Hinckley Allen Client Update Nancy R. Wilsker

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1 Alert Mortgage Foreclosure Procedures New Massachusetts Regulations Effective June 21, 2013 Hinckley Allen Client Update Nancy R. Wilsker This is a summary of a detailed and complex Massachusetts law regarding creditors foreclosure prevention obligations. Please contact Nancy Wilsker at (617) or if you have questions or need assistance implementing specific compliance procedures. The Division of Banks released final amendments to the state Foreclosure Prevention regulations in early June, which implement Massachusetts General Laws ch B. The revised regulations become effective June 21, Use of the regulatory form of Right to Request a Modified Mortgage Loan Notice (explained below) becomes mandatory on September 18, Executive Summary Massachusetts law prohibits a creditor from publishing notice of an intended foreclosure sale with respect to certain mortgage loans unless the creditor has first taken reasonable steps and made a good faith effort to avoid foreclosure. The law applies to loans for personal, family, or household purposes secured by a mortgage on an owner-occupied residential property with one or more of eight enumerated high risk features (such as a deeply discounted introductory rate, a period of interest only payments, or a high loan-to-value ratio). All creditors are subject to the rules; the rules are not limited to financial institutions that are otherwise subject to the supervision of the Division of Banks.

2 Before a creditor may begin the foreclosure process with respect to a covered loan, the creditor must: 1. Notify the borrower of his right to request a modified mortgage loan, using the Right to Request a Modified Mortgage Loan form included in the regulation; 2. Use information provided by the borrower to determine whether there is an affordable monthly payment that the borrower has the ability to pay; 3. Determine whether the borrower s loan could be modified under HAMP, the FDIC s Loan Modification Program, or any other modification program used by the creditor to achieve the borrower s affordable monthly payment; 4. Determine whether the net present value (NPV) of receiving payments under the modified mortgage loan would exceed the anticipated recovery from foreclosure; and 5. Either offer the borrower the modified mortgage loan (if the NPV of the loan exceeds the anticipated recovery from foreclosure) or notify the borrower that he is not eligible for a modification and provide the borrower with copies of the NPV and affordable payment analyses. The regulations also provide step-by-step instructions for determining borrower eligibility and negotiating the terms of the modification. Finally, the regulations identify three safe harbors under which creditors are not required to follow the procedures set out in 35B and the regulations. The Rule in a Nutshell Covered Loans The statute and regulations apply to: a loan to a natural person made primarily for personal, family or household purposes secured wholly or partially by a mortgage on an owner-occupied residential property with 1 or more of the following loan features: a. an introductory interest rate granted for a period of 3 years or less that is at least 2 per cent lower than the fully indexed rate; b. interest-only payments for any period of time, except where the mortgage loan is an openend home equity line of credit or is a construction loan; c. 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; d. the loan did not require full documentation of income or assets; e. a prepayment penalty that exceeds M.G.L. c or applicable federal law;

3 f. the loan was underwritten with a loan-to-value ratio at or above 90 per cent and the ratio of the borrower s debt, including all housing-related and recurring monthly debt, to the borrower s income exceeded 38 per cent; or g. the loan was underwritten as a component of a loan transaction in which the combined loanto-value ratio exceeded 95 per cent. The loan is covered if the creditor cannot determine if it has one or more of the preceding features. Loans financed by the Mass Housing Finance Agency or originated under a program administered by the Mass Housing Partnership Fund are not covered. Borrower s Right to Request a Modified Mortgage Loan If the loan is covered, the creditor must send the borrower a Right to Request a Modified Mortgage Loan notice (together with the notice of Mortgage Modification Options and the list of Required Documents for Loan Modification Application included in the regulation) with the Right to Cure notice required under General Laws ch A. The creditor must file a copy of the notice with the Attorney General s office at the same time it is sent to the borrower. The borrower is entitled to a right to request a loan modification once in any 3-year period. A borrower has 30 days to respond to the creditor, indicating whether or not he wishes to request a loan modification. If the borrower requests a loan modification, he must provide the information specified in the list of Required Documents for Loan Modification Application to the creditor. If the borrower requests a loan modification, the creditor has 30 days to assess the borrower s ability to make an affordable monthly payment and to notify the borrower of the creditor s analysis and of whether or not a modified mortgage loan will be offered. The regulations detail the time periods applicable to various stages of the negotiation of a modification between the creditor and borrower. The regulations also require that the creditor file a semi-annual report with the Division of Banks detailing the final outcome of all Right to Request Modified Mortgage Loan notices sent to borrowers.

4 If the borrower does not respond to the notice of Right to Request a Modified Mortgage Loan, the right to cure period applicable to his loan under Gen. Laws ch A is reduced from 150 days to 90 days. Creditor s Good Faith Effort to Avoid Foreclosure The regulation outlines the circumstances under which a creditor will be presumed to have acted in good faith to avoid foreclosure. Essentially, good faith requires at least: determining an affordable monthly payment (per the formula in the regulation); determining borrower eligibility for the right to a modification; delivering notice of the borrower s Right to Request a Modified Mortgage Loan (including the related Mortgage Modification Options and Required Documents for Loan Modification Application); providing the borrower access to all information submitted in connection with a modified mortgage loan request; promptly reviewing information submitted by the borrower, determining whether or not the request is complete and notifying the borrower of that fact or of the additional information that is needed; offering a modified mortgage loan if the net present value of the modified loan exceeds the anticipated net recovery at foreclosure; otherwise notifying the borrower that no modified mortgage loan will be offered; investigating alleged errors; providing access to a representative of the creditor; and clearly identifying documentation required to support a credit offer. Net Present Value Calculation Creditors must calculate the NPV of the modified mortgage loan using one of the following methods: 1. the federal HAMP base net present value model; 2. the FDIC s Loan Modification Program; 3. the Massachusetts Housing Finance Agency s loan program used by the agency to compare the economic outcome of a loan with or without a modification; or 4. any other model approved by the Massachusetts Division of Banks. The Division has recently approved a calculation tool developed by the Mass Bankers Association, which Mass Bankers has indicated they intend to make available to members and non-members alike.

5 Safe Harbors A creditor satisfies the requirements of the law, without sending the Right to Request a Modified Mortgage Loan or completing the other requirements for avoiding foreclosure, if the creditor can demonstrate any one of the following: 1. The borrower accepted a permanent loan modification for the same loan during the 36 months preceding the date of sending the current 35A Right to Cure notice; 2. The creditor notified the borrower during the 36 months preceding the date of sending the current 35A Right to Cure notice that the borrower was not eligible for a modified mortgage loan; or 3. The creditor is entitled to send a 90-day 35A notice of Right to Cure instead of a 150-day notice under 209 CMR 56.03(2)(a) [the parties engaged in a good faith effort to resolve the mortgage default but failed] or 209 CMR 56.03(2)(b) [the borrower failed to respond to communications offering to negotiate a commercially reasonable alternative to foreclosure]. For additional information, please contact Nancy Wilsker at (617) or

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