Mortgage firms face grading by state

Foreclosure-limiting efforts to be checked

Massachusetts will publicly grade state-licensed mortgage companies on their efforts to help borrowers who can't afford their mortgage payments, the state's latest bid to pressure the industry to limit foreclosures.

Regulators will make the assessments as part of a new annual evaluation of how well lenders are serving the communities where they operate. Most of the evaluation is focused on the lending process, including loan volume and interest rates; the new measure focuses instead on what happens when borrowers fall into trouble.

The state wants companies "to work with borrowers so that to the extent humanely possible and economically reasonable, we can keep borrowers in their homes," Governor Deval L. Patrick said yesterday.

Borrowers who fall behind on mortgage payments often seek a reduction in their monthly payments or a waiver of penalty fees. But lenders have modified relatively few loans in recent months, leaving a growing number of borrowers unable to afford their homes.

A law passed in November extended an existing annual evaluation of state-regulated banks to include mortgage companies. The system, modeled on the federal Community Reinvestment Act, judges whether companies are serving lower-income communities by making loans available at fair prices. Companies that receive low marks on the five-point scale can face state opposition to their expansion plans.

The announcement yesterday expands the scope of the new law.

Kevin Cuff, the executive director of the Massachusetts Mortgage Bankers Association, said the group was supportive of the community reinvestment standards in general but concerned about how the new rules would be applied. In some cases, companies are legally restrained from modifying loans, he said.

"In a lot of situations, there's probably not a lot they can do," Cuff said. "Everyone is sensitive to the issue, everyone wants to do something, but the reality is that there are contracts in place."

The Division of Banks, which will administer the annual assessments, is still formulating its procedures. The first evaluations are expected to be released about a year from now.

The new regulation will apply only to about 30 percent of the companies that collect mortgage payments in Massachusetts, according to state officials.

Borrowers must contact such companies, known as servicers, to discuss modifications, even though the loan itself often is held by investors.

The regulation does not apply to banks regulated by the federal government, which are not subject to state oversight.

It also does not apply to servicers that are not also lenders, thereby excluding several of the largest servicers.

Still, consumer advocates said the state's efforts are a valuable incremental step toward slowing the pace of foreclosures, and as an example to regulators in other states and in Washington, D.C.

John Taylor of the National Community Reinvestment Coalition said the Massachusetts proposal was an improvement over current efforts to persuade lenders to modify loans voluntarily.

"I think the impact is that it sets a standard," Taylor said.

Binyamin Appelbaum can be reached at bappelbaum@globe.com.