Governor’s Program Bill to Address the Subprime Mortgage Crisis

1. Governor’s Program Bill to Address the Subprime Mortgage Crisis Marjorie E. Gross, Deputy Superintendent & General Counsel

2. Caveat: • Please note that the final draft of the Governor’s program bill has not been published. Consequently, the provisions described here are subject to change 2

3. Outline of the Program Bill: Measures to Help Borrowers in Crisis • Requires Pre-Foreclosure Notice 60 days before action to commence foreclosure • Requires settlement conference within 60 days after defendant’s response • Imposes standing requirements, i.e. plaintiff must allege and prove it owns the mortgage and note and has complied with various provisions of New York law • Addresses certain “foreclosure rescue” scams 3

4. Outline of the Program Bill:Measures to Prevent Similar Crises in Future • Measures to protect all borrowers, irrespective of loan size • Imposes duty of care on brokers for all loans • Requires ability to pay determination for all loans (and verification of income/resources for high-cost and non-conventional loans) • Prohibits pressure on appraisers to change appraisals • Requires registration of mortgage loan servicers • Classifies mortgage fraud as a crime 4

5. Outline of the Program Bill:Measures to Prevent Similar Crises in Future 2. Measures to protect borrowers of high-cost and non-conventional home loans • Covers more loans by expanding definition of “home loan” from FNMA conforming limit to $750,000 • Expands “high-cost loan” requirements of (BL § 6-l) to cover non-conventional (subprime) loans 5

6. Existing § 6-l Addresses “High-cost Home Loans” • APR at consummation exceeds by more than eight percentage points (nine percentage points for a subordinate lien loan) the yield on treasury securities with comparable maturity, OR • Total points and fees exceed five percent of total loan amount if loan is $50,000 or more; or six percent if loan is $50,000 or more and is purchase money loan guaranteed by FHA or VA (but some points may be excluded) 6

7. Definitions: “Non-conventional Home Loans” • APR at consummation exceeds by more than three percentage points (five percentage points for a subordinate lien loan) the yield on treasury securities with comparable maturity • If loan has introductory rate, use rate immediately after introductory period to determine APR at consummation 7

8. Measures to Address Foreclosures:Pre-foreclosure Notice • Holder of defaulted high-cost or non-conventional home loan may not take legal action against borrower without sending Pre-foreclosure notice at least 60 days before any legal action • Notice advises borrower to consult a government-approved housing counseling agency and provides five agency names • Notice must be accompanied by form that borrower may use to notify lender of desire to have work-out discussions • If borrower responds within 30 days of receipt, and requests meetings, lender may not take legal action for 60 days 8

9. Measures to Address Foreclosures: Required Settlement Conference • If defendant or family member is resident in property, court must hold settlement conference within 60 days after defendant’s response date • At initial conference, defendant appearing pro se is deemed to have made motion to proceed as a “poor person” and court may appoint counsel • If court appoints counsel, it will adjourn conference for counsel to appear • If defendant appears pro se, court must advise defendant of nature of the action of his/her rights and responsibilities • Plaintiff or its counsel must be authorized to dispose of the case • This does not mean they have to settle 9

10. Measures to Address Foreclosures: Conditions to Foreclosure • In foreclosure of non-conventional home loan, as well as high-cost home loan, plaintiff must allege and prove: • Plaintiff owns mortgage and note or has authority from owner to institute the proceeding • It has complied with all provisions of §§ 6-l and 595-a of Banking Law (and the regulations under those sections), and 1304 of RPAPL (new 60-day notice requirement) 10

11. Foreclosure Rescue Scams • Bill would regulate mortgage foreclosure scams in which a consultant takes money to stop a foreclosure sale or the loss of a home due to non-payment of taxes, or to obtain a loan or fix the homeowner’s credit score • Prohibits consultant from performing services without a written, fully executed contract in language of solicitation • Prohibits consultant from charging for services before the completion of all promised services • Requires that contract contain notice of right to cancel within five business days • Prohibits consultant from taking power of attorney, except to inspect records 11

