The fallout from the demise of Abbey Financial Corp., Cambridge, Mass., has begun raining on the state's residential lending industry.

Last Thursday, Thomas J. Curry, acting commissioner of banks in Massachusetts, held a public hearing in Boston on a controversial set of regulations he proposed last month that has local lenders red with rage.

The proposed regulations would:

* Give the banking commissioner authority to set limits on net worth for individual mortgage banks.

* Set more stringent standards for the ability to do rate locks.

* Mandate escrow accounts for client fees paid before closing.

* Require lenders to file more comprehensive reports of their financial condition.

Consumer Concern

Mr. Curry said he was concerned about protecting Massachusetts consumers from what happened to many of Abbey's customers when the lender became insolvent.

According to Mr. Curry, 900 Abbey consumers in Massachusetts were adversely affected by the lender's implosion. About 300 had loan commitments that went unfunded, he said.

The state's division of banks tried to place Abbey customers with other lenders when it went bankrupt in April, but only 50% managed to get by without losing locked-in rates or prepaid fees, Mr. Curry said.

He said the proposed regulations were designed to try "to minimize the chances of its happening again."

But lenders are cringing at some of the commissioner's proposals.

"If they go through as proposed, it will be traumatic," said Leonard H. Garfield, chairman of Mainstreet Mortgage Co., Burlington, Mass., and a past president of the Massachusetts Association of Mortgage Brokers and Correspondent Lenders.

The proposals regarding rate locks and net worth requirements have lenders most uncomfortable.

Under the proposed regulations, the commissioner would have full discretion to mandate a higher liquid net worth requirement for an individual mortgage company "based on the licensee's particular risk profile."

Lenders say the commissioner would have too much unchecked power without clearly defined parameters for net worth.

Mr. Curry has also suggested stricter guidelines for rate locks. They would be restricted to only those lenders that have liquid net worths greater than $500,000.

Near 'Abolishing' Small Lenders

In addition, the proposal will require lenders to have net worth amounting at least 2% of rate locks. So with only $500,000 net worth, lenders may issue rate locks on loans of $25 million.

That could put many of the state's small lenders out of business. Interate National Mortgage Corp., Methuen, with a net worth of about $250,000, is one of them, said David Chinian, president and chief executive.

"What they are trying to accomplish is literally just short of abolishing mortgage banks" in Massachusetts, Mr. Chinian said.

Mr. Curry, the commissioner said he would take into "serious" account issues raised by lenders and others at the public hearing and in written opinions before issuing a final version of the regulations in two to four weeks.

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