Democratic Rep. Jarrett T. Barrios of Cambridge has filed legislation to extend Community Reinvestment Act requirements to non-bank mortgage lenders.

Ten years ago, non-bank mortgage lenders had about 20 percent market share in the Bay State. Today they comprise about 60 percent. A bill reflective of that swing is scheduled for a hearing tomorrow before the joint legislative Committee on Banks and Banking.

Drafted, in part, by Rep. Jarrett T. Barrios, D-Cambridge, the bill would extend certain Community Reinvestment Act requirements already placed on banking institutions to mortgage companies, including making mortgage broker and lender licenses subject to satisfactory performance of CRA requirements.

“The purpose of this bill is to expand credit access for low- and moderate-income homebuyers. We, in government, talk a lot about how we can make a difference in people’s lives and their futures. One of the best ways we can have an impact is by helping people become homeowners,” said Barrios.

When CRA was passed in 1977, banks dominated the mortgage market. Today, mortgage brokers and lenders have 60 percent market share, yet they don’t have the same requirements to look at low- and moderate-income homebuyers the way banks do, said Barrios.

“It will be a better Massachusetts if we can expand the Community Reinvestment Act to provide low- and moderate-income prospective homebuyers with more credit options. The results of our current failure to include mortgage companies is diminished access to credit … and, in many cases, higher-priced mortgage products because of diminished competition for those consumers’ dollars,” he said.

The disparity between where mortgage companies and bankers conduct business is reflected in a 1999 study by the Massachusetts Community and Banking Council. “Black borrowers received 30 percent of the loans made by the big Boston banks, but only 6.7 percent of those made by mortgage companies and 6.6 percent of those made by other in-state banks,” the report states. Additionally, the study found that mortgage companies, excluding subprime lenders, had 4,692 home purchase loans in 1999 but only 315, or 6.7 percent, went to black borrowers; 175, or 3.7 percent, went to Hispanic borrowers; and 226, or 4.8 percent, went to low-income borrowers. Loans to moderate-income borrowers were better at 18 percent.

But while the bill would create greater parity in the requirements placed on banks and the now-dominant mortgage companies, questions about whether there’s a real need for the law as well as suggestions that such a law would have dire consequences in the market have been raised by mortgage associations.

“We oppose the bill the way it is written,” said Dean Caso, president of HomeVest Mortgage in Newton and chairman of the Massachusetts Mortgage Bankers Association. “We do not oppose the premise of the bill, which is providing financing for low- to moderate-income families. There’s no one against that. The question is the mechanics of how you do it. The number-one problem that I see with it is funding,” he said.

Indeed, the main points of the MMBA’s opposition to the bill are laid out in a white paper the group is expected to submit to the Committee on Banks and Banking. It points out that, unlike banks, mortgage companies don’t have deposits from which to draw funds for loans. That argument has been countered by some, however, who point out that banks are relying less and less on deposits for their lending funds. The paper also states it is difficult for mortgage lenders and brokers to take part in programs such as the Massachusetts Housing Finance Agency, and they cannot seek funds from traditional bank-funding sources such as the Home Loan Bank.

But according to Virginia Healy-Kenney, senior production manager at MHFA, about 10 mortgage lenders have signed up with them. They are allowed to participate with MHFA because they are approved by Fannie Mae or Freddie Mac, she said. When it comes to mortgage brokers, however, it does become more difficult. MHFA’s capital requirements are more stringent and affiliation with a third party, such as a bank, is often necessary for the broker. Three brokers have signed up with MHFA.

As to the funding objection, Barrios said raising the issue of deposits fundamentally misrepresents the purpose of CRA. “There were two purposes when it [CRA] was passed. One was to put money back into a community that you were taking deposits out of. That obviously doesn’t apply to mortgage companies because they don’t take deposits. But the other point – and perhaps the most important point of the Community Reinvestment Act – was guaranteeing equal access to credit for low- and moderate-income folks,” said Barrios.

