Source: https://www.mass.gov/regulations/209-CMR-3232-4000-and-4200-high-cost-mortgage-loans
Timestamp: 2018-05-22 03:55:25
Document Index: 262408122

Matched Legal Cases: ['§2', '§59', '§1', '§2', '§2', '§2', '§7', '§7']

209 CMR 32.32, 40.00, and 42.00: High cost mortgage loans | Mass.gov
209 CMR 32.32, 40.00, and 42.00: High cost mortgage loans
M. G.L. c. 167A, §2A
32.32(1): Coverage
Summary of 32.32(1): Coverage
32.32(2): Definitions
Summary of 32.32(2): Definitions
32.32(3): Disclosures
Summary of 32.32(3): Disclosures
32.32(4): Limitations
Summary of 209 CMR 32.32(4): Limitations:
32.32(5): Prohibited acts and practices
Summary of 32.32(5): Prohibited acts and practices
32.32(6): Unfair practices
Summary of 32.32(6): Unfair practices
32.32(6)(a): Financing of points, fees or charges
Summary of 32.32(6)(a): Financing of points, fees or charges
32.32(6)(b): Loan "flipping"
Summary of 32.32(6)(b): Loan "flipping"
32.32(6)(c): Loan "packing"
Summary of 32.32(6)(c): Loan "packing"
32.32(6)(d): Encouraging default
Summary of 32.32(6)(d): Encouraging default
32.32(6)(e): Advertising
Summary of 32.32(6)(e): Advertising
32.32(6)(f): Unconscionable rates and terms
Summary of 32.32(6)(f): Unconscionable rates and terms
32.32(6)(g) Unreasonable charges
Summary of 32.32(6)(g) Unreasonable charges
32.32(6)(h): Mandatory arbitration and class action provisions
Summary of 32.32(6)(h): Mandatory arbitration and class action provisions
32.32(6)(i): Credit history reporting
Summary of 32.32(6)(i): Credit history reporting
32.32(6)(j): Single premium credit insurance
Summary of 32.32(6)(j): Single premium credit insurance
32.32(6)(k): Call provision
Summary of 32.32(6)(k): Call provision
32.32(6)(l): Modification or deferral fees
Summary of 32.32(6)(l): Modification or deferral fees
32.32(6)(m): Counseling
Summary of 32.32(6)(m): Counseling
40.00: Unfair and deceptive practices in consumer transactions
40.01: Authority, purpose, and scope
40.02: Definitions
40.03: Violations of truth-in-lending
40.04: High cost home loan disclosures
40.05:High cost home loan limitations
40.06:Prohibited high cost home loan acts and practices
40.07:Unfair high cost home loan practices
40.08:Unfair credit practices
40.09:Administrative enforcement
42.00: The licensing of mortgage lenders and mortgage brokers
Summary of 42.12A: Prohibited acts and practices
209 CMR 32.00 is hereby amended by striking out Section 32.32 and inserting in place thereof, the following:
(Note: (1)(a) 1. a. was changed by adding the reference to "For a first mortgage," and by changing 10 to 8 percentage points. (1)(a) 1. b. and c. were added.)
(a) Except as provided in 209 CMR32.32(1)(b), the requirements of 209 CMR 32.32 apply to a consumer credit transaction that is secured by the consumer's principal dwelling, and in which either:
1.a. For a first mortgage, the annual percentage rate at consummation will exceed by more than 8 percentage points the yield on 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 extension of credit is received by the creditor;
b. For a junior mortgage, the annual percentage rate at consummation will exceed by more than 9 percentage points the yield on 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 extension of credit is received by the creditor;
c. When calculating the annual percentage rate for adjustable rate loans, the creditor shall use the interest rate that would be effective once the introductory rate has expired; or
(Note: in 1(a) e.8 percent was changed to 5 percent, and the proviso was added)
The total points and fees payable by the consumer at or before loan closing will exceed the greater of 5 percent of the total loan amount, or $400; the $400 figure shall be adjusted annually on January 1 by the annual percentage change in the Consumer Price Index that was reported on the preceding June 1; provided, however that bona fide loan discount points payable by the borrower in connection with the loan transaction may be excluded from the calculation of the total points and fees payable by the borrower for purposes of 209 CMR 32.32(1)(a)2.
(Note: in(1)(b) the reference to "a residential mortgage transaction" was deleted and the word "unsecured" was added to (b) (2) and renumbered)
(b) 209 CMR 32.32 does not apply to the following:
1. a reverse-mortgage transaction subject to 209 CMR 32.33.
2. an unsecured open-end credit plan subject to 209 CMR 32.00.
The preceding changes expand the scope of 209 CMR 32.32(1). These provisions would apply to all types of first mortgage loans including first lien or purchase money mortgage loans, including adjustable rate mortgage loans ("ARM"). The TIL high rate loan regulation also will apply to second or junior loans that otherwise meet the threshold and definitional provisions of 209 CMR 32.32(1). Consequently, both open and closed end high rate home equity lines of credit would be subject to the proposed regulation.
The most significant proposed change to 209 CMR 32.32(1)(a)1 is the lowering of the interest and fee thresholds under the current regulations. The interest rate threshold in 209 CMR 32.32(1)(a)1 is lowered from 10 points to 8 points over the yield on comparable treasury securities. The regulations also establish a trigger for junior mortgage loans, which is 9 points over the yield on comparable treasury securities under the new 209 CMR 32.32(1)(a)1.b. This new section also provides that the threshold computation is to be based upon the fully indexed ARM rather than an introductory or "teaser" annual percentage rate.(See 209 CMR 32.32(a)(1)(iii).)
The proposed amendments also amend the fee trigger provisions of 209 CMR 32.32(1)(a)2. A mortgage loan will be subject to the TIL high rate loan regulations if the total points and fees exceed 5 percent of the total loan amount or $400, as adjusted by the CPI. This amendment reduces the fee trigger by 3 percentage points from the current 8 percent threshold. The amended section also contains exclusion for any "bona fide" discount points or fees.(See 209 CMR 32.32(a)(2)(c) for a definition of bona fide discount points.)
