On August 3, 2012, Massachusetts Governor Deval Patrick signed House Bill 4323, “An Act Preventing Unnecessary and Unlawful Foreclosures”, into law.  The final version of the bill reflects a compromise because it does not include the provisions for mandatory mediation for foreclosures, which had been included in a proposed prior version of the law.

The Act amends a number of statutes within the Massachusetts General Laws.  However, the addition of M.G.L. c. 244, §35B is the Act’s most significant provision.  Its primary provisions become effective on November 1, 2012.  Our interpretation of this new statute, as well as our recommendations for compliance with its provisions (much of which we’ve previously shared with many of you), appears below.

I.“Certain Mortgage Loans”

It is important to note, at the outset, that the requirements of M.G.L. c. 244, §35B will not apply to every foreclosure action. Under the statute, lenders are only prohibited from foreclosing on “certain mortgage loans” (somewhat of an odd phrase) unless they have first taken “reasonable steps and made a good faith effort to avoid foreclosure”.

“Certain mortgage loans” are defined as loans to natural persons made primarily for personal, family or household purposes secured wholly or partially by a mortgage on owner-occupied residential property which have one or more of these features:

  1. An introductory interest rate granted for a period of 3 years or less and such introductory rate is at least 2% lower than the fully indexed rate;
  2.  Interest-only payments for any period of time, except in the case where the loan is an open-end home equity line of credit or a construction loan;
  3.  A payment option feature, where any one of the payment options is less than principal and interest fully amortized over the life of the loan;
  4.  The loan did not require full documentation of income or assets;
  5.  Prepayment penalties that exceed M.G.L. c. 183, §56 or applicable federal law;
  6.  The loan was underwritten with a loan-to-value ratio at or above 90% and the ratio of the borrower’s debt, including all housing related and recurring monthly debt, to the borrower’s income exceeded 38%; or
  7.  The loan was underwritten as a component of a loan transaction, in which the combined loan-to-value ratio exceeded 95%;
  8.   If, after the performance of reasonable due diligence, a creditor is unable to determine whether the loan has one or more of these features, then the loan shall be a “certain mortgage loan”;

Loans financed by the Massachusetts Housing Finance Agency and loans originated through programs administered by the Massachusetts Housing Partnership Fund board are not considered to be “certain mortgage loans”.

II. Notice of Right to Loan Modification

If a mortgage loan qualifies as a “certain mortgage loan”, then there are a number of steps that a lender must take with respect to that loan before it can be foreclosed upon in order for the lender to be considered to have “taken reasonable steps and made a good faith effort to avoid foreclosure”.

First, the lender must send the borrower a “Notice of Right to Loan Modification” (the “Notice”) concurrently with the “150 Day Right to Cure Notice”.  The form of the Notice has not been provided by the Division Banks but our office has prepared a proposed form for our clients to use.  Right to Cure Notices sent after the enactment of this statute should include a §35B Notice.  It is the Division of Banks opinion that on loans which have, as of August 3, 2012, proceeded through the foreclosure process such as a complaint being filed in the Land Court or Superior Court, or for which a foreclosure notice has been mailed or published, there is no requirement to send a §35B Notice.

The right to a loan modification under this statute shall be granted only once during any 3-year period.  The Notice requirement is more complicated in a situation where a borrower has previously received a 150 Day Right to Cure Notice and then defaults again.  Please contact us where there is a multiple default situation to discuss the appropriate method of compliance with the new law.

The borrower must respond to the lender with his/her intentions with respect to the mortgage loan (i.e. (i) pursue a loan modification, (ii) pursue a foreclosure alternative, (iii) cure or (iv) proceed to foreclosure) within 30 days following the delivery of the Notice.  Failure to respond to the Notice in a timely manner will reduce the borrower’s cure period from 150 days to 90 days.  So, if no response is received, the lender could proceed with foreclosure 90 days after delivery of the Notice.

However, if the borrower timely responds that they would like to pursue a loan modification, then, along with the response, the borrower is also required to provide information about the borrower’s income and a complete list of their total debts and obligations, as requested by the lender.

