In the November 2010 press release, FTC Chairman Jon Leibowitz said, “By banning providers of these services from collecting fees until the customer is satisfied with the results, this rule will protect consumers from being victimized by these scams.”

The MARS rule has a three-prong approach – it bans advance fees, requires certain disclosures and prohibits certain claims:

Advance Fees

Mortgage Relief companies may not collect any fee until they have provided the homeowner with:

• a written offer from their lender or servicer that the consumer decides is acceptable; and
• a written document from the lender or servicer describing the key changes to the mortgage that would result if the consumer accepts the offer.

Required Disclosures

In any advertising and in communications directed at individual consumers (such as telemarketing calls), the mortgage relief companies must make the following disclosures:

• they are not associated with the government, and their services have not been approved by the government or the consumer’s lender;
• the lender may not agree to change the consumer’s loan; and
• if companies tell consumers to stop paying their mortgage, they must also tell them that they could lose their home and damage their credit rating.

Further, these companies must also disclose in their communications to consumers that

• they can stop doing business with the company at any time,
• can accept or reject any offer the company obtains from the lender or servicer, and
• if they reject the offer, they don’t have to pay the company’s fee – said fee must also be disclosed

Prohibited Claims

The MARS Rule prohibits mortgage relief companies from making any false or misleading claims about their services, including claims about:

• the likelihood of consumers getting the results they seek;
• the company’s affiliation with government or private entities;
• the consumer’s payment and other mortgage obligations;
• the company’s refund and cancellation policies;
• whether the company has performed the services it promised;
• whether the company will provide legal representation to consumers;
• the availability or cost of any alternative to for-profit mortgage assistance relief services;
• the amount of money a consumer will save by using their services; or
• the cost of the services.

In addition, the rule prohibits mortgage relief companies from telling homeowners to stop communicating with their lenders or their representatives.   Further, these companies must also have reliable evidence to back up any claims they make about the benefits, performance, or effectiveness of the services they provide.

Lastly, it is a violation of the MARS Rule for any person to provide substantial assistance or support to a MARS Provider when that person knows or consciously avoids knowing that the MARS Provider is engaged in any act or practice that violates this Final Rule. (16 CFR Section 322.6).

Q&A:

What Exactly Are Mortgage Relief Services?

Mortgage Assistance Relief Services (MARS) are services offered or provided to a Consumer for consideration that are intended directly or indirectly to assist the Consumer with regard to:

1. Stopping or postponing a foreclosure sale;
2. Negotiating or arranging a Modification of a Dwelling Loan;
3. Obtaining a forbearance in the timing of payments due on a Dwelling Loan;
4. Negotiating or arranging any extension of the time period for curing a default or reinstating the Dwelling Loan;
5. Obtaining a waiver of an acceleration clause or balloon payment in a Dwelling Loan;
6. Negotiating or arranging a short sale, deed-in-lieu of foreclosure, title reconveyance, sale/leaseback or any other disposition of the Dwelling other than a sale to a third-party purchaser;
7. Offering or conducting a Forensic Loan Audit which is a legal analysis of mortgage loan documents for the purpose of finding compliance violations under federal and/or state law or regulation for the alleged purpose of helping Consumers acquire leverage over their Servicers;
8. Marketing of services to assist consumers in selling a   Dwelling to a third party if the intent of the sale is to enable the Consumer to avoid foreclosure; and
9. Marketing of refinancing options by Mortgage Brokers if offered to avoid a foreclosure.

Does MARS Apply to Attorneys?

Attorneys are fully exempt if they:

1. Provide mortgage assistance relief as part of the practice of law;
2. Are licensed to practice law in the state in which the consumer for whom the attorney is providing mortgage assistance relief services resides or in which the consumer’s dwelling is located;
3. Comply with state laws and regulations that cover the same type of conduct the rule requires;
4. Deposit any funds received from the consumer prior to performing legal services in a client trust account and withdraw fees only as they are earned; and
5. Comply with all state laws and regulations, including licensing regulations, applicable to client trust accounts.

Does MARS Apply to Real Estate Agents?

It appears from examination of the language contained in the Supplementary Information in the Federal Register that the intent was to avoid including real estate brokers and agents handling sales of real property in the definition of MARS.  However, it is certainly clear that real estate agents and brokers handling short sales, title re-conveyance or any other sale or endeavor undertaken in an effort to stop a foreclosure sale would be covered by the MARS definition.

