Bureau of Financial Institutions
OTHER PFR AGENCIES
Chapter 250 (Rule 250) Chapter 119 (Regulation 19)
Alternative Mortgage Transactions Alternative Mortgage Transactions
SUMMARY: In 1985, the Office of Consumer Credit Regulation first promulgated Chapter ("Rule") 250, regulating the making of closed-end, first-lien alternative mortgage transactions by mortgage banking companies. Amendments to federal Regulation Z, effective October 1, 1988 provided an opportunity to redraft Rule 250 so as to increase consistency not only with Regulation Z, but also with Bureau of Banking's Rules 19 and 21 (which regulate similar activities by banks), while retaining important consumer protections.
In 1981, the Bureau of Banking promulgated Regulation 19 which both authorized and regulated the making of adjustable rate mortgages by Maine financial institutions and their affiliates. In 1983, the Bureau promulgated Regulation 21, which both authorized and regulated the making of partially amortized loans (balloon mortgages). These rules contained various borrower protections and disclosure requirements. Regulation #19 was amended in 1984 and again in 1988 to allow financial institutions greater flexibility in selling mortgages to the secondary market and to effect consistency between the Bureau's disclosure requirements and those mandated by Regulation Z, thus assuring an adequate supply of funds for home mortgages. There have been no changes to Regulation 21 since its original promulgation.
This joint rule is the product of efforts by the Office of Consumer Credit Regulation and the Bureau of Banking to combine OCCR Rule 250 and Bureau of Banking Chapter 119 (Regulation 19) and Chapter 121 (Regulation 21) into one regulation identified as OCCR Rule 250 and Bureau of Banking Chapter 119 (Regulation 19). At the same time, this rule repeals Bureau of Banking Chapter 121 (Regulation 21). This 1996 Joint Rule is being promulgated to permit creditors and financial institutions to offer certain loan products in Maine which have achieved general acceptance on the national secondary market, and to foster a more efficient approach to the regulation of alternative mortgage transactions.
This rule is being adopted in accordance with the following statutory authority:
- 9-A M.R.S.A. §6-104(1) (E);
- 9-A M.R.S.A. §9-302(1).
- 9-B M.R.S.A. §111;
- 9-B M.R.S.A. §215;
- 9-B M.R.S.A. §241;
- 9-B M.R.S.A. §532; and
- 9-B M.R.S.A. §732.
The purpose of this Rule is to regulate alternative mortgage transactions "made or entered into in this State", as that term is defined in 9-A M.R.S.A. §1-201(1)(A),(B), by supervised lenders and by financial institutions so as to:
- Assure, to the extent possible, an adequate and consistent supply of funds to consumers for home mortgages;
- Allow these lenders to share, in part, the risk of rising interest rates with consumers so as to encourage mortgage lending;
- Permit and encourage the development of fair and innovative mortgage lending instruments that are responsive to the needs of the times for the benefit of consumers and creditors;
- Assure adequate consumer protections so as to prevent unreasonably high risk of default;
- Create, to the extent possible, competitive equality among those creditors subject to regulation by the Office of Consumer Credit Regulation and financial institutions regulated by the Bureau of Banking and other governmental agencies; and
- Provide consumers with educational information regarding alternative mortgage transactions in order to reduce the potential for misunderstanding and deception in the marketing of alternative mortgage instruments.
As used in this Rule, the following terms have the following meanings, unless the context clearly requires otherwise:
- "Alternative Mortgage Transaction" means a loan or a credit sale secured by a one to four family dwelling located in this state, other than an open-end credit plan, made primarily for personal, family or household purposes with a term greater than one year:
- which is subject to Article IX of the Maine Consumer Credit Code or made to finance or refinance the purchase or initial construction of a one to four family dwelling, including a condominium unit, cooperative housing unit, or a manufactured home, and which is secured by a first lien interest in that property; and
- in which the interest rate may be adjusted or renegotiated, involving fixed rates but which implicitly permits rate adjustments by having the loan mature at the end of an interval shorter than the term of the amortization schedule or involving any similar type of rate, method of determining return, term, repayment, or other variation not common to fixed rate, fixed term transactions, including, but not limited to, shared appreciation mortgages, adjustable rate mortgages, partially amortized mortgages and renegotiable rate mortgages.
- "Creditor" means a supervised lender, other than a supervised financial organization, as those terms are defined in 9-A M.R.S.A. §§1-301(39) and 1-301(38), respectively.
