Massachusetts House Bill 4323: An Act Preventing Unnecessary and Unlawful Foreclosures

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”.

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