KEVIN KILEY
‘Ongoing concern’

For the mortgage industry, predatory lending was one of the most hotly debated legislative topics of 2003. It now looks as if matters are coming to a head.

The Legislature’s Joint Committee on Banks and Banking last week signed off on H.2732, clearing the way for the controversial measure to be considered by the full House of Representatives.

The bill, which has undergone a number of rewrites since an initial public hearing in June 2003, received a favorable vote from members of the banking committee during an executive session last Monday.

The final draft of a predatory lending bill may decide a decade-long debate over instituting legislation that would further protect consumers from predatory lending. While the Massachusetts Division of Banks has tackled the issue from a regulatory standpoint, the state has no laws on the books dealing with predatory lending.

Much of the debate involving the legislation has centered on accurately defining exactly what constitutes predatory lending. Bay State lawmakers say offenders are mortgage lenders who use aggressive techniques to sell high-interest, fee-laden loans to inexperienced and fiscally vulnerable borrowers. Mortgage lenders, however, maintain that the legislation must be carefully crafted so as not to impede the business of reputable subprime lenders that fulfill a very necessary role by lending to homeowners and homebuyers with less-than-perfect credit, usually as a higher interest rate than a conventional loan.

The legislation is primarily aimed to protect borrowers of “high-cost home mortgage loans.” It would improve existing safeguards and create additional protections against the practices of predatory lenders. The bill also contains provisions that would strengthen existing protections for borrowers of conventional home mortgage loans.

The legislation would set limits on the financing of points and fees, prohibit prepayment fees and penalties, bar lenders from increasing interest rates if a borrower defaults, forbid lenders from charging fees for modifying the loan terms, ban mandatory arbitration for the settlement of disputes, prohibit lenders from disbursing funds directly to a home improvement contractor, prevent lenders from encouraging a borrower to default on a pre-existing debt and protect borrowers facing foreclosure.

The bill would require borrowers considering high-cost loans to receive credit counseling before closing and require lenders to have a “reasonable belief” that borrowers have the ability to repay loans. At the same time, it would ensure that legitimate subprime lenders will continue to be able to continue serving the needs of borrowers with credit problems.

Kevin Kiley, executive vice president and chief operating officer of the Massachusetts Bankers Association, said that while there are areas of the bill that need still refinement, the MBA is supportive of the bank committee’s goal of curbing abusive lending practices.

“There are some particular issues that we would like to see refined Â… but overall, they [the committee] are being responsive to what they see as an ongoing concern in the marketplace,” said Kiley. “I commend them for taking a step and dealing with instances where people have been victimized. The MBA continues to support flexibility so that subprime lending can take place, but there is a difference between subprime and what we consider predatory lending.”

The committee’s action was announced by its two co-chairmen, Sen. Andrea Nuciforo Jr., D-Pittsfield, and Rep. John Quinn, D-New Bedford.

“I think this [bill] will force mortgage brokers and mortgage lenders to bring their loans into compliance with the state statutes. Very few lenders are going to want to make high-cost mortgage loans as defined in the statute,” said Nuciforo. “The result of this bill will be to benefit the consumer with lower rates, fewer fees, lower points and more favorable returns.”

But some elements of the bill are raising concerns among members of the mortgage industry.

Out of Reach

David Hadlock, principal of Hadlock Law Offices in Natick and regulatory and compliance counsel to the Massachusetts Mortgage Association, said certain sections of the bill are on target but others pose significant dangers to the mortgage lending industry.

“Some sections of this bill are commendable and should be passed. Those sections include legislation on simple interest, late charges, prepayment penalties – and they are good for everybody,” said Hadlock. “The problem that I have Â… is that I think to the extent that there are predatory lending issues in Massachusetts, they are few and far between and for the most part [the offending lenders] tend to be federally chartered or otherwise exempt entities that are outside the reach of our [state] Division of Banks. It’s not that we need a new law, it’s that some of the perpetrators of predatory lending are not home-based, state-chartered companies – they are from outside state lines and outside the reach of state legislation.”

Thomas J. Callahan, executive director of the Massachusetts Affordable Housing Alliance, said the bill is a good first step but there are some changes he would like see in the legislation to further protect consumers.

“It’s not a perfect bill, but it’s a good first step,” said Callahan, who added that a section of the legislation dealing with telephone counseling should be removed. The DOB currently licenses all home mortgage counselors, but the bill would allow out-of-state telephone counseling, which Callahan said could be a dangerous change.

“Telephone counseling is not as effective as face-to-face counseling, and one fear is that the subprime or predatory lenders could set up a centralized nonprofit counseling arm in Kansas and do it [counseling] all by telephone. Telephone counseling is not as effective as a counselor in the community and I’d like to see that taken out of the legislation,” Callahan said.

