Fitch Revises RMBS Guidelines for Antipredatory Lending Laws
February 23, 2006
Fitch Ratings-New York - Fitch Ratings has revised the guidelines for rating residential mortgage-backed securities for which the loan pools include mortgage loans originated in New Jersey, New Mexico, Kentucky, Massachusetts, and Indiana. These states have enacted antipredatory lending laws, which potentially expose RMBS issuers to unlimited or unquantifiable assignee liability for damages resulting from loans determined to be predatory under the laws ('high cost loans'). Fitch's rating criteria does not permit the inclusion of these high cost loans in rated pools. In an effort to monitor compliance with Fitch's high cost loan criteria, when any mortgage loans from these states are included in an RMBS transaction, it has been Fitch's policy to review the results of an analysis of a sample of the loans conducted by an acceptable, unaffiliated third party. Effective immediately, Fitch will no longer require such third-party reports for each rated transaction. Based on results of the transaction loan sampling over the past 22 months, Fitch has determined that there has been excellent compliance with Fitch's high cost loan criteria. Furthermore, compliance systems have become a critical component of the underwriting and quality control process, and the investment in these systems and the reliance on them has grown accordingly. Fitch's policy modification recognizes the progress the industry has made managing compliance with the myriad antipredatory laws and regulations. Therefore, effective immediately, originators/sellers will no longer need to provide third-party sampling reports at the time of transaction closing.
Fitch will continue to expect representations and warranties indicating that no high cost loans, as defined by any applicable federal, state, and/or local legislation or regulations are included in an RMBS pool, as well as a similar statement in the conveyance section of the relevant agreement if it will allow an RMBS issuer to avail itself of any safe harbor provisions.
Fitch will continue to review an originator's compliance processes for identifying loans that are high cost as defined by state, federal, and local laws. Additionally, Fitch will review an originator's ability to make use of any safe harbor provisions that may be available.
While loan-sampling for each transaction is no longer a requirement, Fitch may request loan-sample reviews when deemed appropriate. Fitch will continue to monitor antipredatory lending legislation as such legislation is enacted and provide the market with commentary on its rating approach.
Source: Fitch Ratings