New York Issues Banking Law Guidance for Subprime Loans
by: Nicole Legere
The New York Department of Financial Services (the Department) has issued additional guidance on the interpretation of state banking law. This is in response to recent readings of section 6-m of the New York Banking Law, which have resulted in a number of loans being incorrectly deemed sub-prime.
Under section 6-m, a sub -prime loan is defined as “a home loan in which the fully indexed annual percentage rate 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 as posted in the week prior to the week when the lender receives a completed application.”
Sub-prime loans face a number of restrictions including no modification fees, no increased interest rates, limitations on advanced payments and mandatory escrowing of taxes and insurance.
The increase in interest rates, combined with lenders usage of the closing date to determine the “fully indexed rate,” has caused a fear that recently originated loans now fall into the sub-prime definition. In 2009, an amendment was passed in order to address lender concerns that loans were being incorrectly categorized as sub-prime, and becoming subject to the restrictions listed above.
This amendment provided lenders with more specific dates to use when determining the fully indexed rate. For an adjustable rate loan, the rate should be determined based on the date the lender provides the good faith estimate. For a fixed rate loan, the rate should be determined based on the date the “lender issues its commitment.” The Department stated that using these dates, as opposed to the closing date, should alleviate many lender concerns.
This letter was issued on July 3, 2013 and can be viewed by clicking on the document link below:
Nicole Legere, Esq., is Assistant Vice President and Senior Counsel at Bankers Advisory, Inc. She is a graduate of the University of Massachusetts at Amherst and earned her Juris Doctor at Roger Williams School of Law. Nicole is admitted to the Bar in Massachusetts and New York. She can be reached at nicole@bankersadvisory.com
Anna DeSimone founded Bankers Advisory in 1986 and is a nationally recognized authority in residential mortgage lending. She has received numerous industry awards and has authored more than 40 best practices guides and hundreds of articles.
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