By the Division of Banks

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BanksCredit Unions
Mortgages: Lenders & BrokersSmall Loan Agencies
Collection AgenciesConsumer Credit Cost Disclosure
Foreign Transmittal AgenciesRequesting an Opinion


See also Mortgages: 95-024, -050
Credit Unions: 95-079

95-044 Bank Restrictions on Paying Other Banks Fees for Referring Trust Services

A state-chartered bank, which intends to pay other banks a fee for referring their customers to its trust department, must determine whether such fees are reasonable for providers of similar services and whether paying such fees is in the best interest of the bank. Customers should also be clearly informed with whom the trust business will occur. The referring banks should not infer that they have trust powers and should also contact the Federal Deposit Insurance Corporation to inquire about the applicable federal law.

95-049 The Word "Bank" in the Name of a Non-Financial Individual, Corporate or Partnership Entity

Unless a person or entity is a bank under Massachusetts or federal law, any individual, corporation or partnership in the Commonwealth is prohibited from using the words "bank", "banking" or "bankers" in its name or title under Mass. Gen. Laws chapter 167 § 37. When the word "BANK" is used as part of the singular name of an entity, i.e. ___BANK or BANK___, whose business in no way relates to banks or any other financial institutions, the use of the word bank may not trigger this prohibition. However, the Office of the Secretary of State has jurisdiction over the use of such corporate names in the Commonwealth. Therefore, the final decision on the use of such names in the Commonwealth rests with the Secretary of State.

95-068 State-Chartered Bank Acquisitions of National Trust Associations

A national trust association may be acquired by a state-chartered bank as a wholly-owned subsidiary subject to approval by the Division of Banks under Mass. Gen. Laws chapter 167F § 2(7). Federal law and regulations require directors of such trust associations to own qualifying shares of at least $1,000 par value. The Division of Banks finds that Mass. Gen. Laws chapter 167F § 2(7) is not negated by this requirement. However, if any shareholder(s) of the national trust association intends to retain its shares no matter how small, the acquisition cannot be completed under Mass. Gen. Laws chapter 167F § 2(7). In such a case, the trust association could not considered a wholly-owned subsidiary because the transaction would have to be consummated under Mass. Gen. Laws chapter 167F § 2(8), otherwise known as the "Leeway Law."

Credit Unions

95-042 NCUA Amendment of Corporate Credit Union Rules and Regulations

The National Credit Union Administration has determined pursuant to Executive Order 12612 that the risk of loss to federally insured credit unions and the NCUSIF caused by actions of certain corporate credit unions are concerns of national scope. 12 CFR § 704.12 applies on its face to all federally insured corporate credit unions including those that are state-chartered unless overturned as a result of pending litigation. Section 704.12(a)(2) stipulates that the chair of the board may not serve simultaneously as an officer, director, or employee of a credit union trade association. The NCUA's official summary to the amendments further specifies that Article IV, section 2, and Article V, of the standard bylaws, which impose mandatory notice and balloting requirements, apply to federally insured state-chartered corporate credit unions. (See 59 Fed. Reg. No. 221, November 17, 1994.) In the absence of a statutory provision requiring in person voting and the wide latitude granted to the Central Fund to adopt bylaws governing its affairs, the Division concludes that the Central Fund could adopt nomination and mail balloting bylaw amendments in order to conform with 12 CFR § 704.12.

95-062 Credit Union Powers to Make Loans and Provide Other Services to Corporations

A credit union may make loans to a corporation if all the individual members or stockholders in the corporation would be eligible for membership in the credit union, under Mass. Gen. Laws chapter 171 § 1. However, the type of loans which may be extended to the corporation by the credit union are limited to those authorized by Mass. Gen. Laws chapter 171 §§ 59-66. There is no authority for state-chartered credit unions to offer loans for equipment financing for businesses unless the loan is originated as a personal loan. Real estate financing, however, is authorized by Mass. Gen. Laws chapter 171 § 65. In addition, federally insured state-chartered credit unions are prohibited from offering non-interest bearing negotiable order withdrawal (NOW) accounts to commercial members under 12 U.S.C.A. § 1785(f)(2).