2. Definitions: For purposes of 209 CMR 32.32, the following definitions apply:
(a)For purposes of 209 CMR 32.32(1)(a)2, points and fees means:
1.all items required to be disclosed under 209 CMR 32.04(1) and 32.04(2), except interest or the time-price differential;
2.all compensation paid to mortgage brokers; and
3.all items listed in 209 CMR 32.04(3)(g) (other than amounts held for future payment of taxes) unless the charge is reasonable, the creditor receives no direct or indirect compensation in connection with the charge, and the charge is not paid to an affiliate of the creditor.
(Note: Previously (2)(b) made reference to control "as set forth in the Bank Holding Company Act of 1956 (12 USC 1841 et seq.)" The rest of (b) through (e) inclusive is new.)
(b)Affiliate means any company that controls, is controlled by, or is under common control with another company. Control shall mean ownership of ten percent or more of any class of outstanding capital stock of the company or the power to direct or cause the direction of the management and policies of the company.
(c)Bona fide loan discount points means loan discount points paid for the purpose of reducing, and which in fact result in a bona fide reduction of, the interest rate or time-price differential applicable to the loan, provided the amount of the interest rate reduction purchased by the discount points is reasonably consistent with established industry norms and practices for secondary mortgage market transactions. For purposes of this section, it shall be presumed that a point is a bona fide loan discount point if it reduces the interest rate by a minimum of 35 basis points or 3/8 of a point provided all other terms of the loan remain the same.
(d) High cost home loan means any transaction covered under 209 CMR 32.32(1).
(e) Scheduled monthly payments means minimum sums required to be paid with respect to all of the borrower's debts that are reported on a nationally recognized consumer credit bureau report and the monthly mortgage payment due under the high cost home loan (ignoring any reduction arising from a lower introductory rate) plus one twelfth of the annualized cost of real estate tax and insurance premium payments during the immediately preceding twelve months. Scheduled monthly payments shall not include any debts that are consolidated with or paid off by the high cost home loan.
Several key definitions in 209 CMR 32.32(2) are amended under the proposed regulations. The definition of "control" is no longer tied to the comparable definition found in the federal Bank Holding Company Act. Control of an entity would occur if 10% of an entity's capital stock exists or other recognized indicia of control exist. "Bona fide loan discount points" also are defined. This definition implements the fee trigger exemption for bona fide loan discount points found in 209 CMR 32.32(1)(a)1. Definitions for the terms "high cost loan" and "scheduled monthly payments" are also provided.
3. Disclosures. In addition to other disclosures required by 209 CMR 32.00, in a mortgage subject to 209 CMR 32.32 the creditor shall disclose the following:
(a) Notices. The following statement: "You are not required to complete this agreement merely because you have received these disclosures or have signed a loan application. If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan."
(b) Annual percentage rate. The annual percentage rate.
(c) Regular payment. The amount of the regular monthly (or other periodic) payment.
(d) Variable rate. For variable-rate transactions, a statement that the interest rate and monthly payment may increase, and the amount of the single maximum monthly payment, based on the maximum interest rate required to be disclosed under 209 CMR 32.30.
(Note: (3)(e) is added)
(e) Application.1.The following statement must appear in at least 12 point type directly above the borrower's signature line on the application: "The loan which will be offered to you is not necessarily the least expensive loan available to you and you are advised to shop around to determine competitive interest rates, points, and other fees and charges."
2.At or prior to taking an application, a creditor must also deliver, place in the mail, fax or electronically transmit to the borrower a statement in substantially the following form: "Although your aggregate monthly debt payment may decrease, the high cost home loan may increase both a. your aggregate number of monthly debt payments and b. the aggregate amount paid by you over the term of the high cost home loan" if such are likely the case. The above disclosure may be combined with disclosures required under G.L. c. 184, s. 17D.
209 CMR 32.32(3) is changed to provide 2 new consumer high rate loan disclosures. The proposed amendment in 209 CMR 32.32(3)(e)1 requires a 12 point signature line disclosure advising the applicant to seek less costly financing alternatives. The second proposed application related disclosure in 209 CMR 32.32(3)(e)2 warns consumers of possible increased aggregate loan payments and total amount paid which may occur under a high cost loan.
4. Limitations. A mortgage transaction subject to 209 CMR 32.32 may not provide for the following terms:
(Note: changed from "five" years)
(a)1. Balloon payment. For a loan with a term of less than seven years, a payment schedule with regular periodic payments that when aggregated do not fully amortize the outstanding principal balance.
2. Exception. The limitations in 209 CMR (4)(a)1 do not apply to loans with maturities of less than one year, if the purpose of the loan is a "bridge" loan connected with the acquisition or construction of a dwelling intended to become the consumer's principal dwelling.
(b) Negative amortization. A payment schedule with regular periodic payments that cause the principal balance to increase.
(c) Advance payments. A payment schedule that consolidates more than two periodic payments and pays them in advance from the proceeds.
(d) Increased interest rate. An increase in the interest rate after default.
(e) Rebates. A refund calculated by a method less favorable than the actuarial method (as defined by section 933(d) of the Housing and Community Development Act of 1992, 15 USC 1615(d)), for rebates of interest arising from a loan acceleration due to default.
(f) Prepayment penalties. Except as allowed under 209 CMR 32.32(4)(g), a penalty for paying all or part of the principal before the date on which the principal is due. A prepayment penalty includes computing a refund of unearned interest by a method that is less favorable to the consumer than the actuarial method, as defined by section 933(d) of the Housing and Community Development Act of 1992.
(g) Prepayment-penalty exception. A mortgage transaction subject to 209 CMR 32.32 may provide for a prepayment penalty otherwise permitted by law (including a refund calculated according to the rule of 78s) if:
1.the penalty can be exercised only for the first three years following consummation;
2.the source of the prepayment funds is not a refinancing by the creditor or an affiliate of the creditor; and
3.at consummation, the consumer's total monthly debts (including amounts owed under the mortgage) do not exceed 50 percent of the consumer's monthly gross income, as verified by the credit application, the obligor's financial statement, a credit report, financial information provided to the lender by or on behalf of the obligor, or any other reasonable means.
(Note: Previously (4)(g) 3. allowed verification of income by a "consumer's signed financial statement, a credit report, and payment records for employment income.")
The preceding proposed amendments generally modify or expand existing consumer protections that currently govern high cost loans. The terms of these loan limitations are strengthened in several key areas where abusive loan practices have been observed.
