| NEW CENTURY FINANCIAL CORP Item 1A Risk Factors Stockholders and prospective purchasers of our common stock should carefully consider the risks described below before making a decision to buy our common stock |
| If any of the following risks actually occurs, our business could be harmed |
| In that case, the trading price of our common stock could decline, and you may lose all or part of your investment |
| When determining whether to buy our common stock, 26 _________________________________________________________________ [28]Table of Contents stockholders and prospective purchasers should also refer to the other information in this annual report on Form 10-K, including our financial statements and the related notes |
| Risks Related to Our Business We are dependent on external sources of financing, and if we are unable to maintain adequate financing sources, our earnings and our financial position will suffer and jeopardize our ability to continue operations |
| We require substantial cash to support our operating activities and growth plans in our taxable REIT subsidiaries |
| Our primary sources of cash for our mortgage loan origination activities are our warehouse and aggregation credit facilities, our asset-backed commercial paper facility and the proceeds from the sales and securitizations of our mortgage loans |
| As of December 31, 2005, we had twelve short-term warehouse and aggregation credit facilities and our asset-backed commercial paper facility that provided us with approximately dlra13dtta1 billion of committed and dlra3dtta0 billion of uncommitted borrowing capacity to fund mortgage loan originations and purchases pending the pooling and sale of such mortgage loans |
| From time to time, we finance our residual interests in securitization transactions through the sale of net interest margin securities, or NIMS During volatile times in the capital and secondary markets, access to warehouse, aggregation and NIMS financing as well as to the securitization and secondary markets for the sale of our mortgage loans has been severely constricted |
| If we cannot maintain or replace these facilities on comparable terms and conditions, we may incur substantially higher interest expense that would reduce our profitability |
| We also require substantial cash in order for our REIT to purchase and hold mortgage loans through securitizations structured as financings and to engage in hedging transactions |
| Our sources of cash for purchasing mortgage loans to be held for investment are the capital markets, borrowings from our taxable REIT subsidiaries or releases of over-collateralization accounts from prior securitizations structured as financings |
| If we have inadequate cash at the REIT, we may not be able to grow or maintain our REIT portfolio size, which may harm our ability to maintain or grow our REIT dividend |
| Likewise, a large margin call on our hedging instruments could negatively affect our liquidity position |
| To qualify as a REIT under the Code, we generally are required each year to distribute to our stockholders at least 90prca of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gains) |
| After-tax earnings generated by our taxable REIT subsidiaries and not distributed to us are not subject to these distribution requirements and may be retained by such subsidiaries to provide for future growth, subject to the limitations imposed by REIT tax rules |
| We conduct a substantial amount of our business through our taxable REIT subsidiaries |
| We cannot be certain that we will have access to funds to meet the REIT distribution and other qualification requirements |
| We may be required to borrow funds from one of our corporate subsidiaries or a third party on a short-term basis or liquidate investments to meet the distribution requirements that are necessary to qualify as a REIT, even if management believes that it is not in our best interests to do so |
| If we do not have access to the necessary funds, we may have to raise capital at inopportune times or borrow funds on unfavorable terms |
| However, if we are unable to maintain adequate financing or other sources of capital are not available, we would be forced to suspend or curtail our operations, which would harm our results of operations, financial condition and business prospects |
| Similarly, we may be required to pursue one or more alternative strategies, such as selling assets, refinancing or restructuring our indebtedness or selling additional debt or equity securities |
| We face intense competition that could harm our market share and our revenues |
| We face intense competition from finance and mortgage banking companies, Internet-based lending companies and large financial institutions |
| Over the past year, we have experienced severe pricing competition from lenders who are offering interest rates lower than those we charge |
| Currently, we do not intend to compete solely on the basis of loan pricing |
| If the other features of our mortgage loans do not provide enough advantages to induce our potential wholesale 27 _________________________________________________________________ [29]Table of Contents and retail customers to choose our mortgage loan products, our mortgage loan production volume could decrease, which could harm our results of operations, financial condition and business prospects |
| In addition, Fannie Mae and Freddie Mac are also expanding their participation in the subprime mortgage industry |
