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To the Chief Executive Officer Addressed:
The Division of Banks (the "Division") is issuing this letter, in response to requests, to clarify the impact of Chapter 454 of the Acts of 2008, An Act Relative to Credit Union Mortgages ("Chapter 454" or the "Act") on the ability of state-chartered credit unions to offer various types of loans and engage in other activities. The Act, which became effective April 5, 2009, significantly expands the statutory lending authorities for credit unions. The Act places enhanced responsibility on the Board of Directors of each credit union to have all proper policies in place for lending and other activities under the new statute. The Act also has an impact on the necessity of certain provisions of Division's regulation 209 CMR 50.00: Parity with Federal Credit Unions (the "Parity Regulations"), and powers which can be granted thereunder.
The Act was based on a bill filed by the Massachusetts Credit Union League, Inc. (the "League"), which provided extensive testimony and support throughout the Legislative process. In addition, during the Legislative process and thereafter, the Division discussed Chapter 454 at length with the League. There were also direct discussions at meetings and outreach seminars with state-chartered credit unions.
The purpose of this letter is to set forth the Division's position on how the Act affects various lending and other authorities in chapter 171 of the General Laws as well as specified provisions of the Parity Regulations.
This letter provides a brief summary of major provisions set forth in the Act; the broadened authorities and responsibilities of the credit unions; what the new requirements are for the Boards of Directors; and what the impact will be on the various related sections of General Laws and the Parity Regulations.
The Division notes that this Industry Letter is not a comprehensive list of all authorities included in the Act, which includes additional provisions not addressed herein. The Act should be consulted directly in reviewing this Letter. A copy of Chapter 454 is attached.
All references to credit unions herein are to state-chartered credit unions.
Overview of Chapter 454
Prior to passage of the Act, credit unions were required to slot each real estate mortgage loan within one of 12 separate categories, each subject to numerous limitations and requirements. Historically, as will be discussed herein, the Parity Regulations included numerous lending authorities to ease some of these statutory provisions, which the Division, with assistance from the League, gradually enhanced through amendments to the Parity Regulations since they were first promulgated in 1999. However, the statutory powers generally remained unchanged in scope and format. The Act eliminated all of these mortgage loan categories, except for adjustable rate mortgage loans and reverse mortgage loans. The Act also includes provisions relative to consumer loans other than mortgage loans, loan participations, and the purchase and sale of loans.
The Act rewrote former sections 65 and chapter 66 of chapter 171 of the Massachusetts General Laws, governing mortgage loans by credit unions. Section 65 was replaced with six new sections, sections 65 through 65E, inclusive. Former section 66 was redrafted as well. As part of this rewrite, the Act also included provisions relative to non-mortgage/other types of consumer loans and other powers as stated above. The Division had testified in support of the petition as initially filed by the League during its public hearing before the Joint Committee on Financial Services.
Summary of Major Provisions of Chapter 454
Among the key provisions of the Act are the removal of the 12 specific classes of mortgage loans; the removal of maximum terms and dollar amounts for various types of loans; and a detailed requirement for written loan policies adopted by the Board of Directors. These provisions apply to all four types of activities discussed herein, and are set out in further detail below, under the caption Common Provisions. In summary, under the Act, credit unions are now allowed to make loans subject to such policies. One significant provision that remains in statute unchanged by the Act is the aggregate lending limits for loans to one member.
The four categories of loans and other activities to be addressed include:
I. Mortgage Loans
The Act allows credit unions to offer mortgage loans to members, consistent with written comprehensive loan policies under section 65A(g) through 65(i), inclusive. The Act eliminates the 12 separate classes of mortgage loans set forth in former section 65. Section 65A authorizes credit unions to subsequently revise or modify any terms or conditions of such loans subject to agreement of the parties. There is additional authority to offer reverse mortgage loans in section 65C and authority to make or acquire adjustable rate mortgage loans in section 65D subject to the terms and limitations set forth therein.
Consistent with the broad lending authority in sections 65A through 65E, inclusive, section 66 is completely rewritten to eliminate most of the additional requirements which governed mortgage loans by credit unions.
Instead of classes of loans, "mortgage loan" is now generally defined under the Act in section 65 as a loan, line of credit, or borrowing secured primarily by a lien on an interest in real estate. Section 66, governing restrictions and requirements on real estate mortgage loans, was also completely rewritten.
Section 66 now includes only the requirements that the loan must be to a member or a person able to become a member; that each loan shall be on real estate situated within Massachusetts or within a radius of 100 miles of the main office of the credit union; and the maximum percentage of assets a credit union may invest in mortgage loans. The Act eliminates all other provisions of former section 66.