The minimum term of a high cost loan with a balloon payment feature has been extended 2 years from 5 to 7 years under 209 CMR 32.32(4)(a)1. This 2-year extension increases the time period in which a consumer can attempt to locate lower cost or substitute financing at the end of a balloon note's term. Prepayment penalties in high cost loans are further restricted in the proposed amendment to 209 CMR 32.32(4)(g)1. The period in which a prepayment penalty may be levied has been decreased 2 years from 5 years to 3 years. The purpose of the proposed change is to further facilitate a borrower's ability to replace a high cost loan with conventional financing or more favorable financing with out incurring punitive prepayment penalties which operate to preclude refinancing or make it financially less attractive. The proposed reduction in maximum prepayment penalties also brings 209 CMR 32.32(4)(g)1 in line with G. L. c.183, §59.
Importantly, 209 CMR 32.32(4)(g)3 is also changed. The current regulation is subject to potential evasion and abuse since it permits reliance on unverified financial data. The revised provision would require independent or extended verification of the borrower's income in determining whether the existing 50% consumer debt to gross income test has been satisfied.
(5) Prohibited acts and practices. A creditor extending mortgage credit subject to 209 CMR 32.32 may not:
(Note: (5)(a) previously read "Engage in a pattern or practice of extending such credit to a consumer based on the consumer's collateral if, considering the consumer's current and expected income, current obligations, and employment status, the consumer will be unable to make the scheduled payments to repay the obligation." The new (5)(a) is as follows)
(a) Repayment ability. Make a high cost home loan unless the creditor reasonably believes at the time the loan is consummated that the obligor or the obligors (when considered collectively in the case of multiple obligors) will be able to make the scheduled payments to repay the obligation based upon a consideration of their current and expected income, current obligations, employment status, and other financial resources (other than the borrower's equity in the dwelling which secures repayment of the loan). An obligor shall be presumed to be able to make the scheduled payments to repay the obligation, if, at the time the loan is consummated, or at the time of the first rate adjustment in the case of a lower introductory interest rate, the obligor's scheduled monthly payments do not exceed fifty percent of the obligor's monthly gross income as verified by the credit application, the obligor's financial statement, a credit report, financial information provided to the lender by or on behalf of the obligor, or any other reasonable means. The requirement of 209 CMR 32.32(5)(a) shall apply only to obligors whose income, as reported on the loan application which the lender relied upon in making the credit decision, is no greater than 120% of the median family income for the Metropolitan Statistical Area (MSA) (as defined by the Director of the U.S. Office of Management and Budget), in which the property to be secured is located. For loans secured by properties that are not located within an MSA, the requirement shall apply only to obligors whose incomes do not exceed 120% of the non-metropolitan median family income for Massachusetts. For purposes of 209 CMR 32.32, the median family income shall be derived from the most recent estimates made available by the U.S. Department of Housing and Urban Development, at the time the application is received. For purposes of determining median income, only the income of the borrower(s) shall be considered.
(b) Home-improvement contracts. Pay a contractor under a home-improvement contract from the proceeds of a mortgage covered by 209 CMR 32.32, other than:
1.by an instrument payable to the consumer or jointly to the consumer and the contractor; or
2.at the election of the consumer, through a third-party escrow agent in accordance with terms established in a written agreement signed by the consumer, the creditor, and the contractor prior to the disbursement.
(c) Notice to assignee. Sell or otherwise assign a mortgage subject to 209 CMR 32.32 without furnishing the following statement to the purchaser or assignee: "Notice: This is a mortgage subject to special rules under the federal Truth in Lending Act. Purchasers or assignees of this mortgage could be liable for all claims and defenses with respect to the mortgage that the borrower could assert against the creditor."
The changes proposed to 209 CMR 32.32(5)(a) extensively amend the borrower repayment ability provisions of the Prohibited Practices section of the existing high cost loan regulations. The existing regulation prohibits a creditor from engaging in a "pattern or practice" of making high cost loans based upon collateral values rather than the borrower's ability to repay. The proposed amendment eliminates the "pattern or practice" requirement and substantially expands the criteria for determining whether the borrower meets repayment requirements.
Under the proposed 209 CMR 32.32(5)(a), a single improper high cost collateral based loan would constitute a prohibited act or practice. This change eliminates the need to demonstrate that a creditor systematically engaged in improper high cost mortgage lending activity. The proposed regulation's bright line test should make enforcement of the TIL high rate loan regulations easier by eliminating the need to show a pattern or practice.
The proposed change also requires independent verification of the borrower's ability to repay. It also sets out a formula, based upon a percentage of median family income, to presumptively establish that a particular high cost loan was based upon repayment ability rather than collateral value. The proposed regulation is an improvement over the current subjective process for determining repayment ability. An objective standard provides greater certainty in determining whether a particular borrower's repayment ability, rather than collateral values, was the basis for making a high cost loan.
(6) Unfair High Cost Home Loan Practices
(1)It is an unfair act or practice for a creditor to engage in any of the following for any transaction subject to 209 CMR 32.32:
The proposed 209 CMR 32.32(6) is new in its entirety. This section identifies and proscribes 13 predatory lending practices as unfair high cost home loan acts and practices. Each provision is summarized below.
