NOVEMBER 2004

Massachusetts Predatory Lending Law
Causing Pullback

A law passed last summer that became effective in Massachusetts on November 7 is having a negative impact on the potential supply of subprime mortgage credit. Massachusetts passed an anti-abuse law that coupled vague wording with a stringent prohibition on refinancing activity. As a result, the American Banker reported that at least one lender, Citigroup Global Markets Realty Corp., announced that it would not accept Massachusetts refinancings beginning November 1, citing the wording of the statute. Specifically, the law bars refinancing a loan in the first five years after origination unless the new loan provides the borrower with a "benefit," which the law says must be "narrowly construed." Legal experts maintained that the law does not adequately explain what constitutes a benefit, and that if lenders followed the few examples offered (i.e., "the note rate is reduced" or "there is a change from an adjustable rate to fixed rate loan) it would not provide lenders with sufficient protection from litigation.

Citigroup vice president Matthew R. Bollo wrote in an October 29 memo to its brokers that because of the "vagueness of certain provisions of the law, coupled with the uncertainty regarding the consequences for a compliance failure, Citigroup has determined that it cannot at the present time provide a market value for such mortgage loans." State regulators promised that a regulation clarifying the statute would be out within a week of the law's effective date, suggesting that any disruption in the market would be short-lived. Nevertheless, the incident demonstrates once again that the supply of mortgage credit is not immune to the vagaries of state and local anti-abuse rules—a fact that fuels arguments for preemptive, uniform national standards.