Members of the Massachusetts mortgage industry are preparing to unveil a regulatory alternative to a legislative push that would extend requirements of the Community Reinvestment Act to mortgage companies.

The Legislature’s Joint Committee on Banks and Banking is expected to consider the proposed Senate bill imposing CRA regulations on mortgage companies in the near future. The approach of those hearings has brought members of the mortgage industry together in a united front to oppose the measure.

The proposed bill would require mortgage lenders that originate more than 500 residential real estate mortgage loans in the state annually to meet the housing credit needs of the communities in the commonwealth, including low- and moderate-income residents, a requirement that already is in place for state-chartered banks.

The bill, which passed the Senate Banking Committee but died in the House Ways and Means Committee, was introduced for the first time two years ago. It was reintroduced at the beginning of the current legislative session.

“We believe that mortgage companies, like banks, care about equal credit access and this bill provides for equal access to credit for working people, regardless of people’s background,” said Sen. Jarrett T. Barrios, D-Cambridge, author of the bill. “By promoting CRA and increasing competition, we know that consumers will get a better deal. Our free-market system works best when we promote competition … and this is best for the commonwealth.”

Rep. John F. Quinn, D-Dartmouth, Chairman of the Banks and Banking Committee, said CRA “is a contentious issue” and the committee is continually looking at effective ways to reconcile the differing viewpoints surrounding the topic.

Members of the mortgage industry around the state have voiced strong opposition to the bill.

“We will oppose the legislation based upon a philosophical position having to do with how CRA was initially conceived,” said James Dougherty, president and CEO of the Massachusetts Mortgage Association, adding that CRA was established because banks take money out of communities in the form of deposits and should be required to reinvest some of that money in neighborhoods where it is most needed. “Mortgage lenders and brokers are not depository institutions … why should we have this regulation? The banking and mortgage broker communities share one product [mortgage loans], but in a much different way,” he said.

Dougherty said members of the MMA, along with the Massachusetts Mortgage Bankers Association, hope to convince members of the state Legislature that introducing CRA legislation to mortgage companies presents numerous dangers and difficulties.

“Over the last 15 years or so, banks – through government-subsidized programs – have developed mortgage products targeted to low-income and minority groups,” said Dougherty. “Mortgage brokers do not have these products and it would be onerous to the industry and the consumer.”

While members of the banking committee work to finalize their hearing schedule, mortgage industry professionals in recent weeks have been formulating their response to the bill, which they say ultimately would “keep us out of business,” according to Charles A. Ferarro, a past chairman of the MMBA. The committee will hold hearings between March and June, but has not yet set a specific date for the CRA bill to be considered.

In a collaborative effort, the two mortgage associations will propose making regulatory changes to existing [Fair Lending] as an alternative to the Barrios bill. The MMBA will present a white paper at the hearings outlining the industry’s position and an alternative plan, which association representatives say will later be submitted to the Division of Banks for consideration. It will focus on affordable housing needs and partnerships with state agencies and programs, education in the community and within the industry, and working partnerships with national agencies to offer specialized mortgage loan products to a wider group of prospective homebuyers.

Bank Commissioner Tom Curry in 2001 implemented new regulations to curb predatory lending in lieu of backing numerous legislative proposals, a move that may give mortgage industry leaders hope that the same route might be possible in the case of CRA.

John Brodrick, chairman of the MMA and First Service Home Mortgage in Westwood, said minority and low-income borrowers need access to credit that is priced fairly, and “that can be achieved through regulation and not legislation.”

“We are regulated by the Division of Banks and so it would seem appropriate that we would work through the division to make sure that there is equal availability of credit,” said Brodrick.

Developing a Program

Dougherty said that the proposal to extend CRA to the mortgage industry would present numerous difficulties, including defining the communities in which mortgage firms would be required to invest and meet the needs of low-income and minority borrowers. In addition, he said, mortgage brokers often do not have access to funding to create mortgage products geared toward meeting the needs of high-risk borrowers, whereas banks, which take deposits, do. Most mortgage firms are limited to originating loans that conform to the requirements of secondary market buyers such as Fannie Mae and Freddie Mac, making meeting the needs of borrowers with low incomes difficult.

“If the reality could sink in somewhere this would go away – this is really a Fair Lending issue and not a CRA issue – it is delivering credit to credit worthy individuals without doing it in an onerous or [harmful] way to mortgage lenders or consumers,” said Dougherty. “An alternative is the [Fair Lending] … so let’s work with what we have and make it better.”

Cynthia Merkle, senior vice president and chief quality officer for mortgage banking and community reinvestment at Eastern Bank in Lynn, named MassHousing, Massachusetts Housing and Finance Authority and community activists groups as possible partners for collaborative educational and loan programs.

