AG Coakley, Senator Spilka, Representative Steven M. Walsh File Legislation Requiring Loan Modifications to Address Foreclosure Crisis
"The effects of the housing crisis have rippled through all sectors of our economy, and we need to continue to address the subprime lending which largely contributed to this crisis in order to appropriately stabilize our economy," said Attorney General Coakley. "We know that voluntary loan modifications will not prevent unnecessary foreclosures. This bill establishes standards to ensure creditors undertake commercially reasonable efforts to avoid unnecessary foreclosure."
"This bill is an important tool to stabilize the housing industry and provide much-needed protections for homeowners," stated Senator Karen Spilka (D-Ashland), the Senate sponsor of the bill. "The squeeze on homeowners is painful enough already in this climate; we must make sure banks are dealing fairly with homeowners by providing proper documentation and only foreclosing when absolutely necessary. At the same time, we must give banks the tools to provide home loan modifications when economically feasible. All of these steps will provide much needed stability in the housing market and allow both owners and lenders to move forward."
"Attorney General Coakley has made it a major priority to address the foreclosure crisis in Massachusetts, which has hit communities such as mine, particularly hard," said Representative Steven Walsh (D-Lynn). "This legislation will benefit working families as well as creditors and I am eager to work with Attorney General Coakley towards its passage."
An Act to Prevent Unnecessary and Unreasonable Foreclosures aims to prevent additional foreclosures by mandating loan modifications in certain circumstances. Specifically, the loan modification legislation requires creditors to take commercially reasonable efforts to avoid foreclosure upon certain mortgage loans secured by homes which are occupied by the owners as their principal residences. Additionally, these loans must contain certain risky features, such as interest-only loans, adjustable rate mortgages, and loans with short-term introductory interest rates. The legislation also provides a safe harbor for creditors to comply with this requirement of commercial reasonableness.
The legislation also addresses problems with foreclosures highlighted in the recent decision by the Massachusetts SJC, <em>U.S. Bank v. Ibanez</em> by prohibiting foreclosures where creditors lack the documents supporting their purported right to foreclose, and prohibits passing on certain fees and costs to homeowners. Specifically, this legislation:
- Codifies the recent SJC decision in Ibanez by requiring a creditor commencing foreclosure to show it is the current legal holder of record of the mortgage. The bill also forbids misrepresentations to courts concerning holder status;
- Prohibits passing on to third parties the costs of remedying prior improper foreclosures or absence of recorded assignments;
- Prohibits "junk fees" (for goods or services not performed) tacked on during foreclosure and prohibits bribes, referral and similar fees for foreclosure business; and
- Requires recordation of assignment establishing the creditor as present holder of the mortgage before it can foreclose on the property.
A violation of this legislation will constitute a violation of the Massachusetts Consumer Protection Act.
Since taking office in January 2007, combating the foreclosure crisis has remained a priority of Attorney General Coakley's administration. By seeking accountability through litigation, regulation and other advocacy, the Attorney General's Office has made a significant impact on those who live in the Commonwealth. On the enforcement side, the office has brought predatory lending cases against two major subprime lenders, Fremont Investment & Loan/Fremont General and H&R Block/Option One Mortgage Corporation. Most recently, Attorney General Coakley's Office settled with investment giants Goldman Sachs and Morgan Stanley for their role in securitizing subprime loans. The AG's Office has also brought enforcement actions against mortgage professionals who engaged in loan application fraud and other loan origination misconduct.
On the regulatory side, the AG Coakley enacted regulations to prevent predatory lending, and worked together with the Massachusetts Division of Banks for the enactment of legislation that provides additional protections for borrowers facing foreclosure. AG Coakley's Office issued new regulations, effective in January 2008, governing the mortgage brokers and mortgage lenders in Massachusetts. These regulations, 940 CMR 8.00, significantly expanded consumer protections to address an array of unfair and deceptive practices in home lending that have contributed to the ongoing foreclosure crisis and harmed thousands of Massachusetts residents and their communities.
AG Coakley has also been successful with other advocacy in this area. This past fall, four of the nation's largest lenders agreed to suspend foreclosures, foreclosure evictions and sales of foreclosed properties in Massachusetts after AG Coakley called on them to do so following revelations that these major lenders were failing to properly review foreclosure documentation and that they routinely submitted affidavits related to the foreclosure process containing information that was not verified or known by the lender's agent that signed the affidavit.
In addition to these initiatives at the state level, the Attorney General's Office continues to take a leadership role among the states in advocating for action at the federal level and looks forward to working with the new federal Consumer Financial Protection Bureau to establish loan servicing standards on a national scale.
The legislation announced today is yet another step in Attorney General Coakley's fight to keep people in their homes and hold banks and lenders accountable. For more information about the Attorney General's foreclosure prevention efforts, please visit www.mass.gov/ago.