John Prendergast, chief risk officer at the state Division of Banks, responds to questions from mortgage lenders and brokers at the Massachusetts Mortgage Association’s forum in Randolph.

During war, a U.S. president’s State of the Union address takes on added significance. In the midst of a national subprime mortgage meltdown, last week’s “Critical Industry Forum” similarly garnered plenty of extra interest.

State regulators, law enforcement officials and some 350 mortgage brokers and lenders gathered to discuss the current loan crisis at an industry event hosted by the Massachusetts Mortgage Association last week in Randolph. With state regulators and legislators considering numerous new rules for residential lenders, mortgage professionals are scrambling to understand how it will affect their businesses.

“2006 was the most lax time of [loan] origination. Things seem to have tightened up toward the beginning of [this] year,” said Massachusetts Office of Consumer Affairs and Business Regulation Director Daniel C. Crane, offering his opinion of today’s lending environment.

Information at the event flowed mostly one way, from state officials to the representatives of an industry their regulations and laws increasingly will target in the wake of a sharp rise in loan defaults and foreclosures nationwide.

But mortgage brokers and lenders peppered state officials with inquiries about whether a host of brand-new and proposed laws single them out unfairly. Many asked whether subprime loans and lenders are more at fault for the present difficulties than a depressed real estate market or borrowers who sought loans they couldn’t afford. Other industry practitioners wondered whether they might be grandfathered in regards to complying with some proposed new requirements such as educational requirements for licenses. Individual licensing for mortgage originators, in addition to current licensing requirements for loan or brokerage offices, is one of the new rules proposed for the mortgage industry in the Bay State.

The message from regulators: Unsustainable subprime loans and the originators who facilitated them are the chief problem. However, Division of Banks Chief Risk Officer John Prendergast said that those industry practitioners who cared enough about the mortgage profession to be in attendance at the event were unlikely to be the main targets of regulators.

“The people in this room – you guys are not the ones we’re worried about,” said Prendergast.

Christopher Barry-Smith, head of Attorney General Martha Coakley’s Consumer Protection Division, said he formed his opinion on who’s at fault in the current crisis after reviewing hundreds of loan files on foreclosed properties.

Most, he said, represented mortgages that carried adjustable rates, 100 percent financing or close to it, and did not require the borrower to document his or her income.

“All these aspects are legal. But at some point, when a huge portion of a lender’s portfolio contains all three of these criteria, it raises questions as to the borrower’s ability to pay,” he said.

Barry-Smith said it’s his belief that there will always be some foreclosures due to loss of income or a medical crisis, but that at least in today’s environment, most of the loans in default are subprime mortgages in which the terms of the loan or the circumstances under which the loan was granted are the problem.

The attorney general won’t tell lenders what kind of products they can offer, Barry-Smith said later. “But,” he said, “at some level, complete absence of underwriting [standards] can result in a claim under [Massachusetts consumer protection law] Chapter 93A that the loan is unfair.”

Steve Cofsky, a Division of Banks supervisor of examiners who oversee mortgage brokers and lenders, said that in recent years, “what we’re seeing is that mortgage fraud is an issue, and lack of underwriting standards is an issue.”

The attorney general has the power under Chapter 93A to file lawsuits or put regulations in place to enforce compliance, Barry-Smith said. But the office simply doesn’t have the resources to sue in every instance in which it believes the law was violated, so it’s using both avenues.

It’s not just the private individual, but the public – neighborhoods where a number of loans in foreclosure were made – that are affected, Barry-Smith said, “which is why we’re dedicating our resources to these issues.”

He said Coakley also is looking into what her office can do about predatory lending problems at the corporate level. For example, some lenders reportedly offered incentives to brokers or originators to steer people to more expensive loans. Such practices could be considered deceptive under Chapter 93A, Barry-Smith said.

Separately, Coakley is one of eight U.S. attorneys general who will soon meet with representatives from the top 12 U.S. lenders and 12 largest loan servicers to try to work out a more “consumer-friendly” approach to modifying loans currently in trouble, Barry-Smith said.

