High Cost Mortgage Loan Regulations
By the Division of Banks
December 8, 2000
To the Chief Executive Officer Addressed:
Enclosed for your review is a summary of the final amendments to the Division of Banks' (the "Division") high rate mortgage loan regulations. Certain issues, which received comment during the Division's extended process but which were not changed from the original proposed regulations, are also noted in this letter. A copy of the regulations appears on the Division's web site, which is cited at the bottom of this page.
As you are aware, the Division mailed several hundred copies of these proposed regulations to interested public and private parties as well as regulated entities on August 3, 2000. That mailing also included a public announcement of the dates, times and locations of three public hearings to be held by the Division on these regulations. This early announcement was followed by all required notices as well as the Division's additional standard forms of informing the public of a pending regulation hearing and process.
The public hearings were held September 19 th, 20 th, and 21 st, 2000, which was more than six weeks after the proposed regulations were released. The hearings were held in Boston, Worcester, and Holyoke, on those respective dates. Approximately eighty people attended the three hearings. Oral testimony was presented by twenty-five individuals. At the close of the third public hearing, in Holyoke, the Division extended the public comment period by one week from October 3 rd to October 10 th, 2000. In addition to the oral comments received at the public hearings, the Division received twenty-six written comments, three of which were submitted after the comment period closed.
The public testimony received during this process covered a broad spectrum of interested parties, including the Office of the Attorney General, the Office of Consumer Affairs and Business Regulation, state representatives, one mayor, the Federal Trade Commission, Northeast Region and the City of Boston. Comments were also received from industry trade groups, individual regulated entities, elderly and community support groups, as well as individual citizens. All comments were carefully reviewed by the Division, and, as noted above, changes were made to the final regulations where warranted.
The regulations amending 209 CMR 32.00: Disclosure of Consumer Credit Costs and Terms ("Truth in Lending") and the regulations amending 209 CMR 42.00: The Licensing of Mortgage Lenders and Mortgage Brokers were filed with the State Secretary on this date and will be included in the December 22, 2000 edition of the Massachusetts Register. However, the Division has determined to delay the effective date of the regulations. Accordingly, as discussed below, the effective date will be Monday, January 22, 2001 and not the publication date. This delay recognizes the upcoming holidays, and will allow regulated entities to familiarize themselves with the changes made to the proposed regulations and to take final steps to implement the regulations they were informed about in early August.
The regulations to establish 209 CMR 40.00: Unfair and Deceptive Practices in Consumer Transactions are governed by section 2A of chapter 167 of the General Laws. That statute requires that regulation to be filed with the Legislature and referred to the Joint Committee on Banks and Banking. The procedures to be followed for complying with that law and completing the regulation process are set out in said section 2A. The Division will file the 209 CMR 40.00 et seq. regulations with the new session of the Legislature which begins on Wednesday, January 3, 2001.
209 CMR 32.32(1) and (2): Thresholds and Triggers
The most significant proposed change in this provision is the lowering of the interest and fee thresholds under the current regulation. The Office of the Attorney General supported lowering the trigger points from 8 to 5 and requiring lenders to calculate the annual percentage rate trigger by using the interest rates that would be in effect after the initial rate expires. These proposed changes would not create an exception for bona fide discount points.
The Federal Trade Commission recommended lowering the HOEPA APR trigger to 8% above Treasury rates for securities with comparable maturities.
Several consumer representatives recommended that the APR and point thresholds be further lowered from the proposed changes.
Several industry commenters urged that the APR and point thresholds remain unchanged. They stated that by changing the thresholds, the Massachusetts regulations would be inconsistent with the federal regulations under Regulation Z. The Division, however, notes that the lowered APR and point thresholds are consistent with Regulation Z's enabling legislation. The federal HOEPA statute itself expressly authorized the Federal Reserve Board of Governors to adopt trigger thresholds within the range adopted by the Division. They also claimed that by lowering the thresholds, this would limit the availability of certain types of credit to potential borrowers. The claim that the lowered thresholds will inexorably result in reduced credit availability is somewhat speculative. The high rate loan regulations do not prohibit the making of high rate loans. They simply define a class of loans that are subject to additional consumer protections. The Division, however, is prepared to revisit the effectiveness of the lower thresholds if subsequent empirical lending data conclusively indicates that legitimate subprime loan products become unavailable solely as a result of the regulations. The relative ease by which a regulation, rather than a statute, may be amended makes this "wait and see approach" appropriate.
Some other commenters suggested that a basis other than the Treasury rates be used . Testimony also was given that the provisions did not take into consideration the cost of mortgage origination and that the impact might be to lower the number of smaller loans as the ability to recoup costs would be limited. Upon review of all comments received, however, the Division has determined not to make any changes to these triggering and threshold amounts. Nevertheless, the Division has made a revision to reserve the right to consider the use of alternative rate indices if economic conditions require.
