Boston Business Journal

New law imperils collection of some business debts

by Denise Magnell
April 18, 2008

A new state law giving a 90-day reprieve to beleaguered homeowners facing foreclosure appears to give the same break to business owners who put up their homes as collateral for commercial loans.

No distinction is made to edge out commercial transactions related to residential property from the "right to cure" provision, which effectively puts foreclosures on hold for three months once the homeowner is notified by the bank.

And that sticking point has some industry experts questioning if the intent of the waiting period should extend to cases of business loans backed by residential property.

Last November, Gov. Deval Patrick signed the new law, which is aimed at stemming foreclosures brought on by subprime lending, but also provides particular help to first-time homeowners and tenants who rent in foreclosed properties. The law applies to all owner-occupied residential property in the state, up to four-family homes in size.

"This law makes a great deal of sense if you've gotten one of the subprime mortgages to finance your home," said real estate attorney Michael Gatlin, a shareholder with the law firm Ruberto, Israel & Weiner in Boston. "The problem is, the way it's written, the law also applies to corporate entities. When I saw that in the law, I thought, 'It must be missing something ... this can't be right.' "

The "right to cure" provision -- which takes effect May 1 -- gives homeowners a chance to reverse their financial woes following a foreclosure notice. During the waiting period, they can put their home loan in good order by refinancing or seeking relief of some kind.

But since that provision in the law applies to "any mortgagor of residential real property," those who put up their private residence as collateral for a commercial loan would reap the same benefit.

The latest figures from The Warren Group, a provider of real estate data, show petitions to foreclose homes statewide rose 27 percent from 2,232 in February 2007 to 2,835 in February this year. Foreclosure deeds in February rose 145.7 percent from 350 last year to 860 in February 2008.

Gatlin contends that when a bank allows a home to be used as a guarantee to a commercial loan, the lender operates on the assumption that foreclosure can begin immediately if collection against the commercial assets falls short.

"This turns a commercial transaction into a consumer transaction," he said. "Now the bank doesn't have ready access to the collateral they thought they had, and that makes the collection different -- they have to go through foreclosure, plus 90 days."

Kim Haberlin, communications director for the state Office of Consumer Affairs, said the Division of Banks is "reviewing this provision for its scope and implications."

"We're committed to implementing this bill so it helps as many homeowners as possible," she said.

Kevin Cuff, executive director of the Massachusetts Mortgage Bankers Association, isn't so sure the wording of the "right to cure" provision thwarts the state's intention to protect homeowners. But he acknowledges questions have been raised about the reach of the new law by real estate attorneys and bankers alike.

Cuff said his and other banking groups have asked the Division of Banks to clarify various points in the law. "The Legislature was trying to give protection to consumers who need protection, but a lot of the law is still open and gray."

Denise Magnell can be reached at denisemagnell@bizjournals.com.