Kevin Cuff
Overwhelming changes

Whew! Massachusetts mortgage brokers and lenders have gotten a six-week reprieve from the regulations they said would bring mortgage originations in the state to a standstill.

Attorney General Martha Coakley agreed last week, following emergency meetings with industry trade groups, to hold off implementing the new rules until Jan. 2. The regulations had been slated to take effect Nov. 15.

Coakley also said she would issue guidance in the near future to clarify the intent of the regulations and better spell out what mortgage practitioners must do to comply with the state’s new lending mandates.

But even as mortgage professionals breathed a sigh of relief, legislation with many similar goals advanced at the federal level last week, passing the U.S. House of Representatives by a vote of 291-127. All voting Democratic representatives voted yes while the Republican vote was split.

Rep. Barney Frank, D-Mass. and chairman of the House Financial Services Committee and lead sponsor of H. 3915, The Mortgage Reform and Anti-Predatory Lending Act of 2007, introduced the legislation last month. With foreclosure rates soaring nationwide, Frank said in a prepared statement that the legislation “seeks to prevent a repetition of events that caused one of the most serious financial crises in recent times.”

The crisis came about after innovations in the lending industry evolved in “a completely unregulated manner,” Frank said.

Brian Koss, managing partner at Danvers-based Mortgage Network, said he hopes Congress and the Senate – where the bill is headed next – will take heed of Coakley’s decision not only to delay her regulations but clarify a particular provision brokers and lenders found daunting.

In announcing the delay in implementing the regulations on Tuesday, Coakley said a section on conflict of interest between brokers and borrowers, which mortgage industry representatives feared would prohibit the use of yield spread premiums as a means of broker compensation, would not necessarily be prohibited under the new rules.

“It appears that certain lenders have viewed [the section that] prohibits a conflict of interest between a mortgage broker’s compensation and their client’s interests as a blanket prohibition on paying broker costs outside of points or fees paid at closing,” she said. “That is inaccurate. Not all such compensation poses a conflict between the broker’s financial interest and the interests of the client.”

Yield spread premiums are the difference between the mortgage interest rate for which a borrower qualifies and the rate at which a loan is actually set, and have become one of the chief methods for compensating mortgage brokers. Industry practitioners say the use of yield spread premiums can be an advantage to borrowers who do not have to pay upfront points or fees related to broker compensation.

Coakley said her office would issue guidance on how to interpret that practice and other aspects of the regulations shortly, and that the clarifications would “assuage some of the concerns” of brokers and wholesale lenders. At least two national lenders – Bank of America and Huntington Third Party Lending – had told Massachusetts brokers they would end all or some of their wholesale business in the state when the regulations went into effect.

Kathleen Schreck, regional sales manager at Mortgage Network and a board member of the Massachusetts Mortgage Bankers Association, who was at one of the emergency meetings with Coakley on Nov. 9, said the issue of yield spread premiums was of “great concern to mortgage lenders and brokers,” and the attorney general’s statement that their use would not be prohibited came as a relief to many in the industry.

MMBA Executive Director Kevin Cuff agreed, but said MMBA is concerned that the “far-reaching attempts by everyone to regulate and correct the industry have led to a piling on of initiatives, any one of which can be understandable, but in their entirety are overwhelming.

“We’re talking about an industry that was the bellwether of the economic recovery,” Cuff said. “I think it needs corrective measures. But if we were to correct in the fashion in which all regulation intended, mortgage lending as we know it would end today.”

So with the advance of H. 3915 in Congress last week, people like Barry Thomas, a branch manager at Amerihome Mortgage Co.’s Burlington office, remain worried.

“Barney Frank’s bill specifically prohibits yield spread premiums,” Thomas said. He said the language in Frank’s bill is more direct than in Coakley’s regulation and leaves the impression that use of yield spread premiums is wrong and would be prohibited by definition.

“Were there predatory lenders? Absolutely,” Thomas said. “Should they be put out of business? Yes.”

However, Thomas said that use of yield spread premiums as a method for compensating brokers can actually benefit borrowers and, done correctly, does not constitute predatory lending. Legislation that doesn’t distinguish between predatory practices and standard business models presents practical problems for lenders or brokers who do try to keep borrowers’ best interests in mind, he said.

‘Poorly Written’ Bill

Richard Shapiro, a broker and co-owner of Asset Mortgage Group in Natick, met with Frank last Tuesday to discuss similar concerns.

He said he felt better afterward.

“Right from the start, [Frank] indicated that the legislation as it is ‘is poorly written,'” Shapiro said. “He said it needed to be changed to be more specific.”

Frank told him the yield spread premium prohibition standard is meant to apply to subprime loans only, Shapiro said.

Frank’s special counsel, Jim Segel, who was also at the meeting, said Frank’s intent is not to eliminate compensation for brokers, but to get rid of incentives that would encourage a broker or lender to offer a loan to a consumer who wouldn’t benefit from it financially.

Segel said the yield spread premium piece of the bill is targeted at subprime loans, but said other sections, including a provision that would require residential mortgage loan originators to be individually licensed, are meant to apply to all originators.

The Massachusetts Division of Banks, in collaboration with the Conference of State Bank Supervisors, has been involved in an effort to create such a licensing system for the past four years. It is expected to debut on Jan. 2. Bay State lenders and brokers have shown uniform support for the effort and the licensing provision in Frank’s bill.

Another controversial provision in Frank’s bill would create limited liability to loan securitizers when it can be shown they purchased loans that the borrower did not have the ability to repay.

The bill also would prohibit lenders from incorporating prepayment penalties into subprime loan deals, and the House has adopted an amendment that would curtail the use of prepayment penalties on prime loans, according to Inman Real Estate News.

Segel said Frank’s bill is intended to apply to all mortgage brokers and lenders, whether bank or non-bank, and would serve as federal baseline to which states could add more stringent regulations.

Koss said that, to the best of his understanding, H. 3915 is intended to apply across all industry genres. Coakley’s regulations, in contrast, struck him as being aimed more at brokers, he noted.

A spokeswoman for Coakley’s office, however, said the regulations apply to brokers and lenders alike.

Schreck said federally regulated institutions would, by definition, be exempt from regulations issued by the state attorney general.

H. 3915 next moves to the Senate. Massachusetts Bankers Association Federal Legislative and Regulatory Policy Director Jon Skarin predicted “something will move forward at some point” in that legislative body.

Skarin said Senate Banking Committee Chairman Christopher Dodd, D-Conn., has indicated he will introduce legislation based on the House version, but probably not until next year.