In mid-July our regular alert was entitled “New Statute A Disaster For Mortgage Origination And Foreclosure” – and the title was not hyperbole. A more detailed version appeared in the New York Law Journal and readers may want to explore that: “New Statute A Disaster For Mortgage Origination And Foreclosure”, NYLJ, July 14, 2021 at 3, col. 1.
Not surprisingly, the bill was signed by the governor (the since resigned Andrew Cuomo). The approval Memorandum contained some unusual language, assuredly worth reading:
“It is important to provide homeowners with a full and fair opportunity to defend themselves in a foreclosure proceeding. While I agree with the sponsor’s intent in that regard, this bill contains technical flaws that prevent its effective implementation.
Therefore, the Executive has secured an agreement with the Legislative to pass legislation in the upcoming session that would clarify the requirement for foreclosure actions involving all residential mortgage loans to plead compliance with the requirements of section 595-a of the Banking Law, and a clarification to avoid confusion about the application of sections 6-1 and 6-m of the Banking Law. On that basis, I am signing this bill.”
This is encouraging, but critical questions remain. Does the agreement secured address all the anomalies and confusion? Does the legislature have carte blanche to change the legislation as much or as little as they choose? And who precisely in the senate or the assembly will address the task?
It is to be hoped that the disaster envisioned will be avoided. But that will not be known for a while. By way of background, reminder and ready reference, the text of the July alert focusing on the issues follows:
NEW STATUTE A DISASTER
FOR MORTGAGE ORIGINATION AND FORECLOSURE
Is it conceivable that as of January 1, 2022 it will become impossible in New York to both issue a home loan mortgage and foreclose upon it?
The odds are that it will happen because Bill 2502-A has passed both houses of the New York legislature and has been sent to the Governor for signature. One problem, though, is that the true effect of this new statute is not so obvious to most observers – one has to prosecute mortgage foreclosures regularly and with dedication to appreciate what these provisions actually mean and what they will do. In short, the new law – an amendment to RPAPL § 1302 – imposes subprime and high cost home loan constraints and prohibitions upon all home loans, even those not of in the subprime or high cost category.
Current RPAPL § 1302
This section, entitled “Foreclosure of high-cost home loans and subprime home loans”, provides at subsection 1 that any complaint in a foreclosure relating to a high-cost home loan or a subprime home loan must contain an affirmative allegation that at commencement the plaintiff is the owner and holder of the mortgage and note (or has been delegated that authority) and has complied with all the provisions of section 595-a of the Banking Law, related regulations, and section six-l or six-m of the Banking Law.
Subsection 2 states that it shall be a defense to a foreclosure of either a high-cost home loan or a subprime home loan that the terms of the subject loan or the actions of the lender violate any provision of six-l or six-m of the Banking Law (or RPAPL § 1304 which is the 90 day pre-foreclosure notice). The key consideration is that § 1302, as currently constituted, applies solely and specifically to high-cost home loans and subprime home loans. The considerable impositions of Banking Law section six-l or six-m, as the case may be, have appropriately have never had any involvement with all other variety of residential or home loan mortgages – or commercial mortgages.
The Danger of High-Cost and Subprime Home Loan Rules (Banking Law § six-l and six-m)
Most of these requirements have no relationship to the typical residential or home loan mortgage. These statutes require (among other directives) no application of default interest, no fees if a loan is restructured or modified, determination of a borrower’s ability to repay as a condition of the loan, a prohibition against the loan issuing without counselling with a delineation of counselors, no employment of prepayment penalties and a mandatory escrow for taxes and insurance (even though many creditworthy borrowers want to pay their own taxes).
Threat of Statute as Amended
The new version removes from the title “high-cost home loans and subprime home loans” and substitutes “certain residential mortgages”. Subsection 1 accordingly provides that a foreclosure of a residential mortgage covering a one-to-four family dwelling must contain the same affirmative allegations as had applied to the statute before amendment. As to compliance with the provisions of Banking Law section six-l or six-m (which of course presently apply exclusively to high-cost home loans and subprime home loans) the statute adds as clarification application “for loans governed by those provisions”. This is acceptable and not a problem.
The peril, however, comes in section 2. There, in stating what shall be a defense to an action to foreclose “a mortgage” (an exceptionally broad category), it removes, or neglects to include, the limiting words “for a high-cost home loan or a subprime home loan”. It goes on the say that it will be a defense to foreclosure that the terms of the home loan or the actions of the lender violate any provision of six-l and six-m.
The previous review does not even mention the considerable confusion in the statute in the loose use of terms: residential mortgage, mortgage and home loan mortgage. It is impossible to determine with precision what the provisions actually refer to, although it is at least home loans with the possibility of being broader. In the end, though, if every home loan needed to adhere to subprime and high cost loan dictates, it is reasonable to conclude that lenders would not make the loans. And if the loans were made (wildly remote though that is) because not adhering to all the mandates would be a defense to foreclosure, borrowers will assert the defense in every case. Lenders will be further bogged down in litigating cases which have already become unmanageable.
More than serious trouble is in store for mortgage lenders and servicers in New York.
Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2021), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.