CHRISTOPHER BARRY-SMITH
Explained details of new regs

With more new regulations in the past 24 months than in the past 20 years, what’s a Massachusetts mortgage lender or broker to do?

The state’s two major industry trade groups, the Massachusetts Mortgage Bankers Association and the Massachusetts Mortgage Association, tried to answer that question – and brokers’ and lenders’ specific compliance concerns about the latest regulation to hit them – at a sold-out “Regulatory and Legislative Update” in Norwood attended by more than 450 last week.

“It’s an awful lot to interpret,” said MMBA Executive Director Kevin Cuff.

Panelist Christopher Barry-Smith, who has directed the Consumer Protection Division at the office of Attorney General Martha Coakley since she took office a year ago, was the headline speaker at the Jan. 16 event.

Barry-Smith was charged with explaining the details of Coakley’s brand-new consumer protection regulations, implemented Jan. 2. He indicated it’s unusual that the attorney general would spend so much time on regulation, as opposed to in court, but said Coakley’s hand was forced by the extent of “abusive” lending practices she saw.

The regulations, which impose restrictions on certain types of loans and broker compensation, already have affected out-of-state lenders, two of whom have chosen to stop lending through Massachusetts brokers.

More than a dozen additional lenders have eliminated or limited certain products in the Bay State, or revised their own broker compensation guidelines in response.

In response to the new rules, several companies, including top-ten lender Wells Fargo, changed their compensation guidelines, limiting broker compensation to a 1.5 percent yield spread premium – the YSP used in examples Coakley offered last month to help clarify the regulation. Barry-Smith said they needn’t have done so.

“There’s no limit under the regulations” as to how much of a YSP a broker can get paid, he said.

A yield spread premium is a loan origination fee paid to the broker by the lender, over time, representing the difference between the interest rate for which the borrower qualified and the amount he or she pays. It stands in contrast to a “point” on a loan, a situation in which a borrower would have the alternative of paying the broker, upfront, to cover his or her costs. One point equals 1 percent of the loan amount.

Barry-Smith seemed to offer conflicting information later during the event, when he said that while the regulations do not impose an upper limit on broker compensation, “if [5 percent] is your average rate, we have the right to bring an unconscionability claim. There are plenty of people whose standard is 2 [percent].”

He also caused something of a stir while responding to a question from panelist David Hadlock, MMA’s general counsel, about service release premiums.

Barry-Smith said the state would like to see SRPs, which represent a lender’s profit when selling a loan to the secondary market and do not currently have to be disclosed, as a state-required disclosure on the settlement statement a borrower signs when a loan closes, eliciting a murmur of surprise.

At other times, his answers to panelist or audience questions seemed to cause relief.

“There are no longer any attorney general-required disclosures,” he said, responding to a query from panelist Ruth Dillingham, special counsel for First American Title Insurance Company’s lenders’ division.

The initial regulation had required a new disclosure form that borrowers would have to sign at closings, but Coakley decided not to require it in response to MMA’s and MMBA’s requests.

‘A Business Reason’

Barry-Smith said a general good practice regarding yield spread premiums is to never create the impression that a broker or lender is profiting with no added risk to themselves or benefit to the consumer.

For example, a YSP that increases as an adjustable-loan rate increases, with no corresponding benefit to the borrower, would create a conflict between the broker’s and borrower’s interest, meaning the regulation was violated.

But if a business operated with both a broker’s and lender’s license, and took a higher yield spread premium as a lender than as a broker for a loan on otherwise similar terms, that would be acceptable, he said, because the lender has a legitimate “business reason” – the added risk in being a lender, as opposed to a broker – for the discrepancy.

Responding to several questions about stated-income or “no-doc” loan – which a few lenders have chosen to eliminate in Massachusetts in response to the regulations, to the dismay of the local industry – Barry-Smith said the new regulations don’t prohibit those loans, but just require that the broker or lender obtain a signed statement of income from the borrower, even if the lender, who underwrites the loan, doesn’t verify it.

The statement also must disclose that no-documentation loans often have higher interest rates or costs because of increased lender risk.

Barry-Smith also said that as professionals, brokers must be reasonably sure a borrower can repay a loan before allowing it to proceed. Answering an audience member’s question, he said even though the lender underwrites the loan, the broker still has that responsibility to the borrower, to whom he or she suggests loan products.

Dillingham said no one in the room should walk away with the illusion that they will never get sued, under Coakley’s new regulation or any other.

What they should try to do instead, she suggested, is ensure that any lawsuit won’t make it past the first round.

“There’s a rule in litigation that goes a long way” toward ensuring that, she said: Companies should have a policies-and-procedures manual, incorporating the regulations into their own rules, and be able to document via regular internal audits that loan officers are following it.

“I can’t stress enough that this will help you going forward,” she said.

After the forum, Medford broker Robert McDonald, who is also MMA’s president-elect, said Coakley’s regulations won’t be a problem for his firm. He added that “any reputable company” should be able to deal with them.

Sheka Kargbo, branch manager at Mortgage Options of America’s Winchester office, said the regulation seems like “common-sense business practice” to him.

Kargbo said he’s had some concerns about how high a yield spread premium will be allowed to go, in light of the fact that realtors typically make 5 percent commission on a sale, even though brokers do more paperwork, he said.

But sometimes, he said, based on the way rates are figured, a 5 percent YSP would be “excessive” for a broker, while 2 percent to 2.5 percent actually would be more “reasonable.”