Commercial Lenders Take Note

Effective November 7, 2004, the Massachusetts Predatory Home Loan Practices Act can have far-reaching consequences for unwary commercial lenders, including liability for multiplied damages under Chapter 93A, Massachusetts’s unfair and deceptive practices statute.

The Act, which governs the terms and conditions of high-cost home mortgage loans, allows borrowers to bring a civil action for damages or injunctive remedies, including barring the lender from collecting under the offending loan, barring foreclosure under the mortgage securing the loan, and other equitable relief.

In a recent case, MIT Financial Group, Inc. v. Palmer, the lender brought an action to enforce a promissory note against homeowners, who filed a counterclaim alleging violations of the Act. The judge ruled in favor of the homeowners, finding multiple violations of the Act and of Chapter 93A.

The note at issue provided for six monthly interest payments of $2,598. After the six months ended, a final balloon payment for the entire unpaid balance, including the principal of $240,000, would become due. The judge found that the balloon payment violated section 8 of the Act, which prohibits loans containing “a scheduled payment that is more than twice as large as the average of earlier scheduled payments.” Moreover, averaging the balloon payment over the sixth-month length and adding it to the monthly housing expenses resulted in monthly debt payments exceeding fifty percent of the homeowners’ monthly income, in violation of section 4 of the Act, which governs the affordability of loans.

The judge also found a violation of section 3 of the Act because the lender, prior to making the loan, failed to obtain a required certification that the borrower had received counseling on the advisability of the loan transaction. The judge determined that the lender’s failure was not excused by the sophistication of the borrowers.

The judge also found violations of sections 6, 7, 9, and 14 of the Act, which respectively prohibit: “financing of points and fees greater than 5 per cent of the total loan amount or $800, whichever is greater;” any provision increasing the interest rate after default; any provision permitting the lender to terminate the loan in advance of the original maturity date and to demand repayment of the entire outstanding balance except in limited circumstances; and disbursements to home improvement contractors without proper signatures.

Because violations of the Act are per se violations of Chapter 93A, the judge opened the door to multiple damages for the homeowners.

The outcome of this case should remind commercial lenders to strictly comply with the Act’s requirements.