‘Pretty Bad’

Crane said the Office of Consumer Affairs, through the Massachusetts Division of Banks, which it oversees, has been working to assist borrowers in trouble in getting extensions on foreclosure proceedings. To date, more than 900 borrowers at risk of foreclosure have been helped, he said.

Gov. Deval Patrick is seeking to require that borrowers receive counseling from nonprofit groups and affirmatively opt-in to a subprime adjustable-rate loan before being allowed to take out such a loan. He also has proposed legislation that would make mortgage fraud an offense punishable by a jail term or stiff fines.

In addition, Patrick is seeking legislation to prohibit mortgage rescue schemes in which a non-family member takes over the title of a home in default or foreclosure with the purported intent of returning it to the original homeowner once his or her financial problems are resolved – an intent usually not realized.

Coakley recently adopted regulations permanently banning the same practice.

This month, following public hearings over the summer, the Division of Banks also adopted increased net-worth requirements for mortgage brokers and lenders, raising the required net worth for licensed lending companies from $100,000 to $200,000 and for brokers from a “positive” net worth to $25,000. It will also now requires licensees to post an additional bond of $75,000 for brokers, and $100,000 for lenders. Another change is that a broker’s or lender’s home cannot be counted toward their qualifying net worth.

Both of Massachusetts’ major mortgage industry trade groups – the Massachusetts Mortgage Association and the Massachusetts Mortgage Bankers Association – supported the increases. MMA Executive Director Denise Leonard previously said the overhaul was overdue and that the last time net-worth requirements were changed was in 1992.

DOB also is proposing that individual originators be licensed, and is participating in the creation of a national database of mortgage licensees and enforcement actions, due to roll out in January.

MMA’s Leonard, who is also a board member of the National Association of Mortgage Brokers, urged mortgage professionals in attendance at last week’s forum also to attend hearings about proposed regulations more often or at least to e-mail MMA their opinions, “so we can speak in a collective voice.” A handout noting the times and places of upcoming public hearings was circulated.

“We will be at every hearing about [Chapter] 93A,” she promised. She also said MMA “will be lobbying very hard to kill Senate Bill 2299,” which would impose new standards on how adjustable-rate loans are made, and penalties for noncompliance and fraud.

The bill has passed the state Senate, but not the House. Leonard said the bill – formerly S. 2296 – is too broad in scope and could have the unintended effect of legislating all adjustable-rate loans out of existence. This would cut many worthy borrowers of non-conventional loans out of the loan market and, in turn, hurt the housing market, she suggested.

She also called some of the proposed penalties “unreasonable” and said portions of the bill’s language are “vague” and “subjective.”

When Leonard exhorted regulators to explain whether so many regulations, so fast, are the best solution to today’s problems, the audience applauded. But Barry-Smith said Coakley thought long and hard about all the regulations she proposed, and carefully considered whether the market could correct its problems without them.

“Things need to be pretty bad before new regulations are adopted,” he said, “but they are pretty bad.”

He said only four of about a dozen regulations that have been considered actually have been proposed.

“I think everyone would agree that mortgage fraud should be a crime,” Prendergast added. “There is still a ton of it going on Â… a ton.”

Tom Richardson, a mortgage officer with Edgeworth Mortgage, a Malden mortgage brokerage firm, asked Barry-Smith to elaborate on why borrowers who signed on to inappropriate loans aren’t bearing more of a share of the responsibility for their part in the resulting foreclosures.

“I’ve had loans where a customer wanted [to put false information] on the application,” he said. “I refused, but he went down the street and got it elsewhere.”

Barry-Smith agreed that “some borrowers are at fault” in certain egregious transactions. But he said there won’t be lawsuits against them unless a scheme, such as those involving a “straw buyer” intended to defraud a lender, can be proven.

“We think the appropriate target is the professional who should have known [better],” he said.

Later, Richardson and Ann Trudeau, president of Walden Mortgage Co. in Concord, said they were leaving the meeting with a renewed sense of urgency about making their feelings on proposed regulations known.

“We are incredibly overregulated already,” Trudeau said.

“The press is painting a broad brush against the mortgage industry,” added Richardson, who said he’d attend upcoming regulatory hearings, or at least express his feelings on the proposals through MMA.