Fitch Inc. said Friday that it would not rate bonds backed by pools of home mortgage loans that include loans made in Los Angeles and Oakland, Calif., where two predatory-lending laws could go into effect soon.
The announcement came just days after the California Mortgage Bankers' Association publicly asked agencies whether they would rate such bonds.
"Both of the ordinances have unlimited assignee liability," said Michael Nelson, a Fitch analyst. "As we have previously said, if we cannot quantify what the risk is to investors, we can't rate loans with unlimited liability in the trust."
Assignee liability means a buyer is liable for damages if a purchased loan does not comply with an anti-predator measure.
Fitch decided to publicize its decision because today is the appeal deadline for an industry-sponsored suit to bar enforcement of the two laws, and there is no guarantee that the California Supreme Court will hear the case, Mr. Nelson said.
The American Financial Services Association lost the suit in a state court last month. It argues that Oakland and Los Angeles, which passed the measures in 2001, had no legislative authority in the matter because the state already had an anti-predator law.
Both cities have delayed enforcement pending the outcome of the trade group's suit.
Adam Bass, senior executive vice president at Ameriquest Mortgage Co. in Orange, said that if the predator measures go into effect in Oakland and Los Angeles, his company and probably many others "won't be able to make loans" in the two cities because of the "unquantifiable risks" posed by the assignee liability clauses.
It was not clear Friday whether Fitch's action would spur the cities to reconsider the measures. Georgia's General Assembly scaled back its anti-predator law this year after Fitch, Moody's Investors Service, and Standard & Poor's cited the 2002 measure in their refusal to rate "high-cost" loans originated in the state.
Skirmishes are also likely in New Mexico, Oklahoma, and Illinois, where legislatures passed predator bills this year that are to go into effect in January.
"Preliminary indications are that New Mexico has unlimited assignee liability but has some language that allows for a safe harbor provision if due diligence is done on the loans," Mr. Nelson said.
The Oklahoma legislation has "limited liability, as far as we can tell," he said, and Illinois "may be construed" to have unlimited assignee liability.
Fitch is still studying those three measures and will not make any announcement until their effective dates are closer, Mr. Nelson said.
Leonard Bernstein, a partner in the Princeton, N.J., office of Reed Smith LP, said: "Fitch's reaction is part of their consistent approach to statutes and ordinances that are overbroad and threaten excessive assignee liability.
"These laws use a shotgun to remove the mole of predatory lending," Mr. Bernstein said.