- “Federally related mortgage loan” means a loan meeting the definition of “alternative mortgage transaction,” defined in Subsection A of this section, which is:
- made in whole or in part, or issued, supplemented or assisted in any way by the Secretary of the Department of Housing and Urban Development (“Secretary”) or any other officer of the Federal government or under or in connection with a housing or urban development program administered by the Secretary or a housing or related program administered by any other such officer or agency; or
- made according to loan terms which, at the time of closing, comply with loan program approved for purchase by the Federal National Mortgage Association (“Fannie Mae”), the Government National Mortgage Association (“Ginnie Mae”), or the Federal Home Loan Mortgage Corporation (“Freddie Mac”).
- “Financial Institution” means a financial institution or credit union authorized to do business in this State, as defined by Title 9-B M.R.S.A. §131(17-A) and (12-A) .
- “Partially amortizing loan” means an alternative mortgage transaction made to finance or to refinance the property which is secured by a mortgage on the property, and where the periodic loan payments are based on full amortization over a period not to exceed 30 years but in which the outstanding principal balance, interest and any outstanding fees or charges are due and payable at the end of a period of less than the amortization period upon which the payment amount is based.
4. AUTHORIZATIONS AND LIMITATIONS
A creditor or financial institution may engage in an alternative mortgage transaction subject to the following limitations:
- Fully-Amortizing Loans with Adjustable Features: An alternative mortgage instrument in which adjustments may be made to the interest rate, payment amount, principal balance or term to maturity shall comply with the provisions of this subsection:
- Frequency of Payment Change. Changes in payment amounts may occur only as follows:
- Loans with interest rate adjustments based on movement of an index: changes may occur only at regular intervals of not less than quarterly, except that:
- the length of the interval before the first potential interest rate change may be extended by any pre-determined period as established in the loan documents; and
- an adjustment in payment amount pursuant to a contract under which the interest rate varies in accordance with an index and under which the borrower may limit the amount of payment increase resulting from such rate variation may require more frequent adjustments if maximum negative amortization permitted under the contract occurs.
- Loans with loan balance adjustments or payment adjustments not tied to changes in interest rate; changes may occur no more frequently than the formula specified in the contract, which shall be no more frequently than yearly.
- Index. Adjustments in the rate of interest shall be in accordance with any index that is verifiable by the borrower, beyond the control of the creditor and which shall be specified in the loan documents.
- Discounted rates. A creditor or financial institution who sets an initial rate that is not consistent with, and is lower than, the formula contained in the note and used to calculate rates may not increase the interest rate of any such discounted loan more than 1/2 of 1% for any 3 month period or 2% for any one year. In calculating the “2% for any one year,” a creditor or financial institution may multiply the 2% limit times the number of years that have elapsed between change dates.
- Required and Permitted Changes. Increases in the interest rate when permitted by the index are optional with the creditor or financial institution; decreases are mandatory when warranted by the index except to the extent that an increment of 1/4 of 1% has not been reached or as limited by any cap set on upward/downward interest rate adjustments. Decreases in the interest rate need not be made if they do not exceed previous increases in the index (not exceeding the cap) which have not been utilized to increase the interest rate.
- Graduated Payment and Payment-Capped Loans. An alternative transactions may include a provision under which adjustments to the rate of interest charged are not immediately or fully implemented by corresponding adjustments to the payment amount, so long as limitations on changes in the payment amount apply equally to increases and decreases. For example, an alternative mortgage transaction may include a provision under which the payment amount will not increase by more than a fixed percentage in each year, even if the interest rate increase applicable to the loan would require a payment amount increase in order to fully amortize the loan. This provision is intended to authorize so-called “payment-capped” and “graduated payment” alternative mortgage transactions. This provision is also intended to authorize loans in which the interest rate adjusts more frequently than the payment amount. During the time period when the payment amount is less than a fully amortizing amount, negative amortization may occur, i.e., unpaid, earned interest may be added to principal.
- Notification of Change. Notification of borrowers of changes in interest rate, loan balances or required payments shall be made in accordance with the following:
- Changes in interest rate: A creditor or financial institution must deliver or place in the mail the disclosures required by Federal Reserve Regulation Z, Section 226.20, subsections (c)(1) through (c)(5), pursuant to the following time limitations:
- for an adjustment to the interest rate with a corresponding adjustment to the payment, at least 25, but no more than 120, calendar days before a payment at a new level is due;
- for an adjustment to the interest rate without a corresponding adjustment to the payment, at least 25, but no more than 120, calendar days before the interest rate adjustment is implemented.
- Changes in Loan Repayment Terms Not Based on Interest Rate Adjustments: At least 25 days, but not more than 120 days, before any payment change occurring for reasons other than an interest rate change, the creditor or financial institution must notify the borrower in writing of the following:
- an explanation of the circumstances that have led to such a payment change;
- the monthly payment due after implementation of the payment adjustment
- the amount of the monthly payment, if different from that given in response to item (ii), that would be required to fully amortize the loan; and
- the right to prepay the loan without penalty.
