Press Releases

Release Date: July 2, 2007
Contact:
Katrina Keller, 646-637-9281, kkeller@sifma.org

ASF and SIFMA Urge Sensible State Regulatory Response to Challenges of Subprime Mortgage Financing Market

New York, NY, July 2, 2007 — In a letter filed with the Massachusetts Attorney General in response to a request for comments on potential amendments to the mortgage brokers and mortgage lenders regulations, the American Securitization Forum (ASF) and the Securities Industry and Financial Markets Association (SIFMA) emphasize the importance of a sensible regulatory response to the challenges of the subprime mortgage finance market.  The organizations note that a measured, reasonable approach at the federal and state level is imperative for liquid, efficient and well-functioning national mortgage securities markets, as those markets ensure that American homeowners have access to affordable mortgage loans.

“Any legislative or regulatory response relating to the subprime mortgage finance market must strike a balance between protecting consumers and maintaining the industry’s ability to innovate and provide flexible approaches that meet the needs of borrowers, thus preserving access to capital for potential homeowners,” said George Miller, executive director of the American Securitization Forum.

In addition to commenting on the six specific areas for which the Attorney General solicited comments, the ASF and SIFMA express two broad points in their letter.  First, the Attorney General should distinguish between the sales and marketing of mortgage loans, which includes issues such as disclosure and fraud, and the product types and transactional features of mortgage loans, such as documentation or underwriting requirements of particular loan products.  Efforts to address subprime issues should be focused on preventing unfair and deceptive lending practices, not the prohibition of certain products or features which are not inherently unfair or deceptive.  Second, the organizations recommend both consideration of the prior actions of the state’s legislature and banking department, since several of the issues under consideration have been previously addressed by the Massachusetts legislature, and an evaluation of other state and federal guidance before enacting additional regulation for the mortgage industry. 

“We fully support the vigorous enforcement of laws protecting consumers against fraudulent or unfair sales and marketing practices, but caution against overly broad or  rigid regulation that has the unintended result of restricting credit to worthy borrowers,” said Randy Snook, senior managing director and executive vice president of the Securities Industry and Financial Markets Association.

Commenting on the Attorney General’s questions, the ASF and SIFMA note that:

• It is not necessary or beneficial to expand existing Massachusetts mortgage broker and lender regulations to include purchase money mortgages.  Existing regulations address purchase money loans and have already curtailed the availability of Massachusetts high cost loans.  The compliance burden and potential for liability have forced mortgage lenders in the state to originate loans that are not subject to such regulations, and investors in the secondary mortgage market are not willing to unduly risk their capital to fund them.  Further expansion of these regulations would serve to further reduce the credit available to subprime borrowers.
• Regulators and legislators should not prescribe inflexible underwriting standards.  While the consideration of a borrower’s ability to repay is an important aspect of the underwriting process, rigid underwriting guidelines will reduce the ability of lenders to react to dynamic market conditions, impair their predictive models and reduce the availability of loans to deserving borrowers. A lender’s flexibility to consider a borrower’s circumstances is critical to the underwriting process.
• There should be no outright bans or limitations on the types of mortgage products and features that lenders may offer to consumers, subprime or otherwise.  Consumers are best served by having a variety of mortgage options from which to choose. While deceptive market practices or misrepresentations about loan products or features are unfair, a loan product with particular underwriting features cannot, in itself, be unfair or deceptive.
• While not taking a formal position on whether mortgage brokers should owe a fiduciary duty to borrowers on whose behalf they arrange or obtain mortgage loans, the ASF and SIFMA do support efforts by state legislatures and regulatory agencies to improve the oversight of mortgage brokers, such as creating a national database, and support informative disclosures from brokers to consumers regarding the nature of the transaction, including details of a broker’s compensation to ensure that borrowers are fully informed of the terms and features of contracts they are considering.
• The organizations do not support imposing a borrower suitability standard.  A requirement to ensure a loan is “suitable” for a borrower is a subjective concept which could result in determinations of unsuitability being made after the fact, with attendant liability consequences for lenders.  Suitability and similar “borrowers best interest” standards take choices away from the borrower; the organizations believe that the borrower is in the best position to decide what loan is suitable for his or her purposes.
• The organizations oppose the imposition of additional secondary market liability, or assignee liability, which holds subsequent buyers of mortgage loans responsible for the actions of brokers and originators.  This could cause investors to shun mortgage securities as investments or demand a premium price for added uncertainty, thereby reducing the supply of capital to borrowers and raising the cost of credit.

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The American Securitization Forum is a broadly-based professional forum through which participants in the U.S. securitization market advocate their common interests on important legal, regulatory and market practice issues.  The ASF also provides information and education on a range of securitization market issues and topics through industry conferences, seminars and various other initiatives.  For more information related to the ASF, please go to www.americansecuritization.com.  The ASF is a forum of the Securities Industry and Financial Markets Association.

The Securities Industry and Financial Markets Association brings together the shared interests of more than 650 securities firms, banks and asset managers. SIFMA's mission is to promote policies and practices that work to expand and perfect markets, foster the development of new products and services and create efficiencies for member firms, while preserving and enhancing the public's trust and confidence in the markets and the industry. SIFMA works to represent its members’ interests locally and globally. It has offices in New York, Washington D.C., and London and its associated firm, the Asia Securities Industry and Financial Markets Association, is based in Hong Kong.