Partners, Volume 13, Number 1, 2003

Uncertainty in Georgia’s Mortgage Market
By Lynn Woosley

When the Georgia legislature passed the Georgia Fair Lending Act (GFLA) in 2002, it created one of the strictest anti-predatory lending laws in the nation. Though proponents hailed it as a victory for consumer rights, some of GFLA’s provisions threatened setbacks for the state’s mortgage brokers, mortgage bankers and consumers. In response, state legislators recently amended the act to ease some of its requirements.

Amendments to GFLA, signed by Gov. Sonny Perdue on March 7, 2003 largely eliminate the act’s tough "pass-through liability" clause and restrict prohibitions on "flipping" to high-cost loans. Many protections for covered loans have been rescinded as well.

While representatives in the mortgage industry and ratings agencies welcomed changes to GFLA in their initial responses, consumer advocates and some legislators vow to continue the battle to restore consumer protections compromised by the amendments.

Pass-through liability

One of the unique features of the original GFLA was broad-based pass-through liability, which extended responsibility for violations of the lending provision from the originator of the loan to any future holders of the loan. Thus, if the originator sold the loan to another institution or packaged it as part of a pool of mortgages underlying a securitization, the liability for GFLA violations traveled with the loan to the new owners. Pass-through liability was intended to ensure that wronged homeowners had recourse even if the original lender was no longer operating.

In addition, the statute mandated actual damages, statutory damages equal to twice the interest paid, costs, reasonable attorney fees, and unlimited punitive damages. It also permitted class action lawsuits and included special rescission rights of up to five years after consummation. Knowingly violating GFLA carried criminal penalties, including six months in prison.

Reaction by the mortgage industry

The combination of pass-through liability and potentially unlimited damages created multifaceted difficulties for the Georgia mortgage industry. Concern about the strict stipulations of the act in its original form limited lenders’ ability to sell or securitize mortgages originated in Georgia. Several lenders left the market altogether or restricted the types of loans offered in the state.

Because of the uncertainty associated with pass-through liability to the holders of residential mortgage-backed securities (RMBS), Standard and Poor’s (S&P), Moody’s and Fitch Ratings stopped assigning credit ratings to securitizations that included conforming mortgages originated in Georgia. Fannie Mae and Freddie Mac stopped buying high-cost Georgia mortgages.

GFLA under fire

Critics claimed that GFLA, as originally passed, posed several significant risks to Georgians and the state’s economy:

  • Inability to sell Georgia mortgages cost-effectively
  • Reduced mortgage and home equity credit availability
  • Increased mortgage costs from increasing risk and decreasing competition
  • Reduced activity in the mortgage and homebuilding industries
  • Possibly reduced consumer spending from less availability of home equity lines of credit or higher costs
  • Less-than-equitable competition caused by partial preemption of the GFLA for federally chartered thrifts and credit unions.

The Office of Thrift Supervision and the National Credit Union Administration preempted many of the provisions of the GFLA related to federally chartered thrifts and credit unions, and further federal preemptions are possible. Additionally, a consortium of affected parties filed suit in Georgia Superior Court seeking preemption of the GFLA by the Alternative Mortgage Transaction Parity Act. Furthermore, some U.S. senators and representatives are promising federal legislation to preempt state anti-predatory laws.

Despite the good intentions of those who crafted the original legislation, the GFLA created significant uncertainty among Georgia’s mortgage brokers, mortgage bankers and consumers. Proponents of the original law feared that revisions would weaken efforts to reduce predatory lending. Mortgage lenders countered that, without the amendments, the Act substantially limited credit availability in Georgia and potentially weakened the state’s economy.

 

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