95-072 Credit Union Open-End Mortgage Loan Amount Limitations

Credit unions are authorized to make open-end mortgage loans to 11/4% of their deposits or $50,000.00, whichever is greater, under Mass. Gen. Laws chapter 171 § 65(11). The placement of paragraph 11 in Mass. Gen. Laws chapter 171 § 65, which contains the substantive authority for state-chartered credit unions to make mortgage loans on real estate, results in the applicability of the individual and aggregate statutory limitations cited in the beginning paragraphs of section 65. Under Mass. Gen. Laws chapter 171 § 65, credit unions, with assets of $500,000 or more, may invest in loans not more than 80% of the aggregate of the total of shares, deposits, loan reserve, investment reserve, undivided earnings and any other surplus accounts. The individual limitation for credit unions having assets of $4 million or more is an amount not to exceed $200,000 on any one parcel of real estate and not to exceed $325,000 for any one member on all real estate loans to that member. Mass. Gen. Laws chapter 171 § 65(11), however, has a limitation that these loans may not exceed 80% of the value of the real estate. Therefore, any balance outstanding on any prior lien on the real estate securing the loan must also be considered.

95-074 Credit Union Board of Directors Eligibility

The only eligibility requirement for a member to be elected to a credit union's board of directors is that the individual must have been a member for at least three months prior to the election, under Mass. Gen. Laws chapter 171 § 11. The Division of Banks' recognizes as a policy in its Administrative Bulletin 35-1 that is it inconsistent with the philosophy of a credit union to distinguish between the rights of its members. The Administrative Bulletin states that all members must be eligible to be elected to the board of directors of the credit union provided that they meet all statutory requirements. Therefore, credit union by-laws cannot restrict the number of directors who may be paid employees of the credit union without violating Administrative Bulletin 35-1. All members, whether paid employees of the credit union or not, must be eligible to be elected to the Board of Directors. However, credit union by-laws may be amended to eliminate the membership eligibility of all credit union employees, under the procedures set forth in Administrative Bulletin 35-1. A diverse Board of Directors which represents the interests of all members is important. Thus, the more appropriate course of action is to leave this issue to the individual members and the election process so that a candidate's status as a paid employee may be considered when reviewing his or her qualifications and suitability for office.

95-079 Retiree Check Cashing Requirements of Financial Institutions

Financial institutions, which in the ordinary course of business do not maintain cash on hand and do not cash checks for account holders or members, are not subject to the provisions of Mass. Gen. Laws chapter 167 § 46 and its implementing regulation, 209 CMR 35.00. However, credit unions or banks, which cash checks for members or depositors, must honor and cash pensioners' or retirees' checks under $2,500.00 regardless of whether they are members or depositors, under Mass. Gen. Laws chapter 167 § 46.

95-080 Credit Union Power to Offer Variable Rate Automobile Loans

State-chartered credit unions are authorized to make adjustable rate or variable rate personal loans, including loans to purchase automobiles, under Mass. Gen. Laws chapter 171 § 59(6). Such loans must follow the guidelines and mandates of Administrative Bulletin 27-1, including the requirement that the interest rate on such loans must be the "sum of the value of a specific index at a particular point in time plus a margin." The index chosen must be a regional or national index and beyond the control of the credit union. Also, no fees may be charged for any rate adjustment based on a change in the index. Finally, the Division finds that credit unions have no authority to write variable or adjustable rate installment loans under Mass. Gen. Laws chapter 171 § 64.

95-081 Branch Application Requirements for Credit Union "Information Offices"

A credit union "information office" would not be considered a branch office under Mass. Gen. Laws chapter 171 § 8, if no deposits or withdrawals would take place there, and the activities to be conducted there would consist of consulting with members regarding consumer loans, providing loan applications, providing information relative to mortgage services, distributing loan proceeds checks, accepting membership applications, and offering financial counseling. Therefore, no branch office application is necessary to establish such an information office, and the notice and publication requirements to establish a branch office also do not apply. Any financial counseling which occurs at such offices should be limited to only those deposit and credit products of the credit union. Moreover, no qualifying shares may be accepted at such offices in conjunction with an application for membership. The credit union should also notify the Commissioner of Banks of the date on which such an information office is activated.

Mortgages: Lenders & Brokers

95-001 Prepayment Penalty Restrictions on Open End Home Equity Lines of Credit

The restrictions on prepayment penalties apply only to mortgage notes secured by a first lien on an owner-occupied 1-3 family dwelling under Mass. Gen. Laws chapter 183 § 56. The legality of a loan is determined at the time it is made. Thus, the lien status should also be determined at the time the loan is made. If a home equity line of credit is secured by a first lien at the time the loan is made, the prepayment penalty provision of Mass. Gen. Laws chapter 183 § 56 applies. However, if such a line of credit is secured by a second lien against the real estate at the time the loan is made, Mass. Gen. Laws chapter 183 § 56 does not apply. Thus, in regard to such loans any prepayment penalty may be established provided that it is disclosed in the equity line agreement. Such notes must also comply with all the consumer disclosure requirements.

