That is the security deposit law. And the tenant is right, you have violated the awl by not giving him the full address of the bank and other information. If you give him all the information required by law now, if you end up in court, the judge may by lenient with you for at least complying wiht the law as soon as you knew about it. If you don't comply with the law now, a judge will most probably hit you with the full three months penalty.

Now that you know where to find LL/tenant laws on the web, read them, learn them, abide by them. Aslo google: abcd landlord tenant. That;s a group alled Bosotn ABCD which has a very good explanation of the law.

If you have a written lease with the tenant, you have to abide by it until it runs out (e.g. have to keep your agreement that he can use sec. deposit for last months rent.). If you don't have a written lease, you can give him 30 days wirtten notice that he has to pay you last months rent or move out.

Either way, the tenant clearly knows the law better than you and you should terminate his enacy as soon as you legally can. But first - learn Massachusetts Lanlord tenant law - and your local city/town law.