12. Measures to Protect All Borrowers: Broker Duty of Care • Each broker must: • Act in borrower’s interest • Act with reasonable skill, care and diligence • Not accept or give undisclosed compensation • Disclose to borrower, within three days after receipt of the application, all material information that affects ability of borrower to receive intended benefits of loan • Present borrower with range of products appropriate to borrower’s circumstances for which borrower likely qualifies 12

13. Measures to Protect All Borrowers: Determination of Reasonable Ability to Repay • A lender or broker may not make or arrange a loan without determining borrower’s ability to pay principal, interest, taxes, insurance, points and fees (with mortgage payments calculated on a fully-indexed, fully amortizing basis). • Rebuttable presumption of ability to repay if total monthly debts do not exceed 50 percent of borrower’s monthly gross income 13

14. Measures to Protect All Borrowers: Influencing Appraisers • No lender or broker may influence or attempt to influence the development, reporting or result of review of a real estate appraisal. 14

15. Expansion of Definition Of Home LoanTo Cover More Loans • Bill expands definition of “home loan” to cover loans up to $750,000 (BL 6-l current uses FNMA conforming loan limit, which was $417,000 until increased by Economic Stimulus Package to maximum of $730,000) • Gives authority to Banking Board to adjust the principal amount • Allows changes when limit returns to $417,000 on 1/1/09 or increases due to house price rises • This will affect applicability of § 6-l to both high-cost and non-conventional loans 15

16. Expansion Of BL § 6-lTo Cover Non-conventional Loans • Makes all 6-l underwriting standards applicable to non-conventional loans • No lending without verification of borrower’s reasonable ability to repay loan • Verification includes viewing tax returns, payroll receipts, bank records or other third party income verifications (best and most appropriate available) • No refinancing without tangible net benefit • No negative amortization (i.e. principal balance may increase because borrower may skip regular payments) 16

17. Expansion Of BL § 6-lTo Cover Non-conventional Loans (continued) • No financing of points and fees in excess of three percent of principal amount of loan • No call provisions in lender’s sole discretion • No balloon payments for 15 years after origination • No increased interest rate after default • Limitation on more than two advance payments • No modification or deferral fees, if after the modification, loan is still non-conventional 17

18. Expansion Of BL § 6-lTo Cover Non-conventional Loans (continued) • No oppressive mandatory arbitration clauses • No financing of insurance products sold in connection with the loan • No refinancing of special mortgages, without counseling on advantages or disadvantages • No lending without disclosing desirability of counseling and providing list of counselors 18

19. Expansion Of BL § 6-lTo Cover Non-conventional Loans (continued) • No paying a contractor under a home improvement contract from loan proceeds • No encouragement of default • No lender or mortgage broker may accept or give a fee, thing of value or split of fee other than as payment for goods actually furnished or services actually performed • No points and fees may be charged when lender refinances its own high-cost or non-conventional loan 19

20. Four new prohibitions added to BL § 6-l • No prepayment penalties on high-cost and non-conventional home loans • Previously permitted during first year • No yield spread premiums to originator (i.e. no compensation for originating a home loan that is more costly than borrower qualifies for) • Mandatory escrow of taxes and insurance • But, on non-conventional loan, borrower may waive in writing after one year • First time borrowers must be informed of taxes and insurance each time lender or broker informs of different payment amount 20

21. Registration of Mortgage Loan Servicers • Bill would require any person engaged in business of servicing mortgage loans on New York property to be registered with New York State Banking Department 21

22. Criminal Mortgage Fraud • The bill adds new provisions to the penal law to a crime of residential mortgage fraud • Crime involves knowingly, and with intent to defraud, making, using or facilitating the use of a misstatement, misrepresentation or omission during the mortgage lending process • But person does not violate if acting solely to obtain a residential mortgage loan on a property he or she intends to occupy 22

23. Q&A 23