II. Non-Mortgage/Other Types of Consumer Loans
Section 65 of chapter 171 now defines "loan" as "a loan or line of credit, whether secured by collateral or security of any nature or unsecured, for consumer or other purposes other than a real estate loan." Section 65A(a) states "Credit unions may make or acquire loans…as specified in sections 65 to 65E, inclusive." This provision offers credit unions broader authority to make such loans, within the provisions of their adopted policies, than other remaining provisions of chapter 171 discussed below. Credit unions can also revise or modify any terms or conditions of such loans subject to agreement of the parties.
Specific sections of chapter 171 relative to various types of consumer loans, specifically section 59, relative to personal loans; section 59A, relative to credit cards; section 60, relative to real estate improvements (so-called "home improvement loans"); section 61, relative to manufactured home loans; section 62, relative to loans for the purchase of boats, camper or trailers; section 63, relative to education loans; and section 64, relative to installment loans, were not amended by the Act and remain in effect. These sections may continue to be cited as authority for such loans subject to the terms and conditions within each such section. As discussed below, these sections may be eliminated or clarified through subsequent Legislative amendments.
III. Loan Participations
Section 65E grants credit unions incidental powers to carry out the purposes of sections 65 to 65E, as well as complementary powers that may fairly be implied from those expressly conferred.
The Act sets forth the power to engage in loan participations under clause (3) of section 65E:
...(3) to buy, sell or make loans as participation loans with any other federally-insured credit union, bank or insurance company and to service any loans sold by it.
Loan participations are now included in clause (3) of section 65E, which provides broader powers than had previously been included in chapter 171, section 65, paragraph 8.
IV. Purchase and Sale of Loans
The ability to make or acquire loans and mortgage loans is expressly provided in section 65A. In addition, it is the position of the Division that the language relative to incidental and complementary powers set forth in said section 65E governs the sale of loans. Accordingly, the authority for the purchase and sale of loans set forth in the Act is broader than had previously been set forth in chapter 171.
The authority that had previously been set forth in the first paragraph of former section 65 of chapter 171 included the power to make or acquire mortgage loans but was limited to the several classes set forth therein.
As noted above, the following provisions are applicable to all four authorities discussed herein:
The Act requires, pursuant to section 65A(g), that credit unions adopt and maintain written loan policies which establish appropriate limits and standards for extensions of credit made pursuant to sections 65 to 65E, inclusive, which are consistent with safe and sound banking practices and are appropriate to the size, nature and scope of the credit union's operations. Additional requirements relative to underwriting standards and annual review and approval of the Board of Directors are set out in section 65A(h) and section 65A(i), respectively.
No maximum term or dollar amount is specified in section 65A of Massachusetts General Laws chapter 171.
The limitations relative to aggregate lending limit for loans to one member contained in section 58 of chapter 171 were not amended by the Act, and remain applicable.
Requirements for Credit Unions
Credit unions seeking to make mortgage loans under sections 65 through 65E, inclusive, will be required to maintain the comprehensive loan policies set forth at section 65(g). The Division urges that close attention be paid to this requirement.
In order to obtain certain enhanced lending powers under the Parity Regulations, a credit union was required to submit its proposed lending policies to the Division for review as part of that approval process. Policies that were reviewed and approved in conjunction with the Parity Regulations may provide guidance for compliance with the Act provided that they are appropriate to the size, nature and scope of the credit union's operations and as further specified in section 65(g).
Applicability of Parity Regulations
The Act, in establishing new sections 65 through 65E, inclusive, provides the broadest and most comprehensive array of powers now available for credit unions. Although the provisions of the Parity Regulations cited herein are still available for credit unions to use, said regulations are no longer the exclusive source of authority for such loans and other activities. Lending powers granted under the Parity Regulations remain in full force and effect. Although it is the position of the Division that the Act expands mortgage and other lending authorities and other activities, all existing powers under the Parity Regulations remain in effect and remain available to a credit union that wants to operate under said regulations or previously approved authorities thereunder. Please see Appendix A for a brief description of the various sections of the Parity Regulations that can be replaced or exceeded by provisions of the Act.
Safety and Soundness Procedures
The examination procedures of the Division will remain largely the same. Chapter 454 places a much greater reliance on the credit unions' own loan policies and operations, which will be extensively reviewed during the regular examination process.
An extensive rewrite of banking laws, Chapter 461 of the Acts of 2004, included similar language rewriting the provisions governing mortgages and other loans for state-chartered banks. The Division will use those same oversight procedures from its experience in implementing provisions from the 2004 Act relative to mortgage and other lending, which are similar to those set forth in Chapter 454.
The establishment of detailed, all-inclusive lending policies based on safe and sound operations of the credit union will help ensure compliance with the provisions of the Act. It is essential that credit union management ensure that their loan policies are reviewed, updated and approved annually, under the provisions of the Act. Said policies must encompass all aspects of the credit union's lending products, in view of the economic environment.
The Division notes that credit unions must be cognizant of any applicable requirements of federal law and any applicable regulations or directives of the National Credit Union Administration when determining internal policies and any related matters relative to any and all of the authorities granted under the Act.
