The following article is reprinted from Basis Points® , Vol. 3, Issue 11, Copyright © 2004, with the permission of CounselorLibrary.com, LLC. All Rights Reserved. Further reproduction is prohibited without permission.

On November 3, 2004, the Massachusetts Division of Banks issued temporary emergency regulations concerning Mass. Gen. Laws chapter 183 Section 28C, prohibiting mortgage lenders from knowingly refinancing a home mortgage loan consummated within the past 60 months unless the refinancing is in the borrower's interest. The temporary emergency regulations are posted at www.mass.gov/dob/209cmr53.htm.

Based on FAQs posted on the Division of Banks web site, these emergency regulations will remain in effect for 90 days commencing on or about November 8. A public hearing will be held on December 1, 2004 to receive oral public comments about the temporary "borrower's interest" regulations. In addition, the Division of Banks will accept written public comments until 5:00 p.m. on December 3, 2004 about the temporary "borrower's interest" regulations. See www.mass.gov/dob/pub_hear.htm.

Covered Mortgage Loan Refinancings

The temporary emergency regulations apply on their face to applications for covered residential mortgage loan refinancings taken on and after November 7, 2004 by any mortgagee, including state and federally chartered banks and nonbank mortgage lenders, regardless of whether they are (or are required to be) licensed as mortgage lenders under Massachusetts law.

A residential mortgage loan refinancing is generally subject to the new regulations if the following are true about the existing loan (the loan being refinanced):

• The borrower is a natural person.
• The loan was consummated within 60 months of the new refinancing.
• The loan was primarily for personal, family, or household purposes; and
• The loan was secured by 1-4 family borrower-occupied property (which need not be the borrower's principal dwelling).

In addition, the new loan must also be made for personal, family or household purposes and secured by 1-4 family property occupied (or to be occupied) in whole or in part by the borrower (including both primary residences and second homes). Both "cash out" ("new money" and/or debt consolidation) and "rate and term" (no cash out) residential mortgage loan refinancings are covered by the new regulations. However, reverse mortgage loans, refinancings of reverse mortgage loans, and refinancings of short-term (less than one year) "bridge" loans relating to the acquisition or construction of a dwelling intended to become the borrower's principal dwelling are excluded. (See 209 Code Mass. Regs. 53.02.)

Covered Mortgage Loan Refinancings Exempt From ‘Borrower’s Interest’ Determination Requirement

No specific, separate lender determination that a covered residential mortgage loan refinancing is in the "borrower's interest" is required if the new refinancing mortgage loan falls into any one of the following three categories:

(1) Government Loans. The new refinancing mortgage loan is guaranteed by the Federal Housing Administration, the Department of Veterans Affairs, or a state or federal housing finance agency.

(2) Closed End Loans Under Rate Ceiling. A refinance is not subject to the new rules if the annual percentage rate does not exceed the yield on U.S. Treasury securities having comparable periods of maturity to the loan maturity as of the 15th day of the month immediately preceding the month in which the application for the refinancing mortgage loan is received by the lender by more than:

• First Lien Loans: 2.25 percentage points;
• Junior Lien Loans: 3.25 percentage points.

However, for an adjustable rate closed-end refinancing mortgage loan, the regulations indicate that lenders should use the "interest rate that would be effective once the introductory rate has expired" (this appears to be a reference to the fully indexed rate - i.e., index plus margin) "when calculating the annual percentage rate" of the refinancing mortgage loan for purposes of the test. It is unclear from the temporary regulations whether the fully indexed rate should be considered the "annual percentage rate" of the refinancing mortgage loan for purposes of the 2.25 / 3.25 percentage point test, or whether the fully indexed rate should be further increased by prepaid finance charges and other non-interest finance charges (such as private mortgage insurance premiums) for purposes of the 2.25 / 3.25 percentage point test.