95-023 Mortgage Payment Revision Restrictions

Fees, incurred by lenders attempting to collect defaulted mortgage loans, may be recovered by increasing the monthly mortgage payment only if the loan is refinanced and a new mortgage note and deed are given by the mortgagor under Mass. Gen. Laws chapter 183 § 63A. Lenders cannot arbitrarily increase the monthly payments of a mortgage loan to recover the costs of collection when such loan has been reinstated.

95-024 (-067) Permissible Reserves in Property Tax Escrow Accounts

Though state-chartered banks may collect a proportionate share of the annual property taxes with their mortgage payment each month, there are no similar statues regulating the amount of a tax escrow reserve which may be collected by banks or non-bank mortgage lenders. Therefore, the Division of Banks would look to any applicable federal regulations for guidance on this subject. The Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. § 2601 et seq., which applies to all mortgage lenders, establishes a limitation on the reserve or cushion a lender may collect on property tax escrow accounts. Section 2609 of RESPA allows lenders only to require borrowers to pay such amount into the escrow account as will be sufficient to pay those charges when due, "plus 1/6 of the estimated total due during the ensuing twelve-month period." Therefore, in Massachusetts, this section of RESPA governs the issue by establishing a two month reserve on tax escrow payments. The Division finds any reserve in excess of the two month cushion to be an unfair business practice, under Mass. Gen. Laws chapter 93A. Thus, lenders conducting such business practices could be liable for remedies to consumers and/or the Attorney General.

95-028 License Requirements for Processing and Packaging Loans for Investors

Mass. Gen. Laws chapter 255E establishes a licensing requirement for any individual who makes or issues commitments for mortgage loans or assists or finds mortgage loans for consumers in the purchase or refinance of owner-occupied residential property. If a business is not involved in the extension of credit, nor contacts or assists borrowers in obtaining credit, it would not be subject to Mass. Gen. Laws chapter 255E. Thus, businesses providing only loan processing and packaging services for investors would not be required to be licensed under Mass. Gen. Laws chapter 255E.

95-031 Loan Participation Programs - Loan Pools

State-chartered banks may participate with one or more other banks in making or acquiring mortgage loans under Mass. Gen. Laws chapter 167E § 2(B). This provision refers to various classes of permissible mortgage loans which should be reviewed carefully prior to implementation of any plan of participation lending. Banks may also make or acquire second mortgage loans in which the real estate is collateral security for a commercial or business loan, provided that the second mortgage is not taken as the primary security for the loan under Mass. Gen. Laws chapter 167E § 11. The bank's counsel should review these provisions as well as the overall terms of the plan subject to the laws of Massachusetts before implementing any such loan participation program. If a bank's counsel cannot find specific authorization to engage in the proposed plan, this plan would be permissible for state-chartered banks under the provisions of and within the limitations of Mass. Gen. Laws chapter 167F § 2(8), the so-called "Leeway Law."

95-037 (-032 & -034) Closing Attorney Payment: The "Good Funds Statute"

A bank's automatic deposit of loan proceeds into a closing attorney's account with the same bank does not meet the technical requirements of Mass. Gen. Laws § 63B, but does meet the requirement that loan proceeds be immediately available for distribution to the parties in a mortgage transaction. Therefore, the Division of Banks supports an exception for banks using the automatic deposit of loan proceeds. The Division, however, has no authority to waive the provisions of Mass. Gen. Laws chapter 183 § 63B. Though the Division strongly encourages the existence of a "Good Funds" statute, this statute should recognize alternative situations. The Division has actively supported and worked to seek amendments to this statute, but until such amendments are signed into law by the Governor, the requirements of Mass. Gen. Laws chapter 183 § 63B remain in effect.

95-039 License, Disclosure & Points Requirements for Construction Loans

At the time a construction loan is made and secured there is no dwelling house yet constructed or existing on the property in question. Thus, the loan does not meet the definition of a mortgage loan on residential property under Mass. Gen. Laws chapter 255E. Because construction loans are not within the scope of Mass. Gen. Laws chapter 255E, neither a mortgage broker or lender license is required to arrange or make construction loans in the Commonwealth. If a construction loan meets the definition of a loan made for "personal, family, or household purposes" under Mass. Gen. Laws chapter 140D and regulation 209 CMR 32.00, then Truth-In-Lending disclosures must be made to the borrower of such a loan. Mortgagees may only charge reasonable points or fees in connection with a mortgage transaction involving residential property located in the Commonwealth of four or less units and occupied or to be occupied in whole or in party by the mortgagor under Mass. Gen. Laws chapter 183 § 63. Administrative Bulletin 13-5(l) establishes 11/2 points as reasonable where the loan is a first or second mortgage and involves construction or rehabilitation of the property. If the borrower of a construction loan is to occupy the premises upon completion, the transaction falls under the provisions of Mass. Gen. Laws chapter 183 § 63 and Administrative Bulletin 13-5. However, an amendment to Mass. Gen. Laws chapter 183 § 63 became effective March 27, 1995 deleting the restriction on points and allowing lenders to charge the number of points previously disclosed to the borrower of a construction loan.

