NY Clarifies When A Mortgage is A Subprime Loan
NY’s Department of Financial services on Tuesday clarified the index to be used by lenders to determine if a residential mortgage loan is a subprime loan.
Under Banking law Section 6-M a subprime home loan “means a home loan in which the initial interest rate or the fully-indexed rate, whichever is higher, exceeds by more than one and three-quarters percentage points for a first-lien loan, or by more than three and three-quarters percentage points for a subordinate-lien loan, the average commitment rate for loans in the northeast region with a comparable duration to the duration of such home loan, as published by the Federal Home Loan Mortgage Corporation (herein “Freddie Mac”) in its weekly Primary Mortgage Market Survey (PMMS) posted in the week prior to the week in which the lender provides the ‘good faith estimate’”
The catch is that Freddie Mac sopped publishing the index on January 1st. The DFS announced that in its place the Freddie Mac PMMS average commitment rate for loans in the United States should now be used as the appropriate threshold. The 1-year Average Prime Offer Rate, as published by the Federal Financial Institutions Examination Council, is now “ the appropriate metric for calculating the subprime threshold for loans with a fixed rate of less than three years.” (http://www.dfs.ny.gov/legal/industry/il160119.pdf)
The Point will be providing more of the specifics on the memo and I know our Compliance department will also be spreading the word as well so I am going to pull back the lens a little. There is an assumption on the part of some federal credit unions that they are automatically not subject to state laws. Categorical assumptions of this kind are dangerous. For instance 6-M applies to “exempt organizations” which state law defines as including both state and federal banks and credit unions. (N.Y.Banking Law § 590 (1)€ (McKinney).
Sure, NCUA has broad preemption powers. For instance, it has repeatedly explained in opinions of counsel that it has the authority to preempt “any state law” purporting to limit or affect rates of interest and amounts of finance charges”. But New York law doesn’t limit what mortgage rates can be charged but simply imposes additional disclosure requirements on subprime lenders. Besides NCUA has never opined that 6-M is preempted by federal law. (https://www.ncua.gov/Legal/OpinionLetters/OL1997-0225.pdf)
One more thing: Don’t assume that your credit union doesn’t make subprime loans. With interest rates at historic lows it is surprisingly easy to trigger the NY tripwire. If you aren’t running your rates against the 6-M criteria you should be.