An Act Preventing Unlawful and Unnecessary Foreclosures

On August 3, 2012, Governor Patrick of Massachusetts signed “An Act Preventing Unlawful and Unnecessary Foreclosures” into law.  As suggested by its title and introductory clause, the purpose of the new law is to “protect forthwith the citizens of the commonwealth and prevent unnecessary foreclosures”.  In an effort to protect residential homeowners, the Act modifies existing foreclosure procedures and imposes additional requirements on lenders before they may move to foreclose on “certain mortgage loans”.

“Certain Mortgage Loans” is a defined term under the Act which refers solely to residential loans made on owner-occupied one to four family residences with any one of the following characteristics:

• An introductory interest rate that is 2% lower than the fully indexed rate and granted for a period of 3 years or less;
• Interest-only payments (except in the case of an equity line or construction loan);
• A payment option that is less than principal and interest fully amortized over the life of the loan;
• Insufficient income and asset verification;
• Excessive prepayment penalties;
• Loan to value at or above 90% and ratio of borrower’s debt to incomes exceeded 38%; and
• Loan was part of a loan transaction in which the combined loan to value exceeded 95%.

Before filing a notice of foreclosure sale in connection with such a mortgage loans, the Act requires that lender take reasonable steps and make a good faith effort to avoid foreclosure.  These include making an assessment of borrower’s ability to make an affordable monthly payment and considering the net present value of receiving payments under a modified loan mortgage as compared to the anticipated net recovery from a foreclosure. The Act also requires lenders to send a notice to such a borrower of their right to pursue a modified mortgage loan and outlines a negotiation process for such loans.  Upon receipt of notice, borrower has thirty days to advise lender of its intent regarding modification. If borrower seeks modification, lender must provide its assessment of borrower’s affordable monthly payment, the net present value and recovery analysis, and whether or not lender will offer a modified loan.  If a modified loan proposal is made, borrower has thirty days to respond.  Prior to commencing foreclosure lender must execute an affidavit certifying to its compliance with these provisions of the Act and such affidavit may be relied upon by a third party purchaser as conclusive evidence of such compliance.

In addition to the foregoing protections, the Act provides measures whereby lenders must clarify how they hold the interest in the applicable mortgage and note.  Prior to publishing a notice of foreclosure sale, lender must review its business records and record an affidavit that it is the holder of the note or the authorized agent of the note holder.  This affidavit may be relied upon by a third party purchaser as conclusive evidence that mortgagee is entitled to proceed to foreclosure. The Act also voids a foreclosure notice if all of the assignments evidencing the foreclosing lender’s interest in the mortgage are not recorded.  Such recording information must be specifically referenced in the foreclosure notice along with a recital of transactions resulting in a name change of the mortgagee.

While the Act is fairly detailed, it must be noted that the Division of Banks is charged with adoption of regulations to administer and enforce of the Act.