| These government-sponsored entities have a size and cost-of-funds advantage that allows them to purchase mortgage loans with lower rates or fees than we may be willing to offer |
| A material expansion of their involvement in the market to purchase subprime mortgage loans could change the dynamics of the subprime industry by virtue of their sheer size, pricing power and the inherent advantages of a government charter |
| In addition, if as a result of their purchasing practices, these government-sponsored entities experience significantly higher-than-expected losses, such experience could harm the overall investor perception of the subprime mortgage industry |
| Certain large finance companies and conforming mortgage originators also originate subprime mortgage loans to customers similar to the borrowers we serve |
| Competitors with lower costs of capital have a competitive advantage over us |
| In addition, establishing a wholesale lending operation such as ours requires a relatively small commitment of capital and human resources |
| This low barrier to entry permits new competitors to enter our markets quickly and compete with our wholesale lending business |
| If these competitors are able to attract some of our key employees and disrupt our broker relationships, it could harm our results of operations, financial condition and business prospects |
| Some thrifts, national banks and their operating subsidiaries are also expanding their mortgage lending activities |
| By virtue of their charters, these institutions are exempt from complying with many of the state and local laws that affect our operations |
| For example, they are permitted to offer mortgage loans with prepayment charges in many jurisdictions where we cannot |
| If more of these federally chartered institutions are able to use their preemptive ability to provide more competitive pricing and terms than we can offer, it could harm our results of operations, financial condition and business prospects |
| In addition, to the extent we purchase mortgage loans or mortgage-related assets from third parties, we will compete with other REITs, investment banking firms, savings and loan associations, banks, insurance companies, other lenders and other entities that purchase mortgage loans or mortgage-backed securities, many of which have greater financial resources than we do |
| As a result, we may not be able to acquire sufficient mortgage-related assets with favorable yields over our borrowing costs, which could harm our results of operations, financial condition and business prospects |
| The intense competition in the mortgage industry has also led to rapid technological developments, evolving industry standards and frequent releases of new products and enhancements |
| As mortgage products are offered more widely through alternative distribution channels, such as the Internet, we may be required to make significant changes to our current wholesale and retail structures and information systems to compete effectively |
| Our inability to continue enhancing our current Internet capabilities, or to adapt to other technological changes in the industry, could harm our results of operations, financial condition and business prospects |
| A prolonged economic slowdown or a lengthy or severe recession could harm our operations, particularly if it results in a decline in the real estate market |
| The risks associated with our business are more acute during periods of economic slowdown or recession because these periods may be accompanied by decreased demand for consumer credit and declining real estate values |
| Declining real estate values reduce the ability of borrowers to use home equity to support borrowings because they reduce the LTV of the home equity collateral |
| In addition, because we make a substantial number of mortgage loans to credit-impaired borrowers, the actual rates of delinquencies, foreclosures and losses on these mortgage loans could be higher during economic slowdowns |
| Any sustained period of increased delinquencies, foreclosures or losses could harm our ability to sell mortgage loans, the prices we receive for our mortgage loans, or the values of our mortgage loans held for investment or our residual interests in securitizations, which could harm our results of operations, financial condition and business prospects |
| 28 _________________________________________________________________ [30]Table of Contents Our earnings may decrease because of increases or decreases in interest rates |
| Our profitability may be directly affected by changes in interest rates |
| The following are some of the risks we face as a result of interest rate increases: • When we securitize mortgage loans, the income we receive and the value of the residual interests we retain from the securitizations structured as financings are based primarily on the London Inter-Bank Offered Rate, or LIBOR This is because the interest on the underlying mortgage loans is based on fixed rates payable on the underlying mortgage loans for the first two or three years from origination while the holders of the applicable securities are generally paid based on an adjustable LIBOR-based yield |
| Therefore, an increase in LIBOR reduces the net income we receive from, and the value of, these mortgage loans and residual interests |
| • Our adjustable-rate mortgage loans have periodic and lifetime interest rate caps above which the interest rate on the mortgage loans may not rise |
