Articles from The Massachusetts Focus
Newsletter of Stewart Title Guaranty Company, Massachusetts Offices
Winter 2005, Volume 4, Number 1
by Pamela Butler O'Brien, Underwriting Counsel
In response to predatory lending concerns, Massachusetts has enacted tough new legislation. Chapter 268 of the Acts of 2004, approved August 9, 2004, amends G.L.c.183 by inserting §28C, replacing §56 and §59, amending §66 and by adding Chapter 183C: Predatory Home Loan Practices. This act took effect on November 7, 2004, and applies to all loan applications received after that date. While Chapter 268 is well worth reading in its entirety, there are several things worth special note for those with time constraints.
G.L.c. 183 §28C applies to refinance transactions. Lenders are prohibited from making home loans to pay off debts of the borrower incurred within the 60 months immediately prior to the transaction unless the loan is in the best interest of the borrower. The statute sets out several factors to be used in determining whether or not a loan is in the best interest of the borrower:
- The new monthly payment is lower than the sum of all the monthly obligations being financed.
- There is a change in the amortization period of the loan.
- The borrower receives cash in excess of the costs and fees of refinancing.
- The borrower's note rate is reduced
- There is a change from an adjustable to a fixed rate loan.
- The refinancing is necessary to respond to a bona fide personal need or court order.
While there has been some much publicized response to this legislation that lenders will no longer be doing refinance lending in Massachusetts, a more common reaction has been a change in the lending procedures. While most of the impact of the new legislation is on the lender at the underwriting stage of the loan, lenders are occasionally asking for back up documentation at the time of closing, so read your closing instructions carefully for new requirements.
G.L.c. 183, §56 changes the prepayment penalties permitted on liens secured by owner-occupied one- to four-family residences or residential properties. Once thirty-six months from the date of the note has elapsed, there may be no prepayment penalty. If a borrower refinances with a different lender within the first thirty-six months, the prepayment penalty may not exceed six months interest. If the borrower is refinancing with the same lender, the prepayment penalty shall not exceed either the first years' interest or three months interest, whichever is less. Mortgages insured by the Federal Housing Commissioner are an exception to this section, and the borrower may have additional liabilities under these mortgages.
The new Chapter 183C makes high-cost home mortgages originated in violation of the statute unenforceable. The statute defines high-cost mortgage loans to be loans that meet certain criteria with respect to either the interest rate charged or by a calculation of points and fees charged in connection with the loan amount. The new statute has many restrictions on high-cost mortgage loans, and only a few will be highlighted here. If you are working with a lender that provides these mortgages, a careful review of the statute is recommended. A creditor is prohibited from making a high-cost mortgage loan unless the borrower has a certificate from an approved counseling agency that they have received counseling on the advisability of the loan transaction. The banking commissioner will maintain a list of counseling programs approved for this purpose. High-cost mortgage loans may not contain prepayment penalties nor provisions that change the interest rate after default. There is a limit on the amount of points and fees that can be included in the loan amount. In addition to the fact that violations of the Predatory Home Loan Practice Act is a violation of Chapter 93A, it is noteworthy that assignees of the original lender of high-cost mortgage loans are subject to the affirmative claims and defenses that borrowers could assert against the original lender.
The Massachusetts Division of Banks is responsible for establishing regulations regarding the new predatory lending laws. Their regulations may be found on their website, www.mass.gov/dob. In addition, their website has a compilation of frequently asked questions and answers.