• Massachusetts Attorney General Regulates Mortgage Industry: New Rules Change the Playing Field for an Industry
  • October 29, 2007 | Authors: Nicholas M. Gess; Ralph C. Martin
  • Law Firms: Bingham McCutchen LLP - Washington Office; Bingham McCutchen LLP - Boston Office
  • On October 17, 2007, Massachusetts Attorney General Martha Coakley promulgated regulations that deeply impact the mortgage lending industry and may require significant business changes for those doing business in Massachusetts — without regard to whether they maintain an office in the commonwealth, M.G.L. c. 93A, Final 940 CMR Part 8.

    Recent decisions hold that the National Bank Act administered by the federal Office of the Comptroller of the Currency generally preempts state enforcement against federally chartered banks in the area of mortgage lending. See Watters v. Wachovia Bank, N.A., 550 U.S. (2007). Such decisions may, however, be insufficient protection, either because the federally chartered bank has subjected itself to state regulation through some activity not preempted or because as a functional matter of business operations, those in its chain of operations such as mortgage brokers must comply with the new rules and thus the federally chartered bank functionally must as well.

    The regulations contain four key provisions intended “to address problems experienced by consumers when they seek or obtain mortgage loans for the purchase or construction of residential homes or when consumers refinance". These provisions:

    1. Prohibit mortgage brokers or lenders from making a loan if they do not “reasonably believe” that the borrower is able to repay the loan;
    2. Restrict so-called “no-documentation” or “stated income” loans by requiring that the mortgage broker or lender both (1) disclose how the interest rates or other charges will increase under such loans, and (2) obtain the borrower’s signed statement of income in order to process those types of loans;
    3. Prohibit mortgage brokers from arranging or processing loans that are not in the borrower’s interest and prohibit brokers from brokering loans if the broker’s financial interest conflicts with the borrower’s interest;
    4. Prohibit mortgage lenders from “steering” borrowers to loan products that are more costly than those that the borrower qualifies for, and prohibit lenders from discriminating between similarly qualified borrowers.


    Violations of the new rules are defined as “unfair and deceptive trade practices” under the Massachusetts Act, M.G.L. c. 93A. Such violations may be prosecuted by the attorney general and/or may be the subject of private consumer litigation. Because this statute has been broadly interpreted by Massachusetts courts and provides for punitive damages and attorneys fees, there is significant business risk.

    All financial institutions and others involved directly or indirectly in the mortgage lending business in Massachusetts should carefully examine their business practices in light of these new rules and carefully analyze whether they are in compliance. Whether or not directly affected, they must make business changes either to comply or to continue effectively doing business.