By now, mortgage lenders and servicers should be well familiar with what we will generically call New York’s new subprime statute – even aside from the lengthy alert on the subject we sent in early September 2008 when much of the law came into force. But more than a few questions about details and procedures have been asked of us by servicers and we want to bring those together here for helpful review.
The second part of that law – which we will not analyze here – sets remarkably strict standards for subprime loans (defined differently than loans from January 1, 2003 and September 1, 2008) entered into on or after September 1, 2008. While the definition of a subprime loan from 2003-2008 includes in part an interest rate three percentage points over the yield on treasury securities of comparable maturity (measured from the fifteenth day of the month the loan closed), loans on or after September 1, 2008 are includable in the definition when the rate is more than one and three quarter points over the average Freddie Mac commitment rate of comparable duration for the Northeast. So, lenders’ origination departments have much in the way of reading and compliance to do here. (You should note that shortly after this law passed, both Fannie Mae and Freddie Mac announced that they would buy no New York subprime home loans.)
The “first part” of the new law is addressed to the enforcement of subprime home mortgage loans vintage 2003-2008: the required 90 day notice and the mandatory court conference. So now to those questions – and answers.
Q. Does sending the 90 day notice mean we don’t have to send the 30 day breach letter?
A. No. If the mortgage requires a 30 day breach (cure letter), as the widely used Fannie Mae/Freddie Mac uniform instrument does, then it must be sent. (But note that not every form of mortgage has such a requirement.) The 90 day notice is a requirement of New York law, the 30 day mandate a matter of contract.
Q. When should we send the 90 day notice?
A. This is a business, not a legal decision, but we do have thoughts on the subject. Recall that the 90 day notice is a precondition to starting a foreclosure action; until the letter is sent and the 90 days expires, a servicer simply cannot begin a mortgage foreclosure action – at least not in compliance with law. Therefore, the longer a servicer waits to send the letter, the greater will be the delay in the overall foreclosure process.
To emphasize the issue of delay, obvious though it is, the more the delay, the greater the accrual of interest and the debt. As the sum due increases, with concomitant declines in property values so epidemic nowadays, the greater is the possibility that the equity will be eroded and the lender will suffer a loss.
To be sure, servicers have typically refrained from taking action until after a delinquency of perhaps three months. Sending a default notice immediately after a single month’s delay seems overly aggressive and harsh. But if the servicer waits, that additional three months lurks out there to delay the process.
So, legally, a servicer can send the notice any time after a default, mindful that it is a prerequisite to foreclosure. From a business standpoint, the choice is with the servicer.
Q. Assuming the mortgage requires the 30 day breach letter, when should we send that?
A. Try to have it coincide with conclusion of the 90 day period.
One of the sometimes confusing aspects of the 30 day cure process is what to do if the borrower partially performs within 30 days. The short answer is that anything less than a full cure before the 30 day expires is insufficient. But servicers don’t need to be confused about clashing time limits, especially encountering varying levels of cure attempts.
Therefore, try to send the 30 day letter 60 days after the 90 day letter has been sent. In that way, if at the end of the 90 days the borrower is in default, the shortest time has expired allowing the servicer to proceed with foreclosure (if that is otherwise a good idea).
Q. We have to send a list of at least 5 HUD counseling agencies along with the 90 day notice. Need we send the whole list the New York State Banking Department publishes?
A. No, a servicer need only send that portion of the list containing agencies in the region in which the borrower resides. Of course, the servicer will need to confirm what region that address fits.
Q. If the property isn’t worth the mortgage debt, or if we are in a second position, we might want to sue on the note and not start a foreclosure. Do we have to send the 90 day notice for an action other than foreclosure?
A. We think not, but there is a glitch in the statute making this unclear, so it is not possible yet to give an absolute answer.
The statute requires the 90 day notice before the “servicer commences legal action against the borrower, including mortgage foreclosure…” This certainly seems to suggest that the notice applies to any legal action, such as suit on a note. But the required notice (indeed the whole statute) is addressed to a borrower losing his home. A suit on the note in no way threatens title to the house.
So, we think the statute’s drafters just missed the nuances of the situation and did not intend notice to apply to an action on the debt. Until the statute is clarified by litigation, though, there may be some risk in suing on the note without first having sent the notice.
Q. We sent the 90 day notice after the borrower missed two payments. Before the 90 days expired, he made those two payments, but then missed another. Must we send the 90 day notice again to start the time running so we can foreclose if this borrower stays in default?
A. No. The statute anticipated this problem and so provides that a servicer need send the 90 day notice but once in a twelve-month period to the same borrower regarding the same loan.
Q. Does the new law – and its notice and conference requirements – apply to commercial loans?
A. No. By definition, the statute applies to subprime (and other) home loans. But commercial foreclosures are procedurally impacted because the courts require some demonstration that the foreclosure does not fit into the new statute. This can sometimes delay the commercial case.
Q. Is the mandatory conference a pre-condition to progressing through the foreclosure?
A. It is not, but as a practical matter, many courts are not entertaining the next stage of the foreclosure until the conference is completed – particularly unfortunate because the conference system is itself quite delayed.
To explain this with some technical precision, the statute provides that the court must schedule a settlement conference within 60 days of filing proof of service of the foreclosure proceedings. So, if for any reason the court has not scheduled the conference, the statute does not say the plaintiff is barred from moving to the next stage, appointment of a referee to compute.
