General Industry Letters
Mortgage Banking Letters
Deeds-in-Lieu of Foreclosure and § 265-a of the Real Property Law
May 10, 2011
This guidance interprets § 265-a of the Real Property Law (“§ 265-a”), which was adopted as part of the Home Equity Theft Prevention Act (“HETPA”). Section 265-a was adopted in 2006 to deal with the growing nationwide problem of deed theft, home equity theft and foreclosure rescue scams in which third party investors, typically representing themselves as foreclosure specialists, aggressively pursued troubled homeowners by promising to “save” their home. As noted in the Sponsor’s Memorandum of Senator Hugh Farley, the legislation was intended to address “two main types of fraudulent and abusive practices in the purchase or transfer of distressed properties.” In the first situation, the homeowner was “misled or tricked into signing over the deed” in the belief that they “were simply obtaining a loan or refinancing. In the second, “the homeowner knowingly signs over the deed, with the expectation of temporarily renting the property and then being able to buy it back, but soon discovers that the deal is structured in a way that the homeowner cannot afford it. The result is that the homeowner is evicted, loses the right to buy the property back and loses all of the equity that had been built up in the house.”
Section 265-a contains a number of protections against home equity theft of a “residence in foreclosure”, including providing homeowners with information necessary to make an informed decision regarding the sale or transfer of the property, prohibition against unfair contract terms and deceit; and, most importantly, where the equity sale is in material violation of § 265-a, the opportunity to rescind the transaction within two years of the date of the recording of the conveyance.
It has come to the attention of the Banking Department that certain banking institutions, foreclosure counsel and title insurers are concerned that § 265-a can be read as applying to a deed in lieu of foreclosure granted by the mortgagor to the holder of the mortgage (i.e. the person whose foreclosure action makes the mortgagor’s property a “residence in foreclosure” within the meaning of § 265-a) and thus restricts their ability to offer deeds in lieu to homeowners in appropriate cases. See, e.g., Bruce J. Bergman, “Home Equity Theft Prevention Act: Measures May Apply to Deeds-in-Lieu of Foreclosure, NYLJ, June 13, 2007.
The Banking Department believes that these interpretations are misguided.
It is a fundamental rule of statutory construction to give effect to the legislature’s intent. See, e.g., Mowczan v. Bacon, 92 N.Y.2d 281, 285 (1998); Riley v. County of Broome, 263 A.D.2d 267, 270 (3d Dep’t 2000). The legislative finding supporting § 265-a, which appears in subdivision 1 of the section, makes clear the target of the new section:
During the time period between the default on the mortgage and the scheduled foreclosure sale date, homeowners in financial distress, especially poor, elderly, and financially unsophisticated homeowners, are vulnerable to aggressive "equity purchasers" who induce homeowners to sell their homes for a small fraction of their fair market values, or in some cases even sign away their homes, through the use of schemes which often involve oral and written misrepresentations, deceit, intimidation, and other unreasonable commercial practices.
In contrast to the bill’s clearly stated purpose of addressing “the growing problem of deed theft, home equity theft and foreclosure rescue scams,” there is no indication that the drafters anticipated that the bill would cover deeds in lieu of foreclosure (also known as a “deed in lieu” or “DIL”) given by a borrower to the lender or subsequent holder of the mortgage note when the home is at risk of foreclosure. A deed in lieu of foreclosure is a common method to avoid lengthy foreclosure proceedings, which may enable the mortgagor to receive a number of benefits, as detailed below. Consequently, in the opinion of the Department, § 265-a does not apply to the person who was the holder of the mortgage or was otherwise entitled to foreclose on the mortgage (or any agent of such person) at the time the deed in lieu of foreclosure was entered into, when such person agrees to accept a deed to the mortgaged property in full or partial satisfaction of the mortgage debt, as long as there is no agreement to reconvey the property to the borrower and the current market value of the home is less than the amount owing under the mortgage. That fact may be demonstrated by an appraisal or a broker price opinion from an independent appraiser or broker.
