Maryland examines regulation, legislation

From the Baltimore Sun:

Lending reforms explored in Md.

With the mortgage-sparked credit crisis expected to worsen over the next year, Maryland lawmakers are exploring legislation aimed at protecting consumers and forcing lenders to examine a borrower’s qualifications more carefully before offering loans.

“We need to prevent people from getting into loans that set them up for failure,” Maryland’s secretary of labor, licensing and regulation, Thomas E. Perez, said yesterday at a hearing in Annapolis. “Foreclosures not only tear families apart, but they undermine communities.”

About a dozen states have begun to make legislative and regulatory changes aimed at protecting subprime borrowers. Gov. Martin O’Malley and Attorney General Douglas F. Gansler have convened task forces to examine the subprime market and find ways to help forestall foreclosures. Legislative fixes could become a major thrust of the General Assembly session that begins in January.

Problems in credit markets, which have hit disparate segments of the global economy, began with rising defaults and foreclosures on subprime mortgages, those extended to borrowers with weak credit histories.
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Industry groups are girding for a fight. Representatives with the Maryland Bankers Association, the Mortgage Bankers Association and the Maryland Association of Mortgage Brokers urged the Senate Finance Committee, which held the hearing, to be wary of legislation that could destroy the subprime lending market.

State officials also said they don’t want to hurt the market. Subprime loans have opened up credit to many who would not have qualified for a loan a decade ago, especially lower-income and minority borrowers.
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D. Robert Enten, general counsel for the Maryland Bankers Association, said legislators should be careful not to over-regulate an industry that is already subject to federal regulation. He said the “cyclical” credit crisis will pass, and higher defaults on subprime loans should not be surprising.

“These are people for whom it’s a stretch,” Enten said. “It’s a stretch to make these loans.”

Industry officials, many of whom are participating in the task forces, said they might support some legislative proposals. David Pulford, president of the Mortgage Bankers Association, said his group would like to see increased enforcement of existing regulations and more education and counseling about financial issues, especially mortgages.
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Some states are looking to require that mortgage brokers act in the best interests of consumers. Roughly two-thirds of mortgages are originated through brokers, and consumer advocates say some steered borrowers to high-cost loans or deliberately excluded real estate taxes and insurance escrow to make mortgage payments look more affordable.
“I firmly believe most mortgage brokers are trying to do the right thing, but the pressure is enormous for them to close the deal,” said Steve Silverman, chief of the consumer protection division at the attorney general’s office.

Other proposals are aimed at tightening standards used in deciding whether to make loans. One would require that lenders verify a borrower’s income. Another would force lenders to consider a borrower’s ability to repay an adjustable rate mortgage at the higher reset rate. Many borrowers signed up for such loans at low initial rates and fell behind on payments once the rate reset after a period of time.