Massachusetts | DocMagic

Massachusetts Predatory Home Loan Practices Act

Massachusetts: Massachusetts' "Predatory Home Loan Practices Act" (the "Act") became effective November 7, 2004. The Act is similar to the High-Cost Home Loan regulations previously in effect, but there are significant differences. Chapter 183C - Predatory Home Loan Practices of the General Laws of Massachusetts can be accessed here.

Coverage: The Act applies to all closed-end and open-end, owner-occupied loans (includes purchase, construction and refinance loans, and regardless of lien position); reverse mortgages and loans primarily for business, agricultural or commercial purposes are excluded.

When is a Loan a "High-Cost Home Loan"? A high-cost home loan is defined as a loan that satisfies either or both of the following tests:

APR Test: Either 8% (for first liens) or 9% (for subordinate liens) over the yield on Treasury securities having comparable periods of maturity on the 15th day of the month immediately preceding the month in which the application is received by the creditor); or
Points and Fees Test: Total Points and Fees exceed the greater of five percent (5%) of the total loan amount or a specified dollar amount that is subject to change annually.

The APR Test: The Act treats the determination of the APR for fixed rate loans and variable rate loans differently.

Fixed Rate Loans: The determination of the APR is per TILA
Variable Rate Loans: The determination of the APR is per TILA unless the initial interest rate is discounted. If the initial interest rate of the loan is discounted, that is, the initial interest rate is less than the fully-indexed rate (index + margin), the initial interest rate is ignored and instead the interest rate that would be in effect once the introductory rate has expired is used in calculating the APR.

The Points and Fees Test: Points and Fees are defined as follows:

Prepaid Finance Charge - the total amount of prepaid finance charges
- Prepaid Interest - to be deducted from prepaid finance charge
+ Other Charges Paid to Creditor - the total amount of all Regulation Z Section 226.4(c)(7) charges not included as a part of the Prepaid Finance Charge, but only if the creditor receives direct or indirect compensation in connection with the charge. Note: whether or not such charges paid to a creditor affiliate constitutes "indirect compensation" is unclear; however, in my judgment it would be best to be conservative and include such charges if also paid to a creditor affiliate ("A")
+ Maximum Prepayment Fees Permitted Under the Loan Documents - Massachusetts permits the imposition of a prepayment charge for prepayments made before the due date in an amount equal to the lesser of the balance of the first year's interest or 3 months interest. In addition, if the prepayment is made within the first 36 months for the purpose of refinancing with another financial institution, a lender may impose an additional prepayment charge of 3 months interest. For purposes of completing this portion of the analysis, we assume the prepayment penalty provision is as described in the foregoing two sentences. Based on the foregoing, we calculate the amount of the prepayment penalty that the borrower would have to pay on any given day of the prepayment period, and default the highest number into this field.
+ Any Prepayment Fee Assessed on Refinanced Loan by the Same Creditor - if the new loan is refinancing a preexisting loan that was made, or is currently being held by the same creditor making the current loan, and a prepayment penalty is assessed on the payoff of the preexisting loan, the amount of the prepayment penalty under the preexisting loan is inserted in this field
+ Other Mortgage Broker Compensation - the total amount of all compensation paid directly or indirectly to a mortgage broker not otherwise included in prepaid finance charges or other charges paid to creditor regardless of the source of payment, i.e., includes YSPs and other lender-paid premiums)
+ Single Premium Credit Insurance/Related Products and Financed - the premium of any single premium credit life, credit disability, credit unemployment, credit property insurance, or any other life or health insurance or debt cancellation or suspension agreement or contract that is financed directly or indirectly by the creditor
- Bona Fide Discount Points - the Act permits the deduction of either a "conventional prepayment penalty," or up to two (2) "bona fide discount points"; the selection appears to be left up to the creditor to make. A "conventional prepayment penalty" is defined as a prepayment fee or charge authorized by law other than the Act provided the loan APR does not exceed the "conventional mortgage rate" by more than two percent (2%), and the prepayment fees or charges do not exceed two percent (2%) of the amount prepaid. The "conventional mortgage rate" is defined as the most recently published yield on conventional mortgages as published in the Federal Reserve's H-15 Statistical Release as of the 15th day of the month immediately preceding the month in which the application is received by the creditor. Our prepayment penalty calculation (see above) could permit a prepayment charge that is more than 2% of the amount prepaid, so we ignore this portion of the test. "Bona fide discount points" are defined as discount points that are knowingly paid by the borrower for the express purpose of lowering the interest rate, and in fact do reduce the interest rate from an interest rate that does not exceed the benchmark rate. The "benchmark rate" is defined as the interest rate which the borrower can reduce by paying discount points so long as it does not exceed the weekly average yield on U.S. Treasury securities of five (5) years on the 15th day of the month immediately preceding the month in which the loan is made, plus four percent (4%). We assume that all discount points paid to lender only are bona fide, and deduct the actual amount of discount points up to a maximum of two (2) discount points; discount points paid to anyone other than lender we do not consider bona fide.
+/- Creditor Requested Adjustments - the total amount of all customer requested overrides

