The Massachusetts legislature recently enacted emergency legislation which requires lenders to comply with new rules before foreclosing on a residential property.  The new law essentially (i) expands existing pre-foreclosure notice requirements and (ii) creates a new statutory chapter granting additional protections to tenants impacted by foreclosures.

Pre-Foreclosure Notice Requirements.

The new bill, S 2407, (Chapter 258 of the Acts of 2010) temporarily revises G.L. c. 244, §35A (the revisions expire on December 31, 2015).  The law now requires that lenders send a 150-day right-to-cure notice rather than a 90-day notice in any case where the property sought to be foreclosed is the borrower’s principal residence and is collateral for a residential loan.  The notice requirement also only applies to one to four family properties where the property is occupied, or to be occupied, in whole or in part by the borrower.

Pursuant to the new law, a lender can opt to send a 90-day notice instead of a 150-day notice if it can certify that it has engaged in a good faith effort to negotiate a commercially reasonable alternative to foreclosure.  In order to demonstrate “good faith” within the meaning of the statute, the lender must show that it considered the borrowers current circumstances by reviewing a number of factors, including the borrower’s income, debts and expenses; a comparison of the net present value of payments under a modified loan versus the anticipated net recovery from a foreclosure; and other interests of the lender.  Documentation of the “good faith” analysis must be provided to the borrower at least 10 days before a meeting, either by telephone or in person, between the lender’s representatives and the borrower or the borrower’s representatives.

If the parties fail to reach a mutually acceptable alternative to foreclosure, the lender may then proceed with a 90-day notice.  The lender must file an affidavit with the Land Court, with a copy to the borrower, evidencing in detail its compliance with the statutory good faith requirements.

If the borrower fails to respond within 30 days to a written offer to negotiate loss mitigation options, the lender may use a 90-day notice instead of a 150-day notice.

The 150-day right-to-cure notice is required to be given to the borrower once during any three-year period, so that if a borrower reinstates and then defaults on the mortgage again, the notice requirements for a subsequent breach within the three year period would be governed by the terms of the mortgage contract rather than the statute.

In addition to the change in timing, the new statute also creates additional disclosure requirements within the body of the notice.  Most notably, the letter must now include the following declaration:  “This is an important notice concerning your right to live in your home. Have it translated at once.” The statute requires that the lender include the declaration in the language the lender has regularly used in communications with the borrower.

The statute now also requires that the notice be sent by regular and certified mail to the borrower’s mailing address. The previous version of the statute did not specify mailing requirements.

Tenant Protections in Foreclosed Properties.

In addition to the changes to the statute regarding pre-foreclosure notices, S 2407 also created G.L.c. 186A, “Tenant Protections in Foreclosed Properties.” The new chapter places significant new limitations and obligations on lenders that purchase properties at their own foreclosure auctions.

The new law restricts lender-owners from evicting tenants occupying property pursuant to a bona fide lease or tenancy at will without having just cause or a binding purchase and sale agreement to sell the property to a third party. Within 30 days after a foreclosure sale, the lender-owner must post a notice giving contact information for the lender-owner, building manager or other representative as well as the address to which rent or use and occupancy must be sent.

After the notice is posted, the lender-owner can evict a tenant for the following just cause reasons: committing a nuisance, causing damage, interfering with the quiet enjoyment of other tenants, using or allowing the unit to be used for illegal purposes or refusing reasonable access to the lender-owner. The lender-owner must wait 30 days after the notice is posted before evicting a tenant for the following just cause reasons: failure to pay rent or use and occupancy, materially violating an obligation of the tenancy and failing to cure the violation after 30 days’ written notice or refusal to renew a written lease after expiration.

The law also prevents eviction, even where just cause exists, if the lender-owner fails to deliver to each tenant a written disclosure of the tenant’s right to a court hearing before eviction. This notice must be delivered at the same time as the contact information is posted. The notice must also be mailed by first-class mail to each unit and slid under the door of each unit.

In the event that the lender-owner believes the amount of rent or use and occupancy being paid by the tenant is unreasonable, the lender-owner must bring a claim in District, Superior or Housing Court seeking to establish a new, reasonable use and occupancy rate. The statute provides a presumption of reasonableness for any rental amount set forth in a bona fide lease.

Violation of the provisions of G.L.c. 186A is punishable by a fine of not less than $5,000.

The provisions pertaining to the 150-day right-to-cure notices and post-foreclosure tenants’ rights took effect immediately took effect on August 7, 2010 and continue in effect until December 15, 2015.

The Massachusetts Division of Banks interprets the new law as applying only to those loan defaults where a right to cure notice was sent after the governor signed the bill.  Thus, if a lender sent a 90-day notice on August, 2010 in compliance with the statute as it then existed, that lender would be entitled to initiate foreclosure after the 90-day period expired.