Massachusetts Effectively Outlaws High Cost Home
Mortgage Loans and Imposes Suitability Standards
on all Home Mortgage Loans
Purchasers of Massachusetts high cost home mortgage loans are subject to a greater risk of assignee liability under the new Predatory Home Loan Practices Act (the “Act”), which Massachusetts Governor Romney signed into law on August 9, 2004 and which is scheduled to become effective on November 7, 2004. The Act materially expands the protections afforded borrowers under the state’s existing anti-predatory lending regulations for high cost home loans1 that the Division of Banks issued several years ago. Unless assignees of high cost home mortgage loans qualify for a due diligence “safe harbor,” they face indeterminate liability for the acts, errors, and omissions of originating lenders and mortgage brokers. In the past, such indeterminate assignee liability in other states’ laws has had serious adverse consequences for high cost lending in those states. H.B. 4880, which added the Act to Massachusetts law, also amends existing laws relating to all residential mortgage loans, including amendments imposing an anti-flipping prohibition. Similar to the now infamous North Carolina anti-predatory lending law, the Act imposes an obligation on a lender to determine the suitability of a home mortgage loan for a borrower without regard to whether the loan is a high cost loan.
There is no explicit assignee liability for that suitability provision (although, as explained below, the Act could impose such liability if the loan is a high cost home mortgage loan, and if the assignee fails to meet the conditions for the safe harbor).
While the Act does not expressly address its interplay with existing regulations for high cost loans, it directs the Commissioner of Banks to promulgate new regulations necessary to carry out the Act’s provisions. Until the new regulations are issued, it may be necessary for lenders to grapple with the burden of complying with both the new Act and the existing regulations.
WHO MUST COMPLY WITH THE ACT?
The Act generally applies to all “lenders.” The Act defines a “lender” as an “entity that originated, or acted as an intermediary between originators and borrowers on, 5 or more home mortgage loans within the past 12 month period.” For the purposes of the Act, the term “lender” also means a “broker.” The Act defines a “broker” as any person who, for compensation, directly or indirectly solicits, processes, places, or negotiates home mortgage loans for others, or who closes home mortgage loans that may be in the person’s own name with funds provided by others and are thereafter assigned to the person providing the funding of the loans. Note that the definition of a “broker” broadly encompasses the mere solicitation of a borrower for compensation.
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While the Act does not expressly apply to servicers, it does contain provisions that will affect the servicing of loans subject to the Act. Furthermore, loan servicers will need to comply with other provisions of H.B. 4880 that amend existing restrictions on late fees and prepayment penalties contained in Massachusetts’s real property laws. Those provisions are discussed in more detail below.
WHAT IS A “HIGH COST HOME MORTGAGE LOAN”?
The Act applies generally to “high cost home mortgage loans,” defined as a consumer credit transaction that is secured by the borrower’s principal dwelling, and that meets one or more of the Act’s high cost thresholds. A “high cost home mortgage loan” does not include a reverse mortgage transaction, but otherwise appears to include both closed- and open-end, first- and subordinate-lien home mortgage loans that meet one or more of the Act’s thresholds.
APR Threshold. The Act’s annual percentage rate (“APR”) threshold is met if the loan’s APR at consummation exceeds, by more than the following thresholds, the yield on United States Treasury securities having comparable periods of maturity to the loan maturity as of the 15th day of the month immediately preceding the month in which the application for the extension of credit is received by the lender:
8 percentage points for first-lien loans; or 9 percentage points for subordinate-lien loans.
These APR thresholds are the same as the APR thresholds in the Division of Banks’ existing anti-predatory lending regulations (the “regulations”) found in Mass. Regs. Code tit. 209, Parts 32 & 40. When calculating the APR for adjustable rate loans, the Act requires the lender to use “the interest rate that would be effective once the introductory rate has expired.”
Points and Fees Threshold. The Act’s points and fees threshold is met if the loan’s total points and fees exceed the greater of:
5% of the total loan amount; or
$400 (to be adjusted annually by the Commissioner of Banks on January 1 by the annual percentage change in the Consumer Price Index that was reported on the preceding June 1).
These points and fees thresholds are the same as the thresholds in the regulations, although the calculation of the thresholds is different, as explained below.
