Michael Gatto, vice president of commercial lending at Emigrant Funding in Braintree – the local mortgage lending arm of New York-based Emigrant Savings Bank – speaks with attendees at last week’s annual convention held by the Massachusetts Mortgage Association.

Subprime lenders are shutting down right and left, and the industry is languishing under the press’ and regulators’ glare. But Massachusetts Mortgage Association President Rosemary O’Neil is looking on the bright side.

“Things can only get better,” O’Neil said when asked about what’s going right in her profession at MMA’s annual convention last week.

More than 1,400 Massachusetts brokers and correspondent lenders attended the event, which was held April 4-5 at the Hynes Convention Center in Boston. It featured nationally known speakers, local regulators and exhibitors of everything from lending software to loan products. Commercial mortgage products seemed especially prevalent, and subprime was still being pushed.

“This was bigger and better” than the last convention, O’Neil said, adding that MMA is working on “refocusing [the industry’s] image.”

Licensing of all loan originators is at the top of the 350-company-member association’s agenda this year. Its bill on that topic, Senate Bill 597, which originally was filed in 2003, is now pending in the state Legislature.

If loan originators were licensed, O’Neil and others contended, the industry might not be seeing some of today’s major problems such as loan foreclosures, cease-and-desist orders and major subprime lenders going bankrupt as increasing numbers of mortgage holders can’t pay off their loans.

Those crises are the result of lack of originator education, according to O’Neil, and fraud, according to Harry Dinham, president of the National Association of Mortgage Brokers – MMA’s national affiliate – and owner of a Plano, Texas-based brokerage.

At one afternoon session, NAMB Legislative Chairman Joe Falk offered stark examples of both factors.

“There are originators who think Fannie Mae [the Federal National Mortgage Association] is a candy,” he said. “There are those who don’t know what a credit score is and who think it’s OK to call an appraiser and say, ‘If you can adjust the price on this house, I’ve got 10 more waiting in the wings for you.’

“These people are untrained,” he continued, adding that there’s a worse problem: convicted felons are entering the industry, which has virtually no barriers for individuals who want to work in it.

“Every single piece of information you need for stealing an identity, you see on mortgage loan documents,” he warned.

Falk said that when Ohio implemented loan originator licensing in 2003, 12 percent of existing originators, who applied for the license so they could continue working, were cut from the overall pool when they couldn’t pass the required criminal-background check.

O’Neil said she’s heard that another Midwestern state that passed a licensing law more recently found that 50 percent of originators couldn’t pass the basic competency test.

“They were saying they all went to work in banks” whose employees weren’t included in that state’s licensing requirement, she said.

“We believe in minimum standards,” Falk added.

‘The Good Ones’
NAMB’s five means of solving the current problem include a short period of studying it so that knee-jerk reactions don’t inadvertently harm consumers; so-called “payment shock sheets” that would give consumers easy-to-understand loan information about minimum and maximum payments; and originator licensing that includes required criminal-background checks.

MMA’s pending bill, for which a hearing has not yet been scheduled, requires all loan originators to be licensed and to pass state and national criminal-background checks, which would be confidential except for use by the Massachusetts Division of Banks (DOB) in determining the applicant’s eligibility. The licenses would be renewable every two years and also would require at least 16 hours of residential mortgage lending continuing education in order to be renewed.

House Bill 1237, a related piece of legislation pending before the Massachusetts Legislature’s Joint Committee on Housing – and put forward by its co-chairman, Rep. Kevin Honan of Boston, with Boston Mayor Thomas Menino – proposes the same requirement.

Yet another bill also proposes licensing but would exempt bank and credit union employees. That legislation, Senate Bill 747, is backed by Gov. Deval Patrick’s administration.

Twenty states currently license loan originators, although several more have bills similar to MMA’s, O’Neil said.

DOB Commissioner Steven L. Antonakes and Compliance Field Manager Dennis C. Otis, who supervises bank examiners working on the North Shore, discussed actions regulators have taken and others under way as the market and government react to the issues affecting the industry.

Antonakes, whose agency has shut down more than a dozen brokers and lenders for being unlicensed or using misleading or fraudulent practices, said he is troubled by the misuse of certain types of loans by some lenders and brokers. He expressed particularly strong concern about reduced-documentation mortgages, a type many say have elements making them easy targets for fraud.

DOB sent out an industry-wide letter not long ago, he said, about the reduced-documentation loans. It promised “severe action” if evidence of mortgage fraud was found. Antonakes said such loans are almost never appropriate for first-time homebuyers or those who only marginally qualify for credit. And yet, he noted, DOB examiners in recent months “found numerous instances in which income stated on reduced-documentation loans bears little resemblance to the income provided on an initial full-documentation loan application.”

Some “egregious” cases featured altered pay stubs or W-2 tax forms, or admissions that a loan document included the income of someone whose name was not on the application, according to Antonakes.

Interest-only and payment-option ARMs (adjustable-rate mortgages) – also are problematic when used to allow buyers who couldn’t otherwise purchase a home to get one, he added.

Antonakes said federal bank and credit union regulators just weeks ago proposed guidelines for subprime lending that focus on 2/28 and 3/27 loans – also known as hybrid ARMs – and states plan to issue similar guidelines that would govern non-bank lenders and brokers.

Massachusetts recently expanded its list of prohibited acts and practices that constitute grounds for a company’s loss of license via emergency amendments to its regulations governing mortgage lenders and brokers. Otis’ description of some of them generated the most questions from about 60 brokers, title insurers and attorneys in attendance.

Numerous comments were devoted to a form required by the Massachusetts Attorney General’s Office that documents loan terms for consumer protection but is outdated and, according to one company owner, “god-awful to fill out.”

Another asked if there were plans to replace the form with something “common-sense.” The DOB is working with the attorney general to create a new one, a representative said.

Later, Alain Valles, who owns Direct Finance Corp., a lending and brokerage company in Hanover, remarked on the number of regulators – and regulatory agencies – with which mortgage companies must deal.

Valles said his firm has a full-time staff person in charge of compliance, and estimated that companies spend 30 percent to 40 percent of their time on such matters.

“There’s a ton of people working with us,” he said.

Valles remarked that the people attending the MMA conference and asking questions of the regulators “are the good ones.”

“The people who are not here are the ones we want to get to,” he said.