Requiring a borrower to directly or indirectly finance any portion of the points and/or fees nor, in any case, directly or indirectly finance points and fees payable to the creditor or charges payable to third parties (other than appraisal fees, credit report fees, mortgage recording tax, fire and miscellaneous property insurance, voluntary credit, disability, unemployment and/or life insurance, title report and title insurance charges), in an amount that exceeds five percent of the principal amount of a closed end high cost home loan, or of the maximum line of credit amount for open end high cost home loans, for loans other than refinancings. For refinancings, a creditor may not finance such points, fees or charges in an amount that exceeds five percent of the additional proceeds received by the borrower in connection with the refinancing other than appraisal fees, credit report fees, mortgage recording tax, fire and miscellaneous property insurance, voluntary credit, disability, unemployment and/or life insurance, title report and title insurance charges. In making a high cost home loan, a creditor may not finance voluntary unemployment insurance unless the underwriting for the loan is predicated on the borrower's W-2 or 1099 income statement. In making a high cost home loan, with regard to obligors subject to the provisions set forth 209 CMR 32.32(5)(a), a creditor may not finance fire and miscellaneous property insurance and/or voluntary credit, disability, unemployment and/or life insurance in addition to the five percent limit set forth in 209 CMR 32.32(5)(a) unless the obligor's scheduled monthly payments do not exceed fifty percent of the obligor's monthly gross income as verified by the credit application, the obligor's financial statement, a credit report, financial information provided to the creditor by or on behalf of the obligor, or any other reasonable means. In making a high cost home loan, a creditor may not directly or indirectly finance any prepayment fees or penalties payable by the borrower in a refinancing transaction if the lender or an Affiliate of the creditor is the originator of the loan being refinanced. For purposes of 209 CMR 32.32(6)(a), "additional proceeds" for a closed end loan is the amount over and above the current principal balance of the existing high cost home loan. For an open end loan, "additional proceeds" is the amount by which the line of credit on the new loan exceeds current principal balance of the existing high cost home loan;
This provision prohibits the financing of certain specified points, fees or charges in mortgage loan transactions governed by the TIL high rate loan regulations. The proposed provision limits the financing of points, certain credit insurance products and third party fees to 5 percent of the principal amount financed. The proposed 209 CMR 32.32(6)(a) also governs loan refinancing with the original creditor or its affiliates. It prohibits the financing of any prepayment penalties in these types of transactions.
(b) Frequent refinancing of existing high cost home loan with new high cost home loan. Charging a borrower points and fees in connection with a high cost home loan if the proceeds of the high cost home loan are used to refinance an existing high cost home loan and the last financing was within two years of the current refinancing. 209 CMR 32.32(6)(b) shall not prohibit a creditor from charging points and fees in connection with any additional proceeds received by the borrower in connection with the refinancing, provided that the points and fees charged on the additional sum must reflect the creditor's typical point and fee structure for high cost refinance loans. 209 CMR 32.32(6)(b) shall apply only in those instances in which the existing high cost home loan was made by the creditor or an Affiliate of the creditor, provided that the new high cost home loan does not involve the use of a mortgage broker, and to all existing high cost home loans in which the new high cost home loan involves the use of a mortgage broker. For purposes of 209 CMR 32.32(6)(b), "additional proceeds" for a closed end loan is the amount over and above the current principal balance of the existing high cost home loan. For an open end loan, "additional proceeds" is the amount by which the line of credit on the new loan exceeds current principal balance of the existing high cost home loan.
This proposed regulation curtails a creditor's ability to charge additional loan fees in connection with the frequent refinancing of high cost mortgage loans, or loan flipping." It makes it an abusive or unfair lending practice for a creditor to charge points or fees in connection with a high rate loan refinancing made within 2 years of making the original high rate loan. An exception to the general prohibition is permitted in certain cases where additional proceeds are advanced to the borrower. The fee prohibition in 209 CMR 32.32(6)(b), however, is not triggered if the refinancing is by another unaffiliated creditor.
(c) "Packing" high cost home loans; that is, the practice of selling credit life, accident and health, disability or unemployment insurance products or unrelated goods or services in conjunction with a high cost home loan without the informed consent of the borrower under circumstances where:
1. the creditor solicits the sale of such insurance, goods or services;
2. the creditor receives direct or indirect compensation for the sale of such insurance, goods or services; and
3. the charges for such insurance, goods or services are prepaid with the proceeds of the loan and financed as part of the principal amount of the loan.
Provided, however, it shall not constitute the practice of "packing" if the creditor, at least three business days before the loan is closed, makes a separate oral and a separate clear and conspicuous written disclosure in at least twelve point type to the borrower containing the following information: a. the cost of the credit insurance or other goods and services; b. the fact that the insurance, goods, or services will be prepaid and financed at the interest rate provided for in the loan; and c. that the purchase of such insurance, goods or services is not required to obtain the mortgage loan; provided further, that insurance premiums shall not be considered financed as part of the loan transaction if insurance premiums are calculated, earned and paid on a monthly or other regular, periodic basis. In addition, the written disclosure shall contain a signed and dated acknowledgment by the obligor(s) that the oral disclosure was made and a signed and dated acknowledgment by the creditor that the oral disclosure was made.
This provision addresses the practice of adding excessive, unnecessary or unsuitable credit insurance products or other goods and services. The proposed 209 CMR 32.32(6)(c) establishes a standard of "informed consent" by the borrower before a creditor may sell, receive compensation and finance the specified products or services in connection with a high cost loan. This provision also requires advance oral and written disclosure, 3 days prior to closing, to the borrower before a creditor may sell, receive compensation and finance unrelated products or services.
(d) Recommending or encouraging default or further default by a borrower on an existing loan or other debt, prior to the closing of a high cost home loan that refinances all or any portion of such existing loan or debt.
This provision is generally self-explanatory. It is intended to eliminate a predatory lending practice, which may unnecessarily increase high cost mortgage loan borrower's financial obligations.
(e) Advertising. Advertising that refinancing pre-existing debt with a high cost home loan will reduce a borrower's aggregate monthly debt payment without also disclosing, if such are likely the case, that the high cost home loan will increase both 1. a borrower's aggregate number of monthly debt payments and 2. the aggregate amount paid by a borrower over the term of the high cost mortgage loan.
This section prohibits certain forms of unfair and deceptive advertising in connection with a high cost home loan. A creditor is required to disclose any increase in aggregate monthly payments and any increase in the aggregate amount to be repaid in connection with any advertisement claiming that the debtor's monthly debt will be reduced by a high cost home loan.
(f) Unconscionable rates and terms. 1. Making a high cost home loan with rates or fees that violate 940 CMR 8.06, if applicable, or otherwise charge interest rates or fees in a high cost loan transaction that significantly deviate from industry standards or that are otherwise unconscionable. 2. It shall be the creditor's burden to demonstrate that interest rates or fees charged are based upon generally accepted credit worthiness, sound underwriting and other risk related standards or otherwise conform to 209 CMR 32.32(6)(f)1.
This proposed section prohibits the charging of unconscionable rates and terms in a high cost home loan transaction. It also places the burden of proof upon the creditor to show that rates and terms are justified.
