WASHINGTON - New York State regulators are writing guidelines to help banks steer clear of packaging and selling predatory mortgage loans to investors.
Elizabeth McCaul, New York's banking superintendent, said Monday that the guidelines, expected to be formalized later this year, will focus on ensuring all loans meet sound underwriting and appraisal practices and comply with all applicable federal and state consumer protection laws.
While the Banking Department has no authority over investment banks, it does oversee lenders that make subprime loans and the few banks that securitize them. The Securities and Exchange Commission has sole authority over investment banks. Ms. McCaul said the guidelines are an effort to bridge the gap between bank and securities regulation.
She said the department is working with the SEC on joint guidelines, but a spokesman for the SEC refused to comment. If federal securities regulators balked, the state would issue its own guidelines.
"Securitization has acted as a virtual spigot" to mortgage lenders, she said. The practice has helped provide credit to low- and moderate-income borrowers, but at the same time has provided money for abusive loans, she said.
"An increased due diligence level is necessary to make sure loans securitized are not used for abusive lending," according to Ms. McCaul.
In recent months, investment banks have come under fire for financing abusive lending practices by pooling and securitizing questionable subprime loans. By packaging these loans and selling them to investors, Wall Street has created liquidity in an ever-growing subprime loan market. Currently, about $100 billion of the roughly $240 billion in outstanding subprime mortgage loans have been securitized, according to Moody's Investors Service and SMR Research Corp. of Hackettstown, N.J.
Lawmakers and community activists have become increasingly concerned by the growth in predatory lending. The House Banking Committee has scheduled a May 24 hearing on the topic, and at a conference sponsored by the Department of Housing and Urban Development last week, investment banks were warned that they may be held responsible for predatory mortgage loans they help finance.
The Rainbow/PUSH Coalition and the National Community Reinvestment Coalition announced Friday that they would work together to pressure investment banks to avoid predatory loans.
"Wall Street has the power to cut off a large source of funding for lenders whose only aim is to deceive and dispossess elderly, low-income, and minority individuals and families," said John Taylor, the NCRC's president.
The two groups said they want investment banks to stop buying loans with "exorbitant interest rates unrelated to the credit risk of the borrower, packed with unnecessary and costly fees, refinanced frequently with no benefits to the borrower, or those made using high-pressure, fraudulent sales tactics."
At least one representative of the mortgage lender community said New York's guidelines may be redundant.
"There might be a misperception that due diligence procedures are not followed, when in point of fact that is just not the case," said Laura J. Borrelli, former president of the National Home Equity Mortgage Association and owner of Barrister Mortgage and Investments, West Paterson, N.J.
While Ms. Borrelli applauded the Banking Department's efforts to crack down on predatory lending, she said that all participants in the loan securitization process routinely perform rigorous audits to make sure their loans meet sound underwriting and appraisal practices.
