The Massachusetts Division of Banks has issued its final rules directing banks on how to implement the state’s new foreclosure law, which requires that certain borrowers be offered a chance to have their loans modified before a foreclosure can be completed.
The law, which was signed by Gov. Deval Patrick in August 2012, requires lenders to offer certain borrowers a loan modification before proceeding with a foreclosure, unless a lender can prove that offering a modification would result in greater losses for the bank or that the borrower has rejected the offer.
Under the new rules, beginning Sept. 18, lenders must send a notice to inform borrowers of their right to request a modification. Borrowers will have 30 days to make the request and will have an opportunity to request reconsideration if the lender initially denies them a mod. A copy of the final regulations and an example notice is available on the division’s website.
Draft regulations came out earlier this year, and the final rules should be well-familiar to lenders who’ve followed the process, said Division of Banks Commissioner David J. Cotney.
"We got a number of comments and tried to incorporate a few tweaks here and there," such as extending the time allotted for banks to respond to a consumer’s request for a mod from three business days to five, as in federal guidelines, Cotney said. But no substantive changes were made.
"One thing we do want to make sure that people understand is that these regulations apply to all lenders. National lenders as well as state lenders will be affected by this law," said Barbara Anthony, undersecretary of the Massachusetts Office of Consumer Affairs and Business Regulation.
Jon Skarin, senior vice president for federal regulatory and legislative policy at the Massachusetts Bankers Association, said lenders were getting up to speed pretty quickly.
"I think we’re going to continue to have to clarify things with regard to [particular loan products]. But at least now people will be able to say, OK, we have a foundation, we can start trying to comply," said Skarin.
It’s not yet clear how many Massachusetts foreclosures will be affected by the new law. As written, only loans which share certain "risky" characteristics, such as balloon payments or negative amortization, are required to be evaluated for modification.
Through the first five months of the year, foreclosure petitions are down 65.8 percent compared to 2012, according to data from The Warren Group, publisher of Banker & Tradesman. Many legal observers have suggested that foreclosures may ramp back up once lenders are clear on how the new rules will work.
For community banks, which tend to keep loans on their own portfolio or service loans they themselves have originated, determining whether a loan meets the definition of "risky" under the law may be a simple matter, said Skarin. If a bank is servicing a loan issued by another lender – particularly one originated in the boom-time era of scant paperwork and sloppy recordkeeping – this may be more difficult to determine.
"We’ve always said to the industry, err on the side of caution, try and provide people with more protections than not, particularly if you’re not sure where the loan would fall under the law," said Skarin.