(g) Unreasonable Charges. Making high cost home loans in which the creditor charges and retains fees paid by the borrower 1. for services that are not actually performed, or 2. for which the fees bear no reasonable relationship to the value of the services actually performed, or 3. which are otherwise unconscionable.
This proposed section prohibits a creditor from charging or receiving unearned, unreasonable or unconscionable fees in connection with a high cost home loan transaction.
(h) Oppressive mandatory arbitration clause or waiver of participation in class action suits. Requiring a mandatory arbitration clause or waiver of participation in class actions that is oppressive, unfair, unconscionable, or substantially in derogation of the rights of consumers. Arbitration clauses that comply with the standards set forth in the Statement of Principles of the National Consumer Dispute Advisory Committee shall be presumed not to violate this regulation.
This proposed section expressly proscribes these two increasingly common types of loan provisions. Such oppressive mandatory arbitration or waivers of participation in class action clauses are unfair and against public policy, including the consumer rights granted under the Massachusetts Truth in Lending Act and other state and federal consumer protection laws.
(i) Failure to report for credit histories. Failing to report both the favorable and unfavorable payment history of the borrower to a nationally recognized consumer credit bureau at least annually if the creditor regularly reports information to a credit bureau.
This provision makes it an unfair and deceptive practice to fail to report a high cost home loan borrower's credit history. Selective credit reporting, particularly the failure to report timely debt payment histories, unfairly inhibits high cost home loan borrowers from being able to move to less expensive or conventional mortgage financing.
(j) Single-premium credit insurance. Making a high cost home loan which contains single-premium credit insurance, including credit life, debt cancellation, and debt suspension.
The proposed 209 CMR 32.32(6)(j) prohibits the sale of this type of expensive and economically questionable form of credit insurance in connection with a high cost home loan.
(k) Call provision. A call provision that permits the creditor, in its sole discretion, to accelerate the indebtedness. This prohibition does not apply when repayment of the loan has been accelerated by bona fide default, pursuant to a due-on-sale provision, or pursuant to some other provision of the loan agreement unrelated to the payment schedule such as bankruptcy or receivership
A creditor is prohibited from exercising or using a call provision in a high cost home loan unless it is based upon the borrower's default or other specified event.
(l) Modification or deferral fees. Making a high cost home loan with any fees to modify, renew, extend, or amend a high cost home loan or defer any payment due under a high cost home loan if, after the modification, renewal, extension or amendment, the loan is still a high cost home loan or, if no longer a high cost home loan, the APR has not been decreased by at least two percentage points.
1.For purposes of 209 CMR 32.32(6)(l), fees do not include interest that is otherwise payable and consistent with the provisions of the loan documents.
2.209 CMR 32.32(6)(l) shall not prohibit a creditor from charging points and fees in connection with any additional proceeds received by the borrower in connection with the modification, renewal, extension or amendment (over and above the current principal balance of the existing high cost home loan) provided that the points and fees charged on the additional sum must reflect the creditor's typical point and fee structure for high cost home loans.
3.209 CMR 32.32(6)(l) shall not apply if the existing high cost home loan is in default or is sixty or more days delinquent and the modification, renewal, extension, amendment or deferral is part of a work-out process
This provision restricts a creditor's ability to charge fees for the modification or deferral of an existing high cost home loan. Three exceptions to this general prohibition are specified in 209 CMR 32.32(6)(l)1-3.
(m) Counseling disclosure and list of counselors.
1.A creditor must deliver, place in the mail, fax or electronically transmit the following notice in at least twelve point type to the borrower at the time of application: "You should consider financial counseling prior to executing loan documents. The enclosed list of counselors is provided by Division of Banks and Executive Office of Elder Affairs". In the event that the creditor does not know whether the borrower's application is a high cost home loan application, such disclosure must be made as soon as the creditor determines that it is a high cost home loan application, but in any event, at least three days prior to the closing. In the event of a telephone application, the disclosures must be made immediately after receipt of the application by telephone, but in any event, at least three days prior to the closing. Such disclosure shall be on a separate form. In order to utilize an electronic transmission, the creditor must first obtain either written or electronically transmitted permission from the borrower. A list of approved counselors, available from the Division of Banks or Executive Office of Elder Affairs, shall be provided to the borrower by the creditor or the mortgage broker at the time that this disclosure is given.
2.In the case of any borrower sixty years of age or more, a creditor shall not make a high cost home loan subject to 209 CMR 32.32 until the prospective borrower has completed a counseling program which shall include instruction on high cost home loans and which shall be approved by the Executive Office of Elder Affairs or the Division of Banks.
A creditor is required to provide a high cost home loan borrower with advance disclosure containing a list of approved credit or financial counseling agencies at the time of application and in no event no later than 3 days before closing under 209 CMR 32.32(6)(m)1. Completion of a counseling program, however, is mandatory for any high cost loan borrower who is 60 years of age under the proposed 209 CMR 32.32(6)(m)2. This latter requirement is consistent with the treatment of elderly borrowers under the Commonwealth's reverse mortgage loan statute, Chapter 283 of the Acts of 1998.
The Division's proposed adoption of Unfair and Deceptive Practices in Consumer Transaction regulations, 209 CMR 40.00, is intended to complement the substantive high rate loan consumer protection changes found in the proposed amendments to 209 CMR 32.32(1)-(6). The primary purpose of the following proposed regulations is to address certain definitional and scope limitations of the Commonwealth's Truth in Lending Act.
The Commonwealth's Truth in Lending Regulations only apply to state-chartered banks and credit unions and all other non bank creditors, including mortgage lenders licensed by the Division. (See 209 CMR 32.02; G. L. c.140D, §1.) The Unfair and Deceptive Practices in Consumer Transaction Act, G. L. c. 167, §§2A-2G, however, applies to all banks and credit unions operating in the Commonwealth, without regard to whether the entity is state or federally chartered. (See G. L. c.167, §2A.) Therefore, the proposed Unfair and Deceptive Practices in Consumer Transaction regulations, 209 CMR 40.00, ensure that the proposed substantive high cost loan protections found in 209 CM 32.32 equally apply to all high rate mortgage lenders operating in the Commonwealth. As a result, a high rate loan borrower would have the same consumer protections with all types of lenders.
Please refer to the section by section summary of the proposed amendments to 209 CMR 32.32 for a discussion of the corresponding high rate loan provisions of 209 CMR 40.00.
