State toughens rules on mortgages

Massachusetts will impose some of the nation's most stringent regulations on the mortgage industry in an effort to curb practices that have led to record numbers of foreclosures.

Regulations finalized yesterday by Attorney General Martha Coakley require lenders and brokers to treat all borrowers fairly, with the aim of eliminating excessive fees and sales of loans that borrowers cannot afford. But it is not clear how easy that will be to enforce.

For example, lenders and brokers will be prohibited from arranging loans that they do not have a "reasonable belief" the customer can repay, using available information about the borrower's financial circumstances to make that judgment.

Coakley's regulations do not specifically define "reasonable belief," but the attorney general said she is aiming to stop those loans that are obviously abusive.

"There's been mortgage after mortgage where there's clearly been no ability to pay," she said, citing one example where a borrower had a monthly income of $1,800 and received a loan with a monthly payment of $7,000.

"It cries out for some reasonableness here," she said.

Under Coakley's regulations, lenders and brokers would also be barred from profiting additionally by charging higher interest rates than the borrower has qualified for. The regulations go into effect in stages over the next 2 1/2 months.

State legislators, meanwhile, are close to adopting other mortgage lending regulations. The House is scheduled to vote today on a bill that would, among other matters, require the state to publish regular reports on lenders that would grade their performance on fair pricing and equitable lending, particularly in low-income neighborhoods.

The combination of regulatory and legislative action begins to give teeth to months of talk by state officials about the appropriate response to the subprime mortgage crisis, in which thousands of borrowers have lost homes to foreclosure because they could not afford to pay their mortgage loans.

"This puts Massachusetts in the lead in the country in responding to subprime lending, and it's not even close," said Tom Callahan of the Massachusetts Affordable Housing Alliance. "We'll have the toughest set of monitoring and oversight of the mortgage industry of any state in the country."

State government is responding to the fallout from the boom in subprime mortgages - higher-priced loans intended for borrowers with lower incomes or poor credit. Most of these loans carried introductory, adjustable rates that increased sharply, resulting in borrowers being unable to make higher monthly payments. That's led to a record number of foreclosure proceedings against Massachusetts homeowners.

The new regulations add Massachusetts to a small list of states that have imposed "second-wave" regulations on the mortgage industry. The term refers to a first wave of regulations in the 1990s aimed mostly at the punitive fees lenders and brokers had attached to many refinancing loans. Lenders responded by reducing fees but pumping up interest rates.

Second-wave regulations, begun just last year, generally mandate fairness rather than spelling out detailed rules.

"This is another situation where Massachusetts is on the front end of providing protections," said Evan Fuguet of the Center for Responsible Lending, a North Carolina group that advocates for tighter regulation of the subprime industry.

Maine, Ohio, Minnesota, and North Carolina have all legislated various measures with the same goal: Requiring lenders and brokers to arrange loans that are suitable for borrowers. In Massachusetts the attorney general used her regulatory powers to impose the rules, which may soon be buttressed by an equally front-running package of legislation before the Legislature.

The Massachusetts Senate in June adopted many of Governor Deval L. Patrick's proposals for increased regulation. The version before the House today is similar. Mortgage brokers and lenders must be licensed, pay an annual fee and be subject to greater regulation and oversight by the Massachusetts Division of Banks. The money would be used to finance housing counselors who would assist first-time homebuyers planning to use adjustable-rate loans.

The legislation would also give borrowers a 90-day grace period in which to catch up on loan payments if they fall behind. And it limits the fees lenders can charge if borrowers convert from adjustable-rate loans to fixed-rate loans, which are generally easier to repay.

"If these rules were in place five years ago, I think it would have gone a long way toward preventing some of the horror stories that we hear happening in the marketplace now," said Representative Ronald Mariano, a Quincy Democrat, who chairs the financial services committee and has helped shepherd the bill.

Some mortgage industry members say they feel unfairly targeted by the new measures. They note that even now, only a small share of overall mortgage borrowers have defaulted on their loans. They also contend that some borrowers conspired in securing unaffordable loans by lying about their income. And they note that Coakley's regulations would subject them to greater lending disclosure standards than banks.

"They seem to have singled out mortgage brokers and that makes banks look like the best option. Well, if that was the case, this industry would never have evolved" and won so much business from borrowers over the last two decades, said Robert McDonald, who runs Mass Mortgage Group Inc., a Medford brokerage and is also the treasurer of the Massachusetts Mortgage Association, a trade group for brokers.

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