General Industry Letters
Mortgage Banking Letters
Home Equity Theft Prevention Act
February 1, 2007
To: The Institution or Individual Addressed:
On July 26, 2006, the Home Equity Theft Prevention Act (the “Act” or “HETPA”) was signed into law. The Act became effective February 1, 2007. Section 265-a of the Real Property Law is intended to address instances of “home equity theft” that occur when homeowners of residential property (defined as a 1–4 family owner/occupied residence) are in default on their mortgage payments or the property is in foreclosure, including the preservation of the equity in such properties to the extent possible for the benefit of the homeowner.
Generally, Section 265-a provides such homeowners with information and disclosures so they can make informed decisions when approached by persons deemed “equity purchasers” who are seeking a sale or transfer of the homeowner’s property. When applicable, the law provides remedies for homeowners in transactions which involve deceit, lack of fair dealing, misleading representations and unfair contract terms. This letter describes legislative changes made to the Banking Law, Real Property Law, and the Real Property Actions and Proceedings Law as a result of the enactment of HETPA.
Section 595-a(1) of the Banking Law was amended to prohibit mortgage bankers, mortgage brokers, and exempt organizations from making or arranging a loan to an “Equity Purchaser” (see Real Property Law below) if the mortgage banker, mortgage broker or exempt organization (for example, banks, thrifts and their consolidated subsidiaries), had knowledge that the Equity Purchaser was not complying with the provisions of Section 265-a of the Real Property Law with respect to such transaction.
Real Property Law
A new Section 265-a, entitled “Home Equity Theft Prevention”, was added to the Real Property Law. This section covers transactions involving the sale of a home in foreclosure or a home in default where the transaction includes a written reconveyance arrangement. These transactions involve “covered contracts.”
However, the requirements of Section 265-a do not apply to a person who acquires title as follows:
- to use, and who uses, such property as his or her primary residence;
- by a deed from a referee in a foreclosure sale conducted pursuant to article thirteen of the Real Property Actions and Proceedings Law;
- at any sale of property authorized by statute;
- by order or judgment of any court;
- from a spouse, or from a parent, grandparent, child, grandchild or sibling of such person or such person’s spouse;
- as a not-for-profit housing organization or as a public housing agency; or
- a bona fide purchaser or encumbrancer for value (e.g., a lienholder) 1
The law requires all “covered contracts” and notices of cancellation to be written in at least twelve-point bold type in English or in both English and Spanish, if Spanish is the primary language of the Equity Seller. Additionally, all such contracts must provide the Equity Seller with a minimum grace period of five business days in which to cancel the transaction.
While Section 265-a provides a format for the notice of cancellation, it does not mandate that the actual notice sent by the Equity Seller takes the particular form as provided with the covered contract. However, at a minimum, the notice must clearly indicate the intention of the Equity Seller not to be bound by the contract; contain the date the contract was signed; the exact date the right to cancel ends; and the name and address of the Equity Purchaser(s) and facsimile number, if any.
Upon receipt of a notice of cancellation, Equity Purchasers are required to return, within 10 days and without condition, any original covered contract and any other documents signed by the Equity Seller as well as any fee or other consideration received from the Equity Seller.
Section 265-a also prohibits Equity Purchasers from taking certain actions prior to the expiration of the five-day cancellation period. The following actions are prohibited during the grace period:
- Accepting execution of (or inducing any Equity Seller to execute) any instrument of conveyance of any interest in the residence in foreclosure or, where applicable, when the homeowner is in default;
- Recording with the County Clerk any document, including, but not limited to, any instrument of conveyance, signed by the Equity Seller;
- Transferring or encumbering or purporting to transfer or encumber any interest in the residence in foreclosure, or where applicable, when the Equity Seller is in default to any third party;
- Paying the Equity Seller any consideration; or
- Suggesting, encouraging, or providing any form which allows the Equity Seller to waive his or her right to cancel or rescind under this section.
In addition to the above prohibitions, Equity Purchasers are prohibited from making false or misleading statements regarding the details of a transaction, such as the value of the residence; the amount of the proceeds the Equity Seller will receive after a foreclosure sale or, where applicable, default; the timing of the judicial foreclosure process; any contract term; the Equity Seller’s rights or obligations under the sale; the nature of any document which the Equity purchaser induces the Equity Seller to sign; or any other false or misleading statement concerning the sale of the residence in foreclosure or, where applicable, default, or concerning the reconveyance arrangement.
Equity Purchasers are also prohibited from making certain types of representations which mislead or manipulate an Equity Seller, such as representing to the Equity Seller that the Equity Purchaser is acting as an advisor or consultant or indicating to the Equity Seller that they are assisting him/her in saving the home or preventing a completed foreclosure, unless there is a good faith basis for such representation.
In those instances in which the residence is not reconveyed to the Equity Seller, the Equity Purchaser must, within 120 days of either eviction or voluntary relinquishment of possession of the residence, provide the Equity Seller with cash payments or consideration of at least 82% of the fair market value of the property. The Equity Purchaser must also make a detailed accounting of the basis for the payment to the Equity Seller using the Homeowner Payment Accounting Form (located on the Banking Department’s Web site) and attaching written documentation of expenses.
The law also establishes a two year rescission period for any transaction involving residential real property in foreclosure or default which materially violates the legal requirements pertaining to; (1) the form and content of the covered contract, including the notice therein as well as the cancellation notice that must accompany the contract; (2) any of the prohibited actions applicable to the Equity Purchaser; and (3) any of the conditions that apply to any reconveyance that is a part of the agreement (see certain provisions of subdivisions three, four, six, seven or eleven of this section). Additionally, an Equity Seller has six years after the date of any alleged violation of those applicable provisions to commence an action against the Equity Purchaser for damages.
Real Property Actions and Proceedings Law
In addition to the legislative changes discussed above, the law amends a key section of the Real Property Actions and Proceedings Law to include a requirement for a specific notice to be given by a foreclosing party to the mortgagor (i.e., homeowner) and delivered with the summons and complaint. The purpose of the notice is to advise the mortgagor that he or she may be approached by persons who offer to save the home and that he or she should seek information and assistance from legitimate resources, some of which may be located by calling the Banking Department’s toll-free helpline (1-877-BANK-NYS) or by visiting the Banking Department’s Web site (http://www.banking.state.ny.us). Unlike the provisions of Section 265-a of the Real Property Law, these provisions are applicable to every lender making loans on residential real property.
If you are interested in reviewing the law, a copy of the Act is posted on the Department’s Web site.
Very truly yours,
Rholda L. Ricketts
Deputy Superintendent of Banks
1 A “bona fide purchaser or encumbrancer for value” means anyone acting in good faith who purchases the residential real property from the Equity Purchaser for valuable consideration or provides the Equity Purchaser with a mortgage or provides a subsequent bona fide purchaser with a mortgage, provided that he or she had no notice of the Equity Seller’s continuing right to, or equity in, the property prior to the acquisition of title or encumbrance, or of any violation of this section by the Equity Purchaser as related to the subject property. (back)