Secretary of State William F. Galvin introduced legislation last week to crack down on predatory lenders, but the bill will likely meet with resistance from mortgage industry groups, which oppose the strict limitation on points and fees the bill would impose.

Galvin last week outlined his plan to battle subprime lenders that engage in questionable business practices in the commonwealth. His announcement came days after the high-profile bankruptcy filing by the California subprime lender First Alliance Corp., which he criticized for charging as much as 23 points on mortgages in Massachusetts and setting interest rates as high as 15 percent.

The attorney general’s office has filed suit against a handful of companies to curb their predatory lending practices in the state. The attorney general’s office sued First Alliance and reached a settlement with United Companies Lending Corp. of Baton Rouge, La., before that company declared bankruptcy.

Galvin said the state needs to more closely regulate subprime lenders because he has seen an uptick in activity, resulting in defaults and foreclosures. A total of 2,474 foreclosures have been filed in the last four months, with an average of 600 filings a month, he said.

The fact is that most of these loans come to a bad end, Galvin said.

A number of subprime lenders have begun to aggressively market their products to unsophisticated borrowers, in part because the rise in interest rates has caused a slowdown in conventional mortgage loans, he said. Too often, home owners in financial distress who take out subprime loans lose their homes in the process, Galvin said.

It’s clearly targeted for urban areas, Galvin said. They’re not advertising in The Wellesley Townsman.

Legislators in several other states have introduced predatory lending laws, including New York, California and Illinois. On the federal level, Rep. John J. LaFalce plans to introduce legislation this week to curb predatory lending. The New York congressman is the ranking Democrat on the House Banking Committee.

The issue has drawn attention from Federal Reserve Chairman Alan Greenspan and U.S. Department of Housing and Urban Development Secretary Andrew Cuomo. Both recently announced plans to form task forces on predatory lending.

I think the time has come to make sure that Massachusetts consumers have protection from predatory lenders, Galvin said in a press conference last week.

Galvin’s bill will be filed this session by principal sponsor Sen. Robert S. Creedon Jr., a Brockton Democrat. The bill would limit points and fees that can be charged to 3 percent of the loan amount. The legislation would ban the practice of loan flipping and would require mortgage lenders to determine the suitability of a borrower to repay a loan.

Galvin proposes blocking lenders from charging fees when a borrower prepays a mortgage loan and would prevent lenders from raising interest rates after a default.

The bill would ban negative amortization, in which the principal amount of a mortgage increases at the same time payments are being made. In addition, it would ban balloon payments before seven years.

Provisions in the bill would prohibit lenders from folding single premium credit insurance into mortgage loans and would require adjustable rate mortgages to be tied to a nationally recognized lending rate.

To monitor practices in the mortgage industry, the bill would require lenders to report default and foreclosure rates to the state banking commissioner each year.

You will see responsible subprime lenders continue in business, Galvin said. But I think the suggestion that we should have no regulation and the market should take care of it is ridiculous. It has failed to take care of it.

While mortgage industry groups acknowledge that abuses have taken place, they opposed limiting fees and points to 3 percent. To help families with troubled credit histories get into homes, many lenders have adopted subprime mortgage programs with flexible underwriting. The subprime mortgages typically charge consumers according to risk. This kind of risk-based pricing has become common in recent years, and even Fannie Mae and Freddie Mac have embraced the practice.

We share his concerns and we know that there are a handful of lenders that are abusing this type of lending, said Maureen Elliot, chairwoman of the Massachusetts Mortgage Bankers Association.

Caps Criticized
The MMBA has worked for some time on predatory lending consumer awareness campaigns with the Attorney General’s office, the Division of Banks and the Massachusetts Bankers Association.

Attorney General Thomas Reilly has established that five points is an acceptable industry standard, and the Division of Banks has used that number as a threshold in its examinations.

The attorney general already has a regulation that prohibits charging excess fees and points, Elliot said. I think that needs to be further clarified.

Galvin acknowledged that the proposed cap on fees and points would likely be a matter of debate as the bill advances.

We looked at what’s reasonable considering the amount of the loans here, and we thought 3 [points] was more appropriate, Galvin said. Obviously if the attorney general has a different opinion when there’s a public hearing on the bill he can send representatives. I’m sure the industry will send theirs, and there can be a public debate about it.

Capping points at 3 percent could drive mortgage companies away from closing smaller loans, said Howard Miselman, president of Continental Funding Corp. in Stoughton and chairman of the Massachusetts Mortgage Association. The state already has a mechanism to monitor the points mortgage companies charge, he said. Each year non-bank lenders must disclose the highest and lowest points they charge to the Division of Banks. By paying points on a mortgage, a consumer can prepay some of the interest they owe to obtain a lower interest rate.

You can buy the rate down by buying more points, Miselman said. Why should you eliminate that option for someone that wants a lower rate for the long term?

Each of the companies Galvin singled out are large mortgage companies with operations in several states. One of the state’s largest subprime lenders, Parkway Mortgage Co. of New Jersey, has charged as much as 14 points and 15 percent interest in Massachusetts, Galvin said. Other offenders that have done extensive business in the state are United Lending of California, Walsh Securities of New Jersey, Ohio-based Amresco and Oregon-based Southern Pacific Funding Corp.

Because most of the offenders have been national mortgage companies, Elliot supports passing federal legislation to create national standards. Passing different rules in states can make conducting business more complicated.

I think this really also needs to be addressed at the federal level because a lot of these are national lenders, said Elliot, who is senior vice president at Ivy Mortgage in Woburn.

The regulations intended to reign in large national companies could have a stifling affect on small local companies, Miselman said.

You can’t really paint us all with a broad brush, Miselman said.