JAMES F. FLYNN
Today’s market different

Almost two months after the state Division of Banks issued emergency rate-lock regulations, more than two-dozen mortgage industry insiders, representing small and large firms, testified before the division that it is difficult to comply with the new set of standards and suggested changes.

The new regulations, effective June 1, state that a written agreement must be drafted between the mortgage lender and the borrower for a mortgage loan. The agreement obligates the lender to make a loan at the specified rate when the lender and the borrower sign the agreement. But many in the mortgage business said relying on the consumer to return documentation is an unrealistic request.

David Hadlock, principal of Hadlock Law in Natick, said current Web-based systems that facilitate communication between brokers and lenders are not set up for the lender’s signature to precede the borrower’s.

Hadlock warned Division of Banks Commissioner Steven Antonakes and Senior Deputy Commissioner David Cotney that companies may be forced to revamp their systems, driving investors out of the industry.

Art Lindberg, northeast regional manager of First Magnus Financial Corp. in Needham, said borrowers most often communicate directly communicate with brokers. Mortgage investors rarely communicate with the borrower and generally rely on brokers to bridge the gap.

Lindberg said the general practice at First Magnus begins when a broker contacts a company like First Magnus, the lender goes online, loads the loan information into their database and a rate-lock confirmation is generated. Confirmation is electronically sent to the broker and they have the ability to inform the borrower.

Elizabeth Phelan, a member of the Massachusetts Mortgage Bankers Association board of directors, said the jargon from a lender is not especially consumer-friendly, making brokers vital in communicating information to the borrower.

The regulations also include language prohibiting mortgage brokers from certain practices.

“It is a prohibited Â… for a mortgage broker to issue a mortgage loan rate-lock commitment on its own behalf or on behalf of a mortgage lender, or to imply to a borrower that it can lock a rate on behalf of the borrower,” the regulations read.

However, mortgage professionals told DOB officials that the broker is necessary in facilitating the rate lock.

“A broker is an integral part of the process,” said Kathleen Schreck, sales manager at Mortgage Network in Danvers.

She added the broker often is the only contact a consumer has with their lender and brokers should therefore be able to issue rate locks on the behalf of the lender.

The regulations were issued on an emergency basis in May when the Division of Banks determined interest rates would likely rise – possibly sharply – in the near future. The “emergency” status expires 90 days from the time the regulations were issued. In an effort to avoid a similar scenario to what occurred in the summer of 2003 when interest rates spiked and more than 200 consumer complaints were logged against the mortgage industry concerning rate locks, the regulations were put into effect before a public hearing or comment period was scheduled.

‘New Emergency’

But James F. Flynn, president of Marathon Mortgage in Hopkinton, told the DOB at the hearing, held at the DOB’s South Station hearing room last Tuesday, that today’s market is a different one from what existed in the summer of 2003

Hadlock agreed, saying there is no emergency this year and the new regulations have created confusion, in effect causing a “new emergency.”

James Dougherty, executive director of the Massachusetts Mortgage Association, said the level of confusion about the regulations has been “unrivaled.”

“I’ve never answered the phone more on one issue than on this,” said Dougherty.

Kevin Cuff, executive director of the Massachusetts Mortgage Bankers Association, wrote in a statement to the DOB that the MMBA has questioned the setting of industry policy and its enforcement before “either due process has been conducted or before most of the industry has been informed or prepared to comply.”

Antonakes cited 1986, 1994 and 2003 as instances when rates rose rapidly. He said the DOB was not attempting to damage the mortgage business, but was concerned with protecting the consumer.

“This action [implementing rate-lock regulations] wasn’t taken lightly,” said Antonakes.

Matt Langley, a local representative from Bank of America, said he understood that the regulations were an attempt to assure promised rates are delivered. He added that last summer, problems existed because of the large volume of loans and rate locks expired.

Langley suggested there should be a standardized form that has a rate and expiration date.

Cuff said that mortgage loan volume has increased from 289,000 closed loans in 1999 to more than 700,000 closed loans in Massachusetts in 2003.

“We also recognize that the number of these [rate-lock] violations and the number of complaints were statistically a very small percentage compared to the rates honored and the loans closed during that same period,” Cuff said.

The majority of people who testified requested that the DOB suspend the regulations until the industry has time to better prepare for compliance. Cuff said most brokers and lenders are trying to comply; however, many have questions.

“Most people are saying ‘we do this, is this accurate?'” said Cuff.

The regulations were released on May 21 and on June 1, lenders and brokers were asked to begin complying with them.

Schreck said changing a rate-lock form to include a signature takes more than 11 days and urged the DOB to recognize the complexity of the matter.

“I am optimistic and hopeful that the current regulations will be suspended until the regulations can be clarified,” Schreck said after the hearing.

Asked if there was a chance an extension would be granted to allow the industry more time, Cotney said, “the emergency regulations are in effect right now.”

Cuff also said in a written statement to the DOB that there are questions about penalties for rate-lock violations.

“The association questions the statutory codification of recently introduced penalties and other empowerment of the division through a separate vehicle (Abusive Home Mortgage Lending Act) which is protected from public hearing or other industry participation,” Cuff said.

However, he added the MMBA ultimately may agree with the penalties or intent of the empowerment.

Those who testified left the DOB with lingering questions about an acceptable signature process – whether handwritten is required or electronic is acceptable – and if the timing of a rate lock begins when the borrower signs an agreement.

Schreck also noted that when a rate lock is issued, it is supposed to be binding. She said she hopes it is not the DOB’s intention to allow consumers to shop around for a better rate after they have locked in with a lender.

Despite the requests for changes to the regulations, the mortgage professionals have concurred with the DOB’s intent to protect mortgage consumers from fraudulent use or non-support of a mortgage rate-lock commitment.

The public comment period following the hearing ended on Friday, July 16, and the DOB will be reviewing all comments.

Cotney said there is the chance the DOB could make changes or amendments to the permanent regulations.

“We have often made changes based on public input,” said Cotney.