Citing confusion and requesting clarification, many mortgage executives recently testified before the state’s Division of Banks regarding emergency regulations related to the recent predatory lending law.

In November, the DOB issued emergency regulations for the determination and documentation of whether a refinance loan is in the borrower’s best interest. Due to some of the language, some national companies threatened to pull out of the refinance market in the Bay State.

The Dec. 1 public hearing was intended for the DOB to hear recommendations and comments from the mortgage industry pertaining to the borrower’s best interest provision. Many expressed confusion and concern about the regulations and requested greater clarity.

“My company is somewhat confused about the new regulations,” said Andrea LeFebvre, regional manager of SunTrust Mortgage in New Hampshire.

LeFebvre said her company does close to 50 percent of its production in Massachusetts. The company is not rolling out a home equity line of credit because of its uncertainty with Massachusetts’ new regulations. She said some of the company’s products are falling in the “gray zone” of borrower’s interest.

Some factors to determine whether a loan is in the borrower’s best interest include whether the borrower’s note rate of interest is reduced, there is a change in the amortization period of the new loan or the borrower receives cash in excess of the costs and fees of refinancing.

LeFebvre said she does not want to open the company up to possible litigation under predatory lending provisions if a consumer falls on hard times in the future.

Matt Langley, regional vice president of Bank of America’s Northeast area, asked the DOB to consider if, when a first mortgage falls within safe harbor, there should then be similar treatment of the second mortgage.

“We are certainly nervous [about] lawsuits even if we fall within the safe harbor,” Langley said.

The regulations state that a lender cannot knowingly refinance a home loan that was consummated within the prior 60 months unless it is in the borrower’s best interest to do so. Chris Burgess, director of compliance at Rockland Trust and member of the Massachusetts Bankers Association’s Legislative and Regulatory Policy Committee, said clarification was needed to determine at which point the start of the 60-month period should be calculated.

David Hadlock, counsel to the Massachusetts Mortgage Association, asked for clarification on a number of items in the provision. The regulations, he said, need a clarification saying that if a loan qualifies as “exempt,” then no claim can ever be brought claiming it was not in borrower’s best interest. Hadlock also asked for a clarification to confirm that no re-determination of borrowers’ best interest is required if the borrower’s circumstances change after the one and only status determination required by the statute and regulation.

Confirmation that the statute and regulation do not apply if the new loan pays off “other debt,” but not mortgage debt, which has aged less than 60 months, was also suggested. Hadlock recommended that claims be limited to the “original lender” and a time limit during which claims may be brought should be established.

‘Proper Test’

One safe harbor provision states that lenders do not need to make the determination of borrower’s best interest if the annual percentage rate of the new home loan does not exceed by more than 2.25 percentage points for closed-end first-lien home loans, or by more than 3.25 percentage points for closed-end subordinate-lien home loans, the yield on U.S. Treasury securities having comparable periods of maturity to the loan maturity. The calculation is based as of the 15th day of the month immediately preceding the month in which the application for extension of credit is received by the lender. The regulations also state that when calculating the annual percentage rate for adjustable-rate loans, the lender shall use the interest rate that would be effective once the introductory rate has expired.

James F. Flynn, president of Marathon Mortgage in Hopkinton, said there is no language in the borrower’s best interest provision that states that a lender would not be subject to future lawsuits if the loan fell below the 2.25 percentage points.

“Everyone is interpreting it differently,” Flynn said. “It appears there is some confusion.”

Burgess suggested the DOB increase the first-lien annual percentage rate (APR) limit to 3 percent and subordinate-lien APR to 4 percent.

Hadlock suggested that the DOB increase the APR caps so the law applies primarily to subprime or “high cost” lenders rather than those who issue conventional loans.

Stuart Rossman, director of litigation for the National Consumer Law Center in Boston, said no one factor should determine what is in a borrower’s best interest.

“The proper test should be to look at the net economic benefit” to the borrower, said Rossman.

The regulations also require the lender and borrower to sign a document that indicates how the lender determined the home loan is in the borrower’s best interest.

Rossman said clarification is necessary to state that the borrower’s signature is an acknowledgement of receipt but not an agreement to the lender’s method of determination of borrower’s best interest.

Wright Andrews, counsel to the Responsible Mortgage Lenders Coalition in Washington, D.C., said a standardized piece of documentation would be difficult for lenders.

“Lenders have a great deal of difference in their internal underwriting systems,” said Andrews. “I urge you not to mandate a specific form.”

Kevin Cuff, executive director of the Massachusetts Mortgage Bankers Association, provided a sample form to the DOB.

“One of the overwhelming suggestions to us through member participation in [a recent series of association-sponsored] seminars was the need for a sample or standard ‘Determination and Documentation of Borrower’s Interest’ worksheet,” said Cuff. “We have come prepared to offer the division one such sample or standard which has been reviewed by many banker, lender and broker representatives throughout the industry. We would ask the division for its consideration in adopting the [sample] as a part of the final regulation as industry guidance while not precluding use of any other forms by many larger lenders or banks which may have systems and operations now currently in place. However, many of our smaller to mid-sized members would embrace such a standard.”

Sen. Andrea Nuciforo Jr., D-Pittsfield, also testified, saying he thought the regulations accurately reflected the Legislature’s intent.

“We had a [mortgage] flipping problem in the commonwealth,” Nuciforo said.

He said the documentation puts the burden on the lenders to assure they have policies in place to make a loan in the borrower’s interest.

Commissioner of Banks Steven Antonakes said the DOB is hoping to clear up the confusion in the regulations.

“We are attempting to provide clarification,” said Antonakes.

The comment period for the emergency regulations closed on Friday at 5 p.m.n

Jennifer Jope may be reached at jjope@thewarrengroup.com.