New York state is cracking down on sub-prime lending with the intention of protecting consumers from loans they may not understand or be able to afford.
The New York Banking Board has proposed restrictions on "high-cost home loans" that are typically marketed to consumers with damaged credit ratings. The new rules would tighten credit in what lenders call the "B, C and D" markets.
New York joins North Carolina as the first two states proposing tougher restrictions on sub-prime lending.
Local mortgage brokers claim the proposed regulations go too far and could drive finance companies out of Western New York, leaving consumers with fewer lending options.
The sub-prime market has expanded in recent years with lenders looking for additional sources of interest income. A growing number of mortgage brokers and finance companies serve Upstate New York, some charging excessive fees and trapping consumers in a downward spiral of debt, according to state regulators.
"We found that while many sub-prime lenders act properly, there are other sub-prime lenders that do engage in abusive lending practices," said Barbara Kent, director of consumer affairs and financial products for the New York State Banking Department. "These loans are often targeted to minority areas and it can have a destabilizing effect on the community."
New Jersey-based Delta Funding Corp. agreed to a $6 million settlement with New York Attorney General Eliot Spitzer last year to settle allegations of "reverse red-lining." While Delta agreed to the damage settlement, the company denied the allegations that it was targeting high-cost loans in New York City's minority communities.
The state's proposed regulations are open for public comment until mid-February and could take effect sometime between March and May.
Some local consumers have accepted mortgages and home equity loans with interest rates as high as 15 percent, according to David Young, executive director of Buffalo Neighborhood Housing Services.
The high-cost loans often leave property owners unable to make payments, which can lead to foreclosure. Some homeowners also get into an expensive cycle of frequently refinancing, paying additional fees and "points" with each new loan.
A point is equal to one percent of the total loan amount. For example, one point on a $50,000 loan would be $500.
The state's new regulations would:
Set a threshold of 5 percent on points and fees. Any loan costing points and fees exceeding 5 percent of the loan amount would trigger a set of consumer disclosures and the "high-cost home loan restrictions."
Prohibit a "high-cost loan" to applicants whose monthly debt-to-income ratio exceeds 50 percent. The "repayment ability" provision could be waived if an applicant's income exceeds 120 percent of the median family income for the metropolitan statistical area.
Restrict fees on loans refinanced within two years. The lender will be able to assess points and fees only on any additional money borrowed, not the initial principal which is being refinanced.
New York's new regulation would be tougher than federal regulations under which sub-prime lenders currently operate. The federal rules have an 8 percent threshold for high cost loans.
Local mortgage brokers think the regulatory reform was primarily inspired by lending abuses in New York City, and will have an unfair impact on upstate consumers.
Because property values are lower in the Buffalo area than New York City, average loans here are much lower and mortgage brokers work off smaller profit margins.
"There's such a huge difference between downstate and upstate that what's considered exorbitant down there, like 5 percent, might not even be a profit up here on a $20,000 loan," said Michael Bonito, the New York Association of Mortgage Brokers president who operates MultiSource Funding in Buffalo.
All mortgage loans have built-in fees, such as application fees and underwriting fees charged by the bank which the loan is brokered through, and those fees can quickly account for much of the 5 percent cost threshold on a small loan, according to local brokers.
"I do $20,000 and $30,000 loans in the city (of Buffalo) all day long," said Michael Florczak, regional manager of Axiom Financial Services in Buffalo. "When you're dealing with the smaller property values and the smaller loans up here, this will really hurt."
The tougher lending regulations will probably drive some finance companies out of the Western New York market, thus tightening credit for people with less than perfect credit ratings, he said.
"The consumers who can't go to the HSBC's of the world still need these products and there's a chance they might not be able to get them," Florczak said.
Young, whose housing organization conducts home ownership counseling, said he thinks the state is moving in the right direction. He said local consumers are often talked into loans without understanding all the provisions.
"They're being told two things. One, you can write off the interest on your taxes and if you make payments on time you can refinance for a better rate in two years," Young said.
Buffalo Neighborhood Housing Services often advises consumers to spend time working on cleaning up their credit before taking a mortgage or home equity loan, then they may qualify for a less expensive loan.