To applause from many local residential lenders, the state of Massachusetts has adopted new regulations that government officials hope will avert a repeat of Abbey Financial Corp.'s recent demise.

The new regulations, which will go into effect July 29, will require lenders to better monitor their pipelines and protect borrowers.

"I think in the grand scheme of things what has emerged here is some more orderliness to the lending business" in Massachusetts, said John R. Heerwagen, chairman, Massachusetts Mortgage Bankers Association.

The demise of Cambridge, Mass.,-based Abbey provided the impetus for reconsidering the state's lender regulations, said Thomas J. Curry, acting commissioner of the state's division of banking.

Rate Drop Forces Shutdown

In April, Abbey was forced to shut down its operations after plummeting rates left it unable to honor rate locks.

About 900 customers were affected by Abbey's flop, according to the Division of Banks. And approximately 300 loan commitments could not be funded at that time, according to the agency.

While considering new regulations, the state "tried to anticipate what happens in the aftermath of a low-interest rate environment," Mr. Curry said. Last month the Division of Banks proposed strong regulations for lenders. They would have imposed major -- and some said "traumatic" -- safety nets for lenders and their borrowers.

Initial Opposition

Most controversial was a proposal which would have required lenders to maintain a net worth of at least 2% of outstanding rate locks. So with only $500,000 net worth, lenders would have been allowed to issue rate locks on loans of $25 million.

Lenders felt that would have been too restricting.

The new regulations will require a net worth of at least 2% of outstnding rate locks only for mortgages that are not "responsibly" hedged, or left "uncovered."

Lenders will also be required to maintain a higher net worth -- $500,000 -- for the permission to lock in loans.

More Data Disclosure

Prepaid fees, for rate locks, up-front "points," or applications, must be placed in an escrow account, according to the new regulations. That's to avoid consumers loosing their fees should a mortgage company like Abbey not be able to honor its loan commitment.

Under the new regulations, lenders will have to disclose more financial information to state regulators. And the Division of Banks will now have greater authority to examine mortgage companies and impose corrective measures on lenders in financial difficulties.

Rule Revamping

Massachusetts adopts new regulations for lenders in response to the Abbey Financial fiasco.

The new rules require:

* Mandatory escrowing of borrowers' prepaid charges

* Higher net worth requirements for locking in interest rates

* Greater disclosure requirements

* Authorize wider discretion for state regulators

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.