William F. Galvin – Proposed legislation

The Division of Banks last week announced it will wait another 60 days before implementing new changes to the state’s predatory lending regulations. The regulatory changes had been slated to go into effect on Jan. 22.

Division of Banks Commissioner Thomas J. Curry made the announcement during a town hall meeting of the Massachusetts Mortgage Bankers Association. Details of the plan were expected to be posted via the division’s Web site after Banker & Tradesman’s press deadline on Friday.

Part of the reason for the delay was the multiple phone calls and at least eight written letters received by the DOB containing questions about the new regulations. Curry also said the division will post the questions, with answers in a FAQ section within the site.

Curry was peppered with questions on various details and definitions contained within the regulations from the audience, which included members of the Massachusetts Mortgage Association. The division promised to answer all questions submitted to them in writing within the extra 60 days before the effective date of the regulations.

The town hall meeting was called to allow Curry to talk about the changes to come under the new high-cost loan, or predatory lending, regulations.

“This isn’t something that happened overnight,” Curry said in reference to the evolution of changes in the regulations.

According to Curry, discussions about predatory lending and action needed to prevent it reach back to 1991 with the enactment of the licensing statute for mortgage lenders and brokers, which was preceded by the infamous home mortgage and home improvement scandal. During that period, some elements within the mortgage and construction industry conspired to convince homeowners – especially the elderly – to take out home-equity loans for repairs, often with the work never being completed. The scandal received national attention and focused the spotlight on predatory lending practices.

Crossing the Line
Curry traced the idea formulation for the current changes back to December 1997, when the division issued a letter on subprime lending.

“I think we were one of the first regulatory agencies to address … subprime lending,” he said.

While the number of institutions entering the subprime lending market increased substantially over the past few years, additional risk has also come into the market in two ways. The first is compliance risk and the second, potentially more damaging to upstanding companies, is “reputation risk,” said Curry.

“The line between subprime lending, which is legal, and predatory [lending] is very fine,” said Curry. “The need to have some clarification, and some lines was one of our objectives,” he said.

“We’ve been regulating the mortgage industry for several years … as you all know, during our exams we see different types of loans … In recent years, we’ve seen some questionable activities,” said Curry. Therefore, the idea of reforming the high-cost loan regulations was in the making by the time Secretary of State William F. Galvin proposed legislative changes, last spring, to protect consumers against predatory lenders.

Curry went ahead with his campaign for regulatory restructuring in lieu of legislative measures because of the rapidly changing environment in the mortgage industry, he said. “A law, once it’s enacted, is extremely difficult to repeal,” said Curry.

Although Galvin’s proposal “had broad initial support … It would have set very strict limitations on all mortgage lending within the state,” he said.

The regulations explain which loans will be covered and how the division will enforce them.

“If you do cross that line … then a full panoply of restrictions will apply for that loan,” Curry said.

But Curry said the rise in subprime lending within the commonwealth is not bad news.

“The development of subprime lending industry is a positive thing in terms of lending ability,” he said. And when done correctly, it fulfills the ideals for which the Community Reinvestment Act was created.

The new regulatory changes alter triggering thresholds for what is considered predatory activity to protect consumers and enable subprime borrowers to “gravitate” to a less costly loan, he said.

The establishment of anti-predatory loan regulations isn’t just a Massachusetts phenomenon; states like New York have also have adopted new stances.

Nationally, the Federal Reserve has proposed high-cost loan regulations and the Federal Deposit Insurance Corp. has issued a guidance paper on the subject.

While Curry supports the Federal Reserve’s actions, he said the state is not likely to agree with the Fed on every point.

“We are pleased the Fed has moved, but it has not moved as far as we have in high-cost loan regulations,” he said.

For instance, it is very likely that the Fed will not require credit counseling, while Curry said he is not ready to abandon that principal yet. The new regulations change the mandatory counseling requirement for people aged 60 and over to a waiver they may sign to acknowledge they know they have the right to counseling if they want it.

“Just because there is a difference does not mean we will change,” he said.

The division expects to revisit the regulations within 10 to 12 months to “see if they do what they are intended to do,” and to gauge whether there was “an adverse effect on credit availability.” That was one outcome that some in the industry feared would happen if the regulations went too far.

The regulations are based, in part, on Truth in Lending regulation, he explained. But that measure didn’t go far enough. The threshold triggers in the current regulations were too high, he said.

“We saw some abuses but technically – they were beautiful loan files – they complied [with the current regulations],” Curry said. As a result of what examiners have seen over the years, the bar has been lowered.

Although the new regulations provide penalties for predatory lending, problems often come to light only after the loan is closed. “We fully believe the problems … need to be addressed much sooner. The least attractive solution is the regulatory solution – limiting [mortgage] products.”

After the regulations go into effect, the division has plans to go after certain institutions for a fuller examination of records. Another plan has the division matching their list of licenses with those designated by the department of Housing and Urban Development as subprime lenders.