The Supplementary Information states that the FTC does not consider the typical functions of real estate brokers, including showing homes, finding homes for Borrowers and listing homes for sale, to be MARS functions.  Nonetheless, any endeavor undertaken by a real estate agent or broker in an effort to prevent a foreclosure other than these typical functions, such as negotiating with a Servicer the terms of a short sale,WILL be considered a MARS activity.

The MARS rule is something with which everyone involved in, either directly or indirectly, assisting consumers avoid foreclosure will need to understand and be in compliance with.  It is broad and far reaching. The penalties for non-compliance with the FTC’s new MARS rule are $11,000 a day.

Related posts:

1. DON’T SAY I DIDN’T WARN YOU! NY Attorney General’s Crackdown on the Loan Modification Industry
2. Mortgage Assignments are Not the Real Estate Investor’s Dream!
3. Short Sales & No-Flip Clauses in the Approval Letter – Removing a Roadblock

“In today’s market, FHA research finds that acquiring, rehabilitating and the reselling these properties to prospective homeowners often takes less than 90 days. Prohibiting the use of FHA mortgage insurance for a subsequent resale within 90 days of acquisition adversely impacts the willingness of sellers to allow contracts from potential FHA buyers because they must consider holding costs and the risk of vandalism associated with allowing a property to sit vacant over a 90-day period of time.”

The online real estate community was buzzing yesterday as news of this waiver spread quickly. The investor “gurus” are, of course, rejoicing and spreading the news far and wide, without a careful read of the Waiver itself.  The intent of this temporary policy change is to allow investors to take title to a property, rehab it and sell it quickly. It is not a panacea for those investors who pick up a property at a discount, seeking to flip it for a profit in a “back to back” or “double” closing.  For those types of transactions, the 90 day seasoning rule is a non-issue if you utilize a land trust correctly.

HUD’s Mortgagee Letter 2006-14 clarified the Rule and Regulations set forth in 24 CFR 203.37a concerning the eligibility of properties for FHA insurance and the rules governing sales of property.  As I have discussed in a previous blog post,  Legal Analysis of FHA’s Seasoning Requirements, the real estate and mortgage industry routinely misunderstands and applies these eligibility rules incorrectly and it appears that the trend is continuing with this new Waiver.

FAQS:

1. Does it have to be a property bought through a small sale, bank auction or an REO to be eligible under the Waiver?

No. There are no requirements in the Waiver concerning the status of the property itself.  It is not necessary to demonstrate the distressed nature of the property.

2. So I can get a property under contract, do a contract with a potential FHA buyer and close with my FHA buyer the same day or the day after I buy the property?

No this transaction would not be eligible for FHA insurance. The waiver is really of the requirement that the real estate contract be executed on the 91st day after the investor takes title to the property. The requirement that the investor own the property is still in effect and therefore Contract Vendees and Assignments of contract are still prohibited.  Further, an application for an FHA mortgage cannot be submitted to a Lender for consideration without a fully executed Contract.  Therefore, Back to Back Closings will be impossible.

3. So I can close a week after I take title?

Virtually impossible for several reasons. I venture that there are nearly no Lenders in this post-bubble market that will take an application for an FHA mortgage and be in a position to close a week later.  I am going to stretch that to probably 30 days.  This is certain if your sale price to your FHA buyer is 20% or more higher than your acquisition price (do the math – its not that hard to hit that number – especially in certain areas of the country where housing prices are below $50,000). If the sale price exceeds the 20% threshhold, the investor will have to document the increase in value with supporting documentation and/or a second appraisal and the Lender will have to obtain a Property Inspection Report (see paragraph 2 of the Waiver).  This report will not be ordered prior to application submittal and as discussed previously, that doesn’t take place until there is a fully executed Contract of Sale.

4. I found this fantastic property that my buddy picked up 2 months ago for $120,000.00.  He rehabbed it and I am in contract to buy it from him for $220,000.  I want to flip it to an FHA buyer for $250,000.00 can I do it?

You will have to wait until the 91st day after you close title to enter into a Contract of Sale with the FHA buyer. The Waiver will not apply if there is a history of prior flipping activity in the 12 month chain of title (see paragraph 1(c) of the Waiver).

5. In April, the Treasury’s Small Sale Program goes into effect and there should be a lot of distressed properties coming on to the market. The Waiver is going to be a huge help in moving those properties!