When calculating points and fees, the Act requires lenders to include most items required under Regulation Z’s provisions (12 C.F.R. § 226.32) that implement the federal Home Ownership Equity Protection Act of 1994 (“HOEPA”), with certain exceptions. For example, the Act includes in the calculation all items required to be disclosed under Section 226.4(a) and (b) of Regulation Z and under the regulations implementing Massachusetts’s version of TILA. Real estate-related fees listed under Section 226.4(c)(7) of Regulation Z and Section 32.04(3)(g) of the Massachusetts regulations also are included, but only if the lender receives direct or indirect compensation in connection with the charge. If the lender receives no direct or indirect compensation, the charges are excluded from the calculation. There are many real estate-related fees expressly excluded from the Act’s points and fees calculation, as explained below. However, the Act’s method of calculating points and fees departs substantially from the method required under the existing regulations with regard to the treatment of prepayment fees. Unlike the regulations, the Act includes in the points and fees calculation the maximum prepayment fees and penalties that may be charged or collected under the
terms of the loan documents, and all prepayment fees or penalties incurred by the borrower if the loan refinances a previous loan made or currently held by the same lender.2 The Act expressly excludes from the calculation either a “conventional prepayment penalty”3 or up to two “bona fide discount points.”4
The Act’s points and fees calculation also includes “all compensation paid directly or indirectly to a mortgage broker, including a broker that originates a home loan in its own name in a table-funded transaction,” that is not otherwise included as described above. We will have to wait to see whether regulations under the Act will include yield spread premiums in this calculation.
Finally, the points and fees calculation includes the cost of all premiums financed by the creditor, directly or indirectly, for any credit life, credit disability, credit unemployment or credit property insurance, or any other life or health insurance, or any payments financed by the creditor directly or indirectly for any debt cancellation or suspension agreement or contract. Insurance premiums or debt cancellation or suspension fees calculated and paid on a monthly basis are not considered “financed by the creditor.”
As indicated above, the Act provides that certain types of real estate-related charges are expressly excluded from the points and fees calculation (notwithstanding that they may otherwise have been included if the lender receives direct or indirect compensation in connection with the charge, as explained above). The Act expressly excludes the following from the calculation of points and fees: (1) taxes, filing fees, recording and other charges and fees paid to or to be paid to a public official for determining the existence of or for perfecting, releasing or satisfying a security interest; and (2) fees paid to a person other than a lender or to the mortgage broker for the following: flood certification, pest infestation, flood determination, appraisals, inspections performed before closing, credit reports, surveys, notaries, escrow charges (so long as not otherwise required to be included under 12 C.F.R. § 226.4(a) or (b) of Regulation Z, or under Section 32.04(1) or (2) of Massachusetts regulations), and premiums for title, fire, and flood insurance (if conditions are met under Regulation Z and the Massachusetts regulations). The Act does not condition the application of this exemption on the amount of the fees being reasonable, the creditor receiving no direct or indirect compensation in connection with the charge, and the charge not being paid to an affiliate of the creditor.5 Document preparation fees are not expressly excluded from the points and fees calculation. Additionally, the Act expressly excludes “escrow” charges from points and fees, whereas Regulation Z expressly excludes from points and fees “amounts held for the payment of future taxes.” That being said, the Act includes as points and fees only charges for items listed in Section 4(c)(7) of Regulation Z, which would include document preparation fees and fees required to be paid into escrow accounts (if the amounts would not otherwise be included in the finance charges), if the lender receives direct or indirect compensation in connection with the charge.
For open-end loans, the Act provides that points and fees are calculated by adding the total points and fees known at or before closing, including the maximum prepayment penalties that may be charged or collected under the terms of the loan documents, plus the minimum additional fees the borrower would be required to pay to draw down an amount equal to the total credit line.
Determining whether the points and fees threshold is met requires not only a computation of the points and fees, but also the “total loan amount.” That term is defined as the total amount the consumer will borrow as reflected by the face amount of the note. Significantly, this definition could result in a higher points and fees threshold than the definition under the HOEPA, thus bringing a smaller set of loans under the “high cost home mortgage loan” rubric. In simplified terms, under HOEPA “total loan amount” is essentially the “amount financed,” as that term is defined in Regulation Z, minus certain financed charges. Under the Act’s definition, since the “total loan amount” is the note amount (without subtracting any such financed charges), the points and fees calculation could result in a higher threshold than under HOEPA.
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WHAT PRACTICES ARE PROHIBITED OR RESTRICTED UNDER THE ACT?
The following acts and/or practices are prohibited or restricted with regard to high cost home mortgage loans.
Certification of Counseling. The Act provides that a “creditor” (which term the Act does not define) is prohibited from making a high cost home mortgage loan without first receiving certification from a counselor that the borrower has received counseling on the advisability of the loan transaction. That counselor must be part of a third-party nonprofit organization approved by the Department of Housing and Urban Development, a housing financing agency of the state, or the regulatory agency with jurisdiction over the creditor. The counseling may take place over the telephone. The Commissioner of Banking must maintain a list of approved counseling programs. Unlike the provisions of the existing regulations, the Act does not appear to allow a lender to accept from a borrower a signed waiver indicating that the borrower was advised of his or her right to seek financial counseling but chose not to exercise that right.