| In the event of general interest rate increases, the rate of interest on these mortgage loans could be limited, while the rate payable on the senior certificates representing interests in a securitization trust into which these mortgage loans are sold may be uncapped |
| This would reduce the amount of cash we receive over the life of the mortgage loans in securitizations structured as financings and our residual interests, and could require us to reduce the carrying value of our residual interests |
| • Changes in interest rates may affect our net interest income, which is the difference between the interest income that we earn on our mortgage loans or mortgage-related assets and the interest expense that we incur in financing our assets through debt, including securitizations |
| We rely primarily on short-term borrowings to acquire assets with long-term maturities |
| Accordingly, increases in short-term interest rates as compared to long-term interest rates may negatively affect the value of our assets and our ability to realize gains from the sale of mortgage loans we originate for resale, which will ultimately affect our earnings |
| In a period of rising interest rates, our interest expense could increase in different amounts and at different rates and times than the interest that we earn on our assets |
| If the net differential between our interest income on our mortgage loan assets and our interest expense to carry such mortgage loans was reduced, our net interest income would be reduced |
| Interest rate fluctuations resulting in our interest expense exceeding our interest income could result in operating losses for us and may limit or eliminate our ability to make distributions to our shareholders |
| • A substantial and sustained increase in interest rates could harm our mortgage loan origination volume because refinancings of existing mortgage loans, including cash-out refinancings and interest rate-driven refinancings, would be less attractive and qualifying for a purchase mortgage loan may be more difficult |
| Lower origination volume may harm our earnings by reducing origination income, net interest income and gain on sale of mortgage loans |
| • During periods of rising interest rates, the value and profitability of our mortgage loans may be harmed between the date of origination or purchase until the date we sell or securitize the mortgage loans |
| • An increase in interest rates could increase the delinquency and default rates on the adjustable-rate mortgage loans that we originate and hold because the borrowers’ monthly payments under such mortgage loans may increase beyond the borrowers’ ability to pay |
| Our portfolio of mortgage-related assets includes a significant number of mortgage loans that were originated in 2004 and 2005 that are adjustable-rate mortgage loans |
| Due to significant increases in interest rates since those mortgage loans were originated, the borrowers may be facing a larger-than-expected payment increase once the initial two or three-year fixed period ends |
| This may result in higher delinquencies and/or faster prepayment speeds, both of which could harm our profitability |
| High delinquencies or losses may decrease our cash flows or impair our ability to sell or securitize mortgage loans in the future, which could harm our results of operations, financial condition and business prospects |
| We are also subject to risks from decreasing interest rates |
| For example, a significant decrease in interest rates could increase the rate at which mortgage loans are prepaid, which also could require us to reduce the carrying value of our residual interests |
| Moreover, if prepayments are greater than expected, the cash we 29 _________________________________________________________________ [31]Table of Contents receive over the life of our residual interests would be reduced |
| Higher-than-expected prepayments could also harm the value of our servicing portfolio |
| Therefore, any such changes in interest rates could harm our results of operations, financial condition and business prospects |
| Our reliance on cash-out refinancings as a significant source of our origination volume increases the risk that our earnings will be harmed if the demand for this type of refinancing declines |
| During the year ended December 31, 2005, approximately 48dtta4prca of our mortgage loan production volume consisted of cash-out refinancings |
| This concentration increases the risk that our earnings will be reduced if interest rates rise and the prices of homes decline, which would reduce the demand and production volume for this type of refinancing |
| A substantial and sustained increase in interest rates could significantly reduce the number of borrowers who would qualify or elect to pursue a cash-out refinancing and result in a decline in that origination source |
| Similarly, a decrease in home prices would reduce the amount of equity available to be borrowed against in cash-out refinancings and result in a decrease in our mortgage loan production volume from that origination source |
| Therefore, our reliance on cash-out refinancings as a significant source of our origination volume could harm our results of operations, financial condition and business prospects |
| Our accounting policies and methods are fundamental to how we report our financial condition and results of operations, and they may require management to make estimates about matters that are inherently uncertain |