The Act greatly enhanced the lending authority of credit unions in all types of credit transactions, not just mortgages. The Act, through its broad language, grants many new authorities relative to mortgage loans and non-mortgage/other types of consumer loans, loan participations and the purchase and sale of loans. In addition, while the provisions of the Parity Regulations cited herein are still in effect, the Act sets forth provisions establishing a broader and more comprehensive array of authorities. The Division will amend the Parity Regulations to reflect the provisions of the Act in the near future. Credit unions should now look to the provisions of the Act for applicable authorities, and determine whether to utilize the provisions of the Act or the Parity Regulations. In addition, the Division reminds all credit unions to remain aware of any and all applicable federal requirements.
The Division will be working with the League and the Joint Committee on Financial Services to update or recodify chapter 171 for purposes of clarifying or eliminating the sections remaining in chapter 171 for non-mortgage/other types of consumer loans discussed on that subject previously in this letter.
As noted above, this letter is not a comprehensive summary of every provision set forth in Chapter 454. The Act should be read directly.
With regard to commercial loans or so called "member business loans", the Division notes that the provisions of Division of Banks Opinion Letter No. 02-126 remain in effect.
If you have any questions, please contact Chief Director Andrea L. Cipolla at 617-956-1532.
Very truly yours,
Steven L. Antonakes
Commissioner of Banks
The following is a list of the various sections of the Parity Regulations that can be replaced or exceeded by the authorities of the Act. Please note that the following descriptions are based on the current provisions of the Parity Regulations. Authorities set forth and approvals granted pursuant to prior versions of the regulation also remain in effect.
40-Year First Lien Mortgages
209 CMR 50.06(3)(j)1.
Closed-End Home Equity Mortgages
209 CMR 50.06(3)(j)2.
Open-End Home Equity Mortgages
209 CMR 50.06(3)(j)3.
95% Loan-to-Value Mortgages
209 CMR 50.06(3)(k)1.
97% Loan-to-Value Mortgages
209 CMR 50.06(3)(k)2.
100% Loan-to-Value Mortgages
209 CMR 50.06(3)(k)3.
Mortgage Loans Written in Accordance with Certain Mortgage Loan Programs of Public Instrumentalities (Soft Second Mortgages)
No notice or approval
209 CMR 50.12(4)(i)
209 CMR 50.14(2)(h)
209 CMR 50.14(2)(i)
209 CMR 50.14(2)(j)
209 CMR 50.14(2)(k)
209 CMR 50.14(2)(l)
209 CMR 50.14(2)(m)
209 CMR 50.15(3)(g)
209 CMR 50.15(3)(h)
209 CMR 50.15(3)(i)
209 CMR 50.15(3)(j)
209 CMR 50.15(3)(k)
209 CMR 50.15(3)(l)
15-Year Consumer Loans
209 CMR 50.06(3)(e)
12-Year Automobile Loans
209 CMR 50.06(3)(f)
Lines of Credit and Credit Cards
209 CMR 50.06(3)(g)
20-Year Home Improvement Loans
209 CMR 50.06(3)(i)1.
20-Year Direct Mobile Home Loans
209 CMR 50.06(3)(i)2.
20-Year Indirect Mobile Home Loans
209 CMR 50.06(3)(i)3.
20-Year Direct Boat, Camper, Trailer, or Recreational Vehicle Loans
209 CMR 50.06(3)(i)4.
20-Year Indirect Boat, Camper, Trailer, or Recreational Vehicle Loans
209 CMR 50.06(3)(i)5.
12-Year Consumer Loans
209 CMR 50.14(2)(a)
12-Year Direct Automobile Loans
209 CMR 50.14(2)(b)
12-Year Indirect Automobile Loans
209 CMR 50.14(2)(c)
209 CMR 50.14(2)(d)
209 CMR 50.14(2)(e)
209 CMR 50.14(2)(f)
20-Year Direct Boat, Camper, Trailer or Recreational Vehicle Loans
209 CMR 50.14(2)(g)
209 CMR 50.15(3)(a)
209 CMR 50.15(3)(b)
209 CMR 50.15(3)(c)
Home Improvement Loans
209 CMR 50.15(3)(d)
Direct Mobile Home Loans
209 CMR 50.15(3)(e)
Direct Boat, Camper, Trailer and Recreational Vehicle Loans
209 CMR 50.15(3)(f)
Consumer Loan Participations
209 CMR 50.06(3)(m)
Non-Residential Real Estate Loan Participations
209 CMR 50.06(3)(n)
Purchase and Sale of Loan Portfolios
209 CMR 50.06(3)(l)
209 CMR 50.09(c)
Purchase of Loan Portfolios from Any Federally-Insured Credit Union
209 CMR 50.12(4)(g)
209 CMR 50.12(4)(h)