The state Division of Banks is completing paperwork, but it’s mortgage companies that will get graded.

Massachusetts mortgage firms soon will have to comply with the Community Reinvestment Act – or rules as similar to the federal law governing banks as state regulators can make them.

The Division of Banks is almost done with a draft regulation, which it will release next month. The regulation fulfills the mandate of state a law passed last fall. The final regulation is expected to go into effect by August.

The new rules will cover about 140 state-licensed non-bank mortgage lenders that make 50 or more loans annually, but what it will look like is anyone’s guess. Mortgage lenders have pointed out that they differ in at least one fundamental way from banks: they don’t accept deposits. But the Community Reinvestment Act, or CRA, requires banks to lend in roughly proportionate measure in any neighborhood in which they accept deposits.

Advocates who sought to have CRA-like requirements placed on mortgage companies say the regulation for mortgage companies focus on scoring for loan quality as much – if not more – than quantity.

“I think we learned from the subprime crisis that quantity isn’t all we should be looking at,” said Judy Jacobson, deputy director and general counsel for the Massachusetts Fair Housing Partnership.
“A lot of subprime loans went to low-income people with kind of disastrous results,” she said.

Fair lending to homebuyers of different racial backgrounds, as well as of different incomes, also is of concern to the Fair Housing Center of Greater Boston.

Ginny Hamilton, executive director of the center, urged Division of Banks in a letter to incorporate a fair lending test in CRA examinations of mortgage companies, and to conduct the exams and report results publicly and promptly.

Michael Hanson, president and CEO of the Massachusetts Credit Union Share Insurance Corp. and a private-practice compliance attorney in Norwell, said the intentions may be good, but warned that too much regulation on lenders will exacerbate the region’s severe “credit crunch,” and make it go on longer.

“We need ethical lenders, but we need lenders,” he said.

CRA has been controversial for banks since it went into effect in 1977, but the law, designed to combat redlining, has been credited with giving low- and moderate-income people more credit opportunities.
The law consists largely of a lending test, although banks with more than $250 million in assets also are rated on service to and investments in their self-defined footprints, or assessment areas.

Institutions are rated on the number and size of home mortgage, small-business and other loans they make in various census tracts in their operational footprints and to individual borrowers in those areas.

Banks’ use of “innovative or flexible lending practice in a safe and sound manner” to help low- and moderate-income borrowers also is considered. This could encompass use of specialized, government-backed or bank-created loan products, or use of special loan terms such as allowing higher loan-to-value ratios for qualifying borrowers.

Unlike banks that may fund some loans and keep them in their own portfolios rather than selling them on the secondary market, mortgage companies typically do not create their own mortgage products. As a result of the new law mortgage firms may end up forging more partnerships with entities that do structure and fund loans suitable for low-income borrowers in underserved markets, according to James Madigan, president of Leader Mortgage in Belmont.

CRA ratings are calculated on a five-point scale, ranging from “Substantial Non-Compliance” to “Outstanding.” They help regulators decide whether a bank will be allowed to merge or open a new branch and whether it can get advances from the Federal Home Loan Bank.
But the Division of Banks uses the ratings in considering virtually any application from a bank, said the agency’s chief operating officer, David Cotney.

A “Satisfactory” grade won’t affect an application’s outcome, but it will affect how often an institution is examined by state regulators compared to a bank or credit union that garners an “Outstanding” rating, he said.

Mortgage lenders’ licenses would be subject to achieving a satisfactory CRA rating under the new law.

Lenders and compliance lawyers agree that the big hurdle for regulators attempting to write a mortgage-company CRA law will be how, or whether, a company’s assessment area can be defined.

Complying with CRA “is a number-crunching exercise for most [banks], where they compare where their loans were originated to their deposits,” Hanson said. “How do you do that with a mortgage company” that doesn’t take deposits and may not even have brick-and-mortar offices, he asked.

Hanson and Cindy Merkle, chief operational risk officer at Eastern Bank, said mortgage company ratings likely will start, as banks’ ratings do, with an examiner’s review of Home Mortgage Disclosure Act data that all lenders must to submit.

That data includes information about the race, gender and income of all loan applicants and borrowers, and pricing data for higher-priced home mortgage loans.

Merkle, a past chairman of the Massachusetts Mortgage Bankers Association, helped create a sample “Community Responsibility Self-Assessment” form for mortgage lenders that MMBA gave to DOB along with pre-draft comments on the regulations it submitted in early March. The three-page form allows lenders to check off whether they offer loan products aimed at low- and moderate-income residents, such as Federal Housing Administration and Veterans Administration loans and SoftSecond mortgage loans, a product created by the Massachusetts Housing Finance Partnership and currently only offered through banks. Jacobson said MHFP is reworking the SoftSecond loan to make it possible for mortgage companies to offer it.

MMBA hopes lenders also will be allowed to count contributions to its charitable foundation, which donates to first-time homebuyer and foreclosure-prevention counseling efforts, toward their rating.
Bill Mullin, the president of NE Moves Mortgage in Waltham, said.
Defining an assessment area will be a hurdle, but there are obvious ways to gauge the efforts of mortgage firms.

“I would want to be judged on whether I am participating with [MHFP] and MassHousing loans,” he said. “I would want them to take a look at the percent of my loans that might be FHA or VA [insured].”

Examiners also could test the percentage of loans a company does that are over 80 percent loan-to-value, Mullin said. “Those would be the things you could in fact test.”