David E. Floreen
‘Two features’ of law
A new Massachusetts law that went into effect on July 1 is expected to streamline mortgage originations, eliminating numerous disclosures that previously had been required of banks during the loan process.
The change is part of a new mortgage discharge law, which, beginning in October, also will impose penalties on all lenders and loan servicers that fail to resolve title issues in a timely manner when a loan is paid off.
Local industry watchers say that lax local laws did not adequately prompt out-of-state lenders to quickly process mortgage discharges. The new law will introduce fines for violators. Several other states already have such fines, but mortgage discharge delays and problems had become pervasive in Massachusetts because lenders focused on moving paperwork faster in states where they faced stiffer consequences for inaction, according to industry experts.
The bulk of the law, such as the implementation of the new fines, won’t go into effect until Oct. 1.
“There are two [separate] features of the new discharge law,” said David E. Floreen, senior vice president of government affairs and trust services for the Massachusetts Bankers Association.
On July 1, however, the mortgage banking industry was handed new disclosure rules pertaining to mortgage applications. The changes bring the disclosure process into line with federal rules. Massachusetts had adopted its own set of rules prior to the establishment of federal guidelines, but more recently bankers had to present redundant disclosure forms to borrowers for both sets of rules, often making the process confusing and time-consuming.
“What was going on was that the Massachusetts laws that were repealed [on July 1] were all enacted before the federal laws,” said Floreen. “We had a duplicate set of disclosures. It basically leaves us with the federal [laws].”
Floreen said the recent change to the local laws is part of an overall effort to look for and address statutes that have outlived their usefulness. The state disclosure requirements for banks were largely duplicated by federal law and resulted in an additional small mound of paperwork during the loan origination process, said Floreen.
“It gets rid of about 12 sheets of paper,” he said.
However, the paperwork pile isn’t shrinking as much as bankers had anticipated. A wrinkle in the new legislation will require banks to comply with the state attorney general’s disclosure proceedings. Banks previously had been exempt from that disclosure requirement. In the early 1990s, the AG’s office created a disclosure act intended for mortgage brokers and companies that were not regulated under the same state laws as banks, he said. Floreen said the MBA has been working to get the message out to bankers that they need to temporarily add the attorney general’s disclosure form to the mortgage proceedings for refinances and fixed-rate junior loans until the matter is cleared up.
The Attorney General’s Office did not return a phone call asking when the issue might be addressed.
Ruth Dillingham, member and past chairwomen of the Massachusetts Mortgage Bankers Association, said the recent change is really only significant to bankers.
“The regulatory effect of this is really quite small unless you are a banker,” she said.
Dillingham said she expects many bankers will be pleased with the reduction of paperwork. The same consumer protections remain in place, but borrowers won’t have to needlessly repeated disclosure information.
“From our perspective, it’s regulatory compliance burden relief,” she said.
Chris Dunn, senior vice president of South Shore Savings Bank, said the reduction in disclosure forms will make the process much less confusing for the customer, as well.
Self-Policing
Dunn said the bigger – and more significant – piece of the legislation is the mortgage discharge component that will be implemented in October. He said he believes the new fines for failure to promptly discharge mortgages that have been paid in full will be very effective in helping to keep future transactions running smoothly.
“I think it gets people’s attention,” said Dunn.
Dillingham said perpetual violators of the past will start to catch on when they begin receiving notices warning them that procrastination will lead to fines. However, she said that she does not believe it is laziness that has been a factor in prolonging the discharge process for lenders. She said it comes down to priorities. Large out-of-state lenders and loan services are going to tend to the discharges more quickly in states with hefty fines and penalties than in states where there are no repercussions for delays, she said.
“They will catch on when they start getting letters,” said Dillingham.
She said the mortgage discharge problem worsened when the mortgage refinance boom hit the marketplace in 2001, a period that often saw mortgages being taken out and paid off via a refinance with startling rapidity as interest rates fell to all-time low levels. If the paperwork to discharge a previous mortgage lien on a property was not filed promptly, however, the new loan could not be approved, a situation that Dillingham said cropped up frequently, frustrating both the new lender and the borrower.
“The problem has been there has been no downside [for not completing the paperwork],” said Dillingham.
“The idea isn’t to go around slapping people with a lot of fines. This is not meant to be the mortgage discharge police,” said Floreen, adding that he hope the possibility of fines will be enough to make the industry do a little more self-policing.
The “Act Providing Remedies to Consumers for Clearing Title After Payoff of Mortgages” provides for a damages-based fine or $500 penalty for delays in providing payoff statements to consumers, and actual damages or a $2,500 fine for failure to record discharges at the state’s registries of deeds. Floreen said Massachusetts’ fines are in the middle compared to what other states charge violators.
“The problem has been [building] in recent years. It just wreaked havoc on everyone,” said Dunn. “It’s a much more complicated business today than it was years ago.”
Dunn also said the bulk of the problem occurs with the out-of-state institutions. He said if a mistake is made on the part of a local bank, the matter tends to be resolved quickly.
However, Dunn said he anticipates at least one problem with the new discharge law. He said several lenders, including his bank, used to offer to send a mortgage discharge directly to the local registry of deeds on behalf of the borrower. However, if the bank takes on this responsibility and a backlog at the registry delays the process, the bank now could face fines. While lenders must make clear to borrowers the necessary steps and provide to them the proper paperwork, it is up to the borrower to submit their discharges to the registry. Because of the new possibility of fines, Dunn said his bank no longer will offer to send discharges directly to registries for consumers. Most banks will likely follow suit, he said.
He said the overall intent of the legislation should make the whole process more efficient and stop several of the problems going forward.
“In the long run it will be better for everyone,” said Edward Smith, legislative council for the Real Estate Bar Association for Massachusetts.
REBA worked hard to get the new legislation passed along with MBA, MMBA and other industry trade groups, Smith said.
Smith said since the mortgage market has slowed since the end of the refinance boom, it may take a while to see just how effective the new procedures are. He said too often lenders, servicers, attorneys or others involved in the mortgage process have failed to take the final step and get the discharge recorded. He said lenders going out of business and companies changing hands have further complicated the process. Adding to the confusion is the fact that 80 percent of mortgage financing in Massachusetts now involves an out-of-state lender, he added.
Starting this summer, REBA is hosting 12 free workshops across the state for anyone who is involved in the mortgage process and wants to better understand how the new discharge law affects their business and the industry. Dates, times and locations of the workshops can be found on REBA’s Web site at www.reba.net.
