• Why Sue The OTS?
  • June 18, 2003 | Author: Maurice L. Shevin
  • Law Firm: Sirote & Permutt, P.C. - Birmingham Office
  • The change in the Alternative Mortgage Transactions Parity Act is ill advised from an economic perspective and wrong as a matter of law. Lenders would have to determine the applicability of each state's laws, rules and regulations for each loan product and business channel they offer.

    Last fall, the Office of Thrift Supervision, a bureau of the U.S. Treasury Department, announced a major change in its treatment of state housing creditors under the 1982 Alternative Mortgage Transactions Parity Act. (State housing creditors are lenders chartered by individual states, as opposed to federally chartered institutions like federal savings and loans, for example.)

    NHEMA has filed a lawsuit to prevent the change because it would mean state housing creditors could no longer depend upon the Parity Act to pre¿empt state, county and municipal restrictions upon late fees and prepayment fees. (Federally chartered lenders could continue to enjoy the pre¿emption.)

    The proposed change will require lenders to study and evaluate each Jurisdiction, to determine whether business can be profitably done there.

    We are suing the OTS to preserve our members' rights under the Parity Act, to preserve choice for borrowers and to preserve a vibrant, competitive mortgage lending market. To do anything less would be an abdication of our responsibilities to our membership.

    Previously, at NHEMNs request, the OTS granted a "stay of execution" in its edict until July 31, 2003. However, the stay does not solve the very serious problem that will exist if the change goes into effect.

    The Parity Act was intended to level the playing field between state and federal housing creditors in the making of alternative mortgage loans (AMTs) ¿primarily adjustable rate mortgage loans. Congress charged the OTS with identifying those federal regulations governing AMTs that are inappropriate for state housing creditors ¿ for example, regulations dealing with matters such as deposit insurance.

    However, the OTS now seeks to make state housing creditors subject to state laws and regulations governing late¿payment and prepayment fee provisions in AMTs. Federal housing creditors would not be subject to the same state laws and regulations. The OTS did not merely identify federal regulations that are inappropriate for state housing creditors, as the law instructs it to do. The OTS grabbed for more and created several adverse effects, as a result.

    MASSIVE BURDEN ON LENDERS

    First, state housing creditors would be subjected to the late¿charge and prepayment fee laws, rules and regulations of each jurisdiction in which they do business. While this seems "innocent" enough, it will require lenders to study and evaluate each jurisdiction, to determine whether business can be profitably done in each.

    Currently, state housing creditors enjoy the ability to present uniform mortgage loan products virtually nationwide. However, if the change occurs it would create a problem that would be far¿reaching because it is not a simple nor an inexpensive task to determine the applicability of each state's laws, rules and regulations for each loan product and business channel. Each product's language and disclosures would have to be altered to meet the law, rule or regulation. Further, lenders would have to train personnel to recognize and address the issues.

    Next, many NHEMA members offer competing products ¿those without a prepayment fee and a competing, generally lower¿priced product with a prepayment fee option. This choice of products well serves the borrower, while protecting the lender in the marketplace.

    Finally, if thrifts and other federally chartered housing creditors are permitted to continue offering products with prepayment fees and late charges - free from the constraints of some state laws - our members are put at a severe competitive disadvantage.

    How are we to compete when we only have "three plays to make a first¿down," while the feds continue to have four? The reality is that if state housing creditors are driven out of a particular marketplace, the prices available there are going to rise in the absence of competition.

    Our members are put at a severe competitive disadvantage. How are we to compete when we now only have ""three plays to make a first¿down?"

    The OTS apparently fell under the charms of our consumer advocate friends who, with absolutely no economic analysis, claim that prepayment fees are indicia of predatory lending. Nothing could be further from the truth.

    A POTENTIAL JUMP IN RATES

    Prepayment fees are a very legitimate method of recouping the cost of originating a loan. Without the ability to assess such a fee, many mortgage loan products could not be offered by state housing creditors at the prevailing interest rates. We think that having to offer mortgage loan products without prepayment fees could increase the average loan interest rate from 25 to 80 basis points.

    It might appear beneficial in the short run if borrowers flocked to federal housing creditors. But the inevitable marketplace departure by state housing creditors ultimately will cost borrowers dearly.

    Since many NHEMA members are state housing creditors, we felt that it is very important to challenge the OTS on this regulatory pronouncement. Not only is it ill¿advised from an economic perspective, it is wrong as a matter of law.