Nineteen of the 20 largest mortgage lenders in Massachusetts are staying and adjusting to new regulations imposed Jan. 2, rather than leaving as some critics had predicted.
Some of the companies have tightened qualification standards, such as requiring more documentation of a borrower's income. Others have changed how they pay the independent mortgage brokers who arrange most loans. The relationship between brokers and lenders is a focus of the new regulations.
But only IndyMac Bank, a California company that made about 1.6 percent of the new mortgage loans in Massachusetts last year, has reacted by suspending most lending in the state.
The response amounts to a victory for Attorney General Martha Coakley, who imposed the regulations. She had argued most lenders would stay and most customers would feel no impact.
"I think overall the regulations help us," said Paul Anastos, vice president of Mortgage Master Inc., a Walpole company that ranks 14th in the number of loans made in the state in 2006. "It helps because people were getting loans other places that we just could not do, and now this tightens it up so that everything is equal."
The new regulations impose the nation's toughest restrictions on the mortgage industry.
The state now requires loan originators to have a "reasonable belief" that a borrower can afford a loan, based on available information about the borrower's financial circumstances.
It requires increased documentation of a borrower's income. And it prohibits mortgage brokers from receiving larger bonuses when they sell more expensive loans.
When the regulations first were disclosed in the fall, some industry representatives warned that a lack of clarity - what constituted a reasonable belief that a loan was affordable - would lead some companies to suspend lending, for fear of inadvertently crossing a line and facing legal action.
Similarly strict laws imposed by Georgia in 2001 and New Jersey in 2003 were rolled back after lenders threatened to withdraw from those states - and in some cases, briefly did.
In Massachusetts, Coakley delayed implementation of the rules for several weeks as she considered industry concerns. But with foreclosures rising, she decided to hold firm.
In response, IndyMac Bank stopped most lending in Massachusetts at the end of 2007. The company "cannot assess its risk as a lender," it said.
In a memo to brokers, the company also blamed the attorney general's office for showing a "reticence for providing sufficient clarity."
IndyMac ranked 14th by loan volume in Massachusetts last year, according to a Globe analysis of federal data.
A much smaller lender, New Jersey-based Freedom Mortgage, said it would leave at the end of January. The company similarly cited "the vagueness of the state law requirements."
Emily LaGrassa, a spokeswoman for the attorney general's office, said it had worked to answer any questions put to it by companies. "Lenders who are pulling out of Massachusetts either haven't taken the steps to understand the regulations or they don't want to follow the law," she said.
Some remaining lenders have responded to the nuances in the new regulations by adopting overly broad policies designed to avoid any possibility of a violation. For example, the new rules limit, but do not prohibit, loans based on limited documentation of a borrower's income. But lenders including AmTrust Bank and Provident Mortgage have stopped making certain kinds of loans that allowed partial documentation.
Wells Fargo & Co., the state's third-largest lender last year, said it will change the way it pays mortgage brokers in Massachusetts, from a sliding fee based on loan's profitability to a flat 1.5 percent of the loan amount.
The practice of paying brokers a sliding fee was a major target of the new Massachusetts rules. Industry critics have long charged the system encouraged brokers to saddle borrowers with more expensive loans.
The new Massachusetts law allows sliding fees so long as the broker's total compensation is not increased at the customer's expense. In practical terms, that means brokers can only sell customers a more expensive loan if they offer an equivalent reduction in the closing costs.
The flat fee offered by Wells roughly matches the average compensation brokers received under the old system, but it eliminates the most lucrative paydays.
Several other factors are roiling the national mortgage business simultaneously. Investors have ended most funding for subprime loans, forcing several large subprime lenders to close. Lenders including Bank of America Corp., National City Corp., and Webster Bank have stopped working with independent mortgage brokers, choosing to increase oversight by writing their own loans instead.
Those nationwide trends have had a much larger impact on Massachusetts mortgage brokers than the new state regulations. Nine of the 20 largest mortgage lenders in Massachusetts last year have suspended all or a significant part of their lending nationwide, in decisions unrelated to the new state rules. Most of the suspended businesses and lending units specialized in subprime lending.
The cumulative impact has excluded about 5 percent of applicants who previously were eligible for some kind of loan, according to several local originators.
"Each additional piece is going to take an additional segment of the marketplace out," said Bill Mullin of NE Moves Mortgage, a Waltham company that ranks 18th by lending volume. "And I think the impact is going to be greatest on lower- or moderate-income communities.
Binyamin Appelbaum can be reached at email@example.com.
Correction: Because of a reporting error, a story in yesterday's Business section about mortgage lenders misstated the response of Freedom Mortgage to new state regulations. The company plans to continue making loans in Massachusetts.