JAMES DOUGHERTY
‘Enforcement issue’

Despite numerous advisory and reminder alerts from the Division of Consumer Affairs and Business Regulation, the Massachusetts Division of Banks and various mortgage associations that a rising interest-rate environment may create pitfalls for mortgage brokers, consumers are flooding DOB phone lines with complaints that promises of low rates are not being honored. The most common reasons are because the rate was not firmly locked to begin with or the transaction did not close prior to the expiration of the lock because of high business volume.

David Cotney, senior deputy commissioner for administration and policy at the DOB, said the amount of consumer complaints about mortgage lenders breaking rate-lock promises in the last three months has risen dramatically.

As of Sept. 10, the DOB had logged 124 complaints over a two-month period. Of those 124 complaints, 31 cases are now closed. From among the closed cases, 17 consumers eventually received the rate they were initially promised from their broker. Cotney said of the remaining 14 cases, some remain pending for further review and other complaints are against federal banks or lenders, which are not regulated by the Massachusetts DOB.

Of the 93 cases that are still open, 41 consumers have been “assured from their lenders that they will honor the interest rate promised,” said Cotney, and the remaining cases are currently being reviewed and worked on at the DOB.

As the DOB and Consumer Affairs Office continue to issue consumer tips and guidelines, DOB officials maintain that the complaints of broken rate-lock promises are broker-specific and not an industry-wide problem.

“We sent a letter on July 31 to everyone – 1,250 letters to the industry – to say this is what you can’t do and what you can do [with mortgage rate locks],” said Cotney. “We’ve taken a look at the number of complaints and the number of companies involved, and right now we don’t feel this is an industry-wide problem. We are working to vigorously address the complaints that we’ve received and we’ve either closed [cases], or we’ve gotten the assurance that the rates will be honored, and everything else we are working on to get to that point.”

However, in some severe cases, the DOB has stopped mortgage lenders from operating altogether.

On Friday, Sept. 12, the DOB issued cease-and-desist orders against four mortgage brokers that regulators claim issued illegal rate-lock commitments or used misleading rate-lock forms.

Integrity Mortgage Assoc. of Chelmsford and Rockland Financial Mortgage Co. of Cranston, R.I., were ordered to cease engaging in the business of mortgage brokerage for allegedly issuing illegal rate-lock commitments. Greater Boston Mortgage Advisors of Canton and Primary Mortgage Corp. of Warwick, R.I., were ordered to cease the use of what regulators describe as misleading rate-lock forms. With the addition of these four most recent orders, the DOB has issued six cease-and-desist orders to mortgage brokers for rate lock-related infractions since August.

Earlier this summer, the DOB issued a notice to lenders and ordered one company – Best Mortgage Services of Brookline – to cease making mortgage loans. The company has denied the charges and is appealing, according to a spokesman for the DOB.

“All licensed mortgage brokers are reminded that they are prohibited from issuing mortgage rate-lock commitments,” Massachusetts Commissioner of Banks Thomas J. Curry said in a recent letter. “Over the last several years, both consumers and the mortgage lending industries have enjoyed the advantages of a low interest-rate environment. The high volume of applications for purchase or refinance mortgages may result in delays processing applications.”

Only lenders that actually commit funding to mortgages, and not brokers who simply originate the loan and find a lender for a consumer, may issue rate locks.

The recent upsurge in interest rates resulted in a large number of consumers flocking to lock in low mortgage rates. The Division of Consumer Affairs and the DOB have issued tips to consumers on mortgage rate locks in light of growing concerns in this area. At the same time, state mortgage associations have issued reminders on the regulations and proper procedures relating to rate locks to their members.

“The fact that the level of bad activity is this high is a surprise, so we make sure that our members are as informed as they can be on the subject,” said James Dougherty, president and chief executive officer of the Massachusetts Mortgage Association, who said he believes the industry has seen the worst of this problem and the end of rate-lock scuffle is near.

Dougherty said the DOB had contacted the MMA in the recent past asking the association for information or updates from consumers on this issue. Dougherty said there was only one phone call from a consumer looking for help, and that consumer was forwarded to the DOB.

“We are not a consumer-oriented association in the sense that we provide an outlet for complaints. When I do receive a complaint, I immediately refer them to the DOB, which is the appropriate forum,” said Dougherty. “Our members read articles and want to make sure that we letting everyone know [about the issue]. When I first got a phone call from the Division of Banks, we did a quick alert to our members reminding them of their obligations, and then I passed along the letter the DOB sent out on July 31. Our role in this is really making sure that our members are aware of the laws.”

Appalling Acts

The Massachusetts Mortgage Bankers Association has issued reminders to mortgage brokers that the association is available to answer questions or concerns on this issue, or about how to cope with a high volume of applications, but MMBA Executive Director Kevin Cuff said he did not receive any questions or concerns from members on this issue.

“The MMBA has consistently worked with the Division of Banks in providing the mortgage lending and brokering communities with [information about] their rate-lock responsibilities as a licensee. As a representative organization of the industry, we would be appalled by any lender who would not honor a rate-lock commitment because of a closing taking place following a rate-lock expiration. We would be equally appalled by any broker misrepresenting their authority by issuing any form of a rate-lock commitment,” said Cuff. “Any consumer complaint regarding the management of a financial issue as important as a mortgage should be taken very seriously. Considering how unique the compilation of factors involving the recent market, 124 complaints out of 20,000 loans closed in this period are all relative.”

But some national industry officials said the real problem is the amount of loan volume amongst brokers, which has resulted in a slew of rate-lock complaints. Regulators should concentrate on the backlog of mortgage loans and not the issue of rate locks, some industry watchers contend.

In a statement from Doug Duncan, chief economist for the Mortgage Bankers Association of America in Washington, D.C., most broken rate-lock promises are likely due to the backlog of mortgage loans lenders are processing.

Duncan said that while there are undoubtedly some dishonest brokers and lenders breaking their promises on what borrowers believed were legitimately locked-down rates, most of the problems are more attributable to loan volume in the pipelines.

In a recent forecast published by the MBAA, Duncan predicted that by the end of 2003 nationwide mortgage loans will total 3.3 trillion. In the last refinance boom in 1993, the MBAA reported loan totals were just $1.3 trillion.

MBAA is suggesting that borrowers get agreements in writing as rate-lock complaints to regulators are piling up not just in Massachusetts but nationwide. Other industry officials say the issue of bogus rate-lock promises is a matter for state and federal banking regulators, and not necessarily the responsibility of consumers.

“This is an enforcement issue and the brokerage community is acutely aware that the DOB and Consumers Affairs are on their case,” said Dougherty. “There is regulation that says what is appropriate and what isn’t. That is why there were cease-and-desist orders – regulations are black and white. You may have had some brokers in the changing tide of interest rates feeling the pinch and circumvent the regulations, but now finding themselves on the short end of the regulatory stick and needing to shape up. To me, it’s a simple thing – here is a regulation and you need to abide by it.”