2009 Mortgage Foreclosure Law - Overview
On December 15, 2009, Governor David Paterson signed the Mortgage Foreclosure Law (chapter 507 of the laws of 2009), which was part of his 2009 legislative program, and was passed on November 16, 2009, at a Special Session of the New York Legislature. This new law builds on the 2008 Subprime Lending Reform Law, and targets the mortgage crisis in two ways: (1) by providing further assistance to homeowners at risk of losing their homes and assisting tenants in foreclosed properties; and (2) by refining some of the prior amendments to the Banking Law regarding mortgage lending. The law became effective upon signing, except as noted below. Full text of Chapter 507 of the laws of 2009.
1. ELEMENTS OF THE LAW TARGETED AT THE FORECLOSURE PROCESS:
Foreclosure Notice to Tenants: The law amends the foreclosure notice provisions of Section 1303 of the Real Property Actions and Proceedings Law (RPAPL) (which requires a notice to the mortgagors to be delivered with the summons and complaint in the foreclosure action) to require notice to tenants in a dwelling that becomes the subject of a foreclosure action, to inform them of their rights. The notice to tenants must be delivered within 10 days of the service of the summons and complaint to the mortgagor. Notice to tenants in buildings with one to four units must be sent by certified mail, return receipt requested, and by first class mail to the tenant’s address at the property, if the identity of the tenant is known to the plaintiff, and by first-class mail addressed to “occupant” if the identity of the tenant is not known to the plaintiff. Notice to tenants in other dwellings must be posted on the outside of each entrance and exit of the building.
Effective Date: January 14, 2010 and applies to notices required on or after that date.
Pre-Foreclosure Notice: The law amends the pre-foreclosure notice provisions of Section 1304 of RPAPL to require that a pre-foreclosure notice be sent, at least 90 days before the lender commences legal action against the borrower, to all borrowers with home loans -- not just to borrowers with high-cost, subprime and non-traditional home loans. The pre-foreclosure notice informs homeowners of steps they can take to avoid foreclosure, including working with their lender to find an affordable solution to foreclosure and consulting with a not-for-profit housing counselor. The amendment makes clear that the requirement to send the notice applies to assignees of mortgages as well as the original lender. It also provides that the notice must be sent to the borrower with respect to all home loans, and is not limited to borrowers whose mortgage principal amount is less than the FNMA conforming loan size limit.
Effective Date: January 14, 2010 and applies to notices required on or after that date. It sunsets five years later.
Notices with Respect to Coop Loans: The law extends the requirement to give a pre-foreclosure notice to debtors with residential cooperative loans. A form of notice is included in the new provision, which is in § 9-611 of the New York Uniform Commercial Code.
The law amends UCC § 9-620 to provide that, where the lender sends a proposal to take the cooperative interest (i.e. coop shares and proprietary lease) in satisfaction of the loan, the proposal must be accompanied by a notice in the form required by new § 9-611 (to the extent not previously given). It also provides that the debtor is deemed to consent to such satisfaction only if the debtor agrees to the terms of the proposal in a record authenticated after default.
Effective Date: January 14, 2010 and apply to notices required on or after that date.
Right of Tenants to Remain in Foreclosed Property: The law gives tenants who reside in a foreclosed property the right to remain in occupancy on the same terms and conditions that were in effect at the time of entry of the judgment of foreclosure and sale. The provision, which is in new Section 1305 of RPAPL, applies to persons who, on the date of the foreclosure notice described above under “Foreclosure Notice,” were tenants of a dwelling unit with a written or oral lease agreement, which required the payment of rent that was not substantially less than the fair market rent for the unit at the time the lease was entered into. The tenant will have the right to remain in the dwelling unit for the greater of (a) the remaining term of the lease, or (b) 90 days. However, if a successor owner of the property intends to occupy a single unit of the building as his or her primary residence the successor may terminate the lease for that unit by giving 90 days’ notice. The section also requires a successor in interest of the property to notify the tenants of their rights, as well as the name and address for communication with the new owner. The new provisions do not affect the right of a successor owner to evict the tenant for non-payment of rent under the lease. The provisions do not supersede any protections granted by other law to tenants subject to rent control, rent stabilization, or governmental subsidy.
Effective Date: January 14, 2010 and applies where a tenant foreclosure notice is required on or after that date.