Q. To what loans does the new law not apply?
A. This is a good question because it focuses the servicer on refraining from bogging down foreclosures in the cumbersome law when it is not required. It is also the reverse of determining what loans are included, thereby requiring the 90 day notice and the mandated court conference.
Servicers need to have reviewed the law to confirm which loans are included, but here is a quick checklist of characteristics which exclude a loan from the new law’s reach.
Q. Should we send the 90 day notice to all defaulting borrowers who have home loans with us?
A. No. It is not required and servicers should seek to avoid unnecessary delay in cases where the law does not newly impose delay. That said, some servicers are indeed sending the notice in all cases, which seems pointedly unfortunate.
To explain, lenders and servicers know that time can be an enemy of a mortgage loan in default. (If time alone would more likely lead to favorable settlements, then extra time – delay – might be more welcome.) But the passage of time increases the debt through the accrual of interest and the possible need to advance taxes or insurance or other expenses. In turn, this increases the likelihood that the debt cannot be recovered in full – all the more so in times when property values are declining.
The new law means that no matter how egregiously in default a borrower may be, a foreclosure cannot be begun until after a 90 day notice has been sent and the time period has expired. And then there must be a court settlement conference which is likely to add any number of months to case duration. Does a servicer want to incur this delay when it is simply unnecessary? The law is applicable only in certain cases; thus, obviously, it is inapplicable in others. (See earlier question and answer for a quick review of when the loan is not covered by the statute.) So, if the loan does not fit the statute, the notice and the conference can be avoided – they become irrelevant as they had always otherwise been.
We recognize that it takes some effort, some labor, some expense, to determine which loans are in and which are out. But if a servicer’s portfolio is 90% non-subprime and only 10% subprime, the effort to separate out the 10% to save enormous time in 90% of the cases would seem to be effort profitably expended. This would appear to be true for an 80-20 mix or 70-30 and so forth. At which percentage breakdown the non-subprime loans don’t merit weeding out is a business decision for servicers to make.
In the legal trenches, avoiding the inefficient impositions of the statute seems a stellar approach.
Q. Are all lenders covered by the statute?
A. Not completely, but as a practical matter for the industry, yes. For readers who are lenders and servicers (servicers are specifically mentioned) as are ongoing business, there is no issue about coverage. For readers who are lawyers or title companies and might need to address the issue, some more detail is helpful.
To briefly explain, a lender is defined [by RPAPL § 1304 (5) (g)] as a mortgage banker pursuant to Banking Law §590 (1) (f) – an expansive list. The definition also includes an exempt organization [pursuant to Banking Law § 590 (1) (e)], which also encompasses any entity incorporated by the federal government or a state which is authorized to make mortgage loans.
We believe this last category means entities specifically given the power to make mortgage loans. So if a jewelry store, for example, was incorporated and happened to make a mortgage loan to one of its vendors, that loan would not be covered by the subprime statute.
Similarly, an individual who makes such a loan (and who otherwise need not be licensed because of the number of loans he makes) would not be included.
Q. If a foreclosure upon what is defined as a subprime loan was begun before September 1, 2008, we know there cannot be any 90 day notice required. But must there be a court conference?
A. Well, the court must notify the borrower defendant that if he resides at the property in foreclosure he can request a settlement conference. If so requested, it must be held.
Q. How quickly will such a conference be scheduled and conducted?
A. The statute says the conference shall be held “as soon as practicable”. What precisely that means in the real world has not yet been revealed, but there is room for concern here about delay. First, we do not know yet how much time the court will afford the borrower to respond to the conference election. Even if the borrower is late, it probably will not take much of an excuse for the court to afford another chance to a person apparently in distress. Even when finally the conference is scheduled, adjournments are typically granted. In sum, duration here is unknown and it might add months to the process.
Q. What if there is no treasury security duration comparable to the length of a loan; how do we know what base rate to use upon which to add the threshold points?
A. The statute doesn’t say, so if your loan is, for example, 4 years, but comparable durations for treasury securities exist only for 3 and 5 years, there is no definitive answer. This is a patent flaw in the statute.
One reasonable approach would be to go to the nearest published duration and use that. In this example, neither is closer. That means you should add the points to both and if either yields a percentage which crosses the threshold, proceed upon the assumption that it is subprime. Even if rounding off to the nearest duration kept it out of subprime, there is no assurance that a court would not object to the method if going to the other available percentage would bring the percentage into subprime territory.
Q. Where there is an initial or introductory rate, we understand that the statute says the rate to apply to determine the threshold will be the annual rate which applies after that initial period. But is there any definition of duration of initial or introductory?
A. There is no definition and so there could be room for confusion with this. Where there is a special (usually artificially low) rate for say the first six months, there won’t be a definitional dilemma. But what if there is a certain rate for the first five years, after which it rises, or is adjusted thereafter upon an index. How will that be computed?
It is possible – but we cannot assert this with any assurance – that certain definitions in the new Banking Law § 6 in (A), (B) and (C) might be helpful These apply to post – September 1, 2008 subprime loans. Whether they enlighten this question is problematic and they certainly do not purport to specifically define or measure “initial” or “introductory”. Accordingly, we may have another statutory flaw for this issue.
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.