| We have identified several accounting policies as being “critical” to the presentation of our financial condition and results of operations because they require management to make particularly subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be recorded under different conditions or using different assumptions |
| These critical accounting policies relate to, without limitation, securitizations structured as financings, allowance for losses on mortgage loans held for investment, residual interests in securitizations, allowance for repurchase losses, gain on sale of mortgage loans, income taxes and derivative instruments designated and documented as hedges |
| Because of the inherent uncertainty of the estimates associated with these critical accounting policies, we cannot provide any assurance that we will not make significant subsequent adjustments to the related amounts recorded |
| For more information, please refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” section in this Report |
| Our hedging strategies may not be successful in mitigating our risks associated with interest rates |
| We use various derivative financial instruments to provide a level of protection against interest rate changes, but no hedging strategy can protect us completely |
| When rates change, we expect to record a gain or loss on derivatives, which would be offset by an inverse change in the value of mortgage loans or residual interests |
| Additionally, from time to time, we may enter into hedging transactions in connection with our holdings of mortgage-backed securities and government securities with respect to one or more of our assets or liabilities |
| Our hedging activities may include derivative financial instruments such as Euro Dollar futures contracts, interest rate cap agreements, interest rate swap agreements, Treasury futures and options on interest rates as well has hedging instruments such as mortgage derivative securities |
| Currently, we intend to primarily use Euro Dollar futures contracts, interest rate cap agreements and interest rate swap agreements to manage the interest rate risk of our portfolio of adjustable-rate mortgages; however, we may change our hedging strategy in the future depending on market factors |
| Under our current strategy, any significant decrease in interest rates could result in a significant margin call, which would require us to provide the counterparty with additional cash collateral |
| Any such margin call could harm our liquidity, results of operations, financial condition and business prospects |
| The derivative financial instruments we select may not have the effect of reducing our interest rate risk |
| There have been periods, and it is likely that there will be periods in the future, during which we will incur losses after accounting for our derivative financial instruments |
| In addition, the nature and timing of hedging transactions may influence the effectiveness of these strategies |
| Poorly designed strategies or improperly executed transactions could actually increase our risk and losses |
| Our hedging strategies also involve 30 _________________________________________________________________ [32]Table of Contents transaction and other costs |
| We cannot assure you that our hedging strategy and the derivatives that we use will adequately offset the risk of interest rate volatility or that our hedging transactions will not result in losses, which losses could harm our results of operations, financial condition and business prospects |
| An increase in mortgage loan prepayments may negatively affect the yields on our assets |
| The value of the mortgage loans and any underlying securitization retained interests that we may hold will be affected by prepayment rates on those mortgage loans |
| Prepayment rates on mortgage loans are influenced by changes in interest rates and a variety of economic, geographic and other factors beyond our control |
| As a result, we are unable to predict prepayment rates with any certainty |
| In periods of declining mortgage loan interest rates, prepayments on mortgage loans generally increase |
| We likely would reinvest the proceeds that we receive from those prepayments in mortgage loans and other assets with lower yields than the yields on the mortgage loans that were prepaid |
| As interest rates decline, the market value of fixed-income assets generally increases |
| However, because of the risk of prepayment, the market value of any mortgage loan or mortgage-related asset does not increase to the same extent as fixed-income securities in an environment of declining interest rates |
| Conversely, in periods of rising interest rates, prepayments on mortgage loans generally decrease, in which case we would not have the prepayment proceeds available to invest in assets with higher yields |
| Under certain interest rate and prepayment scenarios, we may fail to recoup fully our costs |
| The mortgage loans that we hold are subject to the risks of delinquency and foreclosure loss, which could result in losses to us |
| Our mortgage loans are secured by residential properties and are subject to risks of loss from delinquencies and foreclosures |
| The ability of a borrower to repay a mortgage loan secured by residential property typically is dependent primarily upon the income or assets of the borrower |