- Interest Rate Ceiling. Notwithstanding any other section of this Rule, a creditor or financial institution shall include in the credit contract a limitation on the maximum interest rate ceiling that may be imposed during the term of the obligation.
- Prepayment Penalty. A creditor or financial institution must allow borrowers to prepay in whole or in part without penalty at any time. Prepayments are a direct reduction on loan principal, unless otherwise agreed upon by the creditor or financial institution and borrower.
- Duration. The initial duration of an alternative mortgage transaction shall not exceed 31 years and any increase in the duration as a result of interest rate increases may occur only if the monthly payment is adjusted at least once every five years so that the loan is fully amortized within a 40-year period.
- B. Partially-Amortizing Loans: A creditor or financial institution may make partially-amortizing loans subject to the limitations of §4(A), and subject to the additional following limitations:
- (1) Applicability. This subsection 4(B) applies to alternative mortgage transactions, that are not “federally related mortgage transactions” as defined in subsection 3(D) of this rule, in which the periodic loan payments are based on full amortization over a period not to exceed 30 years but in which the outstanding principal balance, interest and any fees or charges are due and payable at the end of a period of less than the amortization period upon which the payment is based.
- (2) Term, Rate and Payment. Loans that are partially amortizing shall be made for a term of not less than four (4) years at a fixed rate of interest with equal monthly payments of principal and interest based upon an amortization schedule not to exceed 30 years. In no case may the loan balance exceed the original appraised value of the mortgaged property, or 125% of the original amount financed, whichever is less, during the term of the loan. Notwithstanding any provision of this subsection, where a borrower's livelihood is dependent upon seasonal or intermittent income, the parties may agree in a separate writing that one or more payments or the intervals between one or more payments may be reduced or expanded in accordance with the needs of the borrower if such payments or intervals are expressly related to the borrower's expected income.
- (3) Refinancing. The borrower shall have the right to refinance the loan with the original creditor or financial institution when it is due and payable upon terms and conditions then generally offered by the creditor or financial institution, provided that the borrower satisfies reasonable credit standards and further provided that the property satisfies reasonable loan-to-value standards. The Office of Consumer Credit Regulation or the Bureau of Banking will examine the reasonableness of standards during regular examinations or upon consumer complaint.
- (4) Alternative Financing. At the time of application for a partially- amortizing loan, the creditor or financial institution must offer to qualify the borrower for a fully-amortizing loan currently being offered by the creditor or financial institution to the general public. This offer shall be in writing. At least three days prior to closing of the partially amortizing loan, the creditor or financial institution must qualify the borrower in writing for a fully-amortizing loan, which shall be at reasonable terms and conditions. The intent of this paragraph is to restrict the general availability of partially-amortizing loans to those borrowers whose particular circumstances justify the risks of financing property with a partially-amortizing loan.
- (5)Notification of Impending Maturity. At least sixty (60) days but not more than 180 days prior to the maturity date of the loan, the creditor must notify the borrower, in writing, of the maturity date and the amount due on the maturity date. Failure to notify the borrower of the impending maturity does not impair the rights of the creditor or financial institution to terminate the extension of credit subsequent to the maturity date provided that the creditor or financial institution gives at least sixty (60) days written notice prior to requiring payment in full.
A creditor or financial institution offering alternative mortgage transactions shall disclose in writing to a prospective borrower at the time an application form is provided or before the applicant pays a nonrefundable fee, whichever is earlier, the following information:
- The terms prescribed by Section 4 [with the exception of §4(A)(4)]; and
- Any additional information required by Federal Reserve Regulation Z, 12 CFR Section 226.19.
This regulation shall be enforced by the Office of Consumer Credit Regulation for creditors and the Bureau of Banking for financial institutions.
The Office of Consumer Credit Regulation, in conjunction with the Bureau of Banking, will continue a formal program of consumer education regarding alternative mortgage instruments. Creditors and financial institutions which offer these instruments will, at the discretion of the Director of the Office of Consumer Credit Regulation or the Superintendent of the Bureau of Banking, distribute informational literature to prospective mortgage customers.
REPEAL OF CHAPTER 121 (REGULATION 21). Chapter 121 (Regulation 21), initially promulgated effective September 6, 1983 is repealed. Financial institutions offering Partially Amortized Loans are subject to the provisions 1996 Joint Rule Chapter 119 (Regulation 19)
EFFECTIVE DATE: August 26, 1996
Adopted pursuant to 9-A M.R.S.A. §6-104(1)(E) and §9-302(1), and 9-B M.R.S.A. §§111, 215, 241, 532, and 732, this Joint Rule retains important consumer protections while exhibiting compatibility, to the extent possible, with federal Regulation Z. It also allows creditors and financial institutions to offer, and Maine consumers to contract for, innovative products which have achieved acceptance on the national secondary market.