209 CMR 32.32(1)(b): Requirements for Certain Closed-End Home Mortgages
A second issue was raised by the coverage of the proposed regulations under this provision. This issue went to the types of loans which would be governed by regulations. The proposed regulations would delete the current exemption for a residential mortgage transaction, as defined in Truth-in-Lending, from being subject to the existing high cost mortgage loan provisions. Under the proposed regulations, the only exempt mortgage transactions would be a reverse mortgage loan and an unsecured open-end credit plan. This change prompted some commenters to offer that short-term bridge loans should also be exempt and questioned the need to extend coverage to first mortgages and purchase money mortgages.
The Division considered these comments and the possible impact, if any, on certain loans which would now be covered. Weight was given to the fact that all such loans are covered already by the other provisions of Truth-in-Lending. The Division also concluded that it would be unlikely that the rate on a conventional first mortgage would trigger these additional provisions but if it did then the safeguards should be extended. Moreover, the Division gave significant consideration that due to retirement and medical advances, elderly consumers may find themselves in later years again involved in purchase money mortgage transactions or financial transactions that once again result in a first lien on their home. Upon review and for the reasons cited, the Division has not made a change to the types of mortgage loans covered or exempted by the regulations.
209 CMR 32.32(2): Definitions - Bona Fide Discount Points
This regulation establishes a presumption that a point meets the definition if it reduces the interest rate by a minimum of 35 basis points or 3/8 of a point and all other terms of the loan remain the same.
Several commenters opposed the definition of bona fide discount points. Two commenters suggested amending the definition of "bona fide discount point" to one that reduces the interest rate by a minimum of 25 basis points. There is a concern that the definition of a point in the proposed regulation may have unintended consequences for lenders in the prime and subprime markets. For some conventional lenders, a large portion of their loan portfolio could be categorized as high cost loans because of the definition as drafted.
One commenter urged the Division to conform its definition of a high cost loan to follow the definition in HOEPA. Another commenter noted that the test for "bona fide loan discount points" is easily met on shorter-term loans up to seven or eight years in duration, but is more difficult to meet on a long-term loan. Another test could be to price loan products by an APR yield.
It should be noted that the 35 basis points in the regulation is a presumptive threshold. The definition clearly allows for a lower threshold similar to that recommended by the commenters if the lender can demonstrate that the interest rate reduction provided to the consumer by paying the discount point is "reasonably consistent with established industry norms and practices for secondary mortgage market transactions. Therefore, the Division notes these concerns, but has determined that the minimum reduction amount for the presumptive test not be lowered.
209 CMR 32.32(3)(e)1 and 2: Disclosures
The provision that the lender provide a disclosure in a section above the signature line on the application and in 12 point print was the subject of several comments from those opposed. Particular concern was expressed by lenders who dealt primarily in telephone applications and recommendations were made that such disclosures could be signed at closing or within a grace period after the telephone application at the same time that various RESPA and HOEPA notices are given. It was also noted that it might not be possible to know that a loan will become a high cost loan covered under these regulations at application. There was also concern that the cost in changing information systems to incorporate new disclosures and type sizes would be prohibitive and would put Massachusetts lenders at a disadvantage.
The Office of the Attorney General, however, strongly supports the new disclosures which will alert consumers to the fact that this may not be the least expensive loan available to them and that the actual aggregate payments over the life of the loan may increase. The Office of the Attorney General also favored the requirement that the type be in 12 point format. It was also felt by other commenters that this would highlight necessary information and would present the financial risks in a clear and meaningful manner.
Based on the comments received, the Division has maintained the disclosure requirement. However, the Division has made changes to the final regulation to allow a creditor to send an applicant the disclosure no later than 24 hours after the creditor determines that the application is for a high cost loan.
209 CMR 32.32(5)(a):Repayment Ability
The Division received several comments from consumer representatives who strongly supported the removal of the "pattern or practice" standard in this section. The Division also received numerous comments from industry representatives who urged the Division to retain the "pattern or practice" standard. The Division strongly believes that the "pattern or practice" standard is too high a threshold for consumers who have been wronged to prove. However, the Division also recognizes that a single violation that is a result of a bona fide error could be an undue burden.
Based on these comments, the Division has added 209 CMR 32.32(7) to address these concerns. Under 209 CMR 32.32(7), it would not be a violation of 209 CMR 32.32(5) or (6) if the single violation was a result a bona fide error. The term bona fide error is a narrowly and clearly defined term within the added provision.
209 CMR 32.32(6)(c): Loan Packing
This provision of the regulations addresses the practice of adding credit insurance products or other goods and services to the mortgage loan by requiring advance oral and written disclosures three days prior to a closing. Those commenters opposed to this provision suggested a subsequent 15-30 day "free look" process. Some suggested this provision contradicted the prohibition on single premium credit insurance in 209 CMR 32.32(6)(j). This provision of the proposed regulations also received significant support. The Office of the Attorney General supported the additional disclosures as did others. The Division does not find a conflict between the provisions of the loan packing regulation and the single premium credit insurance prohibition. However, to avoid any possible confusion, 209 CMR 32.32(6)(c) has been changed to clarify that notwithstanding the provisions of 209 CMR 32.32(6)(c), the making of a high cost loan with single premium credit insurance is an unfair and deceptive practice. It was also amended to eliminate any conflict with recently promulgated regulations on credit insurance disclosures, 209 CMR 52.00 et seq. Language was added to clarify which additional provisions of the credit insurance disclosure regulations applied to a high cost mortgage transaction.
