Massachusetts Attorney General Files Final Mortgage Regulations

Issues Guidance To Industry

December 18, 2007 -- BOSTON – Today, Massachusetts Attorney General Martha Coakley filed final, revised mortgage broker and mortgage lender regulations with the Secretary of State and has issued official guidance to the broker and lender community to help them understand and implement the new consumer protection regulations governing mortgage brokers and lenders. The regulations, which take effect on January 2, 2008, codify several forms of mortgage fraud and unfair lending which contributed to the recent meltdown in the subprime market and the resulting foreclosure crisis in the Commonwealth.

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“We believe the regulations merely make clear behavior which is already illegal, and are essential in ensuring that consumers are treated fairly in the mortgage lending market,” said Attorney General Coakley. “We want to work with the broker and lender community to insure they understand and can implement these regulations.”

“I applaud Attorney General Coakley for implementing these regulations. It is very important to have these penalties for deceptive advertising and predatory lending practices," Mayor Menino said. "Regulations such as these are key to preventing the types of foreclosure we are currently seeing in Massachusetts and will curb unscrupulous mortgage brokers who entice consumers into purchasing loan products they cannot afford."

“This crisis has negatively impacted thousands of residents across the Commonwealth, causing them to question the American dream of homeownership because of deceptive lending practices,” said Representative Jeffrey Sanchez. “This is an issue that has certainly affected my district, and I applaud the Attorney General's leadership in working collaboratively to address it."

“Attorney General Coakley's significant efforts to address predatory lending has been a tremendous boost to ESAC's foreclosure prevention work,” said Robert Pulster, Executive Director of ESAC (Ensuring Stability through Action in our Community). “In the face of rampant mortgage fraud, the Attorney General has led efforts to curtail the unfair and deceptive activity that has resulted in unprecedented numbers of foreclosures across the Commonwealth. The expanded 93A regulations protect consumers by requiring fair and responsible mortgage lending practices that ultimately promotes the goal of sustainable homeownership.”

Many of the regulations were scheduled to go into effect on November 15, 2007. However, on November 13, 2007, Attorney General Coakley decided to delay the implementation date of the regulations in order to provide guidance and to address some of the concerns from the mortgage broker and lender community. This additional time allows for all brokers and lenders to insure that, as of 2008, all loan originations comply with the new regulations and prevented the disruption of loan transactions that were planned for 2007. Over the past month, Attorney General Coakley and her staff have met with representatives of industry groups to hear concerns and provide guidance.

Additionally, the office announced two changes to the regulations since they were first filed in October. First, the original revised regulation required two borrower disclosure forms—one for brokers and one for lenders. As of the filing of the final regulation, those new forms are no longer required. Instead, Section 8.05 simply provides that it is unfair or deceptive for a lender or broker to fail to provide to a borrower a disclosure required by federal or state law. Second, Section 8.06(16), which restricts the use of so-called “stated income” products, has been revised to account for so-called “No Income” loan products. These products—where a lender in no way considers employment status or income because the lender’s decision is based on other criteria—no longer require a borrower’s signed statement of income. See Sections 8.03 (definition of “No Income Loan Product”) and 8.06(16).

The regulations codify and prohibit several forms of mortgage fraud and unfair lending which contributed to the current foreclosure crisis in Massachusetts, and which have been created as illegal previously. Specifically, the regulations:

* require that mortgage lenders and brokers reasonably assess the borrower’s ability to repay the loan, including considering ability to repay an adjustable-rate loan at the higher adjusted rate, not just the initial starter rate. (940 CMR 8.06(15))
* prohibit broker conflicts of interest, where a broker’s compensation increases if the homebuyer obtains a loan with a higher interest rate and less favorable terms. (8.06(17))
* prohibit lenders from price gouging or discriminating against borrowers with similar credit criteria and other relevant qualifications. (8.06(18))
* restrict the use of loans made without income documentation, stopping abuse of these products by requiring the lender or broker to obtain a signed statement of the borrower’s income. (8.06(16))

These new regulations are narrowly crafted to address specific unfair and deceptive practices that the Attorney General’s Office has discovered in the course of investigations and lawsuits. They prevent serious abuses while posing a minimal burden on responsible lenders and brokers. The regulations:

* apply only to loan applications received after January 2, 2008, not to loans already in the pipeline.
* still allow brokers to collect Yield Spread Premiums (YSPs) that do not conflict with the borrower’s interest, provided they are fully disclosed.
* provide clear standards for businesses about what constitutes an unfair or deceptive practice under the state’s Consumer Protection Act , such as misleading borrowers, failing to disclose material facts such as brokers compensation, or making loans with unconscionable terms.
* complement the new protections for homebuyers that the Legislature established in the foreclosure prevention statute enacted in November 2007.
* level the playing field for community banks and responsible Massachusetts lenders that saw their market shrink due to national lenders selling super-risky loans by often using aggressive and deceptive sales tactics.

Attorney General Coakley announced the regulations on October 17, 2007, following a public comment period that began June 1, 2007, and after conducting four statewide hearings that took place between September 18-21, 2007. On November 5, 2007, the Attorney General issued a report accompanying the amended regulations governing mortgage brokers and lenders. Today, Attorney General Coakley filed final, revised mortgage broker and lender regulations which go into effect on January 2, 2008. The regulations identify unfair and deceptive acts or practices under the Consumer Protection Act, chapter 93A.

Source: Massachusetts Attorney General