| In addition, the ability of borrowers to repay their mortgage loans may be affected by, among other things: • property location and condition; • competition and demand for comparable properties; • changes in zoning laws for the property or its surrounding area; • environmental contamination at the property; • the occurrence of any uninsured casualty at the property; • changes in national, regional or local economic conditions; • declines in regional or local real estate values; • increases in interest rates or real estate taxes; • availability and costs of municipal services; • changes in governmental rules, regulations and fiscal policies, including environmental legislation and changes in tax laws; and • acts of God, war or other conflict, terrorism, social unrest and civil disturbances and natural disasters, such as hurricanes |
| In the event of a default under a mortgage loan held directly by us, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral that we can realize upon foreclosure and sale, and the principal and accrued interest of the mortgage loan and the cost of foreclosing on the related property |
| Losses resulting from mortgage loan defaults and foreclosures could have a material adverse effect on our income and cash flow from operations and could limit the funds that we have available for distribution to our stockholders |
| We are exposed to greater risks of loss where we make both a first and second lien mortgage loans on the same property and do not have the benefits of private mortgage insurance |
| Our 31 _________________________________________________________________ [33]Table of Contents underlying subordinated tranches in securitizations would also be affected adversely by losses on our mortgage loans that have been included in the related securitizations |
| In the event of the bankruptcy of a mortgage loan borrower, the related mortgage loan will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy, as determined by the bankruptcy court |
| The lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law |
| Foreclosure of a mortgage loan can be an expensive and lengthy process that can have a substantial negative effect on our originally anticipated return on the foreclosed mortgage loan |
| Residential mortgage-backed securities evidence interests in, or are secured by, pools of residential mortgage loans |
| Accordingly, the subordinated tranches in the mortgage-backed securities that we hold are subject to all of the risks of the related mortgage loans |
| In addition, to the extent that the mortgage loans we originate experience relatively high rates of delinquency and/or foreclosure, then we may be unable to securitize our mortgage loans on terms that are attractive to us, if at all |
| The geographic concentration of our mortgage loan originations increases our exposure to economic and natural hazard risks specific to those areas |
| Over-concentration of our mortgage loan originations in any one geographic area increases our exposure to the economic and natural hazard risks associated with that area |
| For example, in the year ended December 31, 2005, approximately 37dtta4prca of the aggregate principal amount of our mortgage loans was secured by properties located in California |
| Certain parts of California have experienced an economic downturn in the past and have suffered the effects of certain natural hazards |
| Declines in the residential real estate markets in which we are concentrated may reduce the values of the properties collateralizing our mortgages, increase the risk of delinquency, foreclosure, bankruptcy or losses and could harm our results of operations, financial condition and business prospects |
| Furthermore, if borrowers are not insured for natural disasters, which are typically not covered by standard hazard insurance policies, then they may not be able to repair the property or may stop paying their mortgages if the property is damaged |
| A natural disaster, such as Hurricane Katrina, that results in a significant number of delinquencies would cause increased foreclosures and decrease our ability to recover losses on properties affected by such disasters and would harm our results of operations, financial condition and business prospects |
| Likewise, the secondary market pricing for pools of mortgage loans that are not geographically diverse is typically less favorable than for a diverse pool |
| Our inability to originate or purchase geographically diverse pools of mortgage loans could harm our results of operations, financial condition and business prospects |
| An interruption or reduction in the securitization and whole loan markets would harm our financial position |
| We are dependent on the securitization market for the sale of our mortgage loans because we securitize mortgage loans directly and many of our whole loan buyers purchase our mortgage loans with the intention to securitize them |
| The securitization market is dependent upon a number of factors, including general economic conditions, conditions in the securities market generally and conditions in the asset-backed securities market specifically |
| In addition, poor performance of our previously securitized mortgage loans could harm our access to the securitization market |
| Accordingly, a decline in the securitization market or a change in the market’s demand for our mortgage loans could harm our results of operations, financial condition and business prospects |
| We may not realize all of the expected benefits of, and we may incur additional costs related to, the acquisition of a mortgage origination platform from RBC Mortgage |
