Interesting, productive, challenging – all might be appropriate descriptors of the year ahead in the banking and lending industries if prognostications by industry players prove correct. A stable, slowly rising interest-rate environment is expected by many. Mortgage practitioners are predicting a strong home-purchase market even as they closely monitor the effects of the state’s new anti-predatory lending law. Bankers, meanwhile, are anticipating more consolidation within the industry in 2005.

Bank mergers made headlines in 2004 and are expected by many industry watchers to do so again this year. Glen White, president and chief executive officer of Mutual Federal Savings Bank in Whitman, said he would not be surprised to see more mergers and acquisitions shake up the Bay State playing field in 2005.

Massachusetts Commissioner of Banks Steven Antonakes has a similar outlook for 2005, saying there will likely be additional consolidation within the industry, although he doesn’t view that as a problem. Despite the rapid pace of bank consolidation in the last two decades, Antonakes said Bay State consumers still have ample options.

“We’re still a well-banked area,” Antonakes said. “Access to choice is still very strong.”

For the mortgage industry, other issues are expected to crop up.

James Dougherty, executive director of the Massachusetts Mortgage Association, said although Real Estate Settlement Procedures Act reform was withdrawn in 2004, it is likely to turn up again this year as a predominant national issue of note for lenders.

The proposal to reform RESPA in 2004 suggested a single, federally regulated fixed-fee package of interest rates and settlement charges for each homebuying transaction. Many mortgage industry practitioners, however, were concerned that would curtail competition – tipping the balance toward larger lenders – and reduce transparency of fees for consumers.

Some local industry players agree. Calling the 2004 reform measure an “ill-thought-out proposal,” Daniel McMorrow, president, chief executive officer and founder of Boston-based Bayside Home Mortgage, said he expects to see RESPA reform return as an issue in 2005.

Kevin Cuff, executive director of the Massachusetts Mortgage Bankers Association, agreed that RESPA reform could show up once more in 2005. The issue, he said, is a complex one and predicting exactly how things will play out is difficult.

“RESPA [reform] has perplexed me from the get-go,” Cuff said. “It’s so far-reaching, so political.”

Closer to home on the legislative front, Dougherty said he looks forward to explaining to local lawmakers why the MMA recently filed a loan originator licensing bill. Filed on Dec. 1, Dougherty said the benefits of the bill are “clear cut.” It provides an opportunity to increase competency within the ranks of lenders by requiring continuing education and would promulgate professionalism at a deeper level than does the current licensing of lending companies. Dougherty said the bill’s intention is to bring accountability to the industry that does not exist today.

Antonakes said he plans to review the loan originator licensing bill to ascertain “who is covered by it, precisely.”

Antonakes said he will also have to review the degree of pre-emption for national banks and how much it could cost to regulate loan originator licenses. Antonakes estimated it would cost his office a few people and some additional money to oversee licensing, license requirements and adjudicate complaints.

Antonakes questioned why the bill was necessary. He said if originators are working under the auspices of a licensed bank or mortgage firm, it is the company’s responsibility to assure its originators are conducting business appropriately.

Refi Shifts to Buy

Changing interest rates also are expected to play a large role in determining the lending environment in 2005.

Cuff said he has no reason to believe the interest-rate environment will change “dramatically.”

Antonakes said that while rising interest rates have been discussed for the past few years, they have nevertheless stayed at unexpectedly low levels. However, there are strong indications that rates will slowly increase in 2005.

“[I’m] going to presume rates are going to rise,” Antonakes said. “The primary question that really remains is, how are lenders going to react to what should be a contracting market?”

As rates rise and the refinance boom fades into history, lenders are also expecting to see downsizing within the mortgage industry.

“We are going to see a lot of smaller players going away,” Rick Fedele, founder and president of Boston-based Summit Mortgage, said.

He said firms not focusing on the homebuyer – on originating home-purchase mortgages – will move out of the industry as refinance activity slows.

“We almost saw it [in 2004],” Fedele said.

But rates remained low last year, he said, and while most lenders expect that to change to some degree, there’s no guarantee rates will climb in 2005.

McMorrow said he does not think rates will tick up much in 2005. However, McMorrow said he expects to see the lending market change to place more emphasis on originating purchase-mortgage transactions.

“We’ll continue to make sure we are perceived as purchase money specialists,” said McMorrow. “Purchase money [loans] will be big.”

Summit Mortgage also expects 2005 to be a big year in the purchase mortgage arena. Fedele said he expects interest rates and home prices to be stable.

In his own office, Antonakes said 2005 will be a year of increasing efficiency and productivity for the Division of Banks. Decreasing the regulatory burden on smaller banks is a goal for Antonakes, who admits achieving that aim will be a challenge. He hopes to work with the division’s federal counterparts to assure the regulatory job is done, while lessening the burden.

Kevin Kiley, executive vice president of legislative and regulatory policy for the Massachusetts Bankers Association, said the regulatory burden on small banks is a major issue that institutions are grappling with. He said oversight laws need to be streamlined.

Kiley also said looking at the viability of the dual-banking system will be a significant focus for the association year.

“[We want to] create a positive business climate to provide state-chartered banks to grow and compete,” said Kiley.

Although passage of the state’s anti-predatory lending law and rate-lock regulations designed to prevent lenders from reneging on promised low rates in a rising interest-rate environment were high-profile topics in 2004, many in the lending industry expect 2005 will be even more telling as the effectiveness of the initiatives are implemented and measured.

Cuff said he is “interested” to see how both regulations will work in the upcoming year.

Daniel J. Forte, president of the MBA, said he expects anti-predatory lending initiatives to be prominent at the federal level.

“It’s hard to have a different set of laws,” Forte said, referring to varying state predatory lending laws.

Forte said the new state law has the potential to mitigate some of the problems surrounding predatory lending. While he said it is too early to tell the full impact of the law, lenders will be watching in the New Year to see if there are repercussions. One fear is that some legitimate subprime lenders may leave the market, curtailing homeownership opportunities for borrowers with less-than-perfect credit.

Industry practitioners will also be watching a number of other developments at the federal level. Forte said reform of government-sponsored enterprises is likely to be a priority for the Treasury Department in the coming year as a result of recent accounting and executive pay scandals at Fannie Mae.

The local credit union industry also is looking ahead to 2005 and hoping for a strong year. Rob Kimmett, senior vice president of marketing and public relations at the Massachusetts Credit Union League, said the shifting interest-rate environment will make money market accounts more appealing to credit union members.

“People will be more comfortable with traditional deposits,” Kimmett said. “I do think it will be a strong year.”

Credit unions will also spend 2005 finding ways to better improve service to their members. Kimmett said making credit unions more accessible to customers is a priority for many institutions.

Increasing financial literacy for consumers will continue to be a focus for many credit unions as they head into 2005. “A lot of credit unions are actively involved in that,” Kimmett said.

Online banking – a priority for most banks – also will play a greater role in the strategic planning of many credit unions.

“Online banking is not new anymore,” Kimmett said. “A lot of credit unions are getting involved in it.”