Currently, lenders found to be in violation of abusive lending practices must work out a “regulatory agreement” with the state to ensure the problems are corrected, according David Cotney, senior deputy commissioner at the Division of Banks.

If the agreement is subsequently violated, more formal action is considered. The DOB has been involved in the shaping of the legislation and some of the agency’s recommendations have been incorporated into it. Banning of simple interest loans, tightening pre-payment penalties and requiring fair lending exams for mortgage companies that authorize 50 or more loans each year all are elements of the bill specifically supported by the DOB.

Mortgage companies that are currently regulated by the Division of Banks would be required to adhere to the new laws if the bill is approved, but the legislation would not apply to federally chartered companies. Hadlock said the Office of the Comptroller of the Currency’s recent pre-emption ruling, reinforcing the idea that federally chartered institutions need not adhere to state law in such matters, would dilute the bill’s effectiveness.

“The OCC has gone out of the way to make it impossible for state regulators to apply state laws [to federally chartered lenders], and if that is going to be the landscape, what good is this predatory lending act going to do if it can’t be applied? Until we have resolution of the federal pre-emption, people are going to read about predatory lending and blame the wrong people – our mortgage companies and state leaders” rather than abusive lenders based in other states, Hadlock said.

Nuciforo said he also is concerned about the OCC’s federal pre-emption of state laws and that federal predatory lending rules do not adequately protect consumers.

“OCC pre-emption is a big deal and they are going in the absolute wrong direction. We happen to think the [federal Homeowner Protection Act] standards are not sufficient enough to protect consumers so we are enacting state laws to protect them,” Nuciforo said. “It is my hope that the OCC pre-emption will be challenged at some point – I can’t make a prediction on how that is going to go, but I have to believe that a consumer advocacy group or a borrower or somebody will find a way to bring this before a federal judge.”

Hold on CRA
At the executive session on Monday, along with the predatory lending legislation, the bank committee also voted to recommend a number of other bills introduced this session. Among the bills reported out of committee favorably were: S.8, An Act to Establish Standards for Consumer Credit Counseling; S.11, An Act Relative to the Massachusetts Credit Union Share Insurance Corp.; H.483, An Act Relative to Credit Union Deposits; H.2193, An Act Further Regulating Retail Installments Sales of Motor Vehicles; and H.2560, An Act Relative to the List of Legal Investments Prepared by the Commissioner of Banks.

The committee also recommended further study of a number of bills involving issues including privacy rights, check cashing and transmission of money between deposit accounts. The committee voted to hold S.4 and H.3107, Acts Establishing Community Reinvestment Obligations for Certain Mortgage Lenders.

The Community Reinvestment Act legislation was strongly opposed by lenders last year, with mortgage companies testifying that since they were not depository institutions they should not be subject to the same lending reinvestment obligations as banks and other institutions that derive deposits from the communities they serve.

Mortgage industry leaders, including members of the MMA and the Massachusetts Mortgage Bankers Association, lobbied over the past year to eliminate legislation pertaining to predatory lending and community reinvestment and announced their own education plans and collaboration with national lender Fannie Mae to provide a greater variety of loan products for low-income and poor-credit borrowers as an alternative.

MMBA leaders last week declined to comment on the predatory lending bill and possible CRA regulations.

State banking officials, including leaders of the MBA, contend that imposing CRA regulations on mortgage companies is necessary to prevent them from lending primarily in affluent areas, leaving low- to moderate-income communities underserved.

According to Nuciforo, while the CRA bill has been held, it is still being discussed by banking committee members.

Callahan said eventual passage of the CRA bill would provide the best protection possible to consumers.

“We [MAHA] think these two bills [predatory lending and CRA] make a good team. One is going to clean up the worst abuses and the other will shine the spotlight on mortgage company lenders and help clean up a broader range of loans that are not necessarily in the customer’s best interest,” said Callahan. “If CRA were instituted, [mortgage lenders] will be forced to have products that would meet the credit needs of low- and moderate-income homebuyers. We are still hopeful and we are working hard to make sure the bill gets out of committee and goes through the process.”

When CRA obligations for mortgage firms was discussed in September 2003, Callahan said, a handful of legislators voted in support of the bill. Callahan said he hopes those votes remain supportive as the committee discusses the legislation.

“The two bills that we held were the CRA regulations for mortgage companies bills and members of the committee are actively discussing those bills right now,” said Nuciforo.

Meanwhile, the predatory lending legislation is on its way to the full House for consideration. If approved, it would then go to the Senate.

“It’s going to be hard for legislators to vote against this because this [predatory lending bill] is politically correct,” said Hadlock. “However, I would like to see the feds [federal regulators] working with, not against, the state agencies and I think we would see worlds of improvement when that happens.”