| On September 2, 2005, we acquired a mortgage origination platform from RBC Mortgage |
| It is too early to conclude whether we will realize the anticipated benefits of this acquisition, including expanded depth and breadth of our mortgage product offerings, expanded retail presence on a nationwide basis and expanded 32 _________________________________________________________________ [34]Table of Contents channels of distribution, including into the realtor and builder channels |
| Moreover, our management has limited experience operating the recently acquired RBC Mortgage platform and integrating recently acquired businesses |
| At the same time, the ultimate costs associated with this acquisition may be higher than expected |
| In addition, the process of integrating an acquired business may result in operating difficulties, compliance errors and unanticipated expenditures and may require significant management attention that would otherwise be available for ongoing development of other aspects of our business |
| If we make any additional acquisitions, we will incur a variety of costs and may never realize the anticipated benefits |
| If appropriate opportunities become available, we may attempt to acquire businesses that we believe are a strategic fit with our business |
| We currently have no agreements to consummate any material acquisitions |
| If we pursue any such transaction, the process of negotiating the acquisition and integrating an acquired business may result in operating difficulties and expenditures and may require significant management attention that would otherwise be available for ongoing development of our business, whether or not any such transaction is ever consummated |
| Moreover, we may never realize the anticipated benefits of any acquisition |
| Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities and/or amortization expenses related to goodwill and other intangible assets, which could harm our results of operations, financial condition and business prospects |
| Our earnings from holding mortgage-backed securities or government securities may be harmed by changes in the level of interest rates, changes to the difference between short- and longer- term interest rates, changes to the difference between interest rates for these securities compared to other debt instruments, and an absence of or reduction in the availability, at favorable terms, of repurchase financing and other liquidity sources typically utilized by mortgage REITs |
| From time to time, we may purchase mortgage-backed securities or government securities from third parties in order to comply with the income and asset tests necessary to maintain our REIT status |
| The value of, and return on, the mortgage-backed securities and government securities we hold will be affected by changes in the marketplace for such securities, as well as prepayment speeds in the case of mortgage-backed securities, and may be volatile and significantly different than anticipated |
| The securities that we hold may produce large losses instead of the income that we expect |
| The impact of changes in the marketplace for these securities on our results may be magnified because these holdings could be highly leveraged |
| Additionally, much of the financing we will use to hold these securities may be cancelable by our lenders on short notice |
| If our lenders cease providing financing to us on favorable terms, we would be forced to liquidate some or all of these securities, possibly at a substantial loss, which could harm our financial condition, results of operations and business prospects |
| A material difference between the assumptions used in the determination of the value of our residual interests and our actual experience could harm our financial position |
| As of December 31, 2005, the value on our balance sheet of our residual interests from securitization transactions was dlra234dtta9 million |
| The value of these residual interests is a function of the delinquency, loss, prepayment speed and discount rate assumptions we use |
| It is extremely difficult to validate the assumptions we use in valuing our residual interests |
| In the future, if our actual experience differs materially from these assumptions, our cash flow, financial condition, results of operations and business prospects may be harmed |
| We may be required to conform to the standards of the recent Ameriquest settlement, which could harm our business |
| In January 2006, ACC Capital Holding Corporation and its subsidiaries Ameriquest Mortgage Company, Town & Country Credit Corporation and AMC Mortgage Services Inc, formerly known as Bedford Home Loans, which we refer to collectively as “Ameriquest,” reached a settlement with various state Attorneys General resolving some of the regulatory complaints and consumer claims made against Ameriquest related to predatory home mortgage lending |
| By the terms of the settlement, the second largest federal consumer 33 _________________________________________________________________ [35]Table of Contents protection settlement in history, Ameriquest agreed to implement certain new standards and to pay dlra325 million to the states, with most of the money to be used to pay restitution to consumers who obtained mortgage loans from Ameriquest between January 1999 and December 2005 |