Ability to Repay. The Act prohibits a lender from making a high cost home mortgage loan unless the lender reasonably believes at the time the loan is consummated that one or more of the borrowers will be able to make the scheduled payments to repay the home loan, based upon a consideration of the borrowers’ current and expected income, current and expected obligations, employment status, and other financial resources other than the borrowers’ equity in the dwelling securing repayment.
The Act establishes a presumption that the borrower is able to make the scheduled payments if, at the time the loan is made, the borrower’s scheduled monthly payments on the loan, including principal, interest, taxes, insurance, and assessments, combined with the scheduled payments for all other debt, do not exceed 50% of the borrower’s documented and verified monthly gross income, if the borrower has sufficient residual income, as defined in the Department of Veterans Affairs guidelines, to pay essential monthly expenses after paying the scheduled monthly payments and any additional debt. If the loan is a discounted adjustable rate mortgage, this computation must be based on the fully indexed rate, i.e., monthly payments based on the index plus the margin at the time the loan is made.
Prepayment Penalties. The Act provides that a high cost home mortgage loan must not contain any prepayment fee or penalty provisions. This unqualified prohibition is much more restrictive than that found in the existing regulations. The regulations allow for prepayment fees in high cost home loans during the first three years, provided: (a) the source of the prepayment funds was not a refinancing by the same creditor (or an affiliate of the creditor), and (b) at consummation, the consumer’s total monthly debts (including amounts owed under the mortgage) did not exceed 50% of the consumer’s monthly gross income.
Financing Points and Fees. The Act provides that a high cost home mortgage loan must not include the financing of points and fees greater than 5% of the total loan amount, or $800, whichever is greater. As compared to the regulations, the Act adds the $800 alternative maximum, essentially applicable to smaller loans (of less than $16,000). While the regulations allow the financing of certain charges payable to third parties (appraisal fees, credit report fees, mortgage recording tax, fire and miscellaneous property insurance, voluntary credit, disability, unemployment and/or life insurance, title report and title insurance charges), the Act does not expressly provide such exemptions. Unlike the Act, the regulations also specify that for refinancings, the 5% limitation on financing points and fees into the high cost home loan applies to any additional proceeds received by the borrower (other than appraisal fees, credit report fees, mortgage recording tax, fire and miscellaneous property insurance, voluntary credit, disability, unemployment and/or life insurance, title report and title insurance charges). Also unlike the Act, the regulations prohibit a creditor, in making a high cost home loan, from directly or indirectly financing any prepayment fees or penalties payable by the borrower in a refinancing transaction if the lender or an affiliate of the creditor is the originator of the loan being refinanced.
Increased Interest Rate After Default. The Act provides that a high cost home mortgage loan must not contain a provision that increases the interest rate after default, except for interest rate changes in a variable rate loan otherwise consistent with the home loan documents, so long as the rate change is not triggered by the event of default or the acceleration of indebtedness. The existing regulations also prohibit an increase in the interest rate after default (although they do not expressly recognize variations in the rate consistent with the loan documents).
Balloon Payments. The Act provides that a high cost home mortgage loan must not contain a scheduled payment that is more than twice as large as the average of earlier scheduled payments, except with regard to adjustments in the payment schedule for a borrower’s seasonal or irregular income. The existing regulations contain broader exceptions to their prohibition against balloon payments in applicable high cost home loans (i.e., the regulations’ prohibition does not apply to a loan with a term of seven years or more, nor does it apply to bridge loans with maturities of less than one year).
Due on Demand Clause. The Act provides that a high cost home mortgage loan must not contain a demand feature that permits the lender to terminate the loan in advance of the original maturity date and to demand repayment of the entire outstanding balance, except: (i) if there is fraud or material misrepresentation by the consumer in connection with the loan that is not induced by the lender, its employees, or agents; (ii) if the consumer fails to meet the repayment terms of the agreement for any outstanding balance and after the consumer has been contacted in writing and afforded a reasonable opportunity to pay the outstanding balance as outlined within the repayment terms of the agreement; or (iii) if there is any bona fide action or inaction by the consumer that adversely and materially affects the lender’s security for the loan, or any right of the lender in such security as provided in the loan agreement. The existing regulations contain a substantially similar restriction on due-on-demand clauses in high cost home loans.
Negative Amortization. The Act provides that a high cost home mortgage loan must not contain a payment schedule with regular periodic payments such that the result is an increase in the principal amount. The existing regulations also prohibit negative amortization in high cost home loans.
Modification or Deferral Fees. The Act prohibits a lender from charging a borrower a fee or other charge to modify, renew, extend or amend a high cost home mortgage loan or to defer a payment due under the terms of a high cost home mortgage loan.
