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.