The Good Funds Statute revisited

Issue March 2013 March 2013 By Thomas L. Guidi

The Good Funds Statute, G.L.c. 183, § 63B, was enacted by the Massachusetts legislature in 1994 to ensure that when a person obtains a loan that is to be secured by a mortgage on his or her home, before the mortgage is recorded the borrower has reasonable assurance of receiving the loan proceeds. The Good Funds Statute was passed in response to the crisis caused by the insolvency of Abbey Financial, a mortgage lender that went out of business without funding a large number of pending residential mortgage loans for which the mortgage documents had already been recorded. The result was that homeowners attempting to refinance their existing mortgage loans were trapped with new mortgages encumbering their properties, and no loan proceeds to pay off their prior mortgages.

The Good Funds Statute addressed this issue by requiring that the loan proceeds be transferred to the mortgagor, the mortgagor's attorney or the mortgagee's attorney, in the form of good funds, i.e., a certified check, bank treasurer's check, cashier's check or wire transfer, prior to recording of the mortgage. In practice, this means that the attorney representing the lender must have possession of the loan proceeds before the documents go to record. Although inspired by a consumer protection concern, the Good Funds Statute is not by its terms limited to residential mortgage loan transactions.

The Interest on Lawyers' Trust Accounts (IOLTA) program, which was created by the Supreme Judicial Court in 1985 and is mandated by Rule 1.15 of the Massachusetts Rules of Professional Conduct, was a major beneficiary of the Good Funds Statute. Under Rule 1.15, client funds, including mortgage proceeds, must be held in lawyers' clients' funds accounts which are usually IOLTA accounts. The IOLTA Committee, which was created by the Supreme Judicial Court to administer the IOLTA program, distributes the interest earned on IOLTA accounts to the Massachusetts Legal Assistance Corporation, the Boston Bar Foundation and the Massachusetts Bar Foundation to be distributed to legal aid providers to improve the administration of justice.

In 2007, the IOLTA program received and distributed approximately $31 million. However, the recent recession resulted in substantially fewer real estate closings, smaller loans due to decreasing property values, and in some cases, reduced interest rates on IOLTA accounts. Because title insurers and out of state settlement service companies have been conducting closings without the loan proceeds being funded to lawyers' client trust fund accounts in apparent violation of the Good Funds Statute, the funds flowing through and the earnings generated by IOLTA accounts have been further reduced. Consequently, in 2012 IOLTA receipts had dropped to approximately $7 million each year.

The major problem with the Good Funds Statute is that it has no enforcement mechanism. State Sen. William N. Brownsberger (D-Belmont) has filed proposed legislation (S.68) amending the statute to address this issue. The proposed amendments include a private right of action for any mortgagor aggrieved by a violation of the Statute, and provide for actual damages or, absent actual damages, statutory damages of $1000 for each violation, plus costs and reasonable attorneys' fees. The proposed amendments also empower the Undersecretary of the Massachusetts Office of Consumer Affairs & Business Regulation to enforce the Statute and to promulgate reasonable rules and regulations relating thereto.

Under S.68, a violation of the Statute would constitute a violation of Chapter 93A, and could be grounds for suspension of a lender's license to make mortgage loans in Massachusetts.

The proposed amendments would better protect borrowers, generate additional funds for legal services, and deter the unauthorized practice of law. Not surprisingly, both the IOLTA Committee and the Real Estate Bar Association for Massachusetts, Inc. support the proposed legislation.

THOMAS L. GUIDI is the senior real estate partner in the Boston Law Firm of Hemenway & Barnes LLP. He is also the chair of the MBA Property Law Section Council.