No, it isn’t.  Apparently, government offices do not communicate with each other before issuing rulings – one of the requirements under the Treasury small sale program is that the Contract include a representation that the Purchaser will hold the property for 90 days post-closing.  Perhaps the Treasury will revise its Directive and remove this offending language (which, as I had discussed previously, is extremely small-sighted).

Conclusion

Investors should rejoice as finally they are receiving the recognition they deserve: properties are moving because of their hard work and without the proper incentive, it wouldn’t happen. Instead of being the black sheep of the real estate community, investors are a major part of the solution.  This Waiver is what investors need to get the properties rehabbed, sold and occupied to ameliorate the problem of abandoned and blighted homes. It is not a license to flip and should you wish to engage in that type of activity, you will not be able to use this Waiver to accomplish your goals.

Related posts:

1. Mortgage Assignments are Not the Real Estate Investor’s Dream!
2. Seasoning and FHA’s Time Restrictions on Resales – a Legal Analysis
3. Short Sales & No-Flip Clauses in the Approval Letter – Removing a Roadblock

Section 265-b enumerates which activities are forbidden to Distressed Property Consultants:

1. Providing services without a written, fully signed contract with a homeowner;

2. Charging or collecting payment from a homeowner before completion of services;

3. Taking a Power of Attorney from a homeowner;

4. Keeping any original Loan Documents or any original documents relating to the distressed home loan;and

5. Inducing a Homeowner to executing a Contract that does not comply with the provisions of the Act.

The Contract

Section 265-b lists very specific requirements when it comes to the Contract for Distressed Consultant Services.  First, it must be in writing and must contain the entire agreement of the parties.  Therefore, oral agreements pre- and post-contract are not enforceable and the agreement is enforceable only as to those provisions contained within the four corners of the written Contract.  Also, the proposed Contract must be provided to the homeowner, in advance, for his review.

Content & Form

The NY legislature laid out very specific requirements as to the form and content of the Distressed Consultant Contract.  First, as to the font, it must be in at least 12 point type and in the same language that was used between the Consultant and the Homeowner to discuss the Consultant’s services.  For example, if the parties conversed in Spanish about the proposed services, then the resulting written contract must be in Spanish.

The Contract must provide full disclosure.  It must include:

1. the exact nature of the services to be provided by the Consultant and anyone who is associated with the consultant;

2. the total amount and terms of compensation for such services;

3. the name, business address, and telephone number of the distressed property consultant and the address (if different), phone & fax number or email address of the distressed property consultant where the homeowner can send communications to the consultant;

4. it must be dated and personally signed by the homeowner and the distressed property consultant before a Notary Public;

5. It cannot limit the liability of the Distressed Property Consultant nor waive any provisions under this Statute and cannot require arbitration of any dispute arising under the Contract;

6. it must contain a specific Right to Cancel:

a. 14 point boldface type;

b. Containing the following language with the Distressed Property Consultant accurately entering the date the right to cancel ends and his name -

NOTICE REQUIRED BY LAW

YOU MAY CANCEL THIS CONTRACT, WITHOUT ANY PENALTY OR OBLIGATION AT ANYTIME BEFORE MIDNIGHT OF _________________________ (FIFTH BUSINESS DAY AFTER EXECUTION).

_______________________________________ (THE”CONSULTANT”) OR ANYONE WORKING FOR THE CONSULTANT, MAY NOT TAKE ANY MONEY FROM YOU OR QUESTION YOU FOR MONEY UNTIL THE CONSULTANT HAS COMPLETELY FINISHED DOING EVERYTHING THIS CONTRACT SAYS THE CONSULTANT WILL DO.

