This is a startling “heads up” for lenders and servicers: A bill has passed both houses of the New York State legislature and awaits the signature of the governor. While no one can say with certainty whether the governor will sign it, the easy guess is that he will. The law is designed to award legal fees to a residential borrower who successfully defends a mortgage foreclosure action. Of course, it is not quite so benign as that may sound.
Designated to be a new §287 of the Real Property Law, it is entitled “Mortgagor’s Right to Recover Attorneys’ Fees in Actions or Proceedings Arising Out of Foreclosures of Residential Property.”
First, whatever precisely the statute means, its application is solely to “Residential Real Property”. This is defined in subsection 2 of the statute as property:
“improved by a one-to-four-family residence, a condominium that is occupied by the mortgagor or a cooperative unit that is occupied by the mortgagor.”
So while this clearly covers an owner occupied condo or co-op, the one-to-four-family residence can apparently be an investment property; the condition of owner occupied is appended only to the condo and co-op.
The essence of the new statute is that where a mortgage contains a legal fee provision for the lender, then there must be implied in the mortgage a covenant that the lender pay to the borrower the reasonable attorneys’ fees and/or expenses incurred by the borrower resulting from the failure of the lender to perform any covenant or agreement on its part under the mortgage, or in the successful defense of any action commenced by the lender against the borrower arising out of the “contract”. (Any waiver of this new obligation in a mortgage is deemed void as against public policy.)
While the notion that a borrower might be entitled to collect legal fees in a mortgage foreclosure action is generally unpalatable to lenders (and it has not previously existed in New York), where it might be the lender which breached a mortgage, that the borrower should be reimbursed for legal fees does not seem so offensive. The problem, though, is that from time to time courts may indict a lender for a supposed breach when the lender argues quite genuinely that such a defalcation never occurred.
But the real danger here is granting the award for a successful defense of any foreclosure action. What precisely is a successful defense? If a lender loses a foreclosure because it made a mistake, such as the borrower truly was not in default; the lender lost the record of funds having been paid, or someone just made a mistake and erroneously began a foreclosure. But what happens if a foreclosure is defeated because a process server fumbled and the case was dismissed? Sometimes, not incidentally, a borrower will claim that the person served at their home was unknown to them and a court might accept it even if one might deem the assertion to be a prevarication.
Then there is the problem of a lender being accused of not having sent a notice where it did so but the records to prove it are imprecise. Is that a successful defense of a foreclosure action entitling the borrower to be repaid its legal fees? It is one thing for a lender to be substantively wrong and pay the price, it is another for a technical miscue to elicit payment of a borrower’s legal fees.
Mindful that this section is referred to as the “Access to Justice in Lending Act” it suggests most strongly that the governor will view it favorably. If the bill is signed, it will take effect on the sixtieth day after it becomes law and will then apply to any residential real property mortgage in existence on or after that effective date and will apply to any actions commenced on or after that date.
Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), 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.