III. The “Assessment”

The lender is then required to:

  1. determine the borrower’s ability to make an “affordable monthly payment” (which is defined as monthly payments which, after taking into account the borrower’s current circumstances, including verifiable income, debts, assets and obligations, enable a borrower to make the payments).
  2. conduct an analysis comparing the “net present value” of receiving the payments on the modified loan versus the anticipated recovery from foreclosure.

If the “net present value” of the modified mortgage loan exceeds the anticipated net recovery at foreclosure, then the lender must agree to modify the loan in a manner that provides for the “affordable monthly payment”.

The lender only has 30 days to review the borrower’s request and to provide the borrower with its decision regarding a loan modification, including with that decision an “assessment.”  The borrower can then reject, accept, or make a “counteroffer” to the lender’s offer of loan modification.  The borrower’s response must be provided to the lender within 30 days of the borrower’s receipt of the decision and “assessment”.

The statute requires that certain information be included in the “assessment”, and also specifies the methods that the lender must use when developing the “assessment”.  The assessment shall include, but is not limited to:

  1. a written statement of borrower’s income, debts and obligations as determined by the lender;
  2. the lender’s “net present value” analysis of the mortgage loan;
  3. the lender’s anticipated net recovery at foreclosure;
  4. a statement of the interests of the lender; and
  5. a modified mortgage loan offer or a notice that no modified mortgage loan will be offered.

To calculate the “net present value”, the lender must use one of the following formulas:

  1. the federal Home Affordable Modification Program base net present value model;
  2. the FDIC’s Loan Modification Program;
  3. the Massachusetts Housing Finance Agency’s loan program used solely by the agency to compare the expected economic outcome of a loan with our without a modified mortgage loan; or
  4. any model approved by the division of banks to consider the total present value of a series of future cash flows relative to a mortgage loan.

The Attorney General’s Office has provided additional guidance on “net present value” here.  The process for determining whether to offer a loan modification must not take longer than 150 days.  This is intended to coincide with the 150-day right to cure period, such that the loan modification process is carried out over the same 150-day cure period.

To ensure compliance with the Act’s Notice provisions, as well as compliance with all other sections of the Act, please contact our office about suggested forms and practices.

IV. Other Provisions

New requirement that mortgage assignments be recorded.  Going forward, a foreclosure may not proceed until the entire chain of mortgage assignments from the original mortgagee to the foreclosing entity is recorded.  In addition, the recording information for all recorded assignments must be referenced in the advertised notice of foreclosure sale.

New Eaton foreclosure affidavit confirming ownership of note/mortgage loan.  A foreclosing lender must now record an affidavit swearing that it is both the assignee of the mortgage and the holder of the note or acting on behalf of the holder of the note.  This affidavit will shield third party buyers from title claims but will not shield lenders from liability to the borrowers.

Please feel free to contact us if you have any questions about these new requirements or if you would like a copy of our proposed form of “Notice of Right to Loan Modification”.

The Massachusetts Division of Banks (“DOB”) recently issued a final regulation, 209 CMR 56.00(the “Regulation”), which mandates the form of the post-default “right to cure notice” that must be sent to mortgage borrowers pursuant to Massachusetts General Laws Chapter 244, Section 35A (the “RTC Statute”).  The mandatory form is entitled “Right to Cure Your Mortgage Default Notice” (the “RTC Notice”).  Although the Regulation went into effect on March 2, 2012, use of the RTC Notice does not become mandatory until May 21, 2012. Lenders may choose to start using the RTC Notice earlier.  The RTC Notice will supersede and replace the right-to-cure notice that lenders are presently using.

We believe that the RTC Notice omits information that is required by the RTC Statute and other important information that lenders should provide to protect their interests.  Because of this and the fact that the form RTC Notice cannot be modified in any way, we strongly recommend that another letter from the lender be sent accompanying the RTC Notice to fill in omissions and gaps in the RTC Notice.  Perhaps anticipating this, the last sentence in the form RTC Notice already states that additional materials may be provided with the RTC Notice.

Our interpretation of the Regulation and related recommendations for compliance appear below.

I.  Definition of “Mortgagee”

The Regulation was issued for the purpose of implementing the RTC Statute to provide a standardized RTC Notice and procedures and, in some instances, to clarify terms found in the RTC Statute.

