Section 029-119-4 - AUTHORIZATIONS AND LIMITATIONSA creditor or financial institution may engage in an alternative mortgage transaction subject to the following limitations:
A. 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: (1) Frequency of Payment Change. Changes in payment amounts may occur only as follows: (a) 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: (I) 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 (ii) 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.(b) 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.(2) 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.(3) 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.(4) 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 1/14 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.(5) 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.(6) Notification of Change. Notification of borrowers of changes in interest rate, loan balances or required payments shall be made in accordance with the following: (a) 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: (I) 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; (ii) 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.(b) 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: (I) an explanation of the circumstances that have led to such a payment change; (ii) the monthly payment due after implementation of the payment adjustment(iii) 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(iv) the right to prepay the loan without penalty.(7) 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.(8) 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.(9) 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.02-029 C.M.R. ch. 119, § 4