Chapter 472: New N.Y. Mortgage Foreclosure Legislation

There are severe penalties for noncompliance with certain requirements. Under subsection “3″ of new Banking Law §6-m (“Subprime home loans”), “[a]ny provision in a subprime home loan that violates subdivision two ['Limitations and prohibited practices for subprime loans'] of this section shall be rendered void.”

Further, as to “subprime home loans,” Banking Law §6-m(13) provides that “[i]n any action by a lender or assignee to enforce a loan against a borrower in default more than 60 days or in foreclosure, a borrower may assert as a defense, any violation of this section.” In addition, under subsection “2″ of amended §1302 of Real Property Actions and Proceedings Law (RPAPL) (“Foreclosure of high-cost home loans and subprime home loans”), “[i]t shall be a defense to an action to foreclose a mortgage for a high-cost home loan or subprime home loan that the terms of the home loan or the actions of the lender violate any provision of §6-l or 6-m of the Banking Law” or RPAPL §1304.[FOOTNOTE 3]

This article identifies certain provisions of Chapter 472 that should be considered when certain loan title insurance policy endorsements are requested and when a mortgage covered by the legislation is being foreclosed.

NOTICES

Chapter §1 amends the “Help for Homeowners in Foreclosure” notice required by RPAPL §1303 (“Foreclosures; required notices”) for a mortgage foreclosure commenced on and after Feb. 1, 2007 on property improved by an owner-occupied one-to-four-family dwelling.[FOOTNOTE 4] RPAPL §1303 requires the notice to be delivered to the mortgagor with the summons and complaint. The revised form of notice for actions commenced on or after Sept. 1, 2008 is set forth in a footnote to this article.[FOOTNOTE 5]

The notice is required to be on a separate page in bold, 14-point type printed on colored paper that is a color other than that of the paper on which the summons and complaint are printed, captioned, in bold, 20-point type, “Help for Homeowners in Foreclosure.”

Chapter §2 adds RPAPL §1304 (“Required prior notices”), effective Sept. 1, 2008. The lender or mortgage loan servicer, when the loan is a “high-cost home loan” (as defined in Banking Law, §6-l), a “subprime home loan” or a “nontraditional home loan,” as defined in §1304, is required to provide a notice to the borrower at least 90 days before commencing a legal action, such as a foreclosure. The text of the required notice, to be at least 14-point type, is set forth in a footnote to this article[FOOTNOTE 6].

The lender or mortgage loan servicer must send the RPAPL §1304 notice to the borrower by registered or certified mail and also by first-class mail to the last-known address of the borrower. If the borrower resides at an address other than the mortgaged property, the notice is also to be sent to the mortgaged property. Notice is considered given on the date it is mailed.

The notice need only be provided once in a 12-month period “to the same borrower in connection with the same loan.” However, the 90-day period “shall not apply, or shall cease to apply, if the borrower has filed an application for the adjustment of debts of the borrower or an order for relief from the payment of debts, or if the borrower no longer occupies the residence as the borrower’s principal dwelling.”

HIGH-COST HOME LOANS

A “high-cost home loan” is defined in Banking Law §6-l as “a home loan in which the terms of the loan exceed one or more of the thresholds as defined in paragraph (g) of this subdivision.” To be a “high-cost home loan, a loan must therefore be a “home loan” and meet one or more of certain “thresholds.”

A “home loan” is defined in Banking Law §6-l (1)(e) as “a home loan, including an open-end credit plan, other than a reverse mortgage transaction, in which:

(i) The principal balance of the loan does not exceed the conforming loan size limit for a comparable dwelling as established from time to time by the federal national mortgage association;

(ii) The borrower is a natural person;

(iii) The debt is incurred by the borrower for personal, family, or household purposes;

(iv) The loan is secured by a mortgage or deed of trust on real estate upon which there is located or there is to be located a structure intended principally for occupancy of from one to four families which is or will be occupied by the borrower as the borrower’s principal dwelling; and

(v) The property is located in this state.

