Bill to Extend Borrower Redemption, Tenant Rights Goes to Mass. Governor
A bill on the desk of Massachusetts Gov. Deval Patrick would have far-reaching implications on the REO and mortgage industries, including a temporary provision adding five months to the foreclosure process.
The Massachusetts legislature, called the General Court, passed the bill Wednesday, which sends it to the governor for signature. Senate Bill 2407 creates a 150-day pre-foreclosure redemption period for borrowers, contains eviction protections for renters living in a foreclosed property, adds regulations for reverse mortgage originators and enacts state penalties for residential mortgage fraudsters.
The governor's office said Patrick is reviewing the bill and declined to specify if or when he would sign it.
Under current Massachusetts law, after a foreclosure occurs, the mortgagor has three years to file for a right to redemption. If the property is sold after foreclosure for less than the amount due, the borrower gets one more additional year to file a suit to claim their redemption rights.
The bill adds an additional redemption period before the foreclosure process can begin, giving mortgagors 150 days to cure debt before the lender can initiate a foreclosure. The 150-day period begins once the mortgagee provides written notice of the delinquent payments, along with other information, including notification of the borrower's right to seek counseling, or cure the debt by selling the property or refinancing the mortgage within the 150-day window.
The bill requires the borrower to be proactive and act in good faith to receive protection. Acting in good faith requires the borrower to meet at least once in person or over the phone with the lender or its representative, and respond within 30 days to any mailed communications from the mortgagee. If not, the borrower's redemption period is reduced to 90 days. The bill allows a borrower to use the 150-day redemption period once every three years.
The 150-day cure right expires on December 31, 2015. After that, all borrowers have 90 days from receiving notification to cure delinquent payments before a foreclosure can begin and the acting in good faith requirement is waived. In addition, the right can be used once every five years.
Another provision addresses the rights of tenants renting a property that gets foreclosed on. The bill creates a new chapter in the commonwealth's General Laws that prohibits the entity that forecloses on a borrower's property to evict a tenant without cause or prior to the sale of a foreclosed property.
The bill defines just cause as the tenant not making timely rent payments prior to or after the foreclosure, breaking terms of the lease, or if the tenant does not sign a lease extension after the original terms are expired, among other provisions. Even when a foreclosing entity-turned-landlord has just cause to evict, the bill prohibits eviction unless the landlord provides written notice to the tenant, including notification of a right to a court hearing. The eviction can occur 30 days after the notice is made.
The bill requires that tenant leases must be arms-length transactions, and after foreclosure, if the new landlord disagrees with the rent amount, the landlord has the right to a court hearing to set new rent and occupancy rates. Each instance that a landlord improperly evicts a tenant carries a penalty of no less than $5,000.
The tenant provisions mirror similar protections afforded to tenants renting a foreclosed property under the national Protecting Tenants at Foreclosure Act (PTFA), which was recently extended with the signing of the Dodd-Frank Wall Street Reform Act.
Another provision will require that certain reverse mortgage borrowers obtain third-party counseling for an origination to be legal in the state.
Reverse mortgages allow borrowers age 62 or older to borrow against the equity in their home and receive either a lump sum, monthly payments, as a line of credit, or a combination of the three. The loan does not have to be repaid unless the borrower dies, the house is sold, or is no longer the borrower's primary residence. The home equity conversion mortgage (HECM) product is the most popular form of reverse mortgage and is backed by the Federal Housing Administration (FHA).
Under the legislation, if a reverse mortgage applicant makes less than 50% of the area median income (as determined by the Department of Housing and Urban Development (HUD)) or has a property worth less than $120,000, the applicant must participate in third-party mortgage counseling before the loan can be originated. If the borrower doesn't provide documentation of attending the counseling, the state can render the terms of the reverse mortgage unenforceable.
The bill makes residential mortgage fraud a state crime punishable with a prison sentence up to five years and/or fines up to $10,000 for individuals or $100,000 for companies or other entities. The fines increase when the fraudster demonstrates a "pattern of residential mortgage fraud," which the law defines as violating the law in connection with three or more properties. Then, the punishment is up to 15 years in jail and/or a fine of up to $50,000 for individuals or $500,000 for companies.
Different parts of the legislation take effect at different times. The mortgage fraud, tenant protection and borrower 150-day cure provision will go into effect as soon as the bill is signed. The provision shortening the cure period to 90 days would take effect Jan. 1, 2016. The reverse mortgage provisions take effect 90 days after the bill is signed into law.
Write to Austin Kilgore.
Want more information about the PTFA? Check out the REO Insider webinar, "PTFA: Arm Yourself with the Law" on August 17 at 1 p.m. CST.
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