The MMBA plans to use information gathered through Warren Information Services, a sister company to Banker & Tradesman, to prove mortgage companies are lending in traditionally underserved urban markets such as Brockton. Mortgage companies originated more than half the loans closed in the City of Champions in 2000.

According to Warren Information Services President Timothy Warren Jr., “It is true that our database does not include information about the racial makeup of the buyers. However, some lenders may take our data and use it to get an idea of the total market in a neighborhood [defined by town, zip code or a census tract].”

“Yes, mortgage companies are doing more loans in Brockton and Boston – in a lot of the urban centers around the state – but that’s not the issue. The issue is who they’re serving,” said Thomas M. Callahan, executive director of the Massachusetts Affordable Housing Alliance.

“If you break into those numbers, you’ll find that in Boston, for example, while the mortgage companies have 60 percent market share, it’s a whiter, higher-income clientele that they’re serving,” he said.

“There’s a tremendous difference if you look at banks that are covered by CRA and who they serve in terms of black, Latino and low-income borrowers. The banks, in each one of those categories, do a much better job of serving those customers than the mortgage companies. But at the same time, the banks are a smaller and smaller player in the mortgage market,” he said. MAHA supports the bill.

If passed, the bill would require that mortgage companies report various data to the division of banks, including the market shares it has in neighborhoods of different racial makeup and income levels; the number of mortgage loans originated by race, gender and income level; and the interest rate, points and fees of mortgage loans by race, gender and income level. The DOB would then assess scores ranging from outstanding to substantial non-compliance.

‘A Real Burden’
Although he hasn’t endorsed the bill, House Speaker Thomas M. Finneran may be considering doing so. On May 11, his office issued a press release outlining his plans to solve the affordable housing crisis. In it, he stated part of the plan would include CRA “considerations.”

“CRA requirements for mortgage companies is something he’s interested in,” said Finneran’s spokesman, Charles Rasmussen.

The Massachusetts Mortgage Association also opposes the bill, for many of the same reasons the MMBA does. But Chairman Carol Bulman, president of Norwell-based Conway Financial Services, pointed out a different side of the issue that should be considered.

“Basically, the concern is that there might be a double recording if you have lenders and brokers having to have a certain percentage of CRA requirements. The reason for that is we sell to large banks and investors who have CRA requirements,” said Bulman. Even the Home Mortgage Disclosure Act data is reported by one agency – the decision-maker – so as not to double record numbers, she said.

Another consideration is that brokers and lenders usually don’t hold the loans in their own portfolios and don’t loan out their own money. Therefore, they are subject to whatever requirements for approval the bank or investor deems appropriate in order to sell that loan back.

Indeed, banks often use mortgage lenders or brokers as tools to offer products that fulfill the banks’ CRA requirements, said Bulman.

Many brokers and lenders operate small shops with three-person staffs being common, said Bulman. “We see this as a real burden on the small-business owners and it would be very costly … especially when some of it involves community outreach. With a three-person shop, it’s difficult to have the resources to do that,” she said.

But Barrios has already anticipated that argument by creating a streamlined examination process for small mortgage companies, defined as those that originate fewer than 50 loans in a calendar year.

“It is modeled exactly on the law that has been working successfully in the banking industry for 21 years and hasn’t driven people out,” said Barrios.

“CRA is an extraordinarily flexible law. Banks are given enormous discretion, not told by the Division of Banks how they’re supposed to comply. It’s a qualitative assessment,” said Barrios.

The bill has also generated initial support from the Massachusetts Bankers Association, although a formal position on the bill was not issued by press time.

“In principal, I think we agree that the bill has some merit, so we’re leaning towards support,” said Tanya Duncan, director of federal regulatory and legislative policy for the MBA.

“We think non-bank lenders also benefit from a stabilized community … Banks have been subject to CRA for more than 25 years, and we think expanding it to non-bank entities within the commonwealth may make sense. They are financial stakeholders within these communities in which they do business,” she said.

Even if the bill is defeated on the state side, U.S. Rep. Tom Barrett, D-Wis., has proposed a similar bill on the federal level to “modernize” the CRA and expand it to non-bank lenders.