For instance, the RTC Statute does not contain a definition of “mortgagee”, but Section 56.02 of the Regulation defines “mortgagee” as, “an entity to whom property is mortgaged, the mortgage creditor or lender including, but not limited to, mortgage servicers….” This is helpful because it clarifies that mortgage servicers may send the RTC Notice, assuming such authority is provided to them by virtue of their servicing agreements with the mortgagee.  However, an Assignment should be recorded before any foreclosure action is initiated through the filing of a Complaint to Determine Military Status with the Massachusetts Land Court.

 II. Right to Cure Notice:  Content Requirements and Procedure   

The Regulation reiterates those requirements a mortgagee must satisfy before the right to cure period is shortened from 150 to 90 days, as provided in the RTC Statute. We continue to recommend, for the sake of simplicity, as a policy matter, out of an abundance of caution and to ensure uniformity of practice within the lending institution, that mortgagees issue the 150-day notice because there is complexity and uncertainty associated with determining if/when only a 90-day period need be provided, and a miscalculation in this regard could void or add months to the foreclosure process.

Also, the specific date by which the borrower must cure the default to avoid foreclosure must now be included in the RTC Notice.  We recommend that lenders make sure that that date is calculated at least 151 days after the RTC Notice is sent (not including in that calculation the date on which it is sent), and assure that the deadline date does not fall on a weekend or holiday.

III.   The Right to Cure Notice

Lenders must “strictly comply” with the form RTC Notice that is found in Section 56.04 of the Regulation.  However, we believe the RTC Notice is lacking in several respects.  Perhaps the most flagrant flaws are its omission of information that the RTC Statute specifically requires be provided to borrowers.

For instance, Section h(5) of the RTC Statute requires that the name of any current or former mortgage broker or mortgage loan originator be included in the RTC Notice.  The form RTC Notice, however, does not provide for this information.

Additionally, the RTC Notice does not inform the borrower that he/she may have the right to redeem his/her property before the foreclosure sale, yet Section h(8) of the RTC Statute requires that this information be provided to borrowers.

The form RTC Notice also does not include other important information that should be provided to borrowers in a default notice.  For example, the RTC Notice has no “bankruptcy savings clause.”  This protects the lender from an accusation that it has violated the Bankruptcy Code’s automatic stay or discharge injunction provisions.

The RTC Notice also says nothing about partial payments.  The accompanying letter should provide that neither the mortgagee’s receipt nor acceptance of partial payment of past due amounts will be deemed a waiver of the mortgagee’s right to accelerate the loan obligation or to foreclose on the mortgaged property.  It should also notify borrowers that the mortgagee has reserved its right to accept and apply partial payments without waiving its right to accelerate the loan obligation or foreclose, unless the loan documentation or applicable law states otherwise.

To comply with the Regulation’s mandated use of the RTC Notice, to ensure full compliance with state and federal laws, and to protect the interests of lenders, we recommend that mortgagees provide borrowers with a letter accompanying the form RTC Notice addressing these points.  Please feel free to contact us about a suggested form of an accompanying letter.

Effective December 1, 2011, the new amendments to the Federal Rules of Bankruptcy Procedure (“FRBP”) impose dramatic changes to lenders’ existing proof of claim procedures with failure to comply exposing one to harsh penalties.  These new rules are applicable to any case under Chapters 7, 11 or 13.

1. Initial Filing of Proof of Claim

Pursuant to FRBP 3001(c), proofs of claim must be filed on the new Official Form B10 which includes a disclosure of the interest rate at the time of filing and whether it is fixed or adjustable.  Although the old form B10 required the attachment of relevant documentation supporting the lender’s claim, the new rule now mandates the inclusion of specific documentation and subjects the lender to possible sanctions for noncompliance.

As to individual debtors, an itemization of the pre-petition interest, fees, expenses and charges assessed against the account must be provided in the proof of claim.  This rule applies to all claims, even those not secured by a debtor’s principal residence.

If the lender claims to have a security interest in any property of the debtor, a statement of the amount required to cure the pre-petition default must be given.