The existing regulations contain a somewhat more nuanced prohibition against modification and deferral fees, prohibiting fees to modify, renew, extend, or amend a high cost home loan or defer any payment due under a high cost home loan if, after the modification, renewal, extension or amendment, the loan is still a high cost home loan or, if no longer a high cost home loan, the APR has not been decreased by at least two percentage points. This prohibition in the existing regulations does not, however, prohibit a creditor from charging points and fees in connection with any additional proceeds received by the borrower in connection with the modification, renewal, extension or amendment (over and above the current principal balance of the existing high cost home loan), provided that the points and fees charged on the additional sum reflect the creditor’s typical point and fee structure for high cost home loans. Additionally, the prohibition in the existing regulations does not apply if the existing high cost home loan is in default or is 60 or more days delinquent and the modification, renewal, extension, amendment or deferral is part of a work-out process.
Consolidated Advance Payments. The Act provides that a high cost home mortgage loan must not include terms pursuant to which more than two periodic payments required under the loan are consolidated and paid in advance from the loan proceeds provided to the borrower. The existing regulations contain a substantially similar prohibition against such consolidated advance payments.
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Mandatory Arbitration. The Act provides that any provision of a high cost home mortgage loan that allows a party to require a borrower (without regard to whether a borrower is acting individually or on behalf of others similarly situated) to assert any claim or defense in a forum that is less convenient, more costly, or more dilatory for the resolution of a dispute than a judicial forum established in Massachusetts where the borrower may otherwise properly bring a claim or defense, or limits in any way any claim or defense the borrower may have, is unconscionable and void. The existing regulations prohibit requiring a mandatory arbitration clause or waiver of participation in class action lawsuits that is oppressive, unfair, unconscionable, or substantially in derogation of the rights of consumers, and establish a presumption that arbitration clauses in compliance with the standards set forth in the Statement of Principles of the National Consumer Dispute Advisory Committee do not violate this prohibition.
Payments to Home Improvement Contractors. The Act prohibits a lender from paying a contractor under a home improvement contract from the proceeds of a high cost home mortgage loan, other than: (i) by an instrument payable to the borrower or jointly to the borrower and contractor, or (ii) at the election of the borrower, through a third party escrow agent in accordance with terms established in a written agreement signed by the borrower, the lender, and the contractor before the disbursement of funds. The existing regulations contain a substantially similar set of restrictions on payments to home improvement contractors.
Encouragement of Default. The Act prohibits a lender from recommending or encouraging default on an existing loan or other debt prior to and in connection with the closing or planned closing of a high cost home mortgage loan that refinances all or any portion of the existing loan or debt. The existing regulations contain a similar prohibition against the encouragement of default.
WHAT ARE THE PENALTIES AND LIABILITY UNDER THE ACT?
Penalties. A violation of the Act constitutes a violation of Massachusetts’s unfair and deceptive acts and practices provisions in Chapter 93A, which essentially provides for damages, including double or triple damages for willful and knowing violations, as well as equitable relief.
In addition, an aggrieved borrower may bring a civil action under the Act itself for injunctive relief or damages for any violation of the Act. A court also is authorized to order rescission of a home mortgage loan contract that violates the Act, to bar the lender from collecting under any such loan, to bar any judicial or non-judicial foreclosure or other lender action under the mortgage or deed of trust securing any loan that violates the Act, to reform the terms of the loan to conform to the Act, to enjoin a lender from engaging in any prohibited conduct, and/or to impose any other equitable relief.
A lender found to have violated the Act is also subject to Massachusetts’s banking laws that impose a fine of up to $1,000 per violation.
Existing regulations provide (through their enabling statute) that damages available for violation consist of actual damages; a total recovery for class actions arising out of the same failure to comply of no more than the lesser of $500,000 or 1% of the creditor’s net worth; for individual actions, not less than $200 or $2,000; plus costs and reasonable attorney’s fees. According to the regulations, damages are also available under the unfair and deceptive acts and practices provisions in Chapter 93A.
Cure Provision. The Act provides that a lender making a high cost home mortgage loan that, when acting in good faith, fails to comply with the Act will not be considered to have violated the Act if it establishes that either: (1) within 30 days of the loan closing and prior to the institution of any action under the Act, the lender notifies the borrower of
the compliance failure and makes appropriate restitution and whatever adjustments are necessary to the loan, at the choice of the borrower, to either make the high cost home mortgage loan satisfy the Act’s requirements, or change the terms of the loan in a manner beneficial to the borrower so that the loan will no longer be considered a high cost home mortgage loan; or (2) the compliance failure was not intentional and resulted from a bona fide error notwithstanding the maintenance procedures reasonably adapted to avoid the errors, and within 60 days after the discovery of the compliance failure and before the institution of any action under the Act or the receipt of written notice of the compliance failure, the borrower is notified of the compliance failure, appropriate restitution and whatever adjustments are necessary are made to the loan, at the choice of the borrower. Examples of a bona fide error may include clerical errors, errors in calculation, computer malfunction and programming, and printing errors. An error in legal judgment with respect to a person’s obligation under the Act is not considered a bona fide error.
