Relates to certain subprime home loans

2 Co-sponsors

• Joseph A. Griffo
• George D. Maziarz

BILL NUMBER:S7224

Title of bill

An act to amend the banking law, in relation to subprime home loans

Purpose of the bill

To maintain the continued availability of FHA-insured mortgage loans in New York State. This bill adopts some emergency rules promulgated by the Department of Financial Services to help ensure that a federal policy change doesn't inadvertently restrict FHA mortgage financing options.

Summary of specific provisions

Section 6-m of the Banking Law is amended by adding a new subparagraph (iii) to Section 6-m(1)(c). This new subparagraph sets a separate subprime home loan threshold rate for FHA-insured loans.

Justification

This legislation adjusts the subprime threshold rate in order to help maintain the availability of FHA-insured mortgage loans in New York State. FHA loans have been especially helpful to first-time homebuyers, as well as to low-to-moderate income homebuyers.

Policy changes made by the Federal Housing Administration (FHA) in 2013 have inadvertently created a situation where a significant number of FHA-insured mortgage loans would exceed the subprime threshold established in state law in 2008. This raised significant concerns about the ability of potential homeowners to utilize this federal program, since lenders and secondary market participants have been extremely reluctant to make any loans which are designated as "subprime," given the potential financial and reputational risk of such loans.

The FHA's policy changes had simply been intended to strengthen its Mutual Mortgage Insurance Fund. One step, which took effect in June 2013, was to basically require that the annual mortgage insurance premiums be paid over the life of the loan. While this change does not affect the note rate on the loan, nor does it increase the borrower's monthly payment, it does result in an increase in the annual percentage rate (APR).

As a practical matter, this meant that significantly more FHA-insured loans would exceed the threshold specified in Section 6-m of New York's Banking Law, and therefore be deemed "subprime" loans.

New York's Department of Financial Services determined that the FHA rule change had effectively decreased the threshold on these FHA-insured loans, resulting in an unduly negative effect on the availability of mortgage financing.

In order to address these concerns, the Department issued a temporary order in July 2013 regarding the method for calculating the APR on FHA loans. The Department then issued an emergency rule making in October 2013 which adjusted the subprime threshold by 75 basis points for affected FHA-insured loans only.

The Department noted that this action would restore the availability of mortgage financing to approximately the same levels that had been

in existence prior to the FHA's rule change in 2013. However, the Department's emergency rules are only valid for 90 days or less, and the Department has twice had to extend the emergency rule making.

By enacting the emergency rules into statute, this bill will help stabilize the market and provide certainty to both lenders and borrowers regarding the continued availability of FHA-insured home loans.

Prior legislative history

New bill

Fiscal implications

None

Effective date

This act shall take effect immediately.