Option One Mortgage Corp., the state’s dominant lender to borrowers with credit problems, has stopped making mortgage loans in Rhode Island, citing concerns about the state’s new predatory-lending law.

The California-based mortgage company is one of a half-dozen lenders in the “subprime” market which this month suspended, at least for now, lending in Rhode Island since the state’s new Home Loan Protection Act became effective Jan. 1, according to a Providence lawyer and board member of the Rhode Island Mortgage Bankers Association, James H. Hahn.

The state Department of Business Regulation’s director, A. Michael Marques, said yesterday that regulators are reviewing the agency’s “emergency” regulation on the law, which the agency had rushed into production to meet a New Year deadline. The regulations were designed to help lenders comply with the new law, which Hahn described as a complicated and ambiguous statute created from a patchwork of other state laws.

“This is very complicated and I want to make sure we protect the consumer,” Marques said, “but at the same time we don’t make it so onerous that the lenders don’t want to be here.”

Unclear yesterday was whether the mortgage companies that have stopped making loans in Rhode Island did so because of the predatory-lending law itself, the regulations that the state enacted to enforce the law, or both.

The Home Loan Protection Act enacted by the General Assembly in July is designed to regulate mortgage companies with state licenses, or “affiliates” of big financial companies, which fall outside federal laws designed to protect against “predatory” lending. The state law aims to remove incentives for making “predatory” loans and, instead, establishes fee thresholds and other protections for borrowers

The statute sets restrictions on how lenders may collect fees and points on high-cost loans, which the law defines based on the interest rates, points and fees. Any loan that meets the criteria would now automatically require that the borrower obtain credit counseling.

The law also prohibits lenders from extending “high-cost” home loans to borrowers without verifying the borrower’s income and ability to pay. The safeguards are aimed at protecting consumers with less-than-perfect credit from taking on mortgages they can’t afford and losing their houses to foreclosure.

On Jan. 9, Option One issued a “Compliance Alert” bulletin to mortgage brokers around Rhode Island stating that effective on that date the company would “temporarily suspend the origination and purchase of all owner- occupied loan transactions if the subject property is located in Rhode Island.”

The bulletin stated that the company’s “difficult decision” was due to “the Division of Business Regulation promulgation of Emergency Regulations (“Regulations”) to implement the Rhode Island Home Loan Protection Act that became effective January 1st, 2007 on all loans closed on or after that date.”

The notice cited three areas in which the regulations had “significantly modified” lending:

•The interest-rate thresholds on adjustable-rate mortgage loans that require the “fully indexed,” or highest possible interest rate be used to determine the “maximum allowable interest” rate.

•That documentation and evidence be provided of all “third-party loan fees.”

•New disclosure and signature requirements.

A spokeswoman for Option One Mortgage Corp. confirmed that lending on home loans in Rhode Island was being suspended, but did not provide any additional information about the reasons behind the decision.

“We are trying to find a workable solution,” Option One spokeswoman Christine Sullivan said. “We are in the business of serving consumers’ needs [for] mortgage loans and as soon as we do get that solution, we will return to lending in Rhode Island.”

Other mortgage companies that have indicated they have stopped making loans in Rhode Island, Hahn said, are New Century Mortgage Corp., Argent Mortgage Co., Provident Funding Group and Flex Point Funding Corp. First Franklin, a subsidiary of Merrill Lynch Bank & Trust Co., is not among the companies, as had been initially reported.

A spokeswoman for New Century said yesterday that the company last week suspended lending for all owner-occupied home loans in Rhode Island because the deadline for complying with the state regulations was “too short for us to be able to do anything.”

However, company spokeswoman Laura Oberhelman said late yesterday that, since Rhode Island regulators have now pushed back the deadline for enforcing the new regulations on predatory lending, the company expects to announce today that it will remove the lending restrictions on Rhode Island.

About 87 percent of New Century loans are “subprime loans,” she said.

Option One originated more than 3,300 home loans, or 5 percent of the subprime market in Rhode Island, during the third quarter of last year, according to the Mortgage Bankers Association in Washington.

A “subprime” lender is one that makes loans to borrowers with credit problems who don’t qualify for the best rates. A “subprime” lender is different from a “predatory lender,” because the term “predatory” implies that the lender is taking advantage of borrowers.

Last summer, in signing the new law, Governor Carcieri had cited research from the Washington-based Center for Responsible Lending that shows predatory lending costs state residents about $65 million a year.

Rhode Island was the 32nd state in the country to enact a predatory-lending law.

The bills were sponsored by Sen. Juan M. Pichardo, D-Providence, and Rep. Joseph J. McCauley, D-Providence.

larditi@projo.com