The Massachusetts Division of Banks has adopted amendments to its debt collection and loan servicing rules that prevent third-party mortgage servicers, including banks, from foreclosing on mortgaged property if an application for a loan modification is in process. The amended rules, which became effective on October 11, are meant to complement the recently adopted foreclosure prevention rules that require home mortgage lenders and servicers to modify certain mortgage loans if the cost of modification is less than the cost of foreclosure, according to the Division. The foreclosure prevention rules were adopted under the foreclosure prevention law signed by Governor Patrick in August 2012, which amended Chapter 244, Section 35A of the General Laws of Massachusetts to require creditors to take reasonable steps to avoid foreclosure on certain mortgage loans. Under the amended debt collection and loan servicing rules, third-party mortgage servicers are required to consider options to avoid foreclosure and third-party mortgage servicers are prohibited from initiating a foreclosure when an application for a loan modification is in process, a practice also known as “dual tracking.” The amended rules require third-party loan servicers to provide a single point of contact for each borrower, follow specified loan modification procedures and communicate with borrowers in a timely manner. The amended rules also modify the definition of “debt collector” to include active debt buyers who purchase loans in default and then directly collect that debt. The amended rules reflect many of the loss mitigation standards created in the 2012 national mortgage servicer settlement between the U.S. Attorneys General and 49 state attorneys general with the five largest national mortgage servicers.

Nutter Notes: Among the new obligations imposed by the amendments, the debt collection and loan servicing rules now require third-party loan servicers to certify in writing the basis for asserting that the foreclosing party has the right to foreclose. The certification includes the chain of title and ownership of the note and mortgage from the date of the recording of the mortgage being foreclosed on. Third-party loan servicers are required to provide the certification to the borrower along with the notice of intent to foreclose that must be delivered under Chapter 244, Section 35A of the General Laws of Massachusetts, and must also include a copy of the note with all required endorsements. The Division’s amendments to its debt collection and loan servicing rules also modified the loan servicing standards to specifically incorporate the CFPB’s loss mitigation standards under recent amendments to Regulation X, the regulation that implements the Real Estate Settlement Procedures Act (“RESPA”). Tying the Massachusetts loss mitigation standards to the CFPB’s loss mitigation standards means that a violation of the Regulation X requirements will also constitute a violation of the Massachusetts consumer protection statute, Chapter 93A of the General Laws. The Division’s amendments expressly provide that failure to comply with the debt collection and loan servicing rules, including the loss mitigation standards incorporated from Regulation X, will be considered a violation of Chapter 93A. The CFPB’s loss mitigation rules become effective in January 2014. It is not clear whether the Division will require third-party mortgage servicers in Massachusetts to comply with the new loss mitigation standards incorporated from Regulation X into the Massachusetts debt collection and loan servicing rules before the new provisions of Regulation X become effective in January.