NAAG Creates New State-Federal Task Force on Mortgage Enforcement
The National Association of Attorneys General (“NAAG”) has recently created a unique State-Federal Task Force on Mortgage Enforcement (“Task Force”). The Task Force is co-chaired by Attorney General Rob McKenna (R-WA) and Attorney General Tom Miller (D-IA) and includes twenty-two Attorneys General. Of these Attorneys General, seventeen are Democrats and five are Republicans.
NAAG’s impetus for organizing the Task Force is both a reaction to the perils of the mortgage industry in 2009 and a pro-active attempt to address foreseeable issues relating to adjustable rate mortgages (“ARMs”). This year it is anticipated that the interest rate on many notes secured by ARMs will be adjusted and increased. As a result, it is highly likely that a number of homeowners with ARMs will be unable to make their monthly mortgage payment.
Certain state regulators are concerned that these ARMs were sold to consumers who should not have been approved for a loan in the first instance and these sales have been described by certain Attorneys General as violative of their respective state consumer protection laws to the point that one or more of the Attorneys General have characterized such alleged actions as quasi “criminal”. At least one Attorney General has already hired outside counsel to consider filing an action against lenders who made ARMs.
The United States Supreme Court’s recent decision in Cuomo v Clearing House Ass’n, 129 S. Ct. 2710 (2009), has opened doors to the Attorneys General to enforce against national banks many state laws regulating the mortgage industry and promoting customer rights because certain of these regulations are now considered to be preempted by federal law.
Based on litigation emanating from Massachusetts,1 the Attorney General was allowed to enforce that state’s Unfair or Deceptive Acts or Practice (UDAP) statute, notwithstanding a consent decree with the FDIC covering the bank’s origination practices. The focus of the Massachusetts Attorney General, and we anticipate the focus of other Attorneys General, will be on loans with the following characteristics:
- an adjustable rate mortgage with an introductory rate period of three years or less;
- an introductory/teaser rate for the initial period that is 3 percent below the fully indexed rate;
- the borrower’s debt-to-income ratio exceeded 50 percent when measured by the fully indexed rate (rather than the introductory/teaser rate); and
- the loan-to-value ratio was 100 percent or the loan carried a substantial prepayment penalty or a prepayment penalty that extended beyond the introductory period.
In light of NAAG’s creation of its Task Force and the recent holding in Cuomo, mortgage lenders should now anticipate investigations and/or actions by numerous states based on allegedly unlawful conduct and the impact of such mortgage practices on housing markets. Troutman Sanders represents mortgage leaders involving these matters and is following these developments as they unfold.
1. Commonwealth v. Fremont Investment & Loan, SJC 10258, slip op. (Mass. 2008).