Secretary of State William Galvin pushed his predatory lending bill at a banking committee last week, but Division of Banks Commissioner Thomas J. Curry announced his office is taking another approach to combating predatory lending. The division has drafted regulations to crack down on questionable practices and plans to release them for public comment this summer.

Galvin’s bill, filed this spring by Brockton Democratic Sen. Robert S. Creedon Jr., is one of many efforts to eradicate predatory lenders from the mortgage lending industry. Federal legislation has been filed, and the Treasury Department and the U.S. Department of Housing and Urban Development are conducting studies on how to address the issue.

“This is a topic that’s very popular to talk about,” Galvin told members of the Joint Committee on Banks and Banking. “But very little action has been accomplished in this area.”

Predatory lenders have been prosecuted in Massachusetts under consumer protection laws enforced by the Attorney General. However, Galvin said Bay State consumers need to be further protected by a law that prohibits loan flipping and limits points and fees to 5 percent of the loan. The secretary originally proposed limiting points and fees to 3 percent of the loan, but revised the limit to coincide with the Division of Bank’s threshold of 5 percent.

Director of Consumer Affairs and Business Regulation Jennifer Davis Carey directed Curry to determine how the DOB could stop predatory lending through regulations on the books. The DOB has drafted amendments to its regulations, which Curry hopes to implement by the end of the year.

“This type of response is more likely to be effective and adapt to the needs of the industry,” Carey said.

Using regulation to fight predatory lending makes sense because the mortgage industry is constantly evolving, Curry said. The division will examine how to regulate advertising by predatory lenders, which often give false hope to consumers with financial problems, he said.

“In order to have an effective response against predatory lending we need a strong regulatory framework,” Curry said.

Galvin reported that employees of predatory lenders have visited the state’s registry of deeds to obtain foreclosure lists, which they use as marketing lists.

“We see people under distress, under threats of foreclosure, and they find themselves recipients of lots of offers,” Galvin said.

Curry could not quantify how many lenders are engaging in predatory lending in the state, but said an increasing number of state mortgage lender and broker licensees engage in B and C lending. Companies that have engaged in predatory practices in the state have been non-bank financial companies rather than banks, he said.

The mortgage companies often charge fees and points as high as possible under the existing regulatory limits. In Massachusetts, officials prosecuted United Companies Lending Corp. of Louisiana and First Alliance of California for charging as much as 23 points on mortgages and setting interest rates as high as 15 percent. Both companies have left the state.

“You have these entities go from state to state,” Curry said. “We’ve been successful with our licensing and examination efforts.”

When state licensees charge more than 5 percent in points or fees, DOB examiners take a closer look. The lender must justify the charges by a financial risk or other reason.

Members of the Association of Community Organizations for Reform Now testified at the hearing in support of the bill, but said some provisions affecting balloon payments and annual percentage rates do not go far enough. The group also supports loan counseling by a HUD-certified counselor for borrowers that take out high-cost loans.

“Rather than strengthen neighborhoods by providing access to credit, predatory lenders have contributed to further deterioration of lower-income and minority communities by stripping home owners of their equity and charging exorbitant interest rates leading to foreclosures and vacant houses,” said Sandra Ramgeet, chairwoman of the Boston ACORN chapter.

Some ACORN members came to the association after securing home loans with interest rates of 11 to 16 percent through predatory lenders after being turned down by conventional mortgage lenders.

Regs Preferred
Trade groups testifying at the hearing expressed support for Curry’s approach of regulation rather than legislation. Massachusetts Mortgage Bankers Association Chairwoman Maureen Elliot said placing a limit on points and fees could limit options for consumers who like to pay higher points to receive a lower interest rate.

“MMBA shares the committee’s desire to eliminate these players from the marketplace,” Elliot said. “However, we are concerned that [the Senate bill], while attempting to prohibit predatory practices, will negatively impact responsible lenders and consumers in both the subprime and prime markets by limiting choice and increasing costs.”

East Boston Savings Bank Executive Vice President Philip Freehan, speaking for the Massachusetts Bankers Association, said existing laws provide adequate consumer protection. The Fair Housing Act, the Equal Credit Opportunity Act, the Home Ownership and Equity Protection Act and the Real Estate Settlement Procedures Act can be used to regulate predatory lenders.

“Reliance on anecdotal evidence makes it difficult to determine the number of households affected by predatory lenders or how widespread the problem is in the commonwealth,” Freehan said. “Despite widespread agreement that the actions of predatory lenders should be stopped, solutions are complex because predatory lending is difficult to define and legislate.”

The passage of numerous state predatory lending laws could become a burden to the mortgage lending industry because many lenders operate in several states. Industry leaders have suggested reform should be made with a national bill instead of at the state level.

“Clearly we believe that regulation is the way to go,” said Howard Miselman, chairman of the Massachusetts Mortgage Association.

But Galvin said Massachusetts, a state known for its consumer protections, should act before the current session of the Legislature ends.

“I understand a reluctance to regulate,” Galvin said. “People have lost their homes. I think that screams for relief.”

The bill, Senate No. 2202, would require lenders to determine the suitability of a borrower to repay the loan and block lenders from charging fees for prepayment of the loan. The bill would prevent lenders from raising interest rates after a default and ban balloon payments before seven years. In addition, it would ban negative amortization, in which the principal amount of a mortgage increases at the same time payments are being made.

Galvin’s bill would prohibit mortgage lenders from folding single premium credit insurance into mortgage loans and would require that adjustable rate mortgages be tied to a nationally recognized lending rate. Mortgage lenders that do business in Massachusetts would be required to report default and foreclosure rates to the state banking commissioner each year.

The trade groups, regulators and housing advocates agreed on one thing at the hearing: more consumer education is needed to prevent people from borrowing money from predatory lenders.

The most important weapon against predatory lending is consumer education, Carey said. Industry groups have initiated a number of programs to educate consumers and provide counseling for home owners. The Division of Banks plans to open a toll-free consumer mortgage hotline in July to answer consumer questions.