RUTH DILLINGHAM
‘Another layer’ of rules

One of the hottest topics for the mortgage industry in 2003 – predatory lending – has been just as hot for the first half of 2004 as a long-planned predatory lending bill makes its way through the state Legislature.

Those in the mortgage industry watched closely as H. 4606, “An Act Prohibiting Abusive Practices in Home Mortgage Lending,” was released out of the House Committee on Ways and Means last Tuesday with amendments to the bill. On Wednesday afternoon, it was passed by the House of Representatives without debate or amendments. It now moves to the Senate.

“Although we would like to see technical consistencies in some of the intentions of the bill as it relates to high-cost lending vs. conventional lending, all in all, [Joint Committee on Banks and Banking] Chairman [Rep. John] Quinn and his banking committee should be lauded for their efforts in addressing issues that are of concern to all of us in the industry. This bill sets the table for debate and a standard of lending practice within the commonwealth,” said Kevin M. Cuff, executive director of the Massachusetts Mortgage Bankers Association.

James Dougherty, president of the Massachusetts Mortgage Association, had similar praise.

“We want to commend the House for their efforts to address the predatory lending issue,” said Dougherty. “The association views the legislation as comprehensive and we are optimistic it will achieve the results that were intended by the authors of the bill.”

Dougherty, like Cuff, said there are several technical issues within the legislation that need to be addressed. The MMA plans to make suggestions prior to the final passage of the bill in the Senate.

The legislation is primarily aimed to protect borrowers of “high-cost home mortgage loans.” It would improve existing safeguards and create additional protections against the practices of predatory lenders.

While there are still some kinks to work out in the bill, the mortgage associations say they support protecting consumers.

“I like the intent of trying to protect people from predatory lending,” said Dougherty.

Ruth Dillingham, vice president and special counsel for the Lenders Division of First American Title Insurance Co. and chairwoman of the MMBA, said the association was not opposed to a public policy to protect against predatory lenders.

However, the bill did create concern for many in the mortgage industry when the bill was originally drafted. Both the MMA and the MMBA submitted recommendations to the Legislature with changes they hoped to see incorporated.

Leadership at the MMA and the MMBA both expressed displeasure with language in the bill that proposed new annual percentage rate limits of between 6 percent and 7 percent more than the yield on comparable U.S. Treasury securities, banned negative amortization and simple interest loans and further protected borrowers against foreclosure.

Although some of the suggestions offered by mortgage industry groups were incorporated into the bill passed by the House, Sen. Andrea Nuciforo Jr., D-Pittsfield and co-chairman of the bank committee, said he thought it would be beneficial to ban mortgage products that involve interest-only and negative amortization structures.

“That [negative amortization] is a practice that really hurt a lot of consumers,” said Nuciforo.

Dougherty, Dillingham and Cuff said in recent days that banning simple interest loans would prevent construction lending from moving forward, but Nuciforo disagrees. He said there are “alarmists” who are creating the idea that the bill will dry up construction lending.

When the bill was released on Tuesday, changes included language that stated a high-cost home mortgage would be considered so if the annual percentage rate exceeds the yield of U.S. Treasury securities by more than 8, instead of 6, percentage points for first-lien loans or by more than 9, instead of 7, percentage points for subordinate-lien loans.

“That is a codification in support of the current [Massachusetts] Division of Banks regulations,” said Cuff.

He said the 6 and 7 percentage points originally drafted in the bill would have been the most restrictive in the nation. Out of the 700,000 loans issued in Massachusetts last year, Cuff said nearly one-quarter would not have closed if the percentage point limit were set at 6 and 7 percent.

The ban on negative amortization was also changed to address high-cost mortgage loans only instead of banning negative amortization on all lending.

‘Giant Hiccup’

Another section of the bill stipulated that before a lender could initiate a foreclosure, they would have to go to court to determine if the lender was the proper party to invoke the power of sale or other remedy and the grounds for exercising the power of sale or other remedy had been fully satisfied. The section was eliminated from the version of the bill passed by the House.

“No place in the country allows that,” said Cuff.

Dougherty said he feared if that section was approved, it could take up to a year to go through the court process, placing a severe burden on lenders.

State mortgage industry leaders said they were pleased that many of their concerns regarding the bill were addressed, but some still question the necessity of such a law when predatory lending regulations already exist.

Dillingham said the Division of Banks should be the prime regulator of lending practices or the law should at least be consistent with the DOB’s existing regulations.

“Let’s codify their [DOB] rules rather than create another layer [of conflicting rules],” said Dillingham.

Dougherty said that the DOB is more effective in regulating lending activity than a standing law because the agency is more flexible and able to keep up with and adapt to changes in the marketplace.

David Hadlock, principal of Hadlock Law in Natick, said the revisions to the bill were appropriate, but questioned whether the law was unnecessary layering to existing regulations pertaining to high-cost mortgages.

Nuciforo said preventing predatory lending was an important issue worthy of becoming a law. While the DOB commissioners in recent years have been “attentive” to predatory lending practices, Nuciforo said that may not always be true and a law would prevent future problems.

Consumer advocate groups also expressed an interest in the bill and two groups were pleased with what they saw passed by the House.

“This is one of the stronger bills in the country in predatory lending, in preventing equity stripping,” said Deborah Goldstein, senior policy counsel at the Center for Responsible Lending at Self Help in North Carolina.

Chris Saffert, deputy director of the Association of Community Organizations for Reform Now’s Financial Justice Center in New York, said the bill addresses many predatory lending concerns.

“We’re pleased with the House leadership,” said Saffert.

Saffert said he was especially happy to see the changes in the credit counseling section of the bill, which originally stated that a high-cost home mortgage loan borrower must complete an accredited credit counseling program. The bill now stipulates that a creditor may not make a high-cost home mortgage loan without first receiving certification from an approved counselor stating the borrower has received counseling on the advisability of the transaction.

“People don’t always understand the costs they are getting into,” said Saffert.

The section pertaining to points and fees was one area that did not see changes. The bill states that “a high-cost home mortgage loan shall not include the financing of points and fees in excess of 5 percent of the total loan amount or $800, whichever is greater.”

While supporting the concept of greater protections for consumers, Dillingham said the new bill, coupled with the DOB’s implementation of new predatory lending regulations about two years ago, causes a “giant hiccup” in the mortgage industry.

“For a business to reevaluate their entire loan product line is not a good thing,” said Dillingham.

She said many mortgage companies thought the regulations were the final step a few years ago. The prospect of a new law dealing with predatory lending would drastically change such expectations.

Mortgage groups now will have further opportunities to influence the final language of the proposed law. Once in the Senate, the bill will be referred to the Senate Committee on Ways and Means where more amendments can be made and those in the mortgage industry have another chance to offer recommendations. If an agreement is reached, it will occur by July 23 when formal legislative sessions close.