Assignee Liability. The Act provides that any person who purchases or is otherwise assigned a high cost home mortgage loan is subject to all affirmative claims and any defenses with respect to the loan that the borrower could assert against the original lender or broker of the loan. By allowing the borrower to bring “all affirmative claims and any defenses with respect to the loan,” it appears the Act does not limit assignee liability to violations of the Act. This assignee liability provision does not expressly contain a limitation on damages, and it does not expressly address whether a borrower may assert claims and defenses on behalf of a class of similarly situated borrowers, or whether he or she is restricted to bringing an individual action.
However, the Act establishes a due diligence “safe harbor,” so that a purchaser or assignee is not subject to such claims as described above if it demonstrates by a preponderance of the evidence that it: (i) has in place at the time of the purchase or assignment of the subject loans policies that expressly prohibit its purchase or acceptance of assignment of any high cost home mortgage loan; (ii) requires by contract that a seller or assignor of home loans to the purchaser or assignee represents and warrants to the purchaser or assignee that either the seller or assignor will not sell or assign any high cost home mortgage loans to the purchaser or assignee, or that the seller or assignor is a beneficiary of a representation and warranty from a previous seller or assignor to that effect; and (iii) exercises reasonable due diligence at the time of purchase or assignment of home loans, or within a reasonable period of time after the purchase or assignment of the home loans, intended to prevent the purchaser or assignee from purchasing or taking assignment of any high cost home mortgage loans. The Act clarifies that “reasonable due diligence” includes sampling and does not require loan-by-loan review.
In addition to the assignee liability provision explained above, the Act provides that a borrower acting only in an individual capacity may assert claims against any subsequent holder or assignee of a high cost home mortgage loan that the borrower could assert against the lender, but such claims are limited to amounts required to reduce or extinguish the borrower’s liability under the high cost home mortgage loan, plus amounts required to recover costs, including reasonable attorneys’ fees. In accordance with those limitations on damages, a borrower may bring an original action for a violation of the Act in connection with the loan within five years of closing. A borrower may, at any time during the term of a high cost home mortgage loan, employ any defense, claim, counterclaim, including a claim for a violation of the Act, after an action to collect on the home loan or foreclose on the collateral securing the home loan has been initiated, the debt arising from the home loan has been accelerated, the home loan has become 60 days in default, or in any action to enjoin foreclosure or preserve or obtain possession of the home that secures the loan. The Act provides that the rights conferred on borrowers as explained in this paragraph are independent of the rights conferred on the borrower as explained in the previous two paragraphs, and the two sets of rights do not limit each other. Thus, it appears that the due diligence safe harbor does not apply to shield assignees from the liability described in this paragraph. It also appears that while affirmative claims are limited to those arising under the Act, defensive claims are not so limited.
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In addition to express assignee liability, the Act contains other provisions that may affect purchasers and assignees. For example, the Act provides that a high cost home mortgage loan originated by a lender in violation of the counseling certification requirement described above is not enforceable, which presumably voids the entire transaction. In addition, the Act deems that mandatory arbitration provisions of a high cost home mortgage loan that are unlawful (as described above) are unconscionable and void (although not the entire transaction).
For purposes of comparison with regard to assignee liability, the enabling statute for the existing high cost home loan regulations under Part 32 (promulgated in accordance with Massachusetts’s version of the Truth in Lending Act, and applicable to state-chartered banks and credit unions, and all other nonbank creditors, including mortgage lenders licensed under the Licensing of Mortgage Lenders and Brokers Act) provide that as to violations of the regulations, a civil action that may be brought against a creditor may be maintained against an assignee only if the violation for which the action or proceeding is brought is apparent on the face of the disclosure statement, except where the assignment was involuntary. The existing high cost home loan regulations in Part 40 (promulgated in accordance with Massachusetts’s unfair and deceptive acts statute, and applicable to any bank, any Massachusetts or out-of-state branch, any association or corporation chartered and authorized to do a banking business by a state of the United States other than Massachusetts, by the District of Columbia, the Commonwealth of Puerto Rico, any territory or possession of the United States or by a country other than the United States, and (at least as a matter of state law) a national banking association, federal savings and loan association, federal savings bank or federal credit union, which has its main office located in Massachusetts or in any other jurisdiction named above) do not contain express assignee liability.