209 CMR is hereby amended by inserting the following new regulation, 209 CMR 40.00 et seq.: -
209 CMR 40.00:Unfair and deceptive practices in consumer transactions
40.01:Authority, Purpose, and Scope
40.02:Definitions
40.03:Violations of Truth in Lending
40.04:High Cost Home Loan Disclosures
40.06: Prohibited High Cost Home Loan Acts and Practices
Authority. This regulation is issued pursuant to G.L. c. 167, s. 2A.
Purpose. Unfair or deceptive acts or practices in or affecting consumer transactions are unlawful under G.L. c. 167, s. 2A.
Scope. This regulation applies to any bank, any Massachusetts or out-of-state branch, any association or corporation chartered and authorized to do a banking business by a state of the United States other than the commonwealth, by the District of Columbia, the Commonwealth of Puerto Rico, any territory or possession of the United States or by a country other than the United States, or a national banking association, federal savings and loan association, federal savings bank or federal credit union, which has its main office located in the commonwealth or in any other jurisdiction named herein.
For the purposes of 209 CMR 40.00, the following definitions apply:
"Bank", any association or corporation chartered by the commonwealth under the provisions of G.L. c. 168, 170, 171, or 172 or any individuals, association, partnership or corporation incorporated or doing a banking business in the commonwealth, subject to the supervision of the commissioner.
"Bona fide loan discount points" means loan discount points paid for the purpose of reducing, and which in fact result in a bona fide reduction of, the interest rate or time-price differential applicable to the loan, provided the amount of the interest rate reduction purchased by the discount points is reasonably consistent with established industry norms and practices for secondary mortgage market transactions. For purposes of this section, it shall be presumed that a point is a bona fide loan discount point if it reduces the interest rate by a minimum of 35 basis points or 3/8 of a point provided all other terms of the loan remain the same.
"Commissioner", the commissioner of banks.
"Consumer" means a natural person who seeks or acquires goods, services, or money for personal, family, or household use other than for the purchase of real property.
"Consumer transaction" means a transaction between a financial institution and a consumer, in which the money, property or services are primarily for personal, family or household purposes.
"Cosigner" means (a) a natural person who assumes liability for the obligation of a consumer without receiving goods, services, or money in return for the obligation, or, in the case of an open-end credit obligation, without receiving the contractual right to obtain extensions of credit under the account.
(b) "Cosigner" includes any person whose signature is requested as a condition to granting credit to a consumer, or as a condition for forbearance on collection of a consumer's obligation that is in default. The term does not include a spouse whose signature is required on a credit obligation to perfect a security interest pursuant to state law.
(c) A person who meets the definition in this paragraph is a "cosigner," whether or not the person is designated as such on the credit obligation.
"Earnings" means compensation paid or payable to an individual or for the individual's account for personal services rendered or to be rendered by the individual, whether denominated as wages, salary, commission, bonus, or otherwise, including periodic payments pursuant to a pension, retirement, or disability program.
"Federal bank", a national banking association, savings and loan association or savings bank which exists by authority of the United States, the main office of which is located in the commonwealth.
"Federal branch", a branch in the commonwealth of any out-of-state federal bank.
"Federal credit union", a credit union organized under the provisions of the Federal Credit Union Act.
"Financial institution" means a bank, a federal bank, a Massachusetts branch, a federal branch, an out-of-state branch, or a federal credit union.
"High cost home loan" means (a) a consumer credit transaction that is secured by the consumer's principal dwelling, and in which either:
(1)(i)For a first mortgage, the annual percentage rate at consummation will exceed by more than 8 percentage points the yield on 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 extension of credit is received by the creditor;
(ii)For a junior mortgage, the annual percentage rate at consummation will exceed by more than 9 percentage points the yield on 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 extension of credit is received by the creditor;
(iii) When calculating the annual percentage rate for adjustable rate loans, the creditor shall use the interest rate that would be effective once the introductory rate has expired; or
(2)the total points and fees payable by the consumer at or before loan closing will exceed the greater of 5 percent of the total loan amount, or $400; the $400 figure shall be adjusted annually on January 1 by the annual percentage change in the Consumer Price Index that was reported on the preceding June 1; provided, however that bona fide loan discount points payable by the borrower in connection with the loan transaction may be excluded from the calculation of the total points and fees payable by the borrower for purposes of this paragraph.
(b)a high cost home loan does not include the following:
(1)a reverse-mortgage transaction subject to 209 CMR 32.33 or 12 CFR 226.33.
(2)an unsecured open-end credit plan subject to 209 CMR 32.00 or Subpart B of 12 CFR 226.00.
"Household goods" means clothing, furniture, appliances, linens, china, crockery, kitchenware, and personal effects of the consumer and the consumer's dependents. The term "household goods" does not include-
(2) electronic entertainment equipment (other than one television and one radio);
(3) items acquired as antiques; that is, items over one hundred years of age, including such items that have been repaired or renovated without changing their original form or character; and
(4) jewelry (other than wedding rings).
"Massachusetts bank", any bank, other than an association or corporation chartered pursuant to G.L. c. 171.
"Massachusetts branch", a branch in the commonwealth of any out-of-state bank.
"Obligation" means an agreement between a consumer and a creditor.
"Out-of-state bank", any association or corporation authorized to do a banking business the main office of which is located outside the commonwealth and which exists by authority of any state of the United States other than the commonwealth.
"Out-of-state branch", a branch of any Massachusetts bank located outside the commonwealth.
"Out-of-state federal bank", a national banking association, savings and loan association or savings bank which exists by authority of the United States the main office of which is located outside the commonwealth.
"Person" means an individual, corporation, or other business organization.
"Scheduled monthly payments" means minimum sums required to be paid with respect to all of the borrower's debts that are reported on a nationally recognized consumer credit bureau report and the monthly mortgage payment due under the high cost home loan (ignoring any reduction arising from a lower introductory rate) plus one twelfth of the annualized cost of real estate tax and insurance premium payments during the immediately preceding twelve months. Scheduled monthly payments shall not include any debts that are consolidated with or paid off by the high cost home loan.
It is an unfair act or practice for a financial institution subject to 209 CMR 32.00 et seq. to make a high cost home loan in violation of 209 CMR 32.32.
