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S&P Sees More 'High Cost' Losses

Based on a study of over 40 federal, state and municipal anti-predatory lending laws, Standard & Poor's has decided to require additional credit enhancement to address the risk of loans governed by certain anti-predatory lending laws, many of which relate to covered loans and high-cost home loans. The new standard is all about how a legal violation could impair the cash flow needed to pay security holders, according to one Washington attorney.

"Before, S&P said they wouldn't rate loans at all, then they said they were comfortable with the damages, then they required a rate cap," said Laurence Platt of Kirkpatrick & Lockhart LLP. "Now they're saying, 'We need to require extra cash flow to account for the risk on cash flow.'"

The new standard applies to loans governed by laws in Arkansas, Colorado, District of Columbia, Florida, Georgia, Illinois, Maine, Massachusetts, New Jersey, New Mexico, New York, Oklahoma and multiple jurisdictions in Ohio, as well as loans under Section 32 of the Home Ownership and Equity Protection Act.

S&P said some of these laws contain subjective or unclear standards for determining whether a loan is "predatory," including poorly or undefined net tangible benefit and repayment ability tests, which is why it must move to mitigate the risk to investors in mortgage-backed securities.

Frank Raiter, managing director at S&P, recently told a MBA subprime lending conference that the ratings agency never sees loan pools with "high-cost" loans as defined by HOEPA or state laws.

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