Attorney General Martha Coakley postponed new regulations designed to end abusive practices by mortgage brokers after mortgage industry officials complained they were too broad.
The regulations, scheduled to go into effect tomorrow, were postponed until Jan. 2. Coakley, however, said she is not backing off or changing the new rules, despite the complaints from lenders and brokers.
At issue is a regulation that would prohibit brokers from pushing loans with interest rates higher than what borrowers qualified for, in order to increase commissions. Some contend such commissions are not always disclosed and may be hidden from borrowers.
Some members of the mortgage industry complained last week that the wording of the regulation is too restrictive.
They even contemplated taking the attorney general to court, if necessary, to try to stop the rules from taking effect.
Coakley said she elected to delay the start date to give her office more time to explain the rules to lenders and brokers, and to clarify which practices would be prohibited. Her office contended lenders and brokers are inaccurately interpreting the wording of the rules.
"We believe the regulations are accurate, forceful, and fair, and designed to prevent the excesses we've seen," Coakley said.
At issue is the degree to which the regulation would limit so-called yield spread premiums, the amount lenders pay brokers for selling loans that carry higher interest rates than the wholesale rate the lender is asking for the loan.
The premium is often used to reduce the amount of upfront money buyers need to pay for closing costs, making it easier for some to complete their purchases.
But Coakley and other regulators said premiums have been abused by unscrupulous brokers to get borrowers into higher-cost loans, simply because it increases their commissions.
Democrats in the US House of Representatives have also considering banning yield spread premiums.
Coakley said the new regulation was never intended to ban yield spread premiums altogether, though it explicitly bans commissions that increase as the borrowers' rate increases. Existing regulations require that such premiums be disclosed to borrowers.
Yield spread premiums "are not eliminated per se," she said. The new rule "deals with a particular concept that a broker cannot get compensated in a way that is a conflict of interest."
The new rule was being interpreted differently by lenders.
For example, Rosemary O'Neil, past president of the Massachusetts Mortgage Association, which represents loan brokers, said lenders read the rule as banning yield spread premiums, even though this was not the attorney general's intent. Coakley "doesn't want to shut down the brokerage industry or eliminate the yield spread, but she wants to crack down on the abuses, and we're on the same page with her on that," O'Neil said.
Bruce Marks, head of the nonprofit Neighborhood Assistance Corporation of America, which provides affordable housing loans, said his reading of the regulation was that "in the vast majority of cases it would eliminate YSPs - as it should."
Yet another view is from Randy Wilburn of Randy Wilburn & Co., a Boston mortgage originator. He understood the new regulation would permit him to charge customers a yield spread premium, but only if he disclosed it - which he already does. For example, Wilburn said his customers are given the option of paying points up front - a flat fee typically equal to 1 to 1.5 percent of the loan value - or paying a higher interest rate over the life of the loan.
The problem with the new rule, as written, is that "it's very black-and-white" and bars yield spread premiums, Wilburn said. "Some people might not have the extra money to pay points at the closing," he said.
Another problem with the rules taking effect tomorrow is that some loans in the pipeline would not be funded by lenders, who fear they would be in violation of the new rules, Coakley and O'Neil said.
Kimberly Blanton can be reached at blanton@globe.com.