(3) HELOCS Under Rate Ceiling. A HELOC refinance is not subject to the new rules if the APR under the home equity credit line agreement will not exceed at any time the prime rate index as published in the Wall Street Journal plus a margin of one percentage point. It is unclear from the temporary regulations how this safe harbor formula should be applied with respect to a home equity credit line that has scheduled rate adjustments that are less frequent than once each business day, but ties rate adjustments to Wall Street Journal prime plus a margin of one percentage point or less. (See 209 Code Mass. Regs. 53.04(1).)

Covered Mortgage Loan Refinancings Subject to the ‘Borrower’s Interest’ Determination Requirement

If the new refinancing loan does not fall within any of the 3 categories exempt from the "borrower's interest" determination requirement (discussed above), but is otherwise covered by the temporary regulations, the mortgage lender must use "sound underwriting practices which are reasonable in relation to the home loan requested," and must also determine whether the new refinancing loan is in the "borrower's interest." This determination must occur no later than the time of written loan approval or written loan commitment (whether conditional or unconditional), after the lender has reviewed the borrower's completed mortgage application, credit report, and other applicable documents. (See 209 Code Mass. Regs. 53.05 and 53.07.)

The temporary regulations state that the mortgage lender should consider the factors listed in 209 Code Mass. Regs. 53.04(3), among others (these factors are not meant to be all-inclusive of the relevant factors to be considered by a mortgage lender), when determining whether a refinancing loan is in the "borrower's interest." 209 Code Mass. Regs. 53.04(3) in turn lists the six factors set forth in Mass. Gen. Laws chapter 183 Section 28C, plus one additional factor, as follows:

1. The borrower's new monthly payment is lower than the total of all monthly obligations being financed, taking into account the costs and fees;
2. There is a change in the amortization period of the new loan;
3. The borrower receives cash in excess of the costs and fees of refinancing;
4. The borrower's note rate of interest is reduced;
5. There is a change from an adjustable to a fixed rate loan, taking into account costs and fees;
6. The refinancing is necessary to respond to a bona fide personal need or an order of a court of competent jurisdiction; or
7. The time it takes to recoup the costs of refinancing, taking into account the costs and fees.

To document compliance with the temporary regulations, mortgage lenders must develop appropriate policies and procedures, which must include, "at a minimum, a worksheet or other document to be signed and dated at or before closing by both the borrower and the lender indicating how the lender determined that the home loan is in the borrower's interest." The worksheet or other signed and dated document must be kept for at least 3 years and made available for inspection by the Massachusetts Commissioner of Banks. (See 209 Code Mass. Regs. 53.06.)

Based on FAQs posted on the Division of Banks web site, a residential mortgage loan refinancing that falls within the scope of the temporary regulations, but that is specifically exempt from the requirement that the lender separately determine whether the new loan is in the "borrower's interest," must nonetheless be the subject of documentation signed and dated by both borrower and lender at or before loan closing (pursuant to 209 Code Mass. Regs. 53.06), confirming that the loan is exempt from the "borrower's interest" determination requirement due to the loan's annual percentage rate, the loan being guaranteed by the FHA or VA, or the loan falling into another "borrower's interest" determination exemption. (See 209 Code Mass. Regs. 53.04(1).)

If the new refinancing loan is not exempt from the "borrower's interest" determination requirement, but otherwise falls within the scope of the temporary regulations, the mortgage lender may, at its option, contractually obligate the borrower to give the lender 30 days' prior written notice before the borrower files any action alleging a violation of Mass. Gen. Laws chapter 183 Section 28C. The mortgage lender may contractually require this written notice to include a written demand for relief, identifying the borrower and reasonably describing the alleged violation of chapter 183 Section 28C and the injury allegedly suffered by the borrower. (See 209 Code Mass. Regs. 53.08.) Lenders may wish to include such a contractual advance notice obligation as part of their Massachusetts residential mortgage loan refinancings, since chapter 183 Section 28C allows a judge to decide, in the judge's discretion, that a prevailing borrower under Section 28C is not entitled to court costs or attorneys' fees due to the borrower having rejected the lender's reasonable offer to cure the Section 28C violation prior to the borrower's institution of civil action under Section 28C.

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