Note: for HELOCs, in addition to the above, points and fees include the minimum additional fees the borrower would be required to pay to draw down an amount equal to the total credit line. For purposes of our analysis, we assume that there are no such additional fees.

Total Loan Amount: is defined as the face amount of the note (presumably for HELOCs this means the credit limit).

What Happens If a Loan Is a High-Cost Home Loan? There are many substantive limitations imposed on the making of high-cost home loans. These include the following:

Certification from a counselor with a third-party nonprofit organization
Lender must have a reasonable belief that at least one borrower will be able to make the scheduled payments on a basis other than the borrower's equity in the property; there is a presumption of "ability" if borrower's scheduled monthly payments on all debts do not exceed 50% of the borrower's documented and verifiable monthly gross income if the borrower has sufficient residual income to pay essential monthly expenses
No prepayment fees or penalties permitted
No financing of points and fees greater that 5% of the total loan amount or $800, whichever is greater
No increased default interest rate
No balloon loans permitted
No demand features permitted except in cases of fraud or material misrepresentation, failure to meet repayment terms (after notice of default and reasonable cure period), or due to bona fide action or inaction by the borrower that adversely and materially affects the lender's security or right in such security
No negative amortization permitted
No modification, renewal, extension, amendment or deferral fees permitted
No more than 2 payments may be paid in advance from the loan proceeds
Lender may not require a borrower to assert a claim or defense in a forum that is less convenient, more costly or more dilatory for the resolution of a dispute than a judicial forum established in Massachusetts
Lender may not pay a home improvement contractor other than by an instrument payable to the borrower or jointly to the borrower and contractor, or at the election of the borrower, through a third party escrow pursuant to written agreement between the borrower, contractor and lender
Lender may not recommend or encourage default on an existing loan
Purchasers and assignees are liable to all affirmative claims and defenses that the borrower could assert against the original lender or broker unless the purchase or assignee demonstrates by the preponderance of the evidence that: (1) it has policies that expressly prohibit it from purchasing or accepting assignment of high cost loans; (2) requires the seller or assignor to represent and warrant that either the seller or assignor will not sell or assign high cost loans or is itself a beneficiary of such a representation and warranty; and (3) exercises reasonable due diligence (which may provide for a sampling) at the time of purchase or assignment or within a reasonable time thereafter to prevent the purchase or assignment of a high cost loan.
Lender may not attempt to avoid application of the Act by dividing the transaction into separate parts for the purpose of evading the law
There is a limited cure provision when a lender, acting in good faith, notifies the borrower of the compliance failure within 30 days of loan closing and prior to any action being brought (or if the compliance failure was not intentional and resulted from a bona fide error (such as clerical errors, errors in calculation, computer malfunction and programming, and printing errors, but not including errors with respect to legal judgments), or within 60 days of discovering the error and prior to any action being brought, and makes appropriate restitution or adjustments, at the borrower's choice to either make the high cost loan meet the requirements of the Act, or change the terms beneficial to the borrower so that the loan is no longer a high cost loan.