OTHER AMENDMENTS
Outside the provisions of the Act, H.B. 4880 adds to the Massachusetts real property laws several provisions related to residential mortgage lending practices—an anti-flipping provision, additional prepayment fee restrictions, additional late charge limitations, and a prohibition against financing credit insurance. Neither the Act nor the existing real property laws establish penalties specifically for violating these new provisions, or expressly impose liability upon purchasers or assignees specifically related to the provisions. However, for high cost home mortgage loans, if the safe harbor provision in Section 15(a) of the Act is not satisfied, an assignee could be held liable, as explained above under “Assignee Liability.” With no express penalty provisions, the extent of such assignee liability is unclear.
Flipping. Outside the provisions of the Act, H.B. 4880 adds an anti-flipping provision to the real property laws of Massachusetts. The new anti-flipping provision prohibits a lender (which term the provision does not define) from knowingly making a home loan (another term which is not defined) if the home loan pays off all or part of an existing home loan that was consummated within the prior 60 months or other debt of the borrower, unless the refinance is in the borrower’s interest. The new law does not define the “borrower’s interest” standard, but provides that it must be narrowly construed, places the burden upon the lender to determine and demonstrate that the refinancing meets the standard, and provides factors to be considered in determining if the standard is met. Those factors include, but expressly are not limited to, the following:
The borrower’s new monthly payment is lower than the total of all monthly obligations being financed, taking into account the costs and fees;
There is a change in the amortization period of the new loan;
The borrower receives cash in excess of the costs and fees of refinancing; The borrower’s note rate of interest is reduced;
There is a change from an adjustable- to a fixed-rate loan, taking into account costs and fees; or
The refinancing is necessary to respond to a bona fide personal need or an order of a court of competent jurisdiction.
As noted above, the Act imposes this suitability standard on a lender for all home loans, and not just to high cost home mortgage loans.
In any action by a borrower alleging that the defendant violated this anti-flipping provision, the borrower is not entitled to costs and attorneys’ fees if the judge finds that the lender made a reasonable offer to cure before the institution of the borrower’s action, and the borrower rejected that offer.
The Commissioner of Banks is authorized (but not directed) to prescribe necessary and proper rules and regulations for carrying out this anti-flipping provision, which rules and regulations may contain factors, classifications, differentiations, or other provisions, as well as adjustments and exceptions for classes of transactions to carry out the provision, to prevent circumvention or evasion of the provision, or to facilitate compliance with the provision. By way of comparison, the existing regulations also contain restrictions against flipping that apply only to high cost home loans. The regulatory provision prohibits the refinancing of a high cost home loan into another high cost home loan within a 2-year period, unless the refinancing is in the borrower’s interest. As explained above, H.B. 4880 extends the restricted refinancing period to 60 months (5 years).
Prepayment Restrictions. Section 56 of Massachusetts’s real property laws restrict prepayment penalties for first-lien mortgage loans secured by owner-occupied real property with three or fewer separate households. Section 56 provides, in part, as follows:
[I]f said note is paid before the date fixed for payment, any additional amount required to be paid in such event shall be an amount which shall be the balance of the first year’s interest or three months’ interest whichever is less; except, that if anticipatory payment is made within thirty-six months from the date of the note for the purpose of refinancing such loan in another financial institution, an additional payment not in excess of three months’ interest may be required.
H.B. 4880 amends Section 56, expanding it to apply to first- and subordinate-lien mortgage loans, secured by an owner-occupied dwelling of four or fewer separate households, or by a residential condominium unit. In addition, H.B. 4880 prohibits a prepayment fee or additional penalty payable by a mortgagor if the mortgage note is paid in full after 36 months from the date of the note, and provides that a mortgagor shall not be required to pay a prepayment fee or penalty for making additional payments toward the principal balance for the term of the loan, thus apparently restricting prepayment penalties for partial prepayments.
Late Charges. Section 59 of Massachusetts’s real property laws restrict late charges for first- and subordinate-lien mortgage loans secured by an owner-occupied dwelling of four or less separate households or a residential condominium unit. Section 59 prohibits imposing a late charge for any payment made within 15 days (or in the case of a bi-weekly mortgage payment, within 10 days) from the date the payment is due, and prohibiting any such charge from exceeding 3% of the amount of principal and interest overdue. H.B. 4880 amends Section 59 to provide that a mortgagee, assignee or holder of a first- or subordinate-lien mortgage loan secured by a dwelling house of 4 or fewer separate households or on a residential condominium unit occupied or to be occupied in whole or in part by the mortgagor is prohibited from requiring the mortgagor to pay a late charge or late payment penalty unless the penalty is specifically authorized in the loan documents. In addition, H.B. 4880 amends Section 59 in a manner that reflects federal law prohibitions on pyramiding late fees, by providing that a late payment penalty or late charge may not be charged more
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than once with respect to a single late payment. If a late payment fee is deducted from a payment made on the loan, and the deduction causes a subsequent default on a subsequent payment, no late payment fee may be imposed for the default. If a late payment fee has been once imposed with respect to a particular late payment, a fee must not be imposed with respect to any future payment that would have been timely and sufficient, but for the previous default.
