As the foreclosure crisis has unfolded further, it has become clear that the unfair and deceptive practices of some mortgage lenders and brokers played an important role in selling mortgage loans that were destined to fail. Investigations by the Attorney General's Office have determined that too often brokers and lenders sold exceedingly risky loans, using misleading and deceptive sales conduct.
The Attorney General's Office prosecutes enforcement actions against the most unscrupulous of these brokers and lenders. In investigating these cases, the AGO discovered the following practices:
- failing to disclose or explain the terms of loans to borrowers;
- inflating the income of borrowers on applications;
- misstating the source of the borrower's income;
- making loans with rates and terms less favorable than those for which the borrower qualified, often to earn financial incentives for the broker or loan originator; and
- making loans without meaningful consideration of whether the borrowers can repay them.
Attorney General's Regulations
The Attorney General's Office recently revised regulations governing mortgage brokers and lenders ( 940 CMR 8.00: Mortgage Brokers and Mortgage Lenders). The regulations, effective in January 2008, now apply to all mortgage loans, and specifically:
- Prohibit mortgage brokers or lenders from making a loan if they do not have a reasonable belief that the borrower is able to repay the loan.
- Restrict the abuse of no-documentation or "stated income" loans by requiring that the mortgage broker or lender disclose how the interest rates or other charges will increase under a "no-doc" loan, and obtain the borrower's signed statement of income in order to process those types of loans.
- Prohibit mortgage brokers from arranging or processing loans that are not in the borrower's interest, and prohibit brokers from brokering loans if the broker's financial interest conflicts with the borrower's interest.
- Prohibit mortgage lenders from steering borrowers to loan products that are more costly than those that the borrower qualifies for, and prohibits lenders from discriminating between similarly qualified borrowers.
The Attorney General's Office has created a document with frequently asked questions, to provide guidance for understanding these new regulations:
New State Law
In November 2007, Governor Patrick signed into law a series of new provisions governing the mortgage industry. The new laws:
- Provides homeowners a 90-day right to cure, or 90 days to make any overdue mortgage payments and stay in their homes.
- Requires in-person counseling for first-time homebuyers prior to purchasing variable-rate, subprime loans. The Division of Banks must maintain a list of approved counseling programs .
- Requires the Division of Banks to maintain a database tracking foreclosures and produce a report, at least annually, tracking developments and trends of mortgage foreclosures in the state.
- Requires that the Division of Banks examine lenders and prepare a written evaluation of each lender's record of performance which shall be open to the public upon request.
- Enhances penalties for failing to comply with regulations related to the industry, including increasing the fine for failing to license properly. The penalties and fines were increased to $2,000 or imprisonment for not more than two and one-half years in the house of correction or not more than five years in state prison.
Additional provisions include:
- Improved oversight and monitoring of certain mortgage lenders.
- Requiring loan originators to be licensed by the Division of Banks and providing a $3 million appropriation to the Division to implement the provisions of the bill.
- Extending $2 million in grants to establish 10 education centers around the Commonwealth and promote first time homebuyer and foreclosure counseling.
- Granting tenants of foreclosed properties additional tenant at will rights.
- Requiring every mortgage to have endorsed on it the name, address, and license number of the mortgage broker and mortgage originator, if applicable.
- Mandating an accounting of the disposition of the proceeds of a foreclosure sale to a foreclosed consumer, including whether there is any surplus due to the consumer or if any deficiency remains.
- Prohibiting a subprime adjustable rate mortgage for first time homebuyers unless they a) affirmatively opt into a subprime adjustable rate product, and b) get in person counseling from a certified counselor.
Housing and Economic Recovery Act of 2008
The Housing and Economic Recovery Act of 2008 created the HOPE for Homeowners program through the Department of Housing and Urban Development. It is estimated to help as many as 400,000 borrowers, in fear of losing their homes but can afford a new FHA insured loan, refinance into more affordable loans by offering government insurance to lenders who reduce mortgages to at least 90 percent of the property's value. The program is available only to owner occupants and is voluntary for lenders.
Eligible borrowers must:
- The home is their primary residence, and they have no ownership interest in any other residential property, such as second homes.
- Their existing mortgage was originated on or before January 1, 2008, and they have made at least six payments.
- They are not able to pay their existing mortgage without help.
- As of March 2008, their total monthly mortgage payments due were more than 31 percent of their gross monthly income.
- They certify they have not been convicted of fraud in the past 10 years, intentionally defaulted on debts, and did not knowingly or willingly provide material false information to obtain their existing mortgage(s).
To participate in the HOPE for Homeowners program, homeowners should contact an FHA-approved lender.