209 CMR 32.32(6)(h): Mandatory Arbitration and Class Action Provisions
This proposed section expressly proscribes mandatory arbitration and class action provisions.
The Federal Trade Commission (the "Commission") has recommended to Congress a prohibition of mandatory arbitration clauses in HOEPA loans. While the Commission recognizes the benefits of alternative dispute resolution, it opposes mandatory arbitration agreements in HOEPA loans where consumers and their homes are most vulnerable.
The Office of the Attorney General supported this provision but proposed eliminating the second sentence of this proposed regulation that provides that arbitration agreements that "comply with the standards set forth in the Statement of Principles of the National Consumer Dispute Advisory Committee shall be presumed not to violate this regulation."
One commenter opposing the Division's prohibition of mandatory arbitration stated that it was inconsistent with secondary market practices as outlined in new Fannie Mae guidelines. Another commenter suggested that the issue of fair arbitration should be left to the judicial system to determine.
The Division has retained the proposed language, as drafted, in light of the diminished substantive and procedural consumer protections inherent in mandatory arbitration clauses.
209 CMR 32.32 (6)(i): Credit History Reporting
The issue of selective credit reporting under 209 CMR 32.32(6)(i): was also raised during the comment period. This provision makes it an unfair and deceptive practice to fail to report a high cost home loan borrower's credit history. Selective credit reporting, particularly the failure to report timely debt payment histories, unfairly inhibits high cost home loan borrowers from being able to move to less expensive or conventional mortgage financing. Some commenters asked for clarification of the provision's scope by limiting it to creditors who regularly report credit. The Division believes that the text of the provision already contains a "regular" credit bureau information reporting standard.
209 CMR 32.32(6)(j): Single-Premium Credit Insurance
Several commenters opposed the prohibition of single premium credit insurance on the grounds that there was informed consent by the consumer and, in many cases, the consumer needs the protection afforded by this insurance. They felt that the single premium was desirable as opposed to monthly payments as the coverage remained in effect even if payments were delinquent.
The Federal Trade Commission, however, has recommended to Congress that the practice of financing lump-sum credit insurance be prohibited. It has also recommended to the Federal Reserve Board that it use its authority to prohibit this practice in connection with the "refinancing of mortgage loans that the Board finds to be associated with abusive lending practices, or that are not otherwise in the best interest of the borrower." The Federal Trade Commission also has noted possible legislative or regulatory recommendations that would prohibit the financing of single premium credit insurance and other extra fees in loans covered by HOEPA and it recommends prohibiting the sale of single premium credit insurance until after the closing of a HOEPA loan. Credit insurance could then be sold with the premiums paid, not financed, and billed monthly. This type of insurance could be canceled at any time.
The prohibition of single premium credit insurance would protect the consumer against forced increases in their loan amount. The availability of monthly paid credit insurance purchased post closing would afford the consumer the opportunity to secure coverage and to retain the option of cancellation at any time.
Based on the above comments, the Division has elected to retain the prohibition on single premium credit insurance for high cost loans.
209 CMR 32.32(6)(m): Counseling
A number of commenters, including that of the Office of the Attorney General, opposed mandatory counseling for those over 60. While support for counseling was widespread, it was suggested by several that third party review to waive counseling or a signed waiver by the applicant electing not to participate in counseling be acceptable.
There was also feeling that giving lists of counselors only to those who are seeking high cost loans was wrong. It was also noted that it would be difficult to give a list of counselors to telephone applicants. There was also feeling that the protections given to those applying for a reverse mortgage be extended to all those over 60 who seek high cost loans. In addition it was suggested that high cost loans be made unenforceable unless there was counseling.
Concern was expressed about the certification of counselors.
The Office of the Attorney General supported giving a list of counselors to all borrowers and that the Division of Banks and the Executive Office of Elder Affairs supply this list. Other commenters supported credit counseling for all high cost borrowers. It was generally agreed that some form of counseling or at the very least notice of availability of counseling is necessary.
On the basis of the comments received, the Division has changed the final regulations to delete the mandatory counseling requirement for applicants over 60 years of age. Instead, the Division has required that all applicants for a high cost loan that elect not to seek credit counseling sign a waiver that they were informed of their rights.
In closing, the Division wishes to thank all those interested parties that expressed their views and comments during this entire process. You may direct any further questions on the Division's final high cost mortgage loan amendments to the Division's Legal Unit in writing or by calling (617) 956-1520.
Very truly yours,
Thomas J. Curry
Commissioner of Banks