By the Division of Banks


Industry Letter on Funding of Mortgage Loans

July 2, 2014

To the Chief Executive Officer of the Institution Addressed:

The purpose of this letter is to bring to your attention some important information on Massachusetts requirements to timely fund and disburse mortgage loan proceeds and to remind institutions of the importance of internal monitoring and third party oversight.  While the Division of Banks (Division) acknowledges that there are varying requirements related to the funding and disbursement of mortgage loans across the country, the Division felt it important to clarify the requirements in Massachusetts.

One of the primary responsibilities of the Division is to ensure that lenders under its supervision establish appropriate controls necessary to operate fairly and in compliance with applicable state and federal consumer protection laws and regulations.  On numerous recent examinations conducted by the Division, examiners have identified issues with the timely funding of mortgage loans by the lender and disbursement of the funds by settlement agents.

Massachusetts General Laws chapter 183, section 63B, also known as the “Good Funds Law,” requires a mortgagee who makes a loan to be secured by a mortgage or lien on real estate in the Commonwealth to disburse the full amount of the loan proceeds to the mortgagor, the mortgagor’s attorney, or the mortgagee’s attorney, prior to recording the mortgage.  The “Good Funds Law” also requires that the funds be in the form of a certified check, bank treasurer’s check, cashier’s check, or wire transfer.

In Opinion No. 98-166, the Division stated that, “[t]he purpose of said section 63B is to ensure that loan proceeds are available to the borrower upon consummation of the transaction essentially in the form of cash or equivalent and to prevent a mortgagee from failing to fund a transaction with funds that are not immediately available to the borrower.”  In Opinion No. 98-175, the Division clarified that the “Good Funds Law” requires that loan proceeds are to be available to the mortgagor and third parties upon consummation of the mortgage loan in a purchase transaction or, in the case of a refinance transaction, at the beginning of business on the day following the expiration of the rescission period.

Moreover, the Attorney General’s regulation 940 CMR 8.06(8) deems it an unfair or deceptive act or practice for a lender to fail to disburse funds in accordance with any commitment or agreement with the borrower.

When a lender contracts with a consumer through the execution of mortgage loan closing documents, the lender is committing to make the loan proceeds available to the mortgagor upon consummation of the loan in a purchase transaction, or in the case of a refinance transaction, at the expiration of the rescission period.  As a lender’s compliance responsibility extends to providing adequate oversight of third parties who perform services on its behalf, when the mortgagee transfers the loan proceeds to its settlement agent, the mortgagee has the responsibility to ensure that its settlement agent distributes the loan proceeds in the appropriate timeframe and in compliance with the “Good Funds Law.”

A lender’s failure to abide by the requirements set forth in this letter is not only in violation of the Massachusetts statute, but more importantly, is causing harm to the consumers that the statute and regulations were established to protect.

Each lender must establish and implement policies and procedures to ensure that it, or anyone working on its behalf, funds and distributes loan proceeds in the required timeframe.  The scope of internal compliance audits should be expanded to include testing of its settlement processes and procedures as well as those of its settlement agents.  When such violations are noted in the course of an examination, the Division may take appropriate measures up to and including enforcement actions, administrative penalties, and revocation.  In addition, the Division will require that the lender complete a portfolio review and  reimburse consumers for any per diem charged by the institution during which the consumer did not have access to the funds.  The lender will also be required to reimburse consumers for any additional costs incurred on their previous loan due to the Licensee’s failure to timely fund or ensure its settlement agent timely disbursed the loan proceeds.

Should you have any questions relating to this matter, please contact Chief Director Amy Hassey at 617-956-1543 or via e-mail at amy.hassey@state.ma.us.

Sincerely,

David J. Cotney
Commissioner of Banks