Financing Credit Insurance. H.B. 4880 also amended Section 66 of Massachusetts’s real property laws to prohibit lenders from financing, directly or indirectly, any credit life, credit disability, credit unemployment insurance, credit property insurance, including debt cancellation or suspension agreements, or any other life or health insurance premium, through a home mortgage loan. Premiums on insurance calculated and payable on a monthly basis by the borrower are not considered “financed by the lender.”
Licensing of Lenders Offering Secured Retail Installment Sales Contracts. H.B. 4880 adds a provision to Massachusetts’s Retail Installment Sales and Services Act requiring the licensing of any person who sells or agrees to sell goods and/or services where the sale is secured by a mortgage on owner-occupied real property with four or fewer separate households.
Amendments to Mortgage Lenders and Brokers Licensing Act. H.B. 4880 amends the Massachusetts Mortgage Lenders and Brokers Licensing Act to provide that a mortgage lender that has made 50 or more home mortgage loans in the last calendar year must be examined, during the course of its inspection by the Commissioner, for its compliance with federal and state fair lending laws.
H.B. 4880 also raises the maximum penalty for violations of the licensing act or its regulations to $1,000 (from $500). It also establishes additional penalty provisions for any licensee or exempt person who violates the licensing law or its regulations, or any other Massachusetts law applicable to the conduct of the business of making or brokering residential mortgage loans (up to $5,000 per violation, and up to a maximum of $100,000 for such violation plus the costs of investigation). Thus, in addition to imposing penalties upon licensees, it appears that the Commissioner may now impose penalties upon persons that are exempt from licensing but that are subject to and commit a violation of any Massachusetts law relating to mortgage lending, including but not limited to the Act, the anti-flipping provision, or any other applicable mortgage lending law. This could raise some federal preemption issues.
The amendments also authorize the Commissioner to impose a penalty on a person other than the licensee or exempt person, for a violation of the licensing law or its regulations, of up to $5,000 per violation, plus the costs of investigation. It is not clear what types of persons or violations this provision is intended to address.
For a violation of the licensing law or its regulations, or of any order of the Commissioner, the Commissioner may also prohibit any person from performing in the capacity of a principal employee on behalf of any licensee, prohibit a person from applying for or obtaining a license from the Commissioner for a period up to 36 months, or prohibit the person from any further participation, in any manner, in the conduct of the affairs of a mortgage lender or mortgage broker in Massachusetts or from being employed by, an agent of, or operating on behalf of a licensee or any other business that requires a license from the Commissioner.
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This newsletter is for informational purposes only. Nothing herein is intended or should be construed as legal advice or a legal opinion applicable to any particular set of facts or to any individual’s or entity’s general or specific circumstances. If you have any questions about the Act or this newsletter, please contact Nanci L. Weissgold (202-778-9314 / [email protected]), Kris Kully (202-778-9301 / [email protected]), or any other member of our Mortgage Banking Consumer Finance Group.
ENDNOTES
1 As the Act uses the phrase “high cost home mortgage loan,” while the existing Massachusetts regulations use the term “high cost home loan,” we will use those phrases throughout when referring to each set of provisions, respectively. 2 As indicated above, the calculation of points and fees under the Act includes all prepayment fees or penalties incurred by the borrower if the loan refinances a previous loan made or currently held by the same lender. Under the Act, the term “lender” is defined to include a loan broker. We note that the State of New Jersey recently amended its Home Ownership Security Act, which contained a similar provision, to clarify that the points and fees calculation need not include prepayment fees in a loan that refinances a previous loan made by the same broker and is funded by another creditor.
3 A “conventional prepayment penalty” is defined as any prepayment penalty or fee that may be collected or charged in a home loan, and that is authorized by law other than the Act, so long as the home loan: (1) does not have an APR that exceeds the “conventional mortgage rate” by more than 2 percentage points; and (2) does not permit any prepayment fees or penalties that exceed 2% of the amount prepaid. (The “conventional mortgage rate” is the most recently published annual yield on conventional mortgages published by the Board of Governors of the Federal Reserve System in statistical release H.15 or any publication that may supersede it, as of the 15th of the previous month.)