95-045 Credit Service Organizations License Requirements for Loan Brokerage Services

The Division of Banks has no regulatory jurisdiction over credit service organizations under Mass. Gen. Laws chapter 93 § 68A-E. Compliance would be enforced by the Attorney General. Credit service organizations acting as mortgage brokers for property located in the Commonwealth must obtain a mortgage broker's license under Mass. Gen. Laws chapter 255E. Credit service organizations that fall within the definition of a "mortgage broker" found in Mass. Gen. Laws chapter 255E are required to be licensed and are thereby governed by the implementing regulations of 209 CMR 42.00 et seq.

95-050 Real Estate Revaluation and Inspection Requirements for Commercial Mortgage Loans

Parcels of real estate mortgaged to secure a loan payable in three years or less from the date of the note are required to be revalued at intervals of three calendar years under Mass. Gen. Laws chapter 167E § 6(5)(a), except for parcels of residential property improved by a dwelling designed for not more than four families, which must be revalued every five years. Loans payable over more than three years secured by non-residential property also require revaluation or inspection every five years. Accordingly, commercial mortgage loans payable in three years or less from the date of the note at the sole discretion of any state-chartered bank making such a loan, must be revalued every three calendar years under Mass. Gen. Laws chapter 167E § 6(5)(a).

95-053 Student Loan Servicing

The business of servicing student loans does not require a Massachusetts license. If any student loan account becomes 30 days overdue, however, it would be considered a "debt" under Mass. Gen. Laws chapter 93 § 24. The entity servicing such a debt would thus be required to obtain a collection agency license to collect payments on the debt. The entity would also be subject to all other restrictions on the conduct of a collection agency contained in 209 CMR 18.00.

95-061 Mortgage Lender Points Disclosure

The preferred method of disclosing fees or points is the Uniform Mortgage Loan Cost Worksheet required by Mass. Gen. Laws chapter 183 § 17D and its implementing regulations 209 CMR 38.00 et seq. The worksheet is a standard form one-page disclosure which permits mortgage borrowers to individually calculate all of the charges and fees they are likely to incur in securing a residential mortgage from a first mortgage lender. Including broker's points on the line of the worksheet for "Other Charges" is a proper method of disclosure of these fees because it provides the consumer with significant information. Though overstating the amounts of points and fees is not a violation of Mass. Gen. Laws chapter 183 § 63, consistent disclosure of artificial amounts is against public policy and would be viewed as an unfair or deceptive business practice.

95-075 License Requirements for Assisting Consumers in Obtaining Credit

Individuals or entities assisting consumers to obtain mortgage loans and charging a fee for the service must be licensed under Mass. Gen. Laws chapter 255E, if they act in this capacity at least five times in a calendar year. Assisting consumers in any way to obtain loans of $6,000.00 or less requires a small loans license under Mass. Gen. Laws chapter 140 § 96. In addition, providing information to help consumers re-establish credit constitutes a credit service business which is governed by Mass. Gen. Laws chapter 93 § 68A-E.

95-085 Mortgage Lender & Broker License Requirements of Out-of-State Industrial Loan Companies

Industrial loan companies organized in the State of California, and regulated as other financial institutions are by the California Department of Corporations, are exempt from the licensing provisions of Mass. Gen. Laws chapter 255E and its implementing regulations at 209 CMR 42.00 et seq. Financial institutions chartered in other states seeking such an exemption will be reviewed on a case by case basis.

95-089 License Requirements for Individuals Who Match Buyers & Sellers of Mortgage Notes

Agents, for individual investors seeking to purchase existing mortgage loans from private lenders, who collect a fee from an investor upon completion of the transaction, and also collect a fee for obtaining financing for the investor, do not require a mortgage broker's license under Mass. Gen. Laws chapter 255E. Mortgage brokers' licenses are only required to assist or find mortgage loans for consumers, as defined in Mass. Gen. Laws chapter 255E.