Notice of this Joint rule was published by the Secretary of State on or about May 8, 1996 and comments were solicited through June 7, 1996. Comments were received from the Maine Association of Community Banks, on behalf of its twenty state-chartered financial institution members, Richard Hackett of Pierce, Atwood, Scribner, Allen, Smith & Lancaster, and John Carpenter of Bernstein, Shur, Sawyer & Nelson. The specific comments received are addressed below.
Response to Comments
- One commenter suggested amending the definition of “alternative mortgage transaction” found in Section 3 (A) to clarify that it includes only those loans secured by a dwelling located within this State.
This proposal represent a departure from the former Regulations 250, 19, and 21 in that it applies Maine rules governing alternative mortgage transactions only to those loans secured by residential real estate located in Maine. While this definition of alternative mortgage transaction is somewhat different from former regulations governing alternative mortgage transactions, it recognizes the evolution of mortgage lending and the diverse number of creditors and financial institutions, both in-state and out-of-state, that provide home financing to Maine people. In addition, this refined definition of alternative mortgage transaction is consistent with Maine’s consumer protection laws that regulate consumer lending regardless of the principal location of the creditor or financial institution. This clear, bright line choice-of-law rule becomes even more essential with respect to the regulation of multi-state financial institutions and the impending transition to interstate branching . Therefore, the suggestion has been adopted and Section 3 (A) has been modified accordingly.
- One commenter suggested adding the phrase “at the time of closing” to the definition of “federally related mortgage transaction” in Section 3 (C) to clarify that a change in secondary market standards would not change the status of an existing loan.
That suggestion has been adopted.
- One commenter suggested that the definition of “partially amortizing loan” found in Bureau of Banking Chapter 121 (Regulation 21), be incorporated into this new joint rule.
That suggestion has been accepted, and the definition is found at Section 3 (E)
- One commenter suggested that the definition of “financial institution” found in Section 3(D) be drafted to parallel the definition found in Maine’s interstate banking law making any in-state bank (state or federally chartered) and any out-of state bank having a branch in Maine subject to these rules.
Former Banking Regulations 19 and 21 regulated adjustable rate mortgages and partially amortizing mortgages made by Maine-chartered financial institutions. With the passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, the authority of states to enforce state consumer protection laws was affirmed. The Bureau of Banking is favorably inclined to expand the definition of “financial institution” to include in-state and out-of-state financial institutions (both state and federally chartered) to provide for consistent disclosure of information to Maine residents seeking an alternative mortgage transaction. This broadening of the regulated community, for purposes of this rule, becomes even more essential as we anticipate the presence of multi-state financial institutions in Maine through the establishment of interstate branches . Therefore, the suggestion has been adopted and Section 3 (D) has been modified accordingly
- One commenter asked that the provision allowing creditors to average the maximum allowable increase in a loan’s interest rate over the number of years the creditor has provided a discounted fixed rate, found in Section 4 (A)(3), be extended to all loans, rather than being limited to federally related mortgage transactions. Another commenter suggested clarifying the language of the provision.
Both suggestions have been accepted.
- One commenter suggested adding specific language authorizing “graduated payment and payment-capped loans.”
This suggestion has been accepted as a new subsection (5) and subsequent subsections have been renumbered sequentially.
- One commenter suggested deleting the prohibition against negative amortization which was previously contained in Section (4)(A)(9) to accomodate the new allowances for graduated payment and payment-capped loans.
The suggestion has been accepted.
- One commenter asked that Section 4(B)(4), “Alternative Financing,” be amended to allow consumers to waive their right to be qualified for a fully-amortizing loan.
The agencies decline to accept the suggestion at this time, mindful that “federally related mortgage transactions” have already been executed from the limitations of Section 4 (see Section 4(B)(1)). At the suggestion of the commenter, Section 4(B)(4) has been clarified, and no longer requires that, in each instance, the creditor determine its “most prevalent type of fully amortizing loan” in order to offer only that product.
- One commenter suggested that Section 5(B) be removed, since the limits on changes in terms not attributable to interest rate adjustments found in the 1988 Bureau of Banking Rule 119 are no longer included in this proposed joint rule.
The agencies decline to accept this suggestion, since Section 4 (A)(1)(b) still addresses permitted changes in balance or payment adjustments not tied to changes in the interest rate.
Last Updated: February 14, 2012