MARTHA COAKLEY
New lending regulations

With foreclosure rates skyrocketing, new mortgage regulations will be implemented this week. As a result, two industry trade groups are threatening legal action and some of the nation’s largest lenders are hinting they will curtail funding of loans in the Bay State. Some mortgage brokers, meanwhile, are wondering if they will be able to conduct business at all.

Last-minute meetings were held Friday between Attorney General Martha Coakley and the leaders of trade groups representing Bay State mortgage brokers and lenders to forestall those consequences. Whether any agreements were reached between the attorney general and representatives of the Massachusetts Mortgage Bankers Association and Massachusetts Mortgage Association could not be ascertained by Banker & Tradesman’s press deadline late Friday afternoon. The meetings, which began at 1 p.m., were still under way after 4:30 p.m.

“I have a very anxious membership right now that I am trying to keep at bay,” MMBA Executive Director Kevin Cuff told B&T earlier in the week. Cuff was slated to meet with Coakley and Jeffrey Clements, chief of the Public Protection and Advocacy Bureau in the attorney general’s office, on Friday.

Denise Leonard, executive director of the MMA, a group representing brokers, was scheduled to meet Coakley and Consumer Protection Division head Christopher Barry-Smith. She said MMA wanted to talk about, “How do we make this so it doesn’t put us out of business.”

MMBA plans to “do whatever it is we need to, to protect our interests,” Cuff said. While both he and Leonard expressed hopes that Friday’s meetings would help the industry’s cause, Cuff said MMBA wouldn’t rule out pursuing its goals through legal means if necessary.

In August, Coakley announced new rules under the Massachusetts Consumer Protection Act that require, among other things, mortgage brokers turn away loans if they are not in the borrower’s best interest or if the broker’s financial interest conflicts with the borrower’s. The regulations also prohibit discrimination and the steering of borrowers toward loan products more costly than those for which they qualify.

Brokers last week expressed growing worries that the regulations would stymie their ability to operate in Massachusetts. Industry practitioners are most concerned with the conflict-of-interest provision, which they say effectively would wipe out the way they’ve been compensated by lenders for at least 15 years. Wholesale lenders often pay brokers who sell their loans based on yield spread premiums, which is the difference between the interest rate for which a borrower qualifies and what he or she gets charged.

“Eliminating the yield spread premium would eliminate mortgage brokers,” said Brian Driscoll, a production manager at Amerihome Mortgage Co. in Winchester.

“Lenders are really, really scrambling,” said Nanci Weissgold, an attorney who works for the Washington, D.C., office of Kirkpatrick & Lockhart Preston Gates Ellis and represents lenders who do business nationwide.

“Large lenders are wondering, ‘How can we maintain a wholesale shop in Massachusetts?'” Weissgold said.

With the regulations slated to take effect just a month after they were put forward in final form, Weissgold said, there’s not a lot of time left for lenders to make systemic changes to their operations and business models.

Ohio-based wholesale and retail lender Huntington Third Party Lending recently told local brokers that it is no longer funding loans made on Massachusetts properties due to the impending regulations. In a Nov. 8 memo, the company cited the “increased level of risk” stemming from the new rules as its reason for ceasing operations in the Bay State.

Industry representatives say large national lenders, including Countrywide, Wells Fargo and Citimortgage, also are telling brokers they will cease wholesale lending in Massachusetts if the regulations go into effect. None of the lenders mentioned responded to Banker & Tradesman’s requests for comment.

Coakley said she finds it “curious” and “telling” that the yield spread premium concerns are only coming up now.

“If [broker and lenders] were concerned it was unfair, then they should have come forward [at the public hearings] and said, ‘Attorney general, you are barking up the wrong tree,” she said.

However, Barry Thomas, Burlington office manager of Amerihome, said industry concerns about restrictions on yield spread premiums were raised at the hearings.

