R.I. Law Could Create Crisis

The Rhode Island Home Loan Protection Act was signed into law earlier this month as a means to prohibit predatory mortgage lending practices.

Research by a legislative commission revealed predatory lending costs families in the state nearly $65 million a year, according to an announcement from the Rhode Island General Assembly.

“This bill ensures that the opportunity of home ownership is available, affordable and secure,” said Sen. Juan M. Pichardo.

The commission’s February report included an outline of initiatives to prevent predatory lending, and testing of these solutions was reflected in bills S. 2851 and H. 7814, submitted by Pichardo and Rep. John J. McCauley, the assembly said.

“This legislation was drafted with the expertise of many individuals who appeared before our commission over the past year and made invaluable contributions to our understanding of predatory mortgage lending,” Rep. McCauley said in the announcement. “I am very proud of the fact that Rhode Island will now have a guideline to fight predatory mortgage lending from this point on, throughout the state.“

Prior to enactment of the home loan protection legislation, the Mortgage Bankers Association wrote a letter in opposition of several mortgage-related Rhode Island bills. The group expressed that passage of S. 2851 would create a host of new definitions, restrictions, limitations and prohibitions that, “although well intentioned, will have the unintended consequence of creating a ‘crisis of credit availability and affordability’ by establishing an uncertain legal environment under which the mortgage lending industry will find it impossible to conduct business in the state.”

Pichardo and McCauley cited that, contrary to lender concerns that any additional regulation could harm the mortgage market in Rhode Island, other states that have enacted similar legislation have reported the added regulation encourages growth of the subprime lending industry and significantly reduces instances of predatory lending, according to the assembly’s announcement.

The new Rhode Island law will, among other things, develop a rate-and-fee threshold for “high cost home loans,” and protect against all other practices which are known to offer no “tangible net benefit” to the consumer but only serve to profit a predatory lender, the assembly said.

Paul Richman, MBA senior director of government affairs, says flaws in the new law include subjective standards and vague definitions.

“They are not very clear and precise,” he said. “That’s going to cause a compliance nightmare.

“We are very concerned about the direction this bill will take because its going into uncharted waters. Not only do prohibitions apply to high-cost home loans, prohibitions apply to all home loans, which includes home equity, HELOCs, second mortgages, and that’s a great concern to the industry. That hasn’t been seen in many states before.”

Ratings agencies have yet to analyze and provide comment on how the Rhode Island law will affect the secondary market. When ratings agencies decided not to rate paper out of Georgia and New Jersey due to similar acts, the immediate effect was law revision, Richman said.

The MBA director pinpointed the act’s “tangible net benefit” standard, noting that “nobody knows what that means and that applies to all home loans.”

The standard requires a lender to demonstrate a “net tangible benefit to a borrower” before a loan may be refinanced within a 5-year period. MBA disagrees with the requirement that a loan “must include at least one” of seven enumerated items to prove such benefit, and prefers that the law be written as “including, but not limited to” one of the seven items, as to avoid a finite list that cannot include all situations and hampers lenders’ ability to meet the different needs of borrowers.

Under the law, for example, a refinance would not have a net tangible benefit if the cash taken out is insufficient to offset the costs, even if in all other respects, the loan is equal to the current loan being paid off, MBA said. Also, the seven enumerated items do not include the purchase of a second home or rental property as being a net tangible benefit. Thus, it’s possible that someone who wanted to borrow a smaller amount to augment money in savings or wanted to buy a low-down second property, would not fit the cash-out benefit scenario and be unable to get a loan.

The National Association of Mortgage Brokers declined to comment because it was not familiarized enough with the new law.

Rhode Island is the only state in which NAMB does not have an affiliate group, and no other broker trade groups were identified in the state by MortgageDaily.com.

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