Required Filing with Superintendent; Database of pre-foreclosure information: The law requires each lender, assignee or mortgage loan servicer to file with the Superintendent of Banks, within three business days after filing the 90-day pre-foreclosure notice for residential real property or cooperative apartments, certain information that will help the Banking Department help borrowers at risk of foreclosure. This includes the name, address and last known telephone number of the borrower, the amount claimed as due and owing on the mortgage, and any other readily available information the Superintendent may require to determine the type of loan at issue. The filing must be on a form prescribed by the Superintendent. Information filed under this section is not subject to disclosure under the Freedom of Information Law or to certain provisions of the Personal Privacy Protection Law. Within 180 days of the effective date of Section 1306 (or such later time as the Superintendent may determine), the Superintendent is required to develop an electronic database that is capable of receiving the required filings.
Effective Date: The filing requirement, which is in Section 1306 of RPAPL, is effective February 13, 2010 and applies to 90-day pre-foreclosure notices mailed on or after that date.
Duty to Maintain Property: The law requires the plaintiff in a mortgage foreclosure action (other than a governmental unit) who obtains a judgment of foreclosure and sale with respect to residential real property that is vacant or is abandoned by the mortgagor but is occupied by a tenant, to maintain the property until the ownership is transferred. Maintaining the property means keeping it in compliance with listed sections of the New York Property Maintenance Code and other applicable local laws relating to housing standards. If the property is occupied by a tenant, then the property must be maintained in a safe and habitable condition. The maintenance requirement, which is suspended during any period in which the mortgagor is the subject of a bankruptcy proceeding or there is a receiver with respect to the property, is contained in new Section 1307 of RPAPL. It may be enforced by a municipality in which the property is located, a lawful tenant, the board of managers of a condominium or a homeowners association.
Effective Date: April 14, 2010.
Mandatory Settlement Conferences: The new law expands the mortgagors entitled to a mandatory settlement conference by making it applicable to all home loans with respect to residential real property. In a change from the 2008 law, the new provisions are not restricted to high-cost and subprime home loans, or to loans consummated between January 1, 2003 and September 1, 2008. This amendment is a reflection of the fact that many current foreclosures have as much to do with the economic downturn and job losses as with the subprime mortgage crisis. The bill also imposes upon both the plaintiff and defendant a duty to negotiate in good faith to reach a mutually agreeable resolution if possible.
In order to ensure that persons at risk of foreclosure receive counseling to assist them in keeping their homes, the law provides that, when the court receives a request for judicial intervention in connection with a foreclosure action, it must send either the RJI or the defendant’s name, address and telephone number to a housing counseling agency or agencies on a list designated by the Division of Housing and Community Renewal for the judicial district in which the defendant resides. Such information may be used only to make the homeowner aware of housing counseling and the foreclosure prevention services and options available to them.
In order to make settlement conferences more productive than they have been in the past, the law requires the court to send a notice to the parties, in a form to be prescribed by the Office of Court Administration or the Administrative Judge of the judicial district in which the action in pending, advising the parties of the documents they should bring to the settlement conference.
Finally, the law prohibits a lender or servicer from charging the borrower for any cost, including attorneys fees, for appearance at or participation in the settlement conference.
Effective Date: February 13, 2010 and applies to legal actions filed on or after that date. The amendment described in the first paragraph of this section sunsets five years later.
Court Rules for Mandatory Settlement Conferences: The law requires the Chief Administrator of the Courts, within 90 days of the effectiveness of the new law, to promulgate additional rules to ensure the just and expeditious management of settlement conferences in mortgage foreclosures. This includes the authority to ensure that the parties negotiate in good faith and do not use dilatory tactics, through the imposition of appropriate sanctions for egregious behavior. The law also requires the Chief Administrator to submit an annual report to the Governor and the Legislative Leaders on the effectiveness of the settlement conferences.
Effect of Settlement Agreement: The law requires that, within 150 days after execution of any settlement agreement or loan modification, the plaintiff in the foreclosure action must file a notice of discontinuance and vacatur of the lis pendens.
Foreclosure Rescue Scams: The 2008 Mortgage Lending Reform Law amended Section 265-b of the Real Property Law to prohibit “distressed property consultants” – also known as loan modification consultants – from taking an up-front fee. The reason for the prohibition was that many borrowers are eligible for free or low-cost counseling. In addition, under the Obama Administration’s Home Affordable Mortgage Program, many mortgage loan servicers have committed to negotiate loan modifications with eligible homeowners. Moreover, distressed property consultants often did not disclose the likelihood of a successful loan modification before taking money the borrower at risk of foreclosure could ill afford to spend. The 2008 law exempted mortgage bankers and mortgage brokers who are registered with the Banking Department, as well as attorneys admitted to practice in New York. The new law amends Banking Law § 595-a and Real Property Law Section 265-b to add a number of additional requirements. First, a mortgage banker or mortgage broker is prohibited from charging or accepting payment for distressed property consulting services before the full completion of the services. Second, a New York attorney is only exempt when the attorney is directly providing consulting services to a homeowner in the course of his or her regular legal practice. Third, Section 265-b is amended to clarify that a person providing consulting services may not place a fee in escrow pending the completion of the services.
