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Mass. Exodus

Mass. ExodusWholesalers concerned over YSP limitations, suitability standard

January 4, 2008


A new law in Massachusetts that took effect on Jan. 2, which limits fees and yield spread compensation and imposes other restrictions on mortgage broker originations, has at least 15 wholesale lenders modifying or curtailing operations and has brokers scrambling.

But the reasons why lenders, which include Wells Fargo and IndyMac, are taking these steps and the impact on mortgage originations and employment is in dispute.

“It’s going to curtail the availability of credit for all mortgage lending — subprime, prime, refinances, equity loans,” Paul Richman, vice president for state government affairs at the Mortgage Bankers Association, told “And the cost of credit is going to go up in order for lenders to protect their potential for legal liability. Further, it’s going to have some affect on both industry employment and, because people who want to take jobs in Massachusetts won’t be able to buy homes, it will have an affect on general employment.”

But Kevin M. Cuff, executive director of the Massachusetts Mortgage Bankers Association, wonders whether the new regulation, which was issued by Massachusetts Attorney General Martha Coakley and amends the state’s Consumer Protection Act, is responsible for lenders’ actions.

“I’m not sure if those decisions have been made as a result of the regulations or if lenders have used the regulations as the reason to make the decisions,” he told

“That might be ancillary to them pulling out of the market because the [lack of] business is telling them to pull out of the market, not because the regulations are telling them to pull out,” he commented, noting that many lenders have been shutting down their wholesale operations.

Amtrust Bank, Guaranteed Rate, and others are ending their stated income and no income/no asset documentation type loans following the implementation of the regulations. But Cuff noted, “No one’s been doing them anyway.”

IndyMac, in a statement to, said that as a result of the regulations, it “cannot assess its risk as a lender in a brokered transaction or its liability with respect to purchasing loans due to the lack of clarity of the rules. As a result, IndyMac is no longer handling certain loan transactions through mortgage brokers/sellers or purchasing certain loan types in Massachusetts for the time being.”

And Wells Fargo said that due to the regulations, “it will change certain of its lending practices effective for loans secured by property in Massachusetts … so as to comply with these new regulations.”

Spokesmen for both lenders declined to discuss any potential loss in originations or jobs as a result of the regulations.

But some other lenders say they have instituted few, if any changes in their lending practices in the state.

“We’re continuing to do business in the state,” was told by Brian Simon, chief operating officer of Mount Laurel, N.J.-based Freedom Mortgage, who said that this included its wholesale operation, despite reports among lenders and brokers that it was ending its wholesale operations in the state. “What we’re doing matches up conservatively with the regulations. We’re well within the law.”

This includes, he said, their compensation of brokers.

The regulation, Section 8 of what also is known as the Unfair and Deceptive Acts and Practices Act, allow yield spread premiums but prohibits as conflicts of interest any increases in brokers’ compensation that are tied to higher interest rates and less favorable terms. And many lenders have changed, effective Jan. 2, their methods of compensating brokers.

“The regulations,” said Cuff, “have tried to set up a consistent compensation pattern for all brokers across the board, which is probably a good business practice and probably a healthy way of correcting the industry and the general behavior of a mortgage broker.”

But he criticized the capping of YSPs at an assumed 1.5 percent.

And Cuff said that some local lenders have ended their wholesale business “because they’re not quite sure how to compensate brokers” without violating the new state regulation, though he couldn’t name those lenders.

“Right now,” complained the MBA’s Richman, “the way the rules exist they are very vague, broadly written and contain subjective standards, creating an environment of legal uncertainty, which poses too great a risk of litigation and liability. And the guidance is not sufficient to clarify those broad subjective standards proposed by the attorney general.”

Most subjective is the requirement that lenders and brokers must reasonably assess the borrower’s ability to repay the loan, including the ability to repay an adjustable-rate mortgage at the higher adjusted rates, even when the initial adjustment does not occur until the fifth, seventh or tenth year.

“The regulation does not dictate precisely how lenders and brokers must underwrite ARM loans to account for those upward adjustments,” according to the 12-page guidelines, which were issued in response to questions about the 15-page regulations raised by lenders and brokers.

Other provisions prohibit as unfair or deceptive practices any use by lenders of pricing models for mortgages which treat borrowers with similar credit criteria differently, any origination or processing of loans without documentation to verify borrower income, not providing borrowers or their attorneys “reasonable” opportunity to review every document, or to charge fees that “significantly deviate from industry-wide standards or is otherwise unconscionable.” And annual percentage rates are prohibited as unfair or deceptive if they are “unconscionable,” that is if the APR, at the time of origination, was 10 percent above the highest domestic prime rate in the Wall Street Journal’s Money Rates section or inconsistent with comparable rates for borrowers in similar financial circumstances.

The regulation also establishes standards regarding unfair or deceptive practices, including misleading borrowers, failing to disclose such facts as brokers’ compensation and making loans with unconscionable terms.

Ten other practices also are prohibited as unfair or deceptive.

The regulation also sets standards for advertising practices, prohibiting, for example, the use of such terms as “bad credit no problem” without disclosing any limitations on credit availability, or to use such terms as “immediate approval,” “immediate closing” and “instant closing.”

The MBA’s Richman compared the Massachusetts regulations and their impact with the outcome of similar laws established in other states that eventually were dropped or amended because of their negative impact on lending activity.

“We saw this in other places — Georgia, New Jersey, Washington, D.C., Montgomery County, Maryland,” he said. “All the legislative bodies had to change the laws in order for lending to resume.”

The Massachusetts MBA is holding a workshop on Jan. 16 on the regulations, for which more than 75 already had registered as of Jan. 3, MMBA staff member Debbie Sousa told

“As with other recent legislation and guidance that attempts to address current market conditions, it is not simply the expanded scope of these attempts that have caught industry members’ attention, it is also the uncertainty and complexity that surrounds the analysis and implementation of such charges,” Michael S. Waldron, an attorney with the Washington, D.C.-based law firm of Weiner Brodsky Sidman Kider PC, told

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