By the Division of Banks
Guidance on Compliance with Chapter 194 of the Acts of 2012,
An Act Preventing Unlawful and Unnecessary Foreclosures
August 3, 2012
On August 3, 2012, Chapter 194 of the Acts of 2012, An Act Preventing Unlawful and Unnecessary Foreclosures, was signed into law. The Act contains an emergency preamble which makes the law effective immediately. There are a number of provisions that establish additional requirements for mortgage creditors in the mortgage foreclosure process but the most immediate issue is how mortgage lenders initiating a foreclosure after the effective date of Chapter 194 comply with the requirements of the new Section 35B of General Laws chapter 244. Section 35B requires that mortgage creditors, prior to beginning the foreclosure process, send a notice of the right to pursue a mortgage loan modification to a borrower who is deemed to have a "certain mortgage loan" as defined by the statute. At the request of banks, credit unions, and licensed mortgage lenders, this guidance is intended to promote a consistent response to the new requirements of Chapter 194.
- Certain Mortgage Loans
"Certain mortgage loan" is defined in the statute as a loan to a natural person made primarily for personal, family or household purposes secured wholly or partially by a mortgage on an owner-occupied residential property with 1 or more of the following loan features:
i. An introductory interest rate granted for a period of 3 years or less and such introductory rate is at least 2 per cent lower than the fully indexed rate;
ii. Interest-only payments for any period of time, except in the case where the mortgage loan is an open-end home equity line of credit or is a construction loan;
iii. A payment option feature, where any 1 of the payment options is less than principal and interest fully amortized over the life of the loan;
iv. The loan did not require full documentation of income or assets;
v. Prepayment penalties that exceed section 56 of chapter 183 or applicable federal law;
vi. The loan was underwritten with a loan-to-value ratio at or above 90 per cent and the ratio of the borrower’s debt, including all housing-related and recurring monthly debt, to the borrower’s income exceeded 38 per cent; or
vii. The loan was underwritten as a component of a loan transaction, in which the combined loan-to-value ratio exceeded 95 per cent.
However, the law also requires that a loan will be considered as a certain mortgage loan if a creditor is unable to determine whether the loan has 1 or more of the loan features in clauses (i) to (vii) above. The law also determines that loans financed by the Massachusetts Housing Finance Agency and loans originated through programs administered by the Massachusetts Housing Partnership Fund board shall not be certain mortgage loans.
- Timing of Section 35B Notice
Under Section 35B, the creditor must send the borrower a notice of the borrower’s right to pursue a mortgage loan modification if the loan qualifies as a "certain mortgage loan" as defined in the statute. This notice must be sent concurrently for any loans which the right to cure notice under General Laws chapter 244, Section 35A is sent on or after the effective date of the Act. It is the Division’s position that a creditor is in compliance with the Act if it sends the borrower a Section 35B notice at the same time that it sends a Section 35A notice from the effective date of the Act (August 3, 2012).
On all loans where the Section 35A notice has been sent prior to August 3, 2012, no Section 35B notice is required. On loans which have proceeded through the foreclosure process such as a complaint being filed in the Land Court or Superior Court, or for which a foreclosure notice has been mailed or published, there is no requirement for the creditor to send a Section 35B notice.
- Documentation of Determination of "Certain Mortgage Loan" under Section 35B
Since a determination must be made by a creditor whether a mortgage loan has certain features that qualify the loan as a "certain mortgage loan" for purposes of receiving a Section 35B notice, the Division would expect each creditor to maintain written documentation in each loan file so that Division examiners may review the creditor’s determination whether or not the loan qualifies as a certain mortgage loan.
- Form of Section 35B Notice
Subsection (d) of Section 35B requires that the Section 35B notice shall be similar in form and substance to the notice promulgated by the Division of Banks under Section 35A. The Division would recommend that creditors use the header of the form for the Section 35A notice found at 209 CMR 50.04, including the five languages, but revise the body of the form to inform the borrower of his/her right to pursue a mortgage loan modification. The notice must also request the specific information required to be sent by the borrower to the creditor in order to determine whether the borrower qualifies for a loan modification.
It is the position of the Division that such notice contain a disclosure advising the borrower that he/she has 30 days from the delivery of the Section 35B notice to respond to the creditor or be subject to a right to cure period of 90 days instead of 150 days.
- Reverse Mortgage In-Person Counseling Requirement for Certain Borrowers Extended
The requirement for certain reverse mortgage borrowers to complete an in person counseling session has been extended to August 1, 2014. This change became effective August 3, 2012.
Chapter 258 of the Acts of 2010 included a provision that certain applicants for reverse mortgage loans, that is, those with a gross income of less than 50% of the area median income and with assets valued at less than $120,000 (excluding primary residence), would be required to complete an in person counseling session effective as of August 1, 2012.
For reverse mortgage applications taken from August 1, 2012 through August 2, 2012 from borrowers meeting these parameters, lenders should ensure that the borrower(s) attend an in person counseling session prior to making the loan.
Massachusetts law has historically required counseling for all reverse mortgage loan borrowers and, in addition, requires that the third party counseling organization/program be approved by the Massachusetts Executive Office of Elder Affairs. The following is a link to the approved list. http://www.mass.gov/elders/housing/reverse-mortgage-counselors.html