be applied.
Chris Holbert, president of the Colorado Mortgage Lenders Association, told MortgageDaily.com that a U.S. Supreme Court decision -- Watters v. Wachovia -- exempts employees of federally-chartered institutions from state laws.
"The Colorado law may have been written to apply to all loan originators, but that doesn't change the fact that federal preemption, backed up by a 2007 Supreme Court decision, prohibits states from applying state regulation to all loan originators," Holbert said.
John Socknat, a lawyer with Weiner Brodsky Sidman Kider PC in Washington, D.C., said if Colorado tried to regulate federally chartered institutions, it would be the only state to do so.
"There is strong statutory and regulatory authority, interpretative agency opinions and U.S. Supreme Court decisions that make clear that federally-chartered institutions may conduct their mortgage lending operations ... without regard to state law," Socknat told MortgageDaily.com. "Attempting to impose a licensing or registration requirement upon an employee of a federally chartered institution or an operating subsidiary almost certainly would be view as impermissible state interference."
A position statement handed down by the Colorado Department of Regulatory Agencies does recognize that employees of the federally regulated companies are not subject to the new law.
In Kentucky, Gov. Steve Beshear has signed a law that makes "widespread changes in the state's mortgage industry," according to a statement from the state's Office of Financial Institutions.
Provisions of the bill include reducing the maximum prepayment penalty to 3 percent for the first year, 2 percent for the second year and 1 percent for the third year instead of the current 5 percent for five years; prohibiting prepayment penalties within 60 days prior to the first interest rate reset; establishing testing requirements for loan originators by 2010; making it illegal to improperly influence a real estate appraisal; requiring loan processors to register with the state; and establishing the Kentucky Homeownership Protection Center to provide mortgage foreclosure counseling and education.
Michigan has also tightened its mortgage lending laws under a 13-bill package signed by Gov. Jennifer Granholm.
The package creates a state database of loan officers and mandates they undergo background checks and education. Loan officers must be registered with the state to be paid for originating a loan and originators must register within 90 days of being hired.
Also, a mortgage industry hiring board will be formed and make recommendations to state regulators on educational requirements and loan officer applications.
In New York, the Mortgage Bankers Association has expressed concern that the Governor's Program Bill 44 addressing mortgage foreclosures and subprime lending practices may go too far by cutting off some borrowers from loans.
"MBA strongly supports the provisions that criminalize mortgage fraud, prevent foreclosure rescue scams, establish stronger standards for appraisers and create a duty of care for mortgage brokers," Paul Richman, president of state government affairs for MBA, told the New York State Senate's Standing Committee on Banks, according to a copy of his testimony.
But the bill creates a new category of loans, known as "non-conventional loans." Because of the additional legal liability involved in making these loans, lenders simply would not lend in that segment of the market, denying credit to all but those with the best credit profiles, Richman said.
The bill also creates a new liability for predatory lending practices that is extended to include all parties in the loan securitization process, known as "assignee liability." If triggered, that provision would "create a real threat of acute capital shortage in New York," Richman said.
"They will, in all likelihood, eliminate massive volumes of lending in the mid-tier sector of the market and will certainly curtail access to much-needed credit for a large segment of borrowers in New York, particularly low- and moderate-income borrowers," he said.
The Oregon Association of Mortgage Professionals is taking some of the credit for beating back the state legislature's attempts at reforming and further regulating the industry.
"In a year of considerable market change, the OAMP Government Affairs Committee had an active 2008 Special Session at the Oregon Legislature, including defeating the poorly-crafted Senate Bill 1090," the association said on its Web site.
The bill would require loan agents to verify that a borrower has a realistic ability to pay off a mortgage. It also bans prepayment penalties on subprime loans, regulates prepayments on other bills and requires brokers establish a "fiduciary duty" to the borrower so borrowers' interests are protected.
State regulators would also have new powers to enforce alleged violations of the new and existing laws.
Mortgage professionals contended the bill would cut off borrowers' access to credit. They testified and lobbied against the bill. The OAMP, however, expects that the bill will be re-filed later this year.