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REGULATORY UPDATE: MEASURES TO WATCH

Mortgage rules set to tighten

Mortgage companies would be forced to provide borrowers with easyto-read explanations under regulations proposed by the Pennsylvania Banking Department. The companies also would have to carefully scrutinize borrowers' ability to pay before signing off on a loan.

A standard disclosure form created by the department would cut the legalese, said spokeswoman Heather Tyler.

"Plain English," she said. "My mom will understand it"

If the regulation would make loans easier to understand, it would also make them a bit harder to hand out. Mortgage brokers and bankers would be required to evaluate whether a borrower can afford a loan, and they would have to document certain financial information.

The Banking Department proposal was recently forwarded to the Independent Regulatory Review Commission, a state board that reviews regulations.

The department is trying to protect the integrity of the marketplace without unduly restricting credit, Tyler said. These regulations are based on consultations with industry and consumer groups, she said.

The Banking Department has waged a two-year campaign to expand oversight of the mortgage industry in Pennsylvania. That effort includes other regulations and proposals for new laws.

The department published a draft of the latest rules last year. Since then, the subprime-mortgage market has fallen into disarray, and state and federal officials have stepped up efforts to intervene in the home-loan industry.

There are national parallels to the Banking Department regulation. A major industry group, the National Association of Mortgage Brokers, advocates for mandatory disclosure forms that clarify key terms of a mortgage loan in its 2007 Policy Agenda. The group is based in northern Virginia.

The four federal agencies that regulate banks recently published guidelines similar to the latest Banking Department proposal, said James M. Deitxh, chief executive officer of American Home Bank in Lancaster County.

There is a push under way to have brokers and lenders ensure that the mortgages they sell are suitable for the borrower, a concept analogous to an investment broker selling the proper investments, Deitxh said. He welcomes that

"The fraud that's in this industry is costing every consumer money. It's costing every lender money? he said.

The Pennsylvania Association of Mortgage Brokers warned against regulations that would take certain mortgage options off the table.

Some mortgage companies offer loans that require no verification of a borrower's income or assets, a practice that would be threatened by the Banking Department mandate, said association spokesman John Anthony.

"We believe that a better-educated consumer and a better-educated originator will ensure lower foreclosure rates, not the removal of options to the consumer," Anthony said, reading from a prepared statement He added that the group supports legislation that would mandate licensing and education for all loan originators. Anthony is the owner of ACA Mortgage in Cumberland County.

A bill pending in the state Legislature would give the Banking Department more power to watch over individuals in the mortgage industry. The bill would allow the department to license mortgage originators who work for brokerage companies or non-bank lenders. It's one of six bills the Banking Department is promoting.

The department also issued guidelines in December 2006 that define unethical behavior under existing laws for the mortgage industry.

-David Dagan

[Sidebar]

Proposed laws would make mortgages easier for borrowers to read.