While lenders and consumer groups generally support regulatory changes aimed at eliminating predatory lending, they differ greatly on whether those proposed by Massachusetts Division of Banks Commissioner Thomas J. Curry are adequate.
Tomorrow, the first of three public hearings on the regulations will be held in Boston.
“Generally, our position is that it does not go far enough to really protect consumers,” said Alliea Geropp, lead organizer for the Association of Community Organizations for Reform Now.
Industry groups, however, fear regulations may go too far and have unintended consequences such as driving legitimate lenders out of the subprime market, with the ultimate effect being the denial of less-than-perfect borrowers from home ownership.
“We support the commissioner’s intentions as we also have been trying to eliminate predatory lending,” said Susan Zuber, president of the Massachusetts Mortgage Bankers Association. “We want to ensure that we eliminate predatory lending … but we want to balance that with providing low-interest loans to consumers,” she said.
But Geropp maintains the regulations shouldn’t affect legitimate subprime lenders. “The whole point is there needs to be regulations on this [type of] lending. Banks have restrictions on what they can do. We need to have regulations on all lenders,” said Geropp.
Groups like ACORN, the MMBA and the Massachusetts Bankers Association have established committees to analyze the proposed regulations, draft opinions and suggest changes. Thus far, the state has received just a few comments, said Steven L. Antonakes, senior deputy commissioner of administration and policy at the division of banks. He said he expects the bulk of comments will be submitted at the hearings. The official comment period on the regulations ends Oct. 3.
Associations have said they want to work with the Division of Banks to ensure the wording of the regulations won’t burden legitimate subprime lenders. While not revealing the exact comments they will present to the commissioner, Kevin F. Kiley, executive vice president and COO of the MBA said it will raise “certain issues” pertaining to the wording of the regulation.
The association seeks to encourage lenders to extend credit to low-income borrowers, said Kiley, and do it in a way that’s appropriate considering the risk.
“The last thing we want to do is have regulations established which have the impact of limiting the amount of credit a bank can extend,” said Daniel J. Forte, president of the MBA.
However, James C. Dougherty, president of the MMA, said there is another possible outcome of the regulations. The proposed changes would lower the reporting trigger thresholds for interest rates to 8 points from 10 points, possibly resulting in regulatory scrutiny of a greater number of loans. That, Dougherty said, could force lenders to choose between abandoning or focusing greater attention on the subprime market.
“There is a corollary point of view which I think is entirely possible,” he said. “If they lower the interest rate thresholds and it has the effect for a given lender of re-categorizing loans Â… that lender has one basic choice. Either continue and perhaps not pursue Â… business, or, [if] as a result it represents a more substantial portion of the business, to really embrace it.” Lenders could find themselves, as a matter of trying to maintain business volume, pursuing these types of loans, said Dougherty.
But the MMA also has reservations about the regulations as they currently stand. While Dougherty said the MMA “strongly supports” the premise of the regulations, “In general, we see a number of places in the proposed regulations where clarification is absolutely essential,” he said. One area is the use of the word “fees.” “Within the industry there are a number of fees around the closing of a loan. In order for us to appropriately react, we have to know the intention of the word “fees,” he said.
ACORN also sees a problem with the wording of the regulation, especially surrounding the phrase “bona fide discount points.”
“It allows a loophole for the predatory lenders to define the high-cost loan,” Geropp said. “That one part of the regulation makes the entire regulation a moot point because it narrows down the amount of loans,” she said. In addition, ACORN would like to see balloon payments to be eliminated via the proposed regulatory changes.
“There are a number of banks that are involved in legitimate subprime lending,” said Zuber. The new lower triggers will put a lot of loans into the high-cost loan category and restrict them, she said.
The proposed regulations call for lower limits on loan interest rates and fees thresholds. “The interest rate threshold … is lowered from 10 points to 8 points over the yield on comparable treasury securities. The regulations also establish a trigger for junior mortgage loans, which is 9 points over the yield on comparable treasury securities,” wrote Curry in a summary released with the regulations in early August.
A Massachusetts mortgage lender or broker who violates the regulations would receive remedial measures, possibly a cease-and-desist order, or the suspension or revocation of a license.
Under the new rules, mortgage lenders would be prohibited from making a loan when the borrower does not have the reasonable ability or the means to pay back the loan. It would require financial counseling for borrowers 60 years old or older, while encouraging counseling for other borrowers.
Curry’s plan would extend the regulations on high-rate loans to certain open-end credit transactions. It would make loan-flipping illegal by limiting refinancing to two years after a lender issues a high-rate loan and prohibit negative amortization loans.
Lenders would not be allowed to raise interest rates after a borrower defaults on a mortgage loan.
The proposed amendments would keep mortgage lenders from packaging loans with other products, like credit insurance, that would be financed as part of the loan.
Curry’s plan would also place limits on the advertising of high-cost loans.
The proposed regulations would punish lenders that fail to report favorable credit information to credit bureaus and would stop lenders from placing mandatory arbitration provisions and class-action lawsuit waivers in their loan documents.
Legislation in the Wings
After a review of the comments and completion of any necessary changes, Antonakes expects the new regulations could go into effect in late October of early November.
Earlier this year, Secretary of State William Galvin proposed legislation, filed by state Sen. Robert Creedon, D-Brockton, aimed at eliminating predatory lenders from practicing in Massachusetts. That was relegated to a study committee shortly after a June hearing at which Curry, along with several associations, testified. Ed Phelan, counsel to the joint committee on banks and banking, said the committee felt, after the hearing about Curry’s plans to address this problem, it could put the matter to rest. Placing the bill in study committee does not kill it, said Phelan.
“We would still have time [to act] if the commissioner’s [regulations] did not come out in time or weren’t comprehensive enough,” he said.
According to Kiley, the regulatory process of public hearings is better than the legislative approach. The regulations can be revisited and adjusted more easily if problems arise. With the legislation, an amendment would have to be drafted and passed, he said.
“We want to refine the regulations in such a way so that those parts of the market that need [subprime] credit will have access,” said Kiley.
Although the proposed regulations were released after Galvin’s legislative initiative, one official said Curry’s proposal wasn’t reactionary.
“This is something that we’ve been talking about for quite a while,” said Antonakes. Recently the subject has been brought into the forefront by cases on the state and national level. “On that basis and on the increased public attention, we decided to go forward,” he said.
Although there are no hard and fast reporting systems to track predatory lending, the numbers of those engaged in the practice is relatively small, according to those in the industry.
“One of the concerns we have is that we’re in an up cycle,” said Kiley. “We’re going to hit a down cycle. We’ve got a responsibility to the banks we represent to work aggressively to get the regulations in place,” so that when it does turn, consumers will be protected.
But Geropp doesn’t see a compromise being worked out between consumer and industry groups that makes everyone happy. “We want to protect the consumer. That is our Â… goal.”
“We’re proud of our record,” said Kiley. “We’ve made mistakes. We’re highly regulated but I think by and large we’ve done a good job serving that market.”