A deed in lieu is an instrument in which the mortgagor conveys to the lender, or a subsequent transferee of the mortgage note, a deed to the mortgaged property in full or partial satisfaction of the mortgage debt. While the lender is expected to pursue home retention loss mitigation options, such as a loan modification, with a delinquent borrower who wants to stay in the home, a deed in lieu can be advantageous to the borrower in certain circumstances. For example, a deed in lieu may be beneficial for the borrower where the amount owing under the mortgage exceeds the current market value of the mortgaged property, and the borrower may therefore be legally liable for the deficiency, or where the borrower’s circumstances have changed and he or she is no longer able to afford to make payments of principal, interest, taxes and insurance, and the loan does not qualify for a modification under available programs. The DIL releases the borrower from all or most of the personal indebtedness associated with the defaulted loan. Often, in return for saving the mortgagee the time and effort to foreclose on the property, the mortgagee will agree to waive any deficiency judgment and also will contribute to the borrower’s moving costs. It also stops the accrual of interest and penalties on the debt, avoids the high legal costs associated with foreclosure and may be less damaging to the homeowner’s credit than a foreclosure.
In fact, DILs are well-accepted loss mitigation alternatives to foreclosure and have been incorporated into most servicing standards. Fannie Mae and HUD both recognize that DILs may be beneficial for borrowers in default who do not qualify for other loss mitigation options. The federal Home Affordable Mortgage Program (“HAMP”) requires participating lenders and mortgage servicers to consider a borrower determined to be eligible for a HAMP modification or other home retention option for other foreclosure alternatives, including short sales and DILs. Likewise, as part of the Helping Families Save Their Homes Act of 2009, Congress established a safe harbor for certain qualified loss mitigation plans, including short sales and deeds in lieu offered under the Home Affordable Foreclosure Alternatives (“HAFA”) program.
Although § 265-a applies to a transaction with respect to a “residence in foreclosure,” in the opinion of the Department, it does not apply to a DIL given to the holder of a defaulted mortgage who otherwise would be entitled to the remedy of foreclosure. Although a purchaser of a DIL is not specifically excluded from the definition of “equity purchaser,” as is a deed from a referee in a foreclosure sale under Article 13 of the Real Property Actions and Proceedings Law, we believe such omission does not indicate an intention to cover a purchaser of a DIL, but rather indicates that the drafters contemplated that § 265-a applied only to the scammers and unscrupulous entities who stole a homeowner’s equity and to bona fide purchasers who might buy the property from them. We do not think that a statute that was intended to “afford greater protections to homeowners confronted with foreclosure,” First National Bank of Chicago v. Silver, 73 A.D.3d 162 (2d Dep’t 2010), should be construed to deprive homeowners of an important alternative to foreclosure. Nor do we think an interpretation that forces mortgagees who have the indisputable right to foreclose to pursue the more expensive and time-consuming judicial foreclosure process is reasonable. Such an interpretation violates a fundamental rule of statutory construction that statutes be “given a reasonable construction, it being presumed that the Legislature intended a reasonable result.” Brown v. Brown, 860 N.Y.S.2d 904, 907 (Sup. Ct. Nassau Co. 2008).
We have found no New York case law that supports the proposition that DILs are covered by § 265-a, or that even mention DILs in the context of § 265-a. The vast majority of cases that cite HETPA involve other sections of law, such as RPAPL §§ 1302 and 1304, and CPLR Rule 3408. The citations to HETPA often are dicta. See, e.g., Deutsche Bank Nat’l Trust Co. v. McRae, 27 Misc.3d 247, 894 N.Y.S.2d 720 (2010). The few cases that do not involve other foreclosure requirements involve fraudulent deed transactions that clearly are covered by § 265-a. See, e.g. Lucia v. Goldman, 68 A.D.3d 1064, 893 N.Y.S.2d 90 (2009), Dizazzo v. Capital Gains Plus Inc., 2009 N.Y. Misc. LEXIS 6122 (September 10, 2009).
Nothing in this letter affects the responsibilities of a mortgage loan servicer, including one that is an Exempt Organization, with respect to residential mortgage loan delinquencies and loss mitigation efforts under Part 419 of the Superintendent’s Regulations (Business Conduct Rules for Servicing Mortgage Loans).
Marjorie E. Gross
Deputy Superintendent & General Counsel