Fitch Comments on Indiana Predatory Lending Legislation

NEW YORK – On Jan. 1, 2005, the High Cost Home Loan Law (the Act) became effective for the State of Indiana. The Act pertains to loans that are secured by a mortgage or deed of trust on real estate in Indiana on which there is located or will be located a structure or structures; (i) designed primarily for occupancy of one to four families; (ii) occupied by a borrower as the borrower’s principal dwelling; and (iii) meet one of the high cost home loan triggers. It has been determined that the assignee liability for Indiana home mortgage loans is unquantifiable. Fitch Ratings has previously indicated that it will not rate residential mortgage backed securities (RMBS) transactions which contain loans that are originated in jurisdictions which have enacted legislation that may result in unquantifiable purchaser or assignee liability for predatory lending practices of an originator, broker or servicer. Thus, as of Jan. 1, 2005, Fitch Ratings will not be able to rate any transactions that contain Indiana ‘high-cost home loans.’

Effective immediately, Fitch will now expect sampling for all mortgage loans located in the State of Indiana. In accordance with previously published criteria, the number of loans to be reviewed in the random sample of Indiana mortgages should be the greater of i) 5 loans and ii) 10% of the loans in the pool. If the review of the sample loans uncovers any high-cost home loans, then a review of every loan in the pool originated in Indiana is expected in order to comply with the criteria.

There are two triggers: (i) the APR test, and (ii) the total points and fees test. The APR test is triggered when the annual percentage rate exceeds the yield on U.S. Treasury securities with comparable maturities by 8% for first-liens and 10% for subordinate liens at the time of origination. The total points and fees test is triggered when the sum of the points and fees exceed 5% of the total loan amount in the case of a loan for at least $40,000, or 6% if the loan is for less than $40,000.

The Act does not apply to a loan: (i) made or acquired by a federal or state chartered financial institution; (ii) that can be purchased by FNMA, Freddie Mac, or the FHLB; (iii) to by insured by HUD; (iv) to be guaranteed by the VA; (v) to be made or guaranteed by the U.S. Department of Agriculture, Rural Housing Service; (vi) to be funded by the Indiana housing finance authority; or (vii) with a principal amount that exceeds the conforming loan size limit for a single family dwelling as established by FNMA.

Fitch will continue to monitor anti-predatory lending legislation and provide the market with commentary on its rating approach.