It is an unfair act or practice for a financial institution, except a financial institution subject to 209 CMR 40.03, to fail to disclose any of the following in a high cost home loan transaction:
(b) Annual percentage rate. The annual percentage rate.(c) Regular payment. The amount of the regular monthly (or other periodic) payment.
(d) Variable rate. For variable-rate transactions, a statement that the interest rate and monthly payment may increase, and the amount of the single maximum monthly payment, based on the maximum interest rate required to be disclosed under 209 CMR 32.30.(e) Application.1.The following statement must appear in at least 12 point type directly above the borrower's signature line on the application: "The loan which will be offered to you is not necessarily the least expensive loan available to you and you are advised to shop around to determine competitive interest rates, points, and other fees and charges."
At or prior to taking an application, a creditor must also deliver, place in the mail, fax or electronically transmit to the borrower a statement in substantially the following form: "Although your aggregate monthly debt payment may decrease, the high cost home loan may increase both (i) your aggregate number of monthly debt payments and (ii) the aggregate amount paid by you over the term of the high cost home loan" if such are likely the case. The above disclosure may be combined with disclosures required under G.L. c. 184, s. 17D.
It is an unfair act or practice for a financial institution, except a financial institution subject to 209 CMR 40.03, to extend a high cost home loan that provides for any of the following terms:
(a) 1. Balloon payment. For a loan with a term of less than seven years, a payment schedule with regular periodic payments that when aggregated do not fully amortize the outstanding principal balance.
Exception. The limitations in 209 CMR 40.05(a)(1) do not apply to loans with maturities of less than one year, if the purpose of the loan is a "bridge" loan connected with the acquisition or construction of a dwelling intended to become the consumer's principal dwelling.
(e) Rebates. A refund calculated by a method less favorable than the actuarial method (as defined by section 933(d) of the Housing and Community Development Act of 1992, 15 USC 1615(d)), for rebates of interest arising from a loan acceleration due to default.(f) Prepayment penalties. Except as allowed under 209 CMR 40.05(g), a penalty for paying all or part of the principal before the date on which the principal is due. A prepayment penalty includes computing a refund of unearned interest by a method that is less favorable to the consumer than the actuarial method, as defined by section 933(d) of the Housing and Community Development Act of 1992.
(g) Prepayment-penalty exception. A high cost home loan may provide for a prepayment penalty otherwise permitted by law (including a refund calculated according to the rule of 78s) if:
2.the source of the prepayment funds is not a refinancing by the financial institution or an affiliate of the financial institution; and
In connection with the extension of a high cost home loan, it is a deceptive act or practice for a financial institution, except a financial institution subject to 209 CMR 40.03, to engage in any of the following:(a) Repayment ability. Make a high cost home loan unless the creditor reasonably believes at the time the loan is consummated that the obligor or the obligors (when considered collectively in the case of multiple obligors) will be able to make the scheduled payments to repay the obligation based upon a consideration of their current and expected income, current obligations, employment status, and other financial resources (other than the borrower's equity in the dwelling which secures repayment of the loan). An obligor shall be presumed to be able to make the scheduled payments to repay the obligation, if, at the time the loan is consummated, or at the time of the first rate adjustment in the case of a lower introductory interest rate, the obligor's scheduled monthly payments do not exceed fifty percent of the obligor's monthly gross income as verified by the credit application, the obligor's financial statement, a credit report, financial information provided to the lender by or on behalf of the obligor, or any other reasonable means. The requirement of 209 CMR 40.06(a) shall apply only to obligors whose income, as reported on the loan application which the lender relied upon in making the credit decision, is no greater than 120% of the median family income for the Metropolitan Statistical Area (MSA) (as defined by the Director of the U.S. Office of Management and Budget), in which the property to be secured is located. For loans secured by properties that are not located within an MSA, the requirement shall apply only to obligors whose incomes do not exceed 120% of the non-metropolitan median family income for Massachusetts. For purposes of 209 CMR 32.32, the median family income shall be derived from the most recent estimates made available by the U.S. Department of Housing and Urban Development, at the time the application is received. For purposes of determining median income, only the income of the borrower(s) shall be considered.
(b) Home-improvement contracts. Pay a contractor under a home-improvement contract from the proceeds of a high cost home loan, other than:
(c) Notice to assignee. Sell or otherwise assign a high cost home loan without furnishing the following statement to the purchaser or assignee: "Notice: This is a mortgage subject to special rules under the federal Truth in Lending Act. Purchasers or assignees of this mortgage could be liable for all claims and defenses with respect to the mortgage that the borrower could assert against the creditor."
It is an unfair act or practice for a financial institution, except a financial institution subject to 209 CMR 40.03, to engage in any of the following in a high cost home loan:(a) Financing of points, fees or charges. Requiring a borrower to directly or indirectly finance any portion of the points and/or fees nor, in any case, directly or indirectly finance points and fees payable to the creditor or charges payable to third parties (other than appraisal fees, credit report fees, mortgage recording tax, fire and miscellaneous property insurance, voluntary credit, disability, unemployment and/or life insurance, title report and title insurance charges), in an amount that exceeds five percent of the principal amount of a closed end high cost home loan, or of the maximum line of credit amount for open end high cost home loans, for loans other than refinancings. For refinancings, a creditor may not finance such points, fees or charges in an amount that exceeds five percent of the additional proceeds received by the borrower in connection with the refinancing other than appraisal fees, credit report fees, mortgage recording tax, fire and miscellaneous property insurance, voluntary credit, disability, unemployment and/or life insurance, title report and title insurance charges. In making a high cost home loan, a creditor may not finance voluntary unemployment insurance unless the underwriting for the loan is predicated on the borrower's W-2 or 1099 income statement. In making a high cost home loan, with regard to obligors subject to the provisions set forth 209 CMR 40.06(1)(a), a creditor may not finance fire and miscellaneous property insurance and/or voluntary credit, disability, unemployment and/or life insurance in addition to the five percent limit set forth in this subdivision unless the obligor's scheduled monthly payments do not exceed fifty percent of the obligor's monthly gross income as verified by the credit application, the obligor's financial statement, a credit report, financial information provided to the creditor by or on behalf of the obligor, or any other reasonable means. In making a high cost home loan, a creditor may not directly or indirectly finance any prepayment fees or penalties payable by the borrower in a refinancing transaction if the lender or an Affiliate of the creditor is the originator of the loan being refinanced. For purposes of 209 CMR 40.07(1)(a), "additional proceeds" for a closed end loan is the amount over and above the current principal balance of the existing high cost home loan. For an open end loan, "additional proceeds" is the amount by which the line of credit on the new loan exceeds current principal balance of the existing high cost home loan;
(b) Frequent refinancing of existing high cost home loan with new high cost home loan. Charging a borrower points and fees in connection with a high cost home loan if the proceeds of the high cost home loan are used to refinance an existing high cost home loan and the last financing was within two years of the current refinancing. 209 CMR 40.07(1)(b) shall not prohibit a creditor from charging points and fees in connection with any additional proceeds received by the borrower in connection with the refinancing, provided that the points and fees charged on the additional sum must reflect the creditor's typical point and fee structure for high cost refinance loans. 209 CMR 40.07(1)(b) shall apply only in those instances in which the existing high cost home loan was made by the creditor or an Affiliate of the creditor, provided that the new high cost home loan does not involve the use of a mortgage broker, and to all existing high cost home loans in which the new high cost home loan involves the use of a mortgage broker. For purposes of 209 CMR 40.07(1)(b), "additional proceeds" for a closed end loan is the amount over and above the current principal balance of the existing high cost home loan. For an open end loan, "additional proceeds" is the amount by which the line of credit on the new loan exceeds current principal balance of the existing high cost home loan.
