It might have been the subzero temperatures or simply a lack of questions about the Division of Bank’s latest proposed regulations. But unlike past public hearings related to high-cost loan provisions of the state’s new predatory lending law when many lenders and their trade associations testified before the Division of Banks, a hearing on the matter last Wednesday was sparsely attended.

The hearing was intended for the commissioner of banks to solicit comments regarding amendments to two regulations: Disclosure of Consumer Credit Costs and Terms, and Unfair and Deceptive Practices in Consumer Transactions.

The amendments change the definitions in existing regulations to conform to the new Predatory Lending Act, which took effect on Nov. 7, 2004, and add new definitions where none existed in the regulations. Other changes were proposed to make the regulations consistent with the act.

“The hot topic is points and fees and definitional issues,” said David Hadlock, regulatory counsel to the Massachusetts Mortgage Association. One example is the debate over whether yield spread premiums, which are paid to by lenders to mortgage brokers who secure rates higher than the lender’s lowest rate, should be considered part of the calculation of allowable points and fees by regulators.

Hadlock cited a California court ruling, Wolski vs. Fremont Investment & Loan, which said yield spread premiums are based on interest and excludable from points and fees. He points out that both the Massachusetts statute and proposed regulatory changes state “interest” is excluded from points and fees and yield spread premiums should be excluded because they are based on interest payments.

In the regulations, calculations for determining limits for points and fees do not include charges for things such as flood certification, pest infestation, flood determination, appraisals and fees for inspections performed before closing. However, Hadlock said there needs to be confirmation in the regulations that state even if a broker or lender is the payee on a check, the fees are excluded from calculations if the fees are ultimately disbursed to a third party.

Caroline Gilroy-Brown, counsel to the Massachusetts Mortgage Bankers Association, said there should also be a change in language from “fire” insurance to “hazard” insurance.

Hadlock also cited uncertainty about issues related to prepayment penalties. Under the current regulations, a prepayment penalty that meets conventional standards is not considered part of the total points and fees. Conventional prepayment penalties are any prepayment fee that may be charged in a home loan and is authorized by law, provided the home loan does not have an annual percentage rate that exceeds the conventional mortgage rate as defined by regulators by more than 2 percentage points and does not permit any prepayment fees or penalties that exceed 2 percent of the amount prepaid. The regulations state that points and fees include all prepayment penalties if the loan refinances a previous loan made or currently held by the same lender.

Hadlock asked the division to clarify whether a loan being refinanced with a conventional prepayment penalty also should be excluded from points and fees.

In order for a high-cost home loan determination to be triggered, the regulations say total points and fees payable by the consumer at or before loan closing must exceed the greater of 5 percent of the total loan amount or $400. The $400 figure will be adjusted annually by the commissioner of banks on Jan. 1 based on the annual percentage change in the Consumer Price Index that was reported on the preceding June 1. Gilroy-Brown noted that based on the CPI for 2005, the threshold would be about $500 and asked the DOB whether they would be adjusting the allowable fee figure upward.

Any compensation paid to a broker directly or indirectly must be included in points and fees, according to the proposed regulations. Gilroy-Brown asked the Division of Banks to clarify whether yield spread premiums and service release premiums – another form of compensation paid to mortgage brokers – should be excluded in the calculation of allowable points and fees.

‘In Harm’s Way’

Gilroy-Brown also asked for clarification on the annual percentage rate with regard to adjustable-rate loans with an introductory rate. Because there are products that may have a fixed rate for two or three years and then adjust, Gilroy-Brown said loans with fixed rates lasting a number of years should not be considered an introductory rate.

Hadlock said there also needs to be clarification of the definition of lender and broker because there are certain requirements that are outside the broker’s domain.

A mortgage broker, Hadlock said, should be insulated from liability for “lender” domain activities because the broker has no control over lender disclosures, fees and activities and consumers have direct relationships with their lender.

Hadlock also said brokers should not be liable for disagreements over federal preemption of state law as it applies to lenders.

“[Being liable] could put brokers in harms way,” Hadlock said.

Because the regulations currently include brokers in the definition of lender, Gilroy-Brown asked the division to remove that language because brokers cannot fund loans in Massachusetts.

The proposed regulations also cover disclosures and state that creditors must disclose notices, annual percentages rates and other information to the borrower. Hadlock testified that the regulations be amended to require disclosures be given only by the “true creditor,” not the loan originator or broker.

Hadlock said the responsibility for issuing a high-cost loan should go to the party making the credit decision and who determines a borrower’s ability to repay. Brokers should be excluded from liability for “making” a high-cost loan or other “lender” issues, Hadlock said.

Another definition in need of clarification is that of what constitutes a “home mortgage loan,” Hadlock said. He asked the Division of Banks to define “home mortgage loan” as a loan involving one- to four-family primary residences. Hadlock said lending on investment properties should not trigger the statute.

Both Hadlock and Gilroy-Brown asked the division to provide greater protections to stimulate piggyback loans, which is when a first and second mortgage are closed at the same time. According to Hadlock, the statute is unclear about how calculations will be made in a divided loan transaction. Because these products can offer great benefits to the consumer, such as avoidance of private mortgage insurance, Hadlock said there should be safe harbors for brokers and lenders. Gilroy-Brown said the products are treated as separate transactions and are not designed to avoid the law.

Written comments on the proposed regulations are being accepted until March 16 at 5 p.m.