By the Division of Banks

November 5, 2004

Industry Advisory Letter on Mortgage Loan Prepayment Fee Limitations Pursuant to G.L. C. 183, §56, As Amended by Chapter 268 of the Acts of 2004, and Its Applicability to Open-End Home Equity Lines of Credit

To Whom It May Concern:

Chapter 268 of the Acts of 2004 made certain amendments to the Commonwealth's prepayment fee limitation statute, G.L. c. 183, §56 (the "Prepayment Statute"). This letter is intended to clarify the applicability of the Prepayment Statute to open-end home equity lines of credit and the imposition of early cancellation or termination fees (hereinafter referred to as "termination fees") in connection with such lines of credit secured by a mortgage on residential property. The amendments to the Prepayment Statute are effective November 7, 2004.

The Prepayment Statute, prior to the 2004 amendments in Chapter 268, applied to any mortgage note secured by a first lien on an owner occupied dwelling of three or less separate households. The Statute provided that any such mortgage note was subject to the condition that if the note was paid before the date fixed for payment, any additional charge or fee may not exceed the limitations as set forth in the Prepayment Statute. The 2004 amendments extended the applicability of the Statute to mortgage notes secured by a second or subsequent lien on an owner occupied dwelling house of 4 or less separate households or a residential condominium(emphasis supplied). The Division has received inquiries as to whether the extension of the Prepayment Statute to second or subsequent liens was intended to extend its applicability to termination fees charged in connection with an open-end home equity line of credit.

The Division has previously opined that open-end home equity line of credit agreements may include provisions providing for the imposition of fees or charges which are not specifically prohibited by law. ( See Division Opinions 95-020, 96-158, 99-183, and 99-172 citing Northampton Nat. Bank v. Attorney General, 397 N.E.2d 1149, 8 Mass.App. 809 (1979)) It has been the Division's position that Massachusetts General Laws chapter 140, section 114B relative to open end credit governs home equity lines of credit in the Commonwealth and it does not prohibit the imposition of a termination or cancellation fee by a lender. ( See Division Opinions 96-158, 99-183.) In the event a lender is charging such a fee, it should be included in the loan documents and disclosed pursuant to applicable Truth in Lending requirements. It would not be permissible to unilaterally impose such a fee on a customer after the loan documents have been executed.

The Division does not consider the termination or cancellation of an open end line of credit to constitute a "prepayment" as contemplated under the Prepayment Statute. Accordingly, it is the Division's position that the limitations set forth in the Prepayment Statute, as amended in 2004, are not applicable to early cancellation or termination fees imposed in connection with open-end home equity lines of credit, secured by first, second or subsequent liens. ( But See Division Opinions 95-001 and 99-092, prepayment penalty limitations apply to first lien open end home equity lines of credit. Opinions 95-001 and 99-092 are hereby negated by this Industry Letter.) The Division does and will continue to review these fees and others in conjunction with its examination process and consumer complaint processing for deviations from industry standards and unconscionability.

Steven L. Antonakes
Commissioner of Banks