Fitch Ratings Addresses Preemption Statements From The OTS & OCC
January 15, 2004
Fitch rates residential mortgage-backed securities (RMBS) transactions containing 'high-cost' and similarly defined loans originated:
- in any jurisdiction by OTS-regulated entities and their operating subsidiaries,
- in Georgia by OCC-regulated entities and their operating subsidiaries, and
- in Georgia by savings associations and banks chartered in Georgia, in each case without the additional credit enhancement that may otherwise be assessed against other originators.
In all cases, Fitch expects the applicable transaction documents to identify loans originated by the aforementioned entities by 1) type (high cost, covered, etc.), 2) quantity, 3) aggregate dollar amount, and 4) jurisdiction.
In response to requests for confirmation that federal law preempts state laws regulating real estate lending, the OTS released Opinions P-2003-1, P-2003-2 and P-2003-5 confirming that federal law preempts the applicability of much of the relevant provisions of the Georgia Fair Lending Act (GFLA), the New York Predatory Lending Law (NY law) and the New Jersey Home Ownership Security Act of 2002 (NJ act) for federal savings associations and their operating subsidiaries. Fitch relies on the legal opinions of the OTS and its continued stance that federal legislation preempts the application of state predatory lending laws to OTS-regulated entities - which are the named lenders of residential mortgage loans and which have funded such loans - and therefore also to subsequent purchasers and assignees of such lenders.
On July 31, 2003, the Office of the Comptroller of the Currency (OCC) issued a Determination and Order (the Order) in response to a request regarding the GFLA from National City Bank, National City Bank of Indiana, and their operating subsidiaries, National City Mortgage Company and First Franklin Financial Company. The Order indicates that the application of the GFLA to national banks and their operating subsidiaries is preempted by various provisions of federal law and that the GFLA does not apply to such OCC-regulated entities that lend in Georgia. Fitch relies on the Order of the OCC that federal legislation and the implementing regulations preempt the application of the GFLA to OCC-regulated entities and to subsequent purchasers and assignees of such lenders.
In a separate notice of proposed rulemaking, the OCC provided for a comment period in response to its proposed rulemaking that would amend its implementing regulations to add provisions clarifying the applicability of state law to national banks. Fitch will likely reach a similar conclusion as that set forth herein in connection with further orders by the OCC or enactment of the proposed amendments to 12 CFR parts 7 and 34.
The GFLA provides for preemption parity such that federal preemption applies to the same type of state chartered entity as the federally chartered entity affected by the preemption. Accordingly, Fitch rates transactions containing any loans subject to the GFLA originated by Georgia state chartered banks and savings associations.
Fitch has previously indicated that it will not rate residential mortgage backed securities (RMBS) transactions which contain mortgage loans that are originated in jurisdictions which have enacted legislation that may result in unlimited purchaser or assignee liability for predatory lending practices of an originator, broker or servicer (see press release dated May 1, 2003, 'Fitch Revises its Rating Criteria in the Wake of Predatory Lending Legislation' ). Such criteria is still applicable, including the assessment of additional credit enhancement, for loans originated in any jurisdiction by non-OTS-regulated entities and in Georgia by any entity which is not an OCC-regulated entity or a Georgia chartered bank or savings association.
Fitch is aware that some jurisdictions may seek to challenge the preemption determinations of the OTS and OCC and will monitor those actions and, in the event of a successful action, respond accordingly. Fitch will continue to monitor anti-predatory lending legislation and provide the market with timely commentary on its rating approach.
Source:: Fitch Ratings