KEVIN CUFF
‘Zealous scrutiny’

With interest rates threatening to increase soon, the Massachusetts Division of Banks has released new rate-lock regulations to prevent last summer’s problems from reoccurring. But some in the mortgage industry don’t like what they see.

The DOB logged more than 100 complaints between July and September of last year regarding promises of low rates that were not being honored. The most common reasons were because the rate was not firmly locked or the transaction did not close before the expiration of the lock due to high business volume.

“We had an opportunity to take a step back and look at some issues,” said David Cotney, senior deputy commissioner at the DOB.

The new regulations state that a written agreement must be drafted between the mortgage lender and the borrower for a mortgage loan. That mortgage loan rate-lock commitment requires the lender to make a loan at the specified rate once both parties sign it.

The new regulations also define what mortgage brokers are not allowed to do.

“It is a prohibited act or practice 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,” state the new regulations, which were published May 21.

According to the Massachusetts Mortgage Bankers Association, the DOB is asking both the MMBA and the Massachusetts Mortgage Association to notify their members of the new regulations. The MMBA, however, has expressed concern that licensees who are not members of either association will not learn of the changes.

‘Bogus Agreements’

Dean Caso, president of Homevest Mortgage, said he doesn’t think the latest threat of higher interest rates was the impetus for the new regulations.

“It is a result of when rates went up in the summertime [of 2003],” said Caso, adding that a rate may have been locked for 60 days, but the approval wasn’t given in time and rates went up or brokers did not cover the rate with the lender and the market moved against them.

“As the interest rates goes up, that problem continues to occur,” noted Caso.

Cotney said he hopes the new regulations will prevent last summer’s incident from reoccurring.

“This was an effort to eliminate the confusion,” said Cotney. “We’re hoping the new regulations are going to really make clear what a rate-lock is and what must be given to the consumer.”

Caso said the previous regulations did need to be clarified, especially in an instance where brokers would claim a rate was locked, sometimes forcing the lender to cover that rate.

“Games are played,” said Caso.

The regulations were published without a public hearing because the DOB took advantage of emergency filing procedures. A public hearing is set for the “near future” followed by a comment period, said Cotney.

Kevin Cuff, executive director of the MMBA, said some members found the new regulations troublesome.

“The MMBA fully recognizes the importance of the integrity within the rate-lock agreement between lender and consumer. We remain cautious, however, that zealous scrutiny of the process might impede upon the practical implementations of issuing a rate lock,” said Cuff. “This could, in fact, result in mortgage lenders declining to issue rate-lock agreements creating a competitive disadvantage within the market. As an association, we will continue to work with the Division of Banks to prevent bogus agreements while maintaining the integrity of the borrower/lender relationship and allowing a competitive process while protecting the consumer.”

James Dougherty, president and chief executive officer of the Massachusetts Mortgage Association, said the MMA plans to comment on the regulations.

“Our concern has to do with the lack of clarity with regard to the broker’s role in [the new] rate-lock [regulations],” said Dougherty.

David Hadlock, an attorney who deals with residential real estate, said while the intentions of the DOB are good, there are still some flaws.

“We’re in an escalating rate environment,” said Hadlock. “[Regulation] doesn’t address the biggest area of potential problems – the initial communication between the consumer and the broker.”

Hadlock believes a standardized form or system should be put in place to document the dialogue between the consumer and the broker.

Hadlock said it is important for the broker to communicate with the consumer and intentions should be clear. Without documentation, he noted, problems can occur.

“It leaves it open to verbal miscommunication,” said Hadlock.

Dougherty said another problem with the regulations is that they were based on a model from New York. He said the New York lending community may have adjusted the interest rates in New York in order to abide by the regulations. He fears if the onus is on the lender to commit to a rate for a consumer, interest rates may have to be adjusted to abide by the regulations.

“[If that happens] the Office of Consumer Affairs will have done little for the consumer,” said Dougherty.

Cotney said although the regulations were based on the New York model, he has found no evidence that rates were adjusted there.

Hadlock said some of last summer’s problems had to do with out-of-state, Internet and federal lenders, and not in-state lenders.

But ultimately some mortgage lenders, like Caso, say the regulations have one purpose.

“The DOB is just trying to solidify that regulation that brokers don’t issue rate locks,” he said.

Others feel the amount of time between when the regulations were published and when they go into effect, June 1, is a problem. Kathy Schreck, sales manager for Mortgage Network, said 10 days is a small amount of time, especially for those who have to change the format on how they issue locks to borrowers. Schreck said the locks, generally computerized, need to be signed and are generally in a format that isn’t easily translatable to a borrower.

The regulations also deal with how brokers and lenders advertise. According to the new paragraph inserted to the updated regulations, every mortgage broker or mortgage lender must maintain a copy of each separate advertisement. That includes commercial scripts of all radio broadcasts, television broadcasts and electronic media for examination by the commissioner for a period of three years from the date of publication.