If the lender’s claim is secured by an individual debtor’s principal residence, then Official Form B10 (Attachment A) must be attached to a proof of claim. It requires a lender to itemize the pre-petition arrearage and total debt by breaking down the amount of the pre-petition interest, outstanding principal debt, fees, expenses or charges, as well as a statement of the amount necessary to cure a pre-petition default (a total payoff).  If the mortgage payment includes any escrow, an escrow statement as of the petition date must now be attached to the proof of claim.

As a practical matter, to comply with Rule 3001, a lender may wish to use Attachment A with ALL proofs of claim that involve an individual debtor and whose claim is secured by ANY of the debtor’s property.

Proofs of claim must be signed under the pains and penalty of perjury that the statements in the claim are “true and correct and to the best of my knowledge, information and reasonable belief.”

2. Notice of Mortgage Payment Change

New FRBP 3002.1(b) requires notice where there is a change in the amount of the monthly mortgage payment of a claim being paid through the Chapter 13 plan.  The two most common payment changes on a mortgage are to the interest rate or an escrow adjustment.  The mortgage lender must file a Notice of Mortgage Payment Change on Official Form B10 (Supplement 1) and serve that at least 21 days prior to the date the new payment is due.  This form must also be mailed to the debtor, debtor’s counsel, and the Chapter 13 trustee.

Note that a post-petition loan modification also requires the filing of a Supplement 1.

3. Notice of Post Petition Mortgage Fees, Expenses, and Charges

New FRBP 3002.1(c)(i) requires that lenders give notice of any post petition fees, expenses, and charges that the mortgage lender intends to charge against the debtor’s account within 180 days of when incurred.  Under this new rule, a new form, Notice of Postpetition Mortgage Fees, Expenses, and Charges, Official Form B10 (Supplement 2), must be filed with the mortgage lender’s proof of claim and served upon the debtor, debtor’s counsel, and the Chapter 13 trustee.

4. Final Cure Notice

Under new FRBP 3002.1(f)-(h), within 30 days of the debtor making a final payment under the Chapter 13 plan, the trustee must file and serve a notice stating the debtor has paid in full the amount required to cure the default on the mortgage lender’s claim (the “Final Cure Notice”).  The Final Cure Notice must include a statement that advises mortgage lenders of their obligation to file a response within 21 days after the Final Cure Notice.  Failure to file the written response within this time period may be fatal to the mortgage lender’s ability to later assert that a pre-petition arrearage was not cured or that the debtor is not current.

Within 21 days of service of the Notice of Final Cure Payment, the lender must file a statement indicating whether it agrees that the pre-petition arrears according to its claim have been paid in full, and whether the debtor is current on all post-petition payments.  This statement must itemize the amount needed to cure all post-petition amounts, if any, that the lender contends remain unpaid as of the date of the statement.  The statement will be filed as a supplement to the lender’s proof of claim. There is no specific form required to be filed but our office has prepared an appropriate form.

Within 21 days of service of the lender’s notice of the amount needed to become current, the debtor or trustee may file a motion with the court to determine if the default has been cured and/or what amount is needed to bring the account current.  The court will hold a hearing to determine whether the debtor has cured the default and paid all required post petition amounts.

5. Sanctions for Noncompliance

If a lender fails to provide the information required by FRBP 3001 and 3002.1, the court, after notice and a hearing, may take either or both of the following actions: (i) preclude the lender from presenting the omitted information, in any form, as evidence in any contested matter or adversary proceeding in the case, unless the court determines that the lender’s failure to comply was substantially justified or is harmless; or (ii) award other appropriate relief, including reasonable attorneys’ fees, caused by the failure to comply.  The comments to the new Rule indicate that failure to provide the information does not itself constitute grounds for disallowance of the claim, but if an objection to claim or other litigation is filed regarding the claim, the court may preclude presenting any evidence that was missing from the proof of claim.

Contact

Our office is located in beautiful Downtown Providence with easy access to the Financial District and courts, with ample parking within walking distance.
Salter McGowan Sylvia & Leonard, Inc.

56 Exchange Terrace
Providence, RI 02903

Phone: 401.274.0300
Fax: 401.453.0073