CAROLINE GILROY-BROWN
Safe harbor for borrowers
With the state’s predatory lending law set to go into effect in early November, the Division of Banks held a public hearing last week to solicit comments relative to establishing regulations and classifications under the new law.
“An Act Prohibiting Certain Practices in Home Mortgage Lending” was signed into law in August by Gov. Mitt Romney and becomes effective on Nov. 7. It gives the state’s commissioner of banks the authority to fine or penalize a lender who violates the law.
The commissioner of banks has the authority to impose a penalty of no more than $5,000 for each violation and up to a maximum of $100,000 for such violations plus the costs of investigations.
The law also gives the commissioner the ability to prohibit a lender from obtaining a license for a period up to 36 months or performing as a principal employee for a determined length of time.
Wright Andrews, counsel to the Responsible Mortgage Lenders Coalition in Washington, D.C., said the new regulations should provide “much greater clarity” concerning when refinancing a loan will meet the law’s requirement that the refinancing is in the “borrower’s interest.”
The law lists six factors that determine if refinancing is in the borrower’s best interest, but Andrews said there needs to be further explanation.
In a written statement, Andrews questioned the fourth factor regarding the borrower’s interest, which states that the borrower’s note rate of interest is reduced. There is still a question, according to Andrews, about how much the rate must be reduced to determine if it’s in the borrower’s interest.
The law also lists a change in the amortization period of the new loan as a factor determining the borrowers’ interest.
“Would lengthening the period be deemed a benefit if it meant that the borrower ultimately would pay more in total payments even though the monthly payments were lowered so they were more affordable for the borrower?” Andrews wrote in his statement.
Other factors determining borrower’s interest include if there is a change from an adjustable to a fixed-rate loan, if the refinancing is necessary to respond to a bona fide personal need or a court order or if the borrower receives cash in excess of the costs and fees of refinancing.
The ‘Lending Pipeline’
Caroline Gilroy-Brown, counsel to the Massachusetts Mortgage Bankers Association, said the law also doesn’t make clear how many of the six factors must be met to determine a borrower’s interest. She suggested that if a borrower meets one of the criteria, it is in the borrower’s interest.
Gilroy-Brown also suggested carving out classes of loans that would not be in need of the protection the law intended. She said jumbo loans and loans that exceed 120 percent of the gross median income should be excluded.
Short-term construction loans and home loans that are “owner-occupied” and a “primary residence” were also not intended to be covered under the abusive lending practices law, Gilroy-Brown said.
Andrews suggested language that states a home loan would be presumed to be in the borrower’s best interest if any of the factors applies to a new loan. He added that the absence of a factor does not create the presumption that there is lack of borrower’s interest.
Gilroy-Brown said a compliance worksheet could be drafted for safe harbor factors. She also suggested a safe harbor for borrowers who seek credit counseling.
“If you have someone who doesn’t have interest in the transaction, that would be a reason to give a lender an exemption,” Gilroy-Brown said.
Linda Bates, senior executive vice president at Sherwood Mortgage in Boston, also was in support of safe harbor measures.
Not everyone in attendance at the public hearing agreed with the idea of safe harbors. Chris Leonard, organizer for the Massachusetts branch of the Association of Community Organizations for Reform Now, or ACORN, said it has been clear that lenders who practice abusive lending have been aware of their actions. He advised the commissioner to let the law take effect before weakening it with further regulations. Leonard said the six factors in the law should be used as guidelines, but each loan should be dealt with individually.
Debbie Goldstein of the Center for Responsible Lending in North Carolina said she would encourage the Division of Banks to offer guidance on documentation for cases where it is not clear that a borrower is getting the benefit of the loan.
Clarification also was requested regarding other aspects of the law.
Kathleen Schreck, sales manager at Mortgage Network in Danvers and an MMBA board member, said there was confusion as to whether yield-spread premiums were included in the closing fees.
According to Schreck, yield-spread premiums had never been calculated into points and fees before.
Included in the points and fees definition is the cost of all premiums for credit property insurance. Andrews said the regulations should differentiate between that type of coverage and hazard insurance. He said the regulations should make it clear that “fire insurance” is meant to include typical property insurance policies and should be defined as hazard insurance.
Andrews suggested the Division of Banks also clarify the meaning of certain terms.
“It would be helpful for the new regulations to also clarify that the term ‘knowingly,’ as used in … the statute is intended to mean that a violation will occur only if the lender had actual knowledge that the loan was not in the borrower’s interest,” Andrews stated.
According to Andrews, RMLC does not believe the new law should apply to all loans currently in the “lending pipeline.”
“We recommend that the regulations indicate that the new rules only apply to applications received by the lender funding the loan on or after Nov. 7,” Andrews said in his statement.
The public comment period ends today at 5 p.m.
