NY bill would close foreclosure loophole

The New York State Legislature passed a bill on May 3 that would overturn a state high court decision that gave a big win to mortgage servicers regarding foreclosure practices.

The Foreclosure Abuse Prevention Act has gone to Gov. Kathy Hochul for signature into law or a veto. No decision on the bill’s fate has been made. “Gov. Hochul will review the legislation,” according to a statement from her office.

Hochul took office in August 2021, and her early actions in office have been aimed at preventing a flood of foreclosures. She signed a moratorium (which expired in January) and established the state’s participation in the Homeowners Assistance Fund.

Mortgage industry representatives were said to have met with Hochul’s staff, according to a published report. The Governor’s office didn’t comment on that.

New York has a six-year period to complete a foreclosure action, unless that action has been withdrawn; if that happens, the lender can restart the timeline.

The original case involved, Freedom v. Engel, turned on whether there was an “affirmative act” by the servicer that withdrew the foreclosure filing and stopped the statute of limitations. A lower appellate court ruled that because a legal stipulation between the parties did not specifically mention revocation, the original six-year period still applied. The Court of Appeals disagreed in a February 2021 ruling, stating the agreement was an affirmative act of revocation.

In response, legislators proposed this bill, which passed by wide margins, 52-10 in the state Senate and 107-40 in the state Assembly.

“This bill will go a long way in helping homeowners save their homes from foreclosure by leveling the playing field by eliminating certain abuses lenders have used in Courts to the detriment of the homeowners,” the primary sponsor, Sen. James Sanders Jr., D.-Queens, said in a press release.

This legislation “will restore the law to where it was prior to the Court of Appeals’ aberrational decision in Engel, and will ensure that longstanding statute of limitations principles apply to foreclosing lenders just as they apply to every other type of litigant,” said Jacob Inwald, the director of Foreclosure Prevention Legal Services NYC in the Sanders press release. “It will make it clear that foreclosing lenders are not a special category of plaintiff and that they are not free to manipulate statutes of limitations to suit their needs.”

There are two possible effects for mortgage lenders, said Larry Platt, a mortgage compliance attorney with Mayer Brown. (Platt is not licensed in New York, but is broadly familiar with the issues involved.)

If Hochul signs the bill, loss mitigation offers to borrowers for mortgages in process prior to the enactment of this law could be impacted.

“The way it’s worded, it has a retroactive effect,” Platt said. “So if you were a servicer and you wanted to foreclose on a delinquent borrower, and then the CARES Act was passed and you had an automatic state against foreclosure, you would be penalized in effect because the statute of limitations would basically disregard the fact that you are offering loss mitigation, either required by law or by internal policy.”

Platt argues that it ends up discouraging “last minute” loss mitigation offers to borrowers whose circumstances improved just prior to foreclosure.

Without being able to restart the timeline, the statute of limitations would expire and if the borrower was to go into default again, the servicer would not be able to foreclose, Platt said.

Servicers are required to offer loss mitigation options for those servicing agency loans, so the biggest effect would be for borrowers in private-label or portfolio mortgages. Offering “generous loss mitigation options” could then work against the servicer with this change to how the statute of limitations is interpreted.

There are also impacts for lending going forward. If a lender wanted to cancel the foreclosure, “it would be adverse to its interest and so that means they might be less willing to file for foreclosure in the first place,” Platt said. “And if they feel that foreclosure isn’t a viable option, that’s going to impact credit availability.” It is likely to result in much higher mortgage interest rates being extended to borrowers, because it is the ability to reclaim the collateral in the event of default that keeps mortgage rates lower than other forms of credit.