By Richard Neiman
Over the past 18 months, I have been supporting a number of proposed mortgage reforms at the state and national levels that I believe are critical to protect consumers, strengthen the industry and aid in market recovery. On August 5th, New York took broad and decisive action on many of these reforms when Governor Paterson signed the subprime mortgage reform legislation. The federal Housing and Economic Recovery Act and revisions to Reg. Z complement the new state law, and I am encouraged that so many of these changes have become a reality.
While that reality comes with new responsibilities and an increased workload for the Banking Department, there is no doubt that the benefit for New Yorkers and the mortgage market is well worth the effort. We will be registering mortgage servicers for the first time; amending our state mortgage originator licensing system to conform to new federal standards; and developing new regulations and guidance to support the industry’s compliance effort. We welcome these new responsibilities as part of our mission.
And to help the industry to prepare for how the law impacts them, the Banking Department was quick to take the necessary steps to implement components of the law that went into immediate effect or became effective on September 1st. Effective components include: the special pre-foreclosure notice for subprime loans; the foreclosure notice for all homeowners; the requirement for foreclosing entities to make an affirmative allegation of ownership of the loan; and rules for distressed property consultants, designed to prevent foreclosure rescue scams.
The Department has also sent a detailed letter to all supervised institutions related to the mortgage and lending industries. Informational letters were also circulated more broadly to mortgage servicers operating in New York, industry groups, non-profit groups, consumer counselors and the media. A copy can be found on our Web site at www.banking.state.ny.us.
In addition to this industry letter, we have added many other related resources to our Web site, including index rates from both the Treasury Department and the Freddie Mac Primary Mortgage Market Survey. The text of the law is also available.
The goal is to provide comprehensive reference tools, and I hope you continue to dialogue with us about the law and its implementation. I encourage you to continue submitting questions to us for supervisory opinions or other follow-up. We want to ensure that you have the resources you need, to be confident that your compliance program covers all the bases.
But the news about the state law isn’t just about managing enhanced regulatory compliance. I hope that you will also recognize the business benefits that come with these mortgage reforms. For example, a number of features will greatly benefit the industry and reduce the likelihood of default, by strengthening underwriting and ensuring that borrowers plan for additional costs of homeownership.
First among them is the new duty to verify the borrower’s ability to repay the loan, apart from the value of the collateral. Sound underwriting really doesn’t get more basic than that, and yet this fundamental was often ignored in the heat of the subprime boom. Other important provisions include escrow of taxes and insurance, an expense that otherwise may be overlooked, and prohibitions on prepayment penalties. In fact, if these standards had been in place over the past five years, I don’t think the industry would have experienced the recent high level of write-downs.
I realize that both industry participants and consumer advocates may feel the state mortgage reform package did not fully address all of their issues. However, I think that is a clear sign that the law struck the right balance between consumer protection and the continued availability of affordable credit. Varied stakeholders may not have gotten exactly what they wanted, but we all got the changes that were needed.
New York delivered the right mortgage reforms, to help more families keep their homes and to help prevent the undisciplined lending that brought us to this crisis in the first place. I want to thank the many banks in New York for their input and efforts throughout this process, and I look forward to your continuing support as we work together to strengthen the mortgage market.
Richard Neiman, superintendent of the New York State Banking Department, writes on regulatory issues for Banking New York.