State-Chartered Savings Bank Advancing Additional Funds To A Borrower As Part Of A Modification Of An Existing Mortgage Loan - Q4 1999

By the Division of Banks

The issue of whether a state-chartered savings bank may, by way of a modification of an existing mortgage loan, increase the principal amount of the original mortgage loan and retain the priority of these additional funds as of the date of recording the original mortgage, is governed by Massachusetts General Laws chapter 183, section 28A.

Said chapter 183, section 63A states that a mortgagee, at the request of the owner of the equity of redemption, may revise the rate of interest, extend the term of the mortgage or change the amount of the periodic payments of principal or interest or, both, of an existing note and mortgage which it holds on a 1-4 family, owner-occupied residence in the Commonwealth. However, section 63A goes on to state that no additional money shall be loaned or advanced thereon "except (a) in accordance with section twenty-eight A or (b) for the payment of delinquent principal and interest on the original indebtedness." In the event the borrower is not delinquent on principal and interest payments to the bank, no additional money may be loaned except in accordance with Massachusetts General Laws chapter 183, section 28A. Section 28A authorizes a mortgagee to advance additional funds after the recording of the mortgage for the purpose of "paying for repairs, improvements, lead paint removal or replacements to fuel for, or for taxes or other municipal liens, charges or assessments... on the mortgaged premises." These additional funds "shall be equally secured with and have the same priority as the original indebtedness" to the extent that the additional funds when added to the balance due does not exceed the original amount secured by the mortgage.

It is the position of the Division that a state-chartered bank, when modifying the terms of an existing mortgage for a borrower who is not in default on such mortgage, may only advance additional funds in accordance with the categories set forth in said section 28A of chapter 183 to the amount of the original principal balance of the mortgage in order to retain the priority of the new funds under the original mortgage.

Regarding whether section 63A permits a state-chartered savings bank in a revision of terms agreement to increase the original amount of the note, or if section 63A only creates a "safe harbor" for a lender only when the note and mortgage being modified are in default, section 63A does not provide state-chartered banks the blanket authority to advance additional money to a borrower on an existing mortgage loan. Rather, it provides the authority in very specific circumstances for the bank to advance additional funds on a revision of terms and maintain the priority of those funds against subsequent lien holders. When a borrower is not in default, funds may only be advanced in accordance with section 28A of chapter 183 as discussed above. In the situation where a borrower is in default, section 63A authorizes a mortgagee to advance additional funds in a revision of terms for the payment of "delinquent periodic principal and interest on the original indebtedness to the extent that the aggregate amount outstanding at any one time when added to the balance due on the original indebtedness shall not exceed the amount originally secured by the mortgage or the sum of the outstanding balance due and three delinquent payments of principal and interest, whichever is greater."

It is the position of the Division that a state-chartered bank may lend additional funds for the payment of delinquent principal and interest to a borrower who is in default under an existing note and mortgage and these funds would be equally secured by the existing mortgage up to the amount of the original indebtedness or the outstanding balance due plus three delinquent periodic payments of principal and interest, whichever is greater, pursuant to a revision of terms under section 63A.

Regarding the prohibition of a state-chartered savings bank in a revision of terms from increasing the original principal amount of the mortgage, it is the position of the Division that Massachusetts General Laws chapter 167 E, section 6, paragraph 4 is a more limited revision of terms statute for state-chartered banks because any revision of terms under this paragraph must comply with loan to value and amortization requirements of the type of loan being modified and it prohibits additional money from being loaned to the borrower except as authorized by section 28A of chapter 183. There is no provision which authorizes a bank to advance additional funds for payment of delinquent principal and interest. Section 63A specifically exempts banks from the loan to value requirements in a revision of terms and authorizes additional funds for delinquent payments.

Additionally, under section 28A and 63A of chapter 183 a mortgagee can only retain the priority of additional funds advanced for the categories of funds set forth in the statutes.

Finally, section 28A of chapter 183 clearly states that its provisions apply to all forms of mortgages, including both commercial and residential, while section 63A applies only to 1-4 family, owner-occupied residential mortgages.