Effective Date: December 15, 2009.
2. ELEMENTS OF THE LAW TARGETED AT MORTGAGE LENDING:
Shared Appreciation Agreements: The law amends Section 6-f of the Banking Law to authorize the Banking Board to adopt rules permitting shared appreciation agreements where the lender or holder of a residential mortgage loan or cooperative apartment unit loan reduces the principal amount of a mortgage loan in order to assist a borrower at risk of foreclosure. Under such an agreement, the lender is entitled to share in any appreciation of the market value of the real property or coop shares between the effective date of the reduction in the principal amount of the mortgage until the date when the property is sold, but not more than the lesser of (i) the amount of the reduction in principal, plus interest at the same rate as applies to the remaining principal amount and (ii) 50% of the amount of appreciation. The law requires certain disclosures with respect to shared appreciation mortgages. New York does not currently allow shared appreciation mortgages (other than certain FHA-insured mortgages). It is one of 5 states that overrode the preemption effected by the Federal Alternative Mortgage Transaction Parity Act of 1982, with respect to “alternative” mortgages.
SONYMA Mortgages: The law exempts mortgages made by SONYMA (the State of New York Mortgage Agency) from the requirements of the Banking Law’s high-cost and subprime mortgage underwriting standards, on the grounds that SONYMA mortgages are not predatory. See BL §§ 6-l(1)(e) and 6-m(1)(d).
Determinations of High-Cost and Subprime Mortgage Loans: The law makes clear that, in determining whether a mortgage loan is within the FNMA “conforming loan size limit,” and therefore subject to the underwriting standards for high-cost and subprime loans, one looks at any applicable special limit for jumbo mortgages. Consequently, if the FNMA conforming loan limit is $417,000, but the limit in Queens County is $729,750, then a $700,000 loan with respect to a property in Queens County can be a subprime home loan, if it meets the other tests for such a loan. See the definition of “home loan.”
Effective Date: February 13, 2010.
Yield Spread Premiums: The law makes clear that the disclosures required with respect to yield spread premiums for high-cost or subprime loans may be made within three days after receipt of an application. The Banking Law previously required the disclosure to be made “at the time” of application. However, Federal mortgage disclosures can be given within three days after such receipt. The law also indicates that a mortgage broker may receive yield spread premiums and may receive compensation from both the lender and the borrower only if permitted by applicable law. The Board of Governors of the Federal Reserve System has proposed an amendment to Regulation Z that would permit compensation from either the borrower or the lender, but not both. The proposed amendments to Regulation Z would not prohibit yield spread premiums as long as the amount of the payment is not based on the terms of the loan. See §§ 6-l(1)(s) and 6-m(1)(n).
Effective Date: February 13, 2010.
Fully indexed rate: The 2008 Mortgage Lending Reform Law requires that, when determining if a home loan is “subprime” or determining if the borrower has the ability to repay the loan, any introductory period in which there is a “teaser rate” is ignored, and the determination is based on the “fully indexed rate.” The new law makes clear that this concept also applies to fixed rate loans (i.e. where there is no “index”). It also makes clear that, if there is an initial period where the interest rate is higher than in subsequent periods, the determination of whether the loan is subprime, and the borrower has the ability to repay it, is made based on the higher introductory rate, rather than on the later rate or a blended rate. Finally, the new law changes the time when the determination of the fully indexed rate is made. Previously, it was the time of the closing; henceforth for loans based on an index, it will be the time when the lender provides the “good faith estimate” under RESPA, and, for fixed rate loans, it will be the date of the commitment. Because a number of requirements, including a recommendation for borrower counseling, follow from a determination that a loan is “subprime,” the time of the closing was too late in the underwriting process. Banking Law § 6-m(1)(b).
Effective Date: February 13, 2010.
Manufactured Homes: The law amends the definition of “home loan” and the registration provisions for mortgage bankers and mortgage brokers in BL § 590 to give the Banking Board the authority (a) to determine, by regulation, that persons who make or originate loans secured by a security interest on a manufactured home must be registered as a mortgage banker or mortgage broker and (b) to promulgate rules regarding the origination, sale or servicing of manufactured home loans.
Effective Date: February 13, 2010.
Registration of Mortgage Loan Servicers: The law amends Banking Law § 590 to make clear that the Superintendent may require applications for registrations as a mortgage loan servicer to be made through the National Mortgage Licensing System and Registry (NMLS), and to require registrants to pay processing fees to NMLS.