Coakley’s Consumer Division chief, Christopher Barry-Smith, noted the regulations were reviewed extensively for workability and said several provisions were changed prior to their release. Further public comment was sought at four hearings in September.

Immediate past MMBA Chairman John Battaglia, president of Cambridge Mortgage Group in Hingham, said, “We applaud the efforts of the attorney general to weed out bad lenders, but we don’t want them to weed out good pricing in the process.”

Cuff said MMBA hopes Coakley will issue “some guidance on how they think the industry can comply” with the new regulations while still providing credit to Bay State homebuyers.

Battaglia said no-point, no-closing-cost loan options could disappear if the regulations go into effect. Points and closing costs are among the other ways brokers get compensated, and would likely be more widely used if yield spread premiums are prohibited.

Driscoll and others said the regulations unfairly target mortgage brokers. Driscoll cited similarities between the way brokers and banks – which do not use yield spread premiums – get compensated for loans.

Banks are paid a “service release premium,” or fee, when they sell a loan to a secondary-market investor, Driscoll said.

The service release premium is not that different from a yield spread premium, except that the amounts are not disclosed, Driscoll said.

But Massachusetts Bankers Association Director of Federal Legislative and Regulatory Policy Jon Skarin said that while both service release premiums and yield spread premiums add interest-rate costs for the borrower, there are differences. Service release premiums are paid to an institution for the right to perform loan servicing. Yield spread premiums, in contrast, are paid to an individual who already has delivered the service of selling a particular loan to a borrower, Skarin said.

Coakley said that individual financial incentives were a major cause of the current foreclosure crisis in the Bay State and left many consumers with high-cost mortgages.

She said the attorney general’s office has found yield spread premiums either were “not disclosed appropriately or, if disclosed, unfair to the first-time homebuyer who has no idea what the fees are.”

“Brokers and lenders have some answering to do” for the role they played, Coakley said.

Rich Shapiro, a principal at Asset Mortgage Group, said “some brokers were abusing [yield spread premiums].” However, he said those abusive lenders largely are out of business now, either because they’ve been prosecuted or forced out by the changed market.

“Pretty much the only people left are the good guys,” he said.

Fiduciary Duty

In addition to requiring that loans be in the borrower’s best interest and prohibiting brokers from having a fiduciary conflict of interest with the borrower, the new regulations require that lenders and brokers have a reasonable belief that the borrower will be able to repay a loan. They also specifically address so-called no-documentation or stated-income loans by requiring lenders to disclose how such loans affect the rate a borrower pays and obtain a signed statement of the borrower’s income.

Bank of America told brokers on Nov. 8 it would no longer accept stated-income loans in Massachusetts beginning on Nov. 15 when regulators begin enforcing the new rules.

Some industry watchers suggest that the new regulations will mark a sea change in how mortgage brokers are perceived.

Kenneth Ehrlich, an attorney who co-chairs the banking practice at Boston law firm Nutter, McClennen & Fish, said the conflict-of-interest provision “seems to be an expression of the standard a fiduciary would be held to.”

That, he said, would radically change the relationship between mortgage brokers and borrowers.

“Up until now, our laws haven’t viewed mortgage brokers as fiduciaries,” he said, but rather as salespeople who have no obligation to tell a buyer of their services if they think one product is better than another, or if their own interests may be in conflict with the buyer’s.

A fiduciary – for example, someone who manages investments – owes duties of care and loyalty to his or her client, Ehrlich said. “They have to act reasonably and in a prudent manner, and may never put their own interests above the person to whom they owe the fiduciary duty,” he said.

If brokers are held to that standard, he said, “it [would be] a major change, in effect treating the broker as the customer’s agent rather than as an agent for someone on the selling end of the transaction.”

Jim Picciotto, president of Patriot Funding in Framingham, said another major change is on the horizon as a result of the new regulations.

“I think the person they will hit the hardest will be the consumer,” he said, “because the consumers will have fewer choices.”