YOU SHOULD CONSIDER CONSULTING AN ATTORNEY OR A GOVERNMENT-APPROVED HOUSING COUNSELOR BEFORE SIGNING ANY LEGAL DOCUMENT CONCERNING YOUR HOME. IT IS ADVISABLE THAT YOU FIND YOUR OWN ATTORNEY, AND NOT CONSULT WITH AN ATTORNEY RECOMMENDED OR PROVIDED TO YOU BY THE CONSULTANT. A LIST OF HOUSING COUNSELORS MAY BE FOUND ON A THE WEBSITE OF THE NEW YORK STATE BANKING DEPARTMENT, www.banking.state.ny.us OR BY CALLING THE BANKING DEPARTMENT TOLL FREE AT 1-877-BANK-NYS (1-877-226-5697).  THE LAW REQUIRES THAT THIS CONTRACT CONTAIN THE ENTIRE AGREEMENT BETWEEN YOU AND THE CONSULTANT. YOU SHOULD NOT RELY ON ANY ORAL AGREEMENT OR PROMISE.

c. The date for the Right to Cancel: it is midnight of the 5th business day following the day the Contract was executed by both parties.

d. Notice of Cancellation:

1. must be in writing and delivered by the homeowner or the homeowner’s representative, to the Property Consultant to the address, fax or email address specified in the notice.

2. The Contract must include (2) copies of a Notice of Cancellation in the following form:

NOTICE OF CANCELLATION

YOU MAY CANCEL THIS CONTRACT, WITHOUT ANY PENALTY OR OBLIGATION, AT ANY TIME BEFORE MIDNIGHT OF _____________________________ (ENTER DATE).

TO CANCEL THIS CONTRACT, SIGN AND DATE BOTH COPIES OF THIS CANCELLATION NOTICE AND PERSONALLY DELIVER ONE COPY OR SEND IT BY FACSIMILE, UNITED STATES MAIL OR ANY ESTABLISHED COMMERCIAL LETTER DELIVERY SERVICE, INDICATING CANCELLATION TO THE DISTRESSED PROPERTY CONSULTANT AT ONE OF THE FOLLOWING:

NAME OF CONTRACTOR: ________________________________
STREET ADDRESS:______________________________________
CITY, STATE, ZIP:______________________________________
FACSIMILE:___________________________________________

I HEREBY CANCEL THIS CONTRACT

Name of Homeowner: ___________________________________________

Signature of Homeowner:________________________________________

Date:_________________________________________________________

e. Compliance with Notice of Cancellation: If a Distressed Property Consultant receives the Notice of Cancellation within the proscribed time frame, the Consultant must, within (10) days, return the original Contract and any other documents signed by the Homeowner to the Homeowner.  Cancellation, of course, releases the homeowner from any obligation to pay the Distressed Property Consultant.

PENALTIES FOR VIOLATION

If a Distressed Property Consultant violates this Statute, the legislature has crafted the following penalties:

1. Court can declare Contract to be null and void;

2. If the homeowner incurs hurts because of the violation, the homeowner can recover actual and consequential hurts, as well as costs, from the Consultant;

3. If the Consultant intentionally or recklessly violates the provisions of this Statute, the Court can award to the homeowner treble (3x) hurts, attorney’s fees and costs;

4. An application can be made by the Attorney General to issue an injunction forcing the Consultant to stop and desist from engaging in future distressed consulting activities without requiring proof that any person has been injured or hurt and also can require restitution; and

5. The court can fine the Consultant not more than $10,000 for each violation.

There you have it – if you are offering any type of services to a Homeowner who is behind on their mortgage, real estate taxes etc., first determine if you are a Distressed Property Consultant (and not a member of an exempt category) and if your Homeowner and their financial distress is covered by the Statute.  If so, make sure you are in compliance by following the tenets outlined above.  The penalties can be severe but at least now, you have an outline for a plot of compliance.

Related posts:

1. DON’T SAY I DIDN’T WARN YOU! NY Attorney General’s Crackdown on the Loan Modification Industry
2. Mortgage Assignments are Not the Real Estate Investor’s Dream!
3. Seasoning and FHA’s Time Restrictions on Resales – a Legal Analysis

Distressed Home Owners

The Act defines in Sec 265-b(1)(a) the “Distressed Home Owner” as a natural person who is the mortgagor with respect to a distressed home loan or who is in danger of losing a home for nonpayment of taxes. Therefore, if your client is a corporation, LLC, Trust etc., they are not natural persons and therefore not Distressed Home Owners under this Act. In conjunction with this definition, it is imperative to view same in light of the definition of “distressed home loan” in subsection (d) which defines it as a home loan that is in danger of being foreclosed because the homeowner has one or more defaults under the mortgage that entitle the lender to accelerate full payment of the mortgage and repossess the property, or a home loan where the lender has
commenced a foreclosure action. To be a Distressed Home Owner, your client must be in default under the terms of their Note and Mortgage which entitles the Lender to accelerate the loan. You must examine the Mortgage, discern the acts that constitute a default as well as under what circumstances allow the Lender to accelerate the loan. Further, the act defines a “home loan” as a loan in which the debt is incurred by the homeowner primarily for personal, family or household purposes, and the loan is secured by a mortgage or deed of trust on property upon which there is located or there is to be located a structure or structures intended principally for occupancy of from one to four families which is or will be occupied by the homeowner as the homeowner’s principal dwelling. The loan must be secured by your client’s principal residence and have been originated as a residential loan to be covered by this Act.

