Moody's will rate loans subject to New Jersey's predatory lending law
Securitizations can be managed through effective compliance

TRENTON - Banking and Insurance Commissioner Holly C. Bakke and Division of Banking Director H. Robert Tillman are pleased that Moody's Investors Service, a leading provider of independent credit ratings, has confirmed that New Jersey's predatory lending law will not adversely affect the lending market.

"Unlike similar laws in Georgia, which caused lenders to flee the marketplace, New Jersey's approach is fair and balanced and should ensure a vibrant market," Commissioner Bakke said. "Moody's has confirmed that the secondary market can manage New Jersey loans subject to the new predatory lending law. It bolsters our view that this law not only offers unparalleled protections from unscrupulous lenders, but it also ensures that a variety of loan options remain available."

"This announcement confirms that New Jersey's approach to curbing predatory lending practices will work to protect consumers, while at the same time providing lenders with enough flexibility to comply with the law," Director Tillman said.

Like any other new law that relies on compliance procedures, this law requires thoughtful consideration of the steps necessary to develop effective compliance programs, Director Tillman said. "The response from each rating agency differs by how much time and effort was spent in understanding how the new law applies to New Jersey loans," Director Tillman said.

Moody's participated in numerous discussions led by Director Tillman over several months, patiently worked through the provisions of the new law, raised many practical questions, and ultimately provided practical guidance that the industry can follow.

"We appreciate the time Moody's has committed to understand the new law and its impact," Director Tillman said. "There is no easy solution to predatory and abusive lending. But this compromise legislation strikes a balance that is workable for the industry and helps protect New Jersey consumers from unwittingly entering into loan agreements they cannot afford."

Fitch Ratings also spent significant time understanding the new law before announcing that it will continue to rate certain loan pools. Fitch, however, included some requirements that the Department believes could be more flexible. "After the Moody's announcement, Fitch agreed to discuss the Department's Bulletin and due diligence suggestions," Director Tillman said.

Standard & Poor's issued its announcement within 24 hours of the new law being signed. Specifically, Standard and Poor's said it would not rate loans for home improvements, nor would it rate covered loans and high-cost loans, those that are typically associated with higher fees.

Moody's analysis confirms that New Jersey home loans may be included in securitizations without adverse credit impact if the issuer complies with the safe harbor rule in the new law. It is also good to hear that Moody's:

• Will include purchase money "covered" home loans in its securitizations without limits;
• Will allow up to 5 percent of "refinance" covered home loans in its securitizations;
• Will allow up to 2 percent of "high-cost" loans to be included in securitizations;
• Expects lenders/issuers seeking safe harbor protection to represent and warrant that the pool does not include "high-cost" loans. There is no such expectation for "covered" home loans;
• Expects lenders/issuers to agree to repurchase certain loans and indemnify the securitization trust; and
• Addresses industry concerns over the subjective nature of the tangible net benefit requirement for covered refinance loans by considering the financial strength of issuers and the adequacy of an issuer's compliance procedure to document tangible net benefit.

"These steps are consistent with how the securities industry has historically managed portfolios with perceived risks," Director Tillman said. "It is common for investors to expect lenders and issuers to take such steps when loans may pose additional levels of acceptable risk. This shows that the market can continue to operate using tools already available."

"The Moody's announcement serves as a reminder of the importance of developing solid compliance procedures in order to avoid violations," Tillman said. "The Department will continue to provide guidance to the industry as this law is implemented, and we encourage the industry to also work with their vendors to develop compliance procedures."