Rhode Island's tough anti-predator measure may persuade lenders to stop doing business in the state, industry observers said.
The Home Loan Protection Act, which was enacted July 11 and is scheduled to go into effect in December, would let borrowers rescind their loans if the law's provisions against flipping were violated.
Assignees would be liable only for "high-cost" loans - those with an annual percentage rate more than 8 percentage points above the yield on comparable Treasury securities. But the right of rescission in the event of flipping would apply to all loans, regardless of their cost.
Nanci Weissgold, a partner with the law firm Kirkpatrick & Lockhart Nicholson Graham LLP in Washington, said the right of rescission on regular home loans "may create the functional equivalent of assignee liability." In other words, "rescission can impair the loan and impact investors."
She also said the explicit assignee liability for high-cost loans would be imposed without any ceiling on damages in some cases.
The anti-flipping provision requires that on all refinancings, the creditor or broker must be able to demonstrate that the new loan would provide a "tangible net benefit" to the borrower. Ms. Weissgold called the provision ambiguous and hard to comply with.
Though certain federally chartered or Rhode Island depository institutions and their subsidiaries would be expressly exempt from the law, some that would have to comply with it are "flipping out," according to Ms. Weissgold.
It is not clear how the debt ratings agencies will respond to the law.
But Donald Lampe, a partner with Womble Carlyle Sandridge & Rice PLLC in Charlotte, said there is "a high degree of likelihood that the secondary market is going to have trouble with this," because "there's no way through due diligence to escape liability."
Lisa Tibbits, a spokeswoman for Moody's Investors Service Inc., said, "We are studying the law to see how it will affect the market, but we are not ready yet to make a statement."
In a May 2003 report titled "Impact of Predatory Lending Laws on RMBS Securitizations," Moody's said: "When the magnitude of potential damages is large, it may be practically impossible to protect securitization investors sufficiently to obtain an investment grade rating. Where this is the case, loans subject to a particular statute may be effectively unsecuritizable."
Neither Fitch Inc. nor Standard & Poor's Corp. returned requests for comment.
The Rhode Island General Assembly is in recess. A call to the office of Gov. Donald L. Carcieri was not immediately returned.