| In the settlement, Ameriquest denied all allegations but agreed to implement certain new standards and practices meant to prevent a recurrence of its alleged abuses and unfair and deceptive practices |
| Many of the settlement’s requirements far exceed any express requirements of existing lending laws |
| Although we believe our historical controls and practices have operated effectively to mitigate the risk of the abuses alleged in the Ameriquest settlement, in many cases our controls and policies are not identical to those prescribed by the Ameriquest settlement |
| However, some Attorneys General have made public statements that the conduct required by the Ameriquest settlement should be seen as new standards applicable to the entire industry and that they may pursue actions against lenders who do not adhere the new standards |
| If the Attorneys General seek to apply these standards to the entire industry or our company in particular, some of our own practices could be called into question and our revenues, business, results of operations and profitability could be harmed |
| In addition, if it becomes accepted practice that settlements entered with Attorneys General establish new standards for the industry as a whole and supercede existing express legislative requirements, the standards by which we are governed will become less predictable and the risks associated with our business will increase |
| New legislation could restrict our ability to make mortgage loans, which could harm our earnings |
| Several states and cities are considering or have passed laws, regulations or ordinances aimed at curbing predatory lending practices |
| The federal government is also considering legislative and regulatory proposals in this regard |
| In general, these proposals involve lowering the existing federal Homeownership and Equity Protection Act thresholds for defining a “high-cost” mortgage loan and establishing enhanced protections and remedies for borrowers who receive such mortgage loans |
| However, many of these laws and rules extend beyond curbing predatory lending practices to restrict commonly accepted lending activities, including some of our activities |
| For example, some of these laws and rules prohibit any form of prepayment charge or severely restrict a borrower’s ability to finance the points and fees charged in connection with the borrower’s mortgage loan |
| In addition, some of these laws and regulations provide for extensive assignee liability for warehouse lenders, whole loan buyers and securitization trusts |
| Because of enhanced risk and for reputational reasons, many whole loan buyers elect not to purchase any mortgage loan labeled as a “high cost” mortgage loan under any local, state or federal law or regulation |
| Accordingly, these laws and rules could severely constrict the secondary market for a significant portion of our mortgage loan production |
| This would effectively preclude us from continuing to originate mortgage loans that fit within the newly defined thresholds |
| Some of our competitors who are, or are owned by, national banks or federally chartered thrifts may not be subject to these laws and may, therefore, be able to capture market share from us and other lenders |
| Passage of such state and local laws could increase compliance costs and reduce fee income and origination volume, all of which would harm our results of operations, financial condition and business prospects |
| Lawsuits challenging our business practices, our competitors and other companies are pending and more may be filed in the future |
| We are named as a defendant in a number of lawsuits challenging various aspects of our business operations and seeking significant monetary damages |
| These cases allege violations of the Fair Credit Reporting Act, or FCRA, failure to pay overtime wages, the making of mortgage loans with fees greater than permitted by law and advertising practices and interference with broker relationships, among other matters |
| Additional litigation may be filed against us or disputes may arise in the future concerning these or other business practices |
| In addition, lawsuits have been filed, and other lawsuits may be filed in the future, against our competitors and other businesses, and although we are not a party to such litigation, the results of such lawsuits may create additional risks for, or impose additional costs or limitations on, our business operations |
| As courts resolve individual or class action litigation related to our industry, regulations and standards could emerge necessitating material increases in our costs of doing business or preventing us from participating 34 _________________________________________________________________ [36]Table of Contents in certain business activities in which we currently engage |
| For instance, if claims by various plaintiffs that prescreened offers of credit do not qualify as firm offers of credit under the FCRA, and thus that we are not authorized to access certain consumer credit reports in relation to such offers, prevail, our business practices and ability to offer and close certain lines of credit would be impaired and our revenues, results of operations, business and profitability could be harmed |
| The outcome of litigation and other legal matters is always uncertain |
| One or more legal matters could result in losses material to our financial condition, results of operations, business and profitability |
| A description of material legal actions in which we are involved is included under “Legal |