By the Division of Banks

Prepayment Penalties For Second Mortgages

Mass. Gen. Laws chapter 183, section 56 governs prepayment penalties for first mortgage loans on 1-3 family, owner-occupied residential property. Although the imposition of a prepayment penalty is a contractual issue between a mortgage lender and a borrower, said section 56 sets forth the maximum amount of prepayment penalties which may be charged on first mortgage loans. M.G.L. c. 183 § 56 does not limit prepayment penalties on second mortgages, which remain subject to negotiation and agreement by the lender and the borrower. Mass. Gen. Laws chapter 140, section 90A, though, establishes a maximum annual interest rate of eighteen percent on second mortgage loans secured by owner-occupied property of six or less separate households having an assessed value of $40,000.00 or less. This statute grants borrowers the right to repay their debts without penalty, if the property is covered by the statute.

The Attorney General's Office has promulgated 940 CMR 8.00 et. seq., governing "unfair and deceptive practices" by mortgage lenders, as that term is defined in 940 CMR 8.03. Regulation 940 CMR 9.06(10) states that it is an unfair and deceptive practice for a mortgage lender to charge a prepayment fee which violates M.G.L. c. 183 § 56, which significantly deviates from industry-wide standards, or which otherwise is unconscionable. The Attorney General's regulations apply to certain mortgage loans, including, but not limited to, refinancings, second mortgages and subsequent liens other than equity lines of credit.

The Division intends to file legislation for consideration by the Commonwealth's General Court in the 1999 session to extend the coverage of said section 56 to second and subsequent liens. The recommendation would apply the statute to 1-4 family-occupied dwellings and condominium units.