4. the creditor solicits the sale of such insurance, goods or services;
5. the creditor receives direct or indirect compensation for the sale of such insurance, goods or services; and
6. the charges for such insurance, goods or services are prepaid with the proceeds of the loan and financed as part of the principal amount of the loan.
(f) Unconscionable rates and terms. 1.Making a high cost home loan with rates or fees that violate 940 CMR 8.06, if applicable, or otherwise charge interest rates or fees in a high cost loan transaction that significantly deviate from industry standards or that are otherwise unconscionable. 2. It shall be the creditor's burden to demonstrate that interest rates or fees charged are based upon generally accepted credit worthiness, sound underwriting and other risk related standards or otherwise conform to 209 CMR 40.07(1)(f)1.
(h) Oppressive mandatory arbitration clause or waiver of participation in class action suits. Requiring a mandatory arbitration clause or waiver of participation in class action lawsuits that is oppressive, unfair, unconscionable, or substantially in derogation of the rights of consumers. Arbitration clauses that comply with the standards set forth in the Statement of Principles of the National Consumer Dispute Advisory Committee shall be presumed not to violate this regulation.
1 .For purposes of 209 CMR 40.07(1)(l), fees do not include interest that is otherwise payable and consistent with the provisions of the loan documents.
2. 209 CMR 40.07(1)(l) shall not prohibit a creditor from charging points and fees in connection with any additional proceeds received by the borrower in connection with the modification, renewal, extension or amendment (over and above the current principal balance of the existing high cost home loan) provided that the points and fees charged on the additional sum must reflect the creditor's typical point and fee structure for high cost home loans.
3. 209 CMR 40.07(1)(l) shall not apply if the existing high cost home loan is in default or is sixty or more days delinquent and the modification, renewal, extension, amendment or deferral is part of a work-out process
1. A creditor must deliver, place in the mail, fax or electronically transmit the following notice in at least twelve point type to the borrower at the time of application: "You should consider financial counseling prior to executing loan documents. The enclosed list of counselors is provided by Division of Banks and Executive Office of Elder Affairs". In the event that the creditor does not know whether the borrower's application is a high cost home loan application, such disclosure must be made as soon as the creditor determines that it is a high cost home loan application, but in any event, at least three days prior to the closing. In the event of a telephone application, the disclosures must be made immediately after receipt of the application by telephone, but in any event, at least three days prior to the closing. Such disclosure shall be on a separate form. In order to utilize an electronic transmission, the creditor must first obtain either written or electronically transmitted permission from the borrower. A list of approved counselors, available from the Division of Banks or Executive Office of Elder Affairs, shall be provided to the borrower by the creditor or the mortgage broker at the time that this disclosure is given.
2.In the case of any borrower sixty years of age or more, a creditor shall not make a high cost home loan subject to this section until the prospective borrower has completed a counseling program which shall include instruction on high cost home loans and which shall be approved by the Executive Office of Elder Affairs or the Division of Banks.
It is an unfair act or practice for a financial institution to violate 12 CFR 27.00.
The Commissioner, in his or her discretion, may compromise or settle any claims under any proceeding brought, or to be brought against a financial institution for a violation of 209 CMR 40.00, if he or she determines that such compromise or settlement is in the public interest.
Nothing in 209 CMR 40.00 shall limit the ability of the Attorney General to enforce the provisions of 209 CMR 40.00, M.G.L. c. 167A, §§2A -2G, or M.G.L. c. 93A.
209 CMR 42.00 is hereby amended by inserting the following new section:-
42.12A Prohibited Acts and Practices
(1) It is a prohibited act or practice for a Licensee to make or broker a high cost mortgage loan subject to 209 CMR 32.32, which has rates, fees, terms or features that violate:
(b) the loan limitations set forth in 209 CMR 32.32(4);
(c) the prohibited acts and practices provisions of 209 CMR 32.32(5); or
(d) the unfair high cost loan practices provisions of 209 CMR 32.32(6).
(2) It is a prohibited act or practice for a person licensed as a mortgage lender to purchase or to make a high cost loan originated by a mortgage broker that violates the provisions of 209 CMR 32.32 and 209 CMR 42.12A(1).
(3) A violation of 209 CMR 42.12A(1) or 209 CMR 42.12A(2) shall constitute grounds for the issuance of a cease and desist order under M.G.L. c.255E, §7 and shall constitute grounds for license suspension or revocation under M.G.L. c.255E, §7.
This proposed amendment addresses licensed mortgage lender and broker compliance and enforcement issues under the proposed substantive amendments to 209 CMR 32.32, the TIL high rate loan regulations. Essentially, it makes failure to comply with 209 CMR 32.32 a prohibited act or practice. Such violations become express grounds for the imposition of stringent remedial measures against a licensee under 209 CMR 42.12A(3).