95-091 License Requirements for Financial Consultants & Brokers of Commercial Real Estate, Business and Equipment Loans

Entities seeking to act as loan brokers for commercial real estate loans, business loans, and other commercial loans securitized by inventory and equipment of business borrowers are not required to be licensed as mortgage brokers, under Mass. Gen. Laws chapter 255E.

Small Loan Agencies

95-078 Finance Company Licensing Requirements

A corporate entity intending to operate a finance company in the Commonwealth must obtain a small loans license under Mass. Gen. Laws chapter 140 § 96 to make loans of $6,000.00 or less, unless the entity is exempted from this requirement under Mass. Gen. Laws chapter 140 § 114A. To originate residential mortgage loans in the Commonwealth, entities must be licensed as mortgage lenders under Mass. Gen. Laws chapter 255E, unless they are otherwise exempt. Mortgage company subsidiaries of bank holding companies are not exempt, but small loan agencies licensed under Mass. Gen. laws chapter 140 are exempt from the mortgage lenders license requirements. Thus, a small loans license provides a finance company subsidiary the authority to originate both small consumer loans as well as residential mortgage loans without having to obtain separate mortgage lender's license. Motor vehicle sales finance companies and retail installment sales and service agencies are also required to be licensed under Mass. Gen. Laws chapters 255B and 255D. Other licensees and bank holding company subsidiaries are not exempt from either of these laws.

Collection Agencies

95-071 Licensed Collection Agency Powers to Act as Sales Finance Companies

An individual or corporation licensed as a collection agency under Mass. Gen. Laws chapter 93 § 24 and seeking to conduct business as a sales finance company is not exempt from the licensing provisions of Mass. Gen. Laws chapter 255B because it is not a bank as defined by Mass. Gen. Laws chapter 167 § 1 and the business of a collection agency is not in and of itself a banking business.

95-082 Collection Agency License Requirements

Computer information companies which provide merchants access to a data base for the purpose of reducing bad check losses are not required to be licensed under Mass. Gen. Laws chapter 93 § 24, and are not subject to the regulations at 209 CMR 18.00 et seq., if such companies only try to negotiate collection of any dishonored checks after receiving title to such checks. Collection agency license requirements are triggered only by the collection or receipt of payments of any debt for others. The Attorney General has issued collection regulations for retailers and organizations performing debt collection relative to their own accounts at 940 CMR 7.00 et seq.

Consumer Credit Cost Disclosure

95-064 Department Store Credit Account Disclosure Requirements

Disclosures relative to credit and charge card applications and solicitations are required in: (1) direct mail applications and solicitations; (2) telephone applications and solicitations; and (3) applications and solicitations made available to the general public under 209 CMR 32.05A, the regulations promulgated under Mass. Gen. Laws chapter 140D. Also, every interpretation of the Federal Reserve's Official Staff Commentary that interprets a provision of the federal Truth-in-Lending regulation that is similar to the Commonwealth's regulation shall be deemed by the Commissioner of Banks to be an advisory ruling of the Division unless specifically rejected according to Mass. Gen. Laws chapter 140D § 3. The Official Staff Commentary interpreting 12 CFR 226.5a(e) does not consider an application provided to a consumer at the consumer's request to be an application made available to the general public. Therefore, department stores that ask their customers if they would like to open a credit account once the consumer has paid for a purchase by check, are not required to make the truth-in-lending disclosures under 209 CMR 32.05A.

Foreign Transmittal Agencies

95-019 Foreign Transmittal Agency & Traveler's Checks Sales Licensing Requirements

A foreign bank subsidiary must be licensed as a foreign transmittal agency to receive cash and cash equivalents from persons who want to remit money from or send money to another country, under Mass. Gen. Laws chapter 169. Such transmittal activities are not considered banking business and would thus not violate Mass. Gen. Laws chapter 167 § 37. Foreign banks may also establish branches in the Commonwealth under Mass. Gen. Laws chapter 167 § 38. To sell traveler's checks, entities must obtain a license under Mass. Gen. Laws chapter 167F § 4.

Requesting an Opinion

Requesting an Official Opinion

All requests for for official opinions from the Division of Banks should be addressed to:

Thomas J. Curry,
Commissioner of Banks
100 Cambridge Street, Room 2004
Boston, MA 02202

Each request should be as specific and complete as possible. Include all relevant facts as well as cites to applicable statutes, regulations and/or regulatory documents. If applicable, also include a brief analysis of the materials supporting your position.

Requesting Copies Of Opinions & Other Public Records

Public records retained by the Division of Banks, including past opinions, may be obtained for a fee from the Division's Public Information Officer. To order public records, or for more information please call: (617) 727-3145 x 344.