4 “Bona fide discount points” are defined as loan discount points that are knowingly paid by the borrower, paid for the express purpose of lowering the “benchmark rate,” and that in fact reduce the interest rate or time-price differential applicable to the loan from an interest rate that does not exceed the benchmark rate. (The “benchmark rate,” or the interest rate that the borrower can reduce by paying bona fide discount points, shall not exceed the weekly average yield of United States Treasury securities having a maturity of 5 years, on the 15th day of the month immediately preceding the month in which the loan is made, plus 4 percentage points.)
5 See 12 C.F.R. § 226.32 of Regulation Z, which provides that certain real estate-related charges are included in the points and fees calculation unless the charge is reasonable, the creditor receives no direct or indirect compensation in connection with the charge, and the charge is not paid to an affiliate of the creditor.
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© 2004 KIRKPATRICK & LOCKHART LLP. ALL RIGHTS RESERVED.
This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer.
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MORTGAGE BANKING/CONSUMER FINANCE GROUP
Kirkpatrick & Lockhart LLP was founded in 1946, and, with more than 700 lawyers, is one of the 50 largest law firms in the United States. K&L attorneys are based in ten offices in key U.S. cities—Boston, Dallas, Harrisburg, Los Angeles, Miami, Newark, New York, Pittsburgh, San Francisco, and Washington. Our firm represents a broad range of clients in a wide variety of matters, including corporate and securities, e-commerce, investment management, insurance coverage, financial institutions, mortgage banking and consumer finance, creditors’ rights, intellectual property, tax, labor, environmental, antitrust, health care, and government contracts. More than half our attorneys are litigators. We litigate class actions on a range of financial issues, generally defending financial institutions, broker-dealers, public companies, and investment companies and their officers and directors against claims of violations of securities laws, consumer credit laws, and common law tort and contract claims. You can learn more about our firm by visiting our Internet website at www.kl.com.
The Mortgage Banking/Consumer Finance Group provides legal advice and licensing services to the consumer lending industry. We counsel clients engaged in the full range of mortgage banking activities, including the origination, processing, underwriting, closing, funding, insuring, selling, and servicing of residential mortgage loans and consumer loans, from both a transactional and regulatory compliance perspective. Our focus includes both first- and subordinate-lien residential mortgage loans, as well as open-end home equity, property improvement loans and other forms of consumer loans. We also have experience in multi-family and commercial mortgage loans. Our clients include mortgage companies, depository institutions, consumer finance companies, investment bankers, insurance companies, real estate agencies, homebuilders, and venture capital funds. Members of the Mortgage Banking/Consumer Finance Group and their telephone numbers and e-mail addresses are listed below:
ATTORNEYS
Phillip L. Schulman 202.778.9027 [email protected] Laurence E. Platt 202.778.9034 [email protected] Costas A. Avrakotos 202.778.9075 [email protected] Melanie Hibbs Brody 202.778.9203 [email protected] Steven M. Kaplan 202.778.9204 [email protected] Jonathan Jaffe 415.249.1023 [email protected] H. John Steele 202.778.9489 [email protected] R. Bruce Allensworth 617.261.3119 [email protected] Daniel J. Tobin 202.778.9074 [email protected] Jerome Walker 212.536.4850 [email protected] Nanci L. Weissgold 202.778.9314 [email protected] Phillip John Kardis II 202.778.9401 [email protected] David L. Beam 202.778.9026 [email protected] Emily J. Booth 202.778.9112 [email protected] Krista Cooley 202.778.9257 [email protected] Eric J. Edwardson 202.778.9387 [email protected] Suzanne F. Garwood 202.778.9892 [email protected] Laura A. Johnson 202.778.9249 [email protected] Kris D. Kully 202.778.9301 [email protected] Drew A. Malakoff 202.778.9086 [email protected] Christopher G. Morrison 202.778.9245 [email protected] Erin Murphy 415.249.1038 [email protected] Lorna M. Neill 202.778.9216 [email protected] Sam A. Ozeck 202.778.9085 [email protected] Holly M. Spencer 202.778.9853 [email protected]
DIRECTOR OF LICENSING
Stacey L. Riggin 202.778.9202 [email protected]
REGULATORY COMPLIANCE ANALYSTS
Dana L. Lopez 202.778.9383 [email protected] Nancy J. Butler 202.778.9374 [email protected] Susan C. Curtin 202.778.9337 [email protected] Joelle Myers 202.778.9093 [email protected] Marguerite T. Frampton 202.778.9253 [email protected] Jeffrey Prost 202.778.9364 [email protected] Patricia E. Mesa 202.778.9219 [email protected] Kenasha Scott 202.778.9384 [email protected] Heidi M. Evans 202.778.9241 [email protected] Allison A. Rosenthal 202.778.9894 [email protected]
