Secretary of State William Galvin (left) testifies before the Committee on Banks and Banking in favor of a law that would prohibit predatory lending.

Although the amendments to regulations about high-cost mortgage loans mandated by the Division of Banks have barely reached the 60th day in effect, legislators, backed vehemently by the community, are again asking for a law instead of regulations.

Last Tuesday, the Committee on Banks and Banking heard arguments in favor of the law from numerous consumer groups and elected officials, including Secretary of State William Galvin and Sen. Dianne Wilkerson, D-Boston.

In his capacity overseeing the Registry of Deeds, Galvin said he has become increasingly aware of foreclosures. “I think the problem remains,” he said, even though the DOB has taken measures against it and the issue has received widespread coverage in the media.

The House bill against predatory lending would prohibit loan flipping and negative amortization and limit balloon payments. Its counterpart on the Senate side would do much of the same, including disallowing penalties for prepayments and requiring counseling before a person signs for a high-cost loan.

“The bill is stricter than regulations on prepayment penalties,” said Galvin. Additionally, it grants the borrower a private right of action against the company.

According to Galvin, predatory lenders are attracted to the elderly, particularly widows. An unethical lender knocks on the door of the person and points out a weak point in the roof, for example, and suggests a reverse mortgage. While reverse mortgages are legitimate transactions, in the hands of unscrupulous business people it can become a black hole.

“They suddenly find that a roof problem has become a problem where they lose their home,” said Galvin.

Traditional proponents of the law, like the Association of Community Organizations for Reform Now, recognized the strides made in the industry since the redlining scandal of the early 1990s and commended the commissioner of the DOB on his regulatory efforts.

“Over the past two decades, we’ve been working against bank redlining … Many banks have responded by creating products that meet the community needs,” said Alliea E. Groupp of ACORN. However, even though banks have improved, the industry as a whole hasn’t done enough.

“They [predatory lenders] capitalize on that dream, that Americans want their own home,” she said.

Balloon payments are a particular problem, she said, because low- to moderate-income people can’t possibly save enough money to make some of the outrageous payments predatory lenders expect. A balloon payment is good for a business because its income increases, but not so for a single person. A balloon payment “sets people up to fail,” she said.

But the committee co-chairman, Rep. John F. Quinn, D-Dartmouth, pointed out that some real estate speculators who signed on for a balloon payment five years ago and sold the property today would get great returns and therefore, it was a valid tool.

Groupp acknowledged there is a place for balloon payments for someone with good credit.

But Rep. Philip Travis, D-Rehoboth, countered Groupp’s argument, saying those with bad credit who can’t get a loan elsewhere will often take one with a balloon payment with the intention of establishing a good record and refinancing.

While he agreed that something has to be done about predatory lendin, he was skeptical of how to draw the line between legitimate subprime lending and predatory lending.

Throughout the hearing, in fact, committee members asked various people testifying before them to define predatory lending. The best definitions rested on “intent” and determining if the lender’s plan was to create a loan and conditions the borrower couldn’t possibly meet.

‘Loud Message’
Wilkerson said while the redlining problem of the early 1990s has been taken care of, predatory lending remains a problem. One solution created out of the scandal, the Massachusetts Community and Banking Council, has become a source to identify a continuing and disturbing trend, she said. A recent report from that organization showed disparity of loans granted to minority residents of Boston, often giving subprime loans to those who would qualify for prime.

“It is that reality that pushes them into the predatory lenders’ hands,” she said. While bankers and associations said the regulations by the DOB should be given a chance to work, it may be hard for them to argue against stories such as the one Wilkerson cited, in which a couple earned $1,300 a month and signed a mortgage for $2,400 a month with a $134,000 balloon payment. “They were too proud to tell someone that they couldn’t read,” said Wilkerson. “[Predatory lenders are] back – they’re back with a vengeance,” she said.

“Every merger we’ve had – African-Americans and Latinos saw a significant reduction in mortgages,” she said.

“This issue is on the table and has the ability to shrink – unintentionally – access to credit,” said James C. Dougherty, president of the Massachusetts Mortgage Association, echoing the sentiments of bankers who testified that in North Carolina – where anti-predatory lending laws were enacted last year – lenders such as Countrywide pulled out due to the complexity of laws.

Massachusetts is one of five states that have enacted regulatory solutions to the predatory problem, according to Susan Zuber, president of the Massachusetts Mortgage Bankers Association.

“I think that was a very loud message we are all opposed to predatory lending,” said Zuber.

Despite calls by consumer groups and legislators to create a law, the DOB itself has asked for more time to allow the regulations to work.

Although not present to speak specifically on the two bills, Joseph Leonard, counsel for the DOB, was questioned how the division views the situation. “The regulations can be adjusted more frequently than legislation … to reflect changes in the market,” said Leonard.

Last year, the DOB sat before the committee and asked for a chance to create regulations, which it did. The commissioner, Leonard said, could more easily revisit the regulations and make appropriate changes than could be made with a law.

Last year, predatory lending was a hot-button issue for the state. Legislation failed in light of the commissioner of banks’ promise to create regulations to prevent high-cost loans. If Wilkerson’s bill is passed, it would require that a report be generated to the division on all mortgages and leave it up to the commissioner to determine which loans are predatory. The report would be within the lender’s annual report and contain, among other things, the annual percentage rate of each high-cost home loan; the term of the loan; the total amount of money owed by each borrower; the points and fees; and the annual income of the borrower.