New mortgage regulations announced by Attorney General Martha Coakley have prompted a number of lenders reconsider their business status in the Bay State.

Since Indymac Bank told Massachusetts mortgage brokers that it would stop working with them following the implementation of new consumer protection regulations that took effect last Wednesday, another lender has followed suit.

Mount Laurel, N.J.-based Freedom Mortgage also announced it would suspend wholesale loan origination on Massachusetts properties effective Dec. 31 because it believes it “cannot determine its risk or its liability” under the regulations, which Attorney General Martha Coakley first announced in October.

Meanwhile, more than a dozen other lenders have decided to change their compensation policies, or eliminate or limit certain product offerings in the Bay State.

Banker & Tradesman first reported Indymac’s Dec. 28 announcement that same day on its Web site, www.bankerandtradesman.com.

“It can’t be helping things when lenders are leaving the state, because it reduces the availability of products and programs for borrowers,” said Denise Leonard, executive director of the state’s primary broker trade group, the Massachusetts Mortgage Association, who owns a brokerage and lending firm in Wakefield.

“People are saying it will end up harming consumers,” she added, “because products that were offered at low or no cost to consumers, like no-point loans, are being limited or not offered.”

Leonard said it’s too soon to predict the long-term effect.

Coakley made adjustments to the regulations in the fall following urgent meetings with MMA and the Massachusetts Mortgage Bankers Association, and in December offered clarifications of provisions that they questioned. But lenders remain concerned about the provision that prohibits conflicts of interest between brokers and borrowers, which some say effectively eliminates the possibility of using yield spread premiums.

A number of industry officials have raised concerns over whether the use of yield spread premiums would be a proscribed practice under that provision. Yield spread premiums – the difference between the mortgage interest rate for which a borrower qualifies and the rate at which a loan is actually set – is one of the chief means for broker compensation. Industry practitioners say borrowers can benefit by paying a higher interest rate instead of upfront points or fees, which also are methods sometimes used in broker compensation.

Coakley has said the use of yield spread premiums is not banned by the regulation, as long as all compensation options are accurately disclosed to borrower.

Others are concerned with the provision that requires lenders to obtain signed statements of a borrower’s income for no- or limited-income loans, even if they choose not to verify or document it.

New York-based Chase Bank told brokers last Wednesday that due to the conflict-of-interest provision, it would no longer permit the total dollar value of broker fees for Massachusetts loans to increase following the broker’s initial good-faith estimate of closing costs to the borrower. The company now also will require brokers to obtain a signed statement identifying the borrower’s income and its source, and stating that the borrower is aware that applying for a no- or limited-income documentation loan could mean it will have less favorable terms.

Chase is not changing its broker compensation policy, which allows brokers to be paid a fee of up to 5 percent of the overall loan amount or $3,000. But Wells Fargo has eliminated yield spread premiums in favor of offering a flat fee of 1.5 percent of the loan amount to brokers closing loans on Massachusetts properties.

Wells Fargo Funding also no longer will purchase loans where the lender has paid a yield spread premium to a broker, and the company is no longer allowing off-site underwriting on interest-only or adjustable-rate loans.

Countrywide, First Franklin, Provident Funding, Amtrust Bank, Aurora Loan Services, Crescent Mortgage, Freedom Mortgage, Guaranteed Rate, Homecoming Financial, Vertice, M&T Bank’s mortgage division and Taylor, Bean & Whittaker are among other the lenders that have decided to eliminate no-documentation and no-ratio loans (those in which income is not considered as a factor in making the loan), limit yield spread premiums brokers can accept to 1 percent or 1.5 percent for most loans, or eliminate YSPs entirely, among other product and compensation changes announced since late December.

Many lenders now also are requiring adjustable-rate loans to be underwritten at the higher interest rate, in accordance with the regulations’ provision that lenders and brokers must “reasonably believe” that “the borrower will be able to repay the loan.”

Leonard said she believes the lenders’ legal departments are erring on the side of caution.

“We are trying to communicate with all the investors [that] there is no cap on the YSP,” she said.

The regulations, in fact, specifically “do not authorize any particular level of compensation to mortgage brokers or originators,” according to a Frequently Asked Questions document Coakley mailed to brokers late last month.

One local broker said Indymac was once a “strong” Alt-A lender, but dropped those loan products several weeks ago. Richard Shapiro, a principal at the Asset Mortgage Group brokerage in Natick, said Indymac most recently has been offering only government agency-backed loans, such as those conforming to Fannie Mae and Freddie Mac standards.

The credit rating of Indymac’s parent company, Indymac Bancorp, was cut to “junk” status on Dec. 11 by Standard & Poor’s, which cited the increased risk the company will suffer due to turmoil in the housing and mortgage finance markets, the Associated Press reported.

‘Ever More Difficult’

Indymac told Banker & Tradesman that it will continue to make mortgage loans in Massachusetts through its retail lending channel. However, Shapiro said he’s heard Indymac has had the most success in the state with correspondent lending through independent channels.

In its e-mail to brokers and lenders, the company said Coakley’s new regulations are not clear. The regulations forbid broker/borrower conflicts of interest, restrict the use of so-called “no-doc” loans, prohibit lenders or brokers from discriminating between borrowers with similar credit criteria, and require lenders to “reasonably assess the borrower’s ability to pay back the loan” under both initial teaser rates and any adjusted rates.

Barry Thomas, branch manager at Amerihome Mortgage in Burlington, said his Indymac representative told him about the bank’s concerns related to the regulation’s yield spread premium provisions.

Thomas said lenders’ decisions to cease working with area mortgage brokers will have a “significant” impact on competition and availability of credit for area homebuyers and borrowers. In particular, because Indymac offered Alt-A loans, options for borrowers seeking nonconforming loans now will be more limited in Massachusetts, he said.

The shrinking pool of lenders willing to work with mortgage brokers also will decrease competition in the Bay State and will favor banks, according to Thomas.

“We’re making it ever more difficult [for borrowers to obtain financing],” he noted.

Shapiro said he’s scared by the thought that new regulations and laws affecting lending “may eventually be killing consumer choices” in Massachusetts.

Asked to comment on the lenders’ recent decisions, Coakley said in an e-mailed statement that her new regulations “do not change the law in terms of what is legal and what’s illegal” but rather “codify what practices are unfair or deceptive.”

She added, “Lenders who are pulling out of the Massachusetts market either do not understand the regulations or do not want to follow the law. Otherwise, there may be other market factors influencing their departure.”