The Dodd-Frank act is intended to sweep bad loans out of the marketplace, but some experts are predicting a few good products may get thrown out with the bathwater – including, among other things, adjustable-rate mortgages.

Popularly associated with bait-and-switch tactics that saw borrowers take on low introductory rates that “adjusted” far upward soon after they signed the contract, ARMs developed a bad reputation during the financial crisis. But ARMs are not inherently bad, bankers noted, and can add flexibility for borrowers looking to buy during periods of high interest rates.

Still, they may become far rarer, according to people like Jon Skarin, director of federal and regulatory policy for the Massachusetts Bankers Association.

Two Camps

Under Dodd-Frank, mortgages fall into two categories: “qualified” and “unqualified.” Simple, fixed-rate loans, for example, are qualified – but the law penalizes lenders who make “unqualified” loans by loading them down with new requirements.

Depending on how regulators interpret the rules, Dodd-Frank may make any but the plainest of vanilla loans too burdensome for some banks to offer.

“It could basically kill the product,” said Richard Hackett, partner with law firm Pierce Atwood, which has an office in Boston.

Skarin and others cautioned that this is a very early interpretation. It will be more than a year before new rules are implemented, and regulatory experts note that much remains unknown about the concrete form they’ll take. But if regulators interpret the legislation in a way unfriendly to certain loans, it would have far-ranging consequences.

Skarin predicted that the new regulation would make every bank take a second look at its product offerings and loan procedures, and they’d have to decide if it’s worth the bother of extra requirements.

Many may decide some products aren’t worth it, and long standbys – such as ARMs – might grow more elusive.

“Is that a good thing or a bad thing?” Skarin asked. “I would make the argument that the more products available, the better for consumers.”

But not everyone has a gloomy outlook that all types of ARMs would become rare.

Ed McDonald, president of Salem Five Mortgage Co., said he doesn’t expect ARMs to go away under the new law. The regulations are mostly trying to require that lenders simply do what’s in the best interest of the borrower, which he said Salem Five does, anyway. The law might limit some products, he acknowledged, but many riskier mortgages would be done away with, and plenty of good products would remain.

“We don’t anticipate changing the way we do business,” McDonald said. “Any loan in the borrower’s best interest, we’re going to have available.”

Kenneth Ehrlich, partner at Boston-based law practice Nutter McClennen & Fish, said he also thought ARMs wouldn’t be shut out, in general. But the law is set to clamp down on specific types of ARMs, he said, with terms widely considered too complicated or inappropriate for most borrowers.

Details, Details

Some ARMs carry fixed payments, for example, which means the borrower pays a set amount regardless of whether the interest rate moves. If the rate goes up but the payment stays the same, the borrower is paying down less and less of the debt. That can end with a “balloon payment,” where the borrower owes a substantial lump sum at the end of the loan’s term.

These are considered “nefarious” by consumer advocates, who say the borrower is more likely to be stuck with a loan he or she can’t repay. Such loans will be subject to greater restrictions under new laws.

Still, “It’s pure speculation at this point to pick out particular products that are likely to suffer,” Ehrlich said, noting that the final verdicts were still a long way off.

The devil is in the details, Hackett said. With regard to ARMs, Dodd-Frank contains a requirement that the only way a mortgage rate can change is in accordance with a rate index. But virtually every ARM features an initial offering rate less than the indexed rate. That makes it attractive to borrowers, but it also means it’s not a “qualified” mortgage under the law.

Even without that low initial rate, other restrictions apply. Hackett said that ARMs are only “qualified” if a borrower has income high enough to afford the highest possible interest rate that could apply to the loan within five years of signing. That rate is usually about 5 percent or more above the initial rate – and at that point, only the wealthy can afford an ARM.

Between the technical and practical hiccups, as well as the problem of trying to offer discounted rates, lenders have strong incentives to scrap their ARM offerings, Hackett said.