By the Division of Banks

Federal Preemption Of State Law Concerning Prepayment Penalties For Mortgage Loans

The Office of Thrift Supervision opinion concerning the Alternate Mortgage Transaction Parity Act indicates that the Act preempts state laws which restrict prepayment penalties for federal thrift institutions and other housing creditors relative to adjustable rate mortgage loans, unless the state opts out of the Act's preemption provision. Under 12 U.S.C.S. §3804 of the Act, each state was given three years to reject the federal preemption with regard to alternative mortgage transactions. The Legislature voted to override this preemption by enacting Chapter 224 of the Acts of 1985. It is the position of the Division of Banks that prepayment penalties on adjustable rate mortgage loans and balloon payment mortgage loans are governed by Massachusetts law. As Mass. Gen. Laws chapter 183, section 56 makes no distinction between fixed rate mortgage loans and adjustable or balloon payment mortgages, all loans originated in the Commonwealth must be in compliance with this statute concerning maximum prepayment penalties.