Standard & Poor’s to Disallow Georgia Fair Lending Act Loans
NEW YORK (Standard & Poor’s) Jan. 16, 2003 — Standard & Poor’s announced today that beginning February 1, 2003 conforming-balance
mortgage loans and manufactured housing loans governed by the Georgia Fair Lending Act (GFLA) will not be allowed in Standard
& Poor’s rated structured finance transactions. This determination is based on Standard & Poor’s assessment that investors
cannot be insulated from the potential liability resulting from violation of the GFLA either through credit enhancement or
Loans governed by the GFLA are categorized as “Home Loans”, “Covered Home Loans”, or “High Cost Home Loans”, with each category
having its own requirements and, in the case of Covered Home Loans and High Cost Home Loans, fees, points, and annual percentage
rate tests. According to Standard & Poor’s, violations of the statute will subject non-complying parties to potentially severe
liability. Most importantly, however, the GFLA subjects assignees of Home Loans that violate the Act to potential liability.
Thus, transaction parties in securitizations, including depositors, issuers and servicers, might all be subject to penalties
for violations under the GFLA.
Since it is not feasible to ensure that all GFLA-governed loans have been originated in compliance with the Act — and given
that the liability associated with non-compliance may subject depositors and trusts to liability exceeding a loan’s principal
balance — these loans are being disallowed and a representation that no mortgage loans meeting the definition of Home Loans
will be required in transactions.
Mortgage loans on properties located in Georgia that are not governed by the GFLA may be included in Standard & Poor’s rated
transactions. These loans include: i) loans with an unpaid principal balance exceeding the current conforming loan size limit
for single family dwellings established by the Federal National Mortgage Association of $322,700; ii) reverse mortgages; iii)
bridge loans that finance the initial construction of the borrower’s primary residence; iv) agricultural loans; and v) loans
for commercial purposes.
In addition to excluding Georgia loans governed by the GFLA from Standard & Poor’s rated transactions, Standard & Poor’s revised
criteria will require that a new special purpose entity (SPE) be created for each transaction if an issuer chooses to utilize
a two-tier structure with a pledge from the intermediate SPE to a trust (as opposed to utilizing a double true sale structure).
This requirement follows from the fact that legal structures utilizing a pledge (rather than a sale) expose the depositor
(pledgor) to liability since the assets are not sold but rather are held by the depositor. Therefore, if any of the loans
the depositor pledges to any trust (whether or not the transaction is rated by Standard & Poor’s) include Georgia Home Loans,
all cashflow to other trusts, which may not have any Georgia Home Loans, will potentially be exposed should the depositor
be subject to liability. Standard & Poor’s may allow the same SPE to be used for multiple transactions where a representation
has been made that the SPE has not transacted and will not transact in loans covered by the GFLA. This will not be necessary
for transactions utilizing a double true sale structure (where Standard & Poor’s receives a true sale opinion from the seller
to the depositor and from the depositor to the trust) since the loans are actually sold and subsequent cashflows are not intertwined
with other issuances.
Finally, the GFLA requires that servicers follow certain procedures in servicing loans governed by the GFLA. Should the applicable
procedures not be followed, the servicer may be subject to liability and an interruption of cashflow in securitizations may
result. Given this, Standard & Poor’s will now require all servicers who service GFLA-governed loans (even though such loans
are not included in Standard & Poor’s rated transactions) to maintain individual accounts for the deposit and remittance of
payments pertaining to an issuance. No commingling of cash will be permitted for servicers who service loans subject to the
Standard & Poor’s will continue to monitor this and other pending predatory lending legislation and will update its criteria
Source: Standard & Poor’s