What Tom Brady, subprime loans and White House break-ins have in common

October 2, 2014 at 9:37 am Leave a comment

There are some things we just instinctively know don’t happen. Like we know that a lunatic can’t jump the white house fence with the ease of a drunk teenager diving into a neighbor’s pool and that the same lunatic couldn’t procede to run for more yards on White House than Tom Brady passes for in a Monday Night Football game. Similarly, we know instinctively that credit unions don’t make subprime loans. As a result I’ve seen otherwise studious compliance professionals daydream when the presenter starts talking about subprime lending disclosure requirements.

So you may have been a little surprised by yesterday’s CU Times article suggesting that Navy Federal Credit Union may be setting itself up for Fair Housing examination scrutiny by offering No- Money-Down mortgages with 5% interest rates . The article exemplifies a simmering problem in mortgage regulation: Everyone is against sub prime lending but there is no set definition of what makes a subprime loan a subprime loan. With interest rates continuing near record lows all credit unions and banks for that matter, should  double-check if they are making loans that regulators could single out for greater scrutiny.

So what exactly is a subprime loan? First let’s keep in mind that almost all statutes and regulations now tie subprime loans to the APOR. The APOR is generally an average index of comparable loans. As interest rates go down so do the subprime trip wires.

First grab some more coffee. Then here are some of the differing definitions of a subprime loan,

Regulation Z defines a higher-priced mortgage loan as follows:

Higher-priced covered transaction Higher-priced covered transaction means a covered transaction with an annual percentage rate that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set by 1.5 or more percentage points for a first-lien covered transaction, other than a qualified mortgage under paragraph (e)(5), (e)(6), or (f) of this section; by 3.5 or more percentage points for a first-lien covered transaction that is a qualified mortgage under paragraph (e)(5), (e)(6), or (f) of this section; or by 3.5 or more percentage points for a subordinate-lien covered transaction

12 C.F.R. § 1026.43

High-Cost Mortgage which regulation Z defines as The annual percentage rate applicable to the transaction, will exceed the average prime offer rate, as defined in), for a comparable transaction by more than:

(A) 6.5 percentage points for a first-lien transaction,

(B) 8.5 percentage points for a first-lien transaction if the dwelling is personal property and the loan amount is less than $50,00012 C.F.R. § 1026.32

But wait there’s More…The state of course has its own definitions for what constitutes a High Cost Loan in 6-L of the Banking Law and a Sub Prime loan in 6-M.

There are many more examples with which I could sedate you; Keep in mind that each one of these definitions comes with its own disclosure requirements and penalties for noncompliance, and it quickly becomes apparent that what started as a genuine attempt to rein in abusive lending practices has morphed into a regulatory minefield more analogous to a speed trap then a legitimate regulatory framework. While it is true that none of this would matter much but for the fact that interest rates are so low they are, and now a bank or credit union making a 5% mortgage can be scrutinized for making a subprime loan.

Clearly something should be done. Congress could come up with a definition that preempts competing state requirements. Conversely, states could streamline their own subprime definitions   so that they are defined in reference to federal law.

Of course, I’ve given up on commonsense changes at least on the federal level, so my suggestion to you is to take a quick look at your mortgage interest rates this morning. You may be making “subprime loans” without even knowing it…

Speaking of subprime loans the New York Times is continuing to sound the alarm against the tactics used by used car dealers to qualify individuals for auto loans, they can’t afford. This morning, it is reporting that: “some of the same dynamics-including the seemingly insatiable demand for loans as the market heats up and the dwindling pool of qualified borrowers that helped precipitate the 2008 mortgage crisis are  now playing out, albeit on a smaller scale in the auto loan market”

The paper is reporting this morning that prosecutors in New York, Alabama and Texas are zeroing in on used car dealerships and have discovered hundreds of fraudulent loans given to people with inadequate credit. If you do indirect lending now would be a good time to double check the credit union’s underwriting policies and to make sure that you can document adequate oversight over the dealerships with which you have a relationship..


Entry filed under: Advocacy, Compliance, Mortgage Lending. Tags: , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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