“We would like to work with national agencies to develop a program that would provide a specialty product to mortgage lenders. We believe that will bring capital to the industry,” said Merkle. “By developing a program with a national investor and working with the housing agencies and credit agencies, we can bring homeownership to another level, and we don’t need legislation to do that.”

George Downey, president of Harbor Mortgage Solutions in Braintree, said he strongly opposes the Barrios bill. “CRA is of concern and it is, of my opinion, a reflection of the old taxation without representation fight. CRA is being twisted and manipulated to either broaden the revenue or reallocate and reduce the pressure on the banks,” he said.

Coming Together

While the idea of implementing CRA requirements to mortgage companies has been talked about previously, the most recent bill is the first official piece of legislation filed in the Bay State to impose CRA on the mortgage industry.

Merkle said the MMBA created the CRA Task Force last year as a result of the legislative proposal.

The MMBA, which has a membership primarily of banks, mortgage bankers and companies who sell directly to Fannie Mae and Freddie Mac and service their own mortgage loans, invited the MMA to attend the task force meetings in an effort to stand on common ground against the CRA bill.

“We felt it was important to have task force members with knowledge of the industry and [the board] went to our membership to select task force members,” said Merkle. “It was an MMBA initiative that came out of the fact that we should be proactive and there were valuable issues that needed to be addressed at a state level. The MMA was invited to attend task force meetings in October of 2002 … we thought it was appropriate to work together toward a statewide strategy.”

The MMA is essentially made up of mortgage lenders and brokers who do not sell directly to Fannie Mae or Freddie Mac or service loans but act as third-party originators for companies that deal with secondary-market agencies.

“The [MMA] has been participating with the MMBA and we are standing together on the issue,” said Brodrick. “We tend to serve a wider geographic audience, so to define an area [in which CRA lending would be required] is more difficult [for MMA members]. A mortgage lender or broker can only lend out what a third-party investor has made available – unlike a bank who can pool their money and underwriting.”

According to Barrios, 28 different groups, including the Citizens Housing and Planning Association, Massachusetts Affordable Housing Alliance, the Massachusetts Bankers Association and various community activist groups stand in favor of the proposed bill. Other than the mortgage industry itself, he said, no trade or community groups have voiced opposition to the bill.

Since the mortgage industry is standing virtually alone it its opposition to the Barrios initiative, Brodrick said it is important for the two organizations to agree completely on this issue and work in tandem to support an alternative plan.

“The MMA and the MMBA have a cross membership and while there are a lot of banks in the MMBA, there are [also] a lot of independent mortgage brokers and we can agree [on a unified position],” said Brodrick.

MMBA executives said there was no dividing line between the banking and mortgage companies within the association on this particular issue, despite the fact that the state’s banking trade group, the Massachusetts Bankers Association, favors the Barrios bill.

“There are a percentage of people in our [association] that represent banks and have not voiced much of an opposition on our stance, but they might not necessarily agree with us [fully], either,” said Kevin Cuff, executive vice president of the MMBA. Leaders in both groups, however, are in accord on opposition to the CRA bill and the alternatives that will be espoused.

The threat to the industry presented by the CRA bill has forged a link between the two organizations that over the past few years have not always worked closely together.

“[The MMBA] has their business and we have our business and clearly there is a lot of overlap in issues,” said Dougherty. “The history has been that the MMBA works independently on what they are doing but this particular piece of legislation is significant enough to bind us together.”

Both associations are preparing for the upcoming hearings and will collaborate by announcing their opposition and providing alternative resolutions.

“This is a new thing and it’s all in anticipation of a hearing process that we want to be involved in,” said Dougherty. “Because the associations are not used to working together in this way, the process of who says what – and how do we say it – needs to be established.”

Although the mortgage industry is voicing strong opposition to the proposed CRA bill as written, Merkle said mortgage companies looked upon sections of the bill and its overall intent favorably.

“The intent of the bill has some positives, but the enforcement of the regulation and the oversight [for mortgage companies] is a major issue for us,” said Merkle. “We all have a common interest but if you are going to introduce legislation and enforce it, it needs to be on a level playing field.”

Merkle, who is a CRA compliance officer at Eastern Bank, said the bill contains two major flaws in its attempt to compare mortgage companies to banks.

“We are not gathering deposits so there is no defined service area, and there is no capital or portfolio ability [for mortgage companies],” said Merkle. “From a banking perspective, you need the capital or portfolio capabilities and mortgage lenders aren’t equipped to do that, so it has to be provided from the bank or from the agency.”

Cuff said he could not comment on how the industry would proceed if the bill becomes law because this “isn’t a black and white issue.”

According to Merkle, the important thing for the industry is to speak with the same voice and educate others on the unbalanced playing field that ensues from imposing CRA regulations to mortgage companies.

“We’ve had years of CRA oversight,” said Merkle. “When it’s all said and done, I’m not sure that this bill is going to bring more lending to the communities.”

Melanie Nayer may be reached at mnayer@thewarrengroup.com.