A Massachusetts law that went into effect last week has some lenders worried about refinancing home loans in the state.
The law prohibits lenders from refinancing mortgages that are less than five years old unless they determine the new loan is in the “borrower’s interest.” But observers say the law is vague and makes it difficult for lenders to determine what the “borrower’s interest” means.
“A couple of lenders said we’re not doing refis in Massachusetts because of this,” said Nanci Weissgold, partner with Kirkpatrick & Lockhart, a Washington, D.C., law firm that focuses on mortgage banking and consumer finance.
Whether lenders actually pull out of the state remains to be seen. Weissgold couldn’t name specific lenders who threatened to halt their refi business in the state, but said the law remains a genuine concern for many despite a new regulation designed to clear up confusion.
The emergency regulation, valid for 90 days, exempts some refis from the borrower’s interest determination. New home loans guaranteed by the Federal Housing Administration, the Department of Veterans’ Affairs or other state or federal housing finance agencies do not have to meet the borrower’s interest test. Also exempt are refinanced loans with APRs that do not exceed the yield on U.S. Treasury securities by more than 2.25 percentage points for first-lien home loans or 3.25 percentage points for subordinate-lien home loans.
“It gave a little breathing room for lenders,” Weissgold said. “However, for loans that do not meet that narrow exemption, the regulations really didn’t give any relief.”
David Cotney, senior deputy commissioner for Massachusetts’ Division of Banks, heard that the borrower’s interest provision initially caused some lenders to rethink their Massachusetts’ refi business. But, Cotney said, he hasn’t heard any rumblings recently.
“Since the regulation, we have not had a lot of reaction, which I think is a good thing,” Cotney said.
Some people have called with technical questions about the regulation, but he said their concerns haven’t been substantial.
The Division of Banks is currently taking comments on the regulation and plans to hold a public hearing on it early next month. Cotney said the Division would take those concerns into consideration when coming up with its permanent regulation, which it hopes to have in place by the end of the year.
From there, the Division of Banks likely will turn its attention to other provisions of the “Act Prohibiting Certain Practices in Home Mortgage Lending.” A large chunk of the law deals with predatory home loan practices, which occur when lenders use dicey sales tactics to target the poor, minorities and people with substandard credit by charging inflated interest rates on mortgage and home equity loans. Victims often end up with destroyed credit and some have even lost their homes.
Predatory lending laws aren’t new, as many states and localities around the country have passed them their own strict versions against the practice. But some trade groups including the Mortgage Bankers Association have criticized such laws, saying they threaten to break up the national mortgage system.
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Tightened predatory lending laws have led some lenders to retreat from states where the laws were viewed as too onerous.
Fitch announced last week that it would not rate mortgage-backed securities subject to Massachusetts’ predatory lending law because it increases the risk of unlimited assignee liability, which means investors could be on the hook for any claims a borrower has against the lender.
Still, much of the concern about the new law overall has surrounded the borrower’s interest provision, which applies to all loans, not just high-cost ones. The law doesn’t directly specify penalties for lenders making a refinance if it isn’t in the borrower’s interest, but lenders fear the law could increase the likelihood of contested foreclosures, Weissgold said.
If a refinance does not meet the exemptions laid out in the emergency regulation, lenders must consider the following factors to determine whether the loan is in the borrower’s interest:
- The borrower’s new monthly payment is lower than the total of all monthly obligations being financed, taking into account the costs and fees;
- There is a change in the amortization period of the new loan;
- The borrower receives cash in excess of the costs and fees of refinancing;
- The borrower’s note rate of interest is reduced;
- There is a change from an adjustable to a fixed-rate loan, taking into account costs and fees; or
- The refinancing is necessary to respond to a bona fide personal need or an order of a court of competent jurisdiction.
The law does not offer more specifics on the factors, nor does it give directions on how many positives a refi must have to be considered in the borrower’s interest. That leaves a lot of room for interpretation, especially since some categories could be considered both a positive and a negative, Weissgold said.
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