“Thresholds” is defined in Banking Law §6-l(1)(g) and includes alternative standards, one of which is, for example, “[f]or a first lien mortgage loan, the annual percentage rate of the home loan at consummation of the transaction exceeds eight percentage points over the yield on Treasury securities having comparable periods of maturity to the loan maturity measured as of the fifteenth day of the month immediately proceeding the month in which the application for the extension of credit is received by the lender … “

SUBPRIME HOME LOANS

• For RPAPL §1304. For purposes of RPAPL §1304, a “subprime home loan … means a home loan consummated between Jan. 1, 2003 and Sept. 1, 2008 in which the terms of the loan exceed the threshold as defined in paragraph (d) of this subdivision. A subprime home loan excludes a transaction to finance the initial construction of a dwelling, a temporary or ‘bridge’ loan with a term of twelve months or less, such a loan to purchase a new dwelling where the borrower plans to sell a current dwelling within 12 months, or a home equity line of credit.”

RPAPL §1304(5)(b) defines “home loan” the same as in the definition of “home loan” in Banking Law, §6-l. RPAPL §1304 (5)(d) defines “threshold” in a manner similar to one of the standards contained in the definition of “thresholds” in Banking Law §6-l(1)(g).

NONTRADITIONAL HOME LOANS

A “nontraditional home loan,” defined in §1304(5)(e), is “a payment option adjustable rate mortgage, or an interest-only loan consummated between Jan. 1, 2003 and Sept. 1, 2008.”

As indicated above, under RPAPL §1302(2) “[i]t shall be a defense to an action to foreclose a mortgage for a high-cost home loan or subprime home loan that the terms of the home loan or the actions of the lender violate any provision of” RPAPL §1304. (Presumably this was intended to also encompass a nontraditional home loan).

NEGATIVE AMORTIZATION

• And Changes in Interest Rate.Chapter §5 adds new Banking Law §6-m (“Subprime home loans”), defining, and setting forth requirements for the making of, “subprime mortgage loans” consummated on and after Sept. 1, 2008.[FOOTNOTE 7]

A “subprime home loan” is defined in §6-m(1)(c), different from the definition of a “subprime home loan” for the notice required by RPAPL §1304.

(c) A ‘subprime home loan’ means a home loan in which the fully indexed annual percentage rate exceeds by more than one and three-quarters percentage points for a first-lien loan, or by more than three and three-quarters percentage points for a subordinate-lien loan, the average commitment rate for loans in the northeast region with a comparable duration to the duration of such home loan, as published by [Freddie Mac] in its weekly Mortgage Market Survey (PMMS) as posted in the week prior to the week when the lender receives a completed application. A subprime home loan excludes a transaction to finance the initial construction of a dwelling, a temporary or ‘bridge’ loan with a term of 12 months or less, such as a loan to purchase a new dwelling where the borrower plans to sell a current dwelling within 12 months, or a home equity line of credit.[FOOTNOTE 8]

‘NO NEGATIVE AMORTIZATION’

The act amends the prohibition on “negative amortization” for “high-cost home loans” in Banking Law §6-l (2)(c) and adds a prohibition on negative amortization for “subprime home loans” in new Banking Law §6-m(2)(b).

No negative amortization. No high-cost home loan [subprime home loan] may contain a payment schedule with regular periodic payments that cause [or may cause] the principal balance to increase. A loan is considered to have such a schedule if the borrower is given the option to make regular periodic payments that cause the principal balance to increase, even if the borrower is also given the option to make regular periodic payments that do not cause the principal balance to increase. This paragraph shall not prohibit negative amortization as a result of a temporary forbearance sought by a borrower.

Title Insurance Rate Service Association Inc. (TIRSA) loan title insurance policy endorsement 6.2 (Variable Rate Mortgage-Negative Amortization) insures a mortgage lender, in part, against loss or damage sustained by the insured mortgagee by reason of “the invalidity or unenforceability of the lien of the insured mortgage resulting from the provisions therein which provide for … the addition of unpaid interest to the principal balance of the loan.” To issue this loan policy endorsement, a title insurer or its agent should verify that the loan being secured is not a “high-cost home loan” or a “subprime home loan.”

CHANGES IN INTEREST RATE

The act adds a prohibition on “teaser rates” for “high-cost home loans in new Banking Law §6-l (2)(v) and for “subprime home loans” in new Banking Law §6-m(2)(q).

No teaser rates. No lender or mortgage broker shall make or arrange a high-cost home loan which has an initial or introductory rate with a duration of less than six months.

Banking Law §6-m(2)(c) prohibiting certain increases in a loan’s interest rate reads as follows:

2(c) No increased interest rate. No subprime home loan may contain a provision which increases the interest rate after default. This provision shall not apply to interest rate changes in a variable rate loan otherwise consistent with the provisions of the loan documents; provided that the change in the interest rate is not triggered by the event of default or the acceleration of the indebtedness.