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The OTS has proposed to eliminate a mortgage bankers' ability to rely on the Alternative Mortgage Transactions Parity Act (AMTPA) to charge prepayment penalties and late fees on alternative mortgage loans. It has also issued a challenge to the Congress to consider whether AMTPA ought to be repealed altogether.

Background

Congress enacted the Parity Act in 1982 to stimulate credit in an unusually high interest rate environment by encouraging variable rate mortgages and other creative financing. In hearings before the Senate in 1981, mortgage bankers testified that statutes in 26 states barred state-chartered mortgage bankers and lending institutions from originating alternative mortgage loans, or imposed significant restrictions on those loans. Congress wanted to make more housing credit available by giving those state-chartered housing creditors parity with federally chartered institutions and eliminate the discriminatory impact of the state laws by authorizing those creditors to make, purchase, and enforce alternative mortgage loans.

AMTPA applies to loans with any "alternative" payment features that vary from conventional fixed-rate, fixed term mortgage loans, such as variable rates, balloon payments, or call features. It allows state licensed and regulated housing creditors to engage in "alternative mortgage transactions" notwithstanding "any State constitution, law, or regulation," provided the transactions are in conformity with regulations that would apply to a comparable federally chartered housing creditor.

To qualify as a state housing creditor and take advantage of the preemption, the creditor must be licensed under applicable state law and [remain or become] subject to the applicable regulatory requirements and enforcement mechanisms provided by state law. Housing creditors, other than state-chartered banks and state-chartered credit unions that wish to make an alternative mortgage transaction under the authority of the Parity Act, must abide by the designated OTS regulations. Those regulations are enforced by each state housing creditor's applicable state regulator.

The Parity Act directed the Federal Home Loan Bank Board (Bank Board), OTS's predecessor agency, to identify, describe, and publish those portions of its regulations that were inappropriate for, and thus inapplicable to, non-federally chartered, non-bank, non-credit union housing creditors. In 1982, the Bank Board published a "Notice to Housing Creditors." The 1982 Notice provided that state housing creditors may make alternative mortgage loans subject to the Bank Board's requirements on adjustments to rate, payment, balance or term of maturity and disclosure.

In 1983, the Bank Board published a final rule codifying a revised Notice to Housing Creditors. The 1983 final rule identified three provisions that were an integral part of, and particular to, alternative mortgage transactions. These included provisions governing the authority to make partially amortized or non-amortized loans and to adjust the interest rate payment, balance or term of maturity; limitations on adjustments on loans secured by borrower-occupied property; and requirements for disclosures on loans secured by borrower-occupied property that are not fixed-rated and fully amortized.

In January 1996, OTS proposed to designate additional rules as applicable under the Parity Act. Specifically, OTS proposed to designate all of proposed part 560 (rules on the lending powers of federal savings associations and safety and soundness-based lending provisions applicable to all savings associations) and proposed Sec. 563.99 (fixed and adjustable-rate mortgage loan disclosures adjustment notices, and interest rate caps). In the final rule, OTS deleted the general reference to part 560, and specifically identified applicable regulations, including new references to late charges and prepayment provisions. The list of OTS regulations currently applicable to state housing creditors now includes the following sections:

• § 560.33 - Permits you to impose late charges as agreed with the borrower after a minimum 15-day grace period.
• § 560.34 - Permits you to charge prepayment penalties as agreed to by the borrower.
• § 560.35 - Requires that you use an external index on ARM loans and certain issues related to adjustments to the payment and loan balance.
• § 560.210 - Requires you to comply with TILA for initial disclosures and rate adjustment notices on ARM loans.

Proposed Revisions to Sec. 560.220. The OTS has reviewed its regulations on prepayments and late charges and has proposed to delete these rules from the list of provisions that apply to state housing creditors under the Parity Act.

Recommendations for Statutory Changes. Having built up a good head of steam, the OTS then went on to make some suggestions to Congress. Specifically, the OTS suggested that Congress should revisit the Parity Act, possibly in the context of broader mortgage reform legislation involving RESPA, HOEPA and predatory lending. It asserted that, in contrast to the situation in the late 1970s and early 1980s (when rates were so high that only ARM loans were available and the minefield of state laws made it impossible to originate ARM loans across state lines), state laws no longer regulate alternative mortgage loans and, as a result, the preemption really is not necessary any longer. Stop and think about that one. On the one hand, the OTS thinks that the preemption ought to be lifted because it unnecessarily interferes with the authority of states to regulate what happens on high cost loans. On the other hand, it is suggesting that the preemption can be eliminated because states no longer want to regulate alternative mortgage loans. And why do you suppose that so few states have laws that regulate alternative mortgage loans, generally? Do you suppose it has something to do with the fact that for the past 20 years any such law would have been preempted? Or do you think that given the opportunity, states would choose not to start regulating these transactions again?

The OTS has two additional recommendations in the event of Congressional review of the Parity Act. First, if the Act remains in place, states should be permitted another opportunity to opt out of the preemption provided by the Parity Act. Congress originally gave the states a choice to opt out of the preemption provision so that housing creditors in that state would be bound by the state's regulations with respect to alternative mortgage transactions. Initially, the states had three years from the effective date of the Parity Act, from 1982 to 1985, to opt out of the preemption provisions. At the time, only a handful of states decided to reject preemption. However, today, with credit more readily available, additional states might possibly elect to opt out of the Parity Act if given the opportunity.

Second, the OTS recommended that state housing creditors lending under AMTPA be required to identify themselves to the states. Currently, states can stop a mortgage lender from making alternative mortgage loans under AMTPA by revoking the lender's state lending license. States can also challenge the application of the preemption to a specific loan if they can prove that the lender has not complied with the rules in § 560.220. According to the OTS, it is difficult for the states to do so without a reliable means of knowing who is relying on AMTPA. Again, this assertion is just ridiculous. Remember how the OTS thinks that no states currently regulate alternative mortgage loans? If that were true, then why would any lenders be asserting preemption under AMTPA? On the other hand, if any state does regulate these loans, and it finds that a lender has not complied with its state law, what possible advantage does the state get if we have required all non depository mortgage lenders to sign on to some list? Scary stuff.

Makes you wonder what is going on at the OTS. Clearly, they are doing all they can to disassociate themselves from the accusation that their rules encourage predatory lending. But the phrase "alternative mortgage loan" is not just another name for a predatory loan. And killing AMTPA will result in a lot of generic Grade A conventional Fannie Mae and Freddie Mac loan programs disappearing from the scene, simply because they include some creative alternative feature that states decide to outlaw. The OTS should know better than to ignore this fact.

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