Distressed Property Consultants & Consulting Services

Section 265-b(1)(c) Defines the nature of the consulting services covered by the statute. Such definition is very broad and encompasses far more than loan modification:

(c) “Consulting services” means services provided by a distressed property consultant to a homeowner that the consultant represents will help to achieve any of the following:

(i) stop, enjoin, delay, void, set aside, annul, stay or postpone foreclosure filing, a foreclosure sale or the loss of a home for nonpayment of taxes;

(ii) obtain forbearance from any servicer, beneficiary or mortgagee or relief with respect to the potential loss of the home for nonpayment of taxes;

(iii) help the homeowner to exercise a right of reinstatement or similar right provided in the mortgage documents or any law or to refinance a distressed home loan;

(iv) obtain any extension of the period within which the homeowner may reinstate or otherwise restore his or her rights with respect to the property;

(v) obtain a waiver of an acceleration clause contained in any promissory note or contract secured by a mortgage on a property in foreclosure;
(vi) help the homeowner to obtain a loan or advance of funds;

(vii) help the homeowner in answering or responding to a summons and complaint, or otherwise providing information regarding the foreclosure complaint and process;

(viii) avoid or ameliorate the impairment of the homeowner’s credit resulting from the commencement of a foreclosure proceeding or tax sale;
or

(ix) save the homeowner’s property from foreclosure or loss for non-payment of taxes.

Therefore, if you perform loan modifications and/or workouts, small sales, credit repair your services are covered.  If you help a distressed home owner with obtaining financing, including refinancing or any type of loan or advance, your services are covered (Note exception below for licensed mortgage bankers & brokers).  If you provide “consulting” services wherein you help a distressed home owner in defending a foreclosure defense action, your serviced are covered.  Or, if you do anything whatsoever that will result in “saving” the home owner’s property from foreclosure or loss from non-payment of taxes, your services are covered.  Paragraph (ix) is extremely broad and ambiguous – what constitutes “saving”? That will require clarification by the courts in the future.

What is a Distressed Property Consultant?
While you may have determined that your client is a distressed homeowner who has a distressed home loan and your services are covered by the Act, but the question remains – are you a Distressed Property Consultant?

The Act defines “Distressed Property Consultants” as an individual or a corporation, partnership, limited liability company or other business entity that, directly or indirectly, solicits or undertakes employment to provide consulting services to a homeowner
for compensation or promise of compensation with respect to a
distressed home loan or a potential loss of the home for nonpayment of taxes.

Note: A consultant does not include the following:

(i) an attorney admitted to practice in the state of New York;

(ii) a person or entity who holds or is owed an obligation secured by a lien on any property in foreclosure while the person or entity performs services in connection with the obligation or lien;

(iii) a bank, trust company, private banker, bank holding company,savings bank, savings and loan association, thrift holding company, credit union or insurance company organized under the laws of this state, another state or the United States, or a
subsidiary or affiliate of such entity or a foreign banking corporation licensed
by the superintendent of banks or the comptroller of the currency;

(iv) a federal Department of Housing and Urban Development approved mortgagee and any subsidiary or affiliate of such mortgagee, and any agent or employee of these persons while engaged in the business of such mortgagee;

(v) a judgment creditor of the homeowner, if the judgment creditor’s claim accrued before the written notice of foreclosure sale is sent;

(vi) a title insurer authorized to do business in this state, while performing title insurance and settlement services;

(vii) a person licensed as a mortgage banker or registered as a mortgage broker or registered as a mortgage loan servicer as defined in article twelve-D of the banking law;

(viii) a bona fide not-for-profit organization that offers counseling or advice to homeowners in foreclosure or loan default;
or

(ix) a person licensed or registered in the state to engage in the practice of other professions that the superintendent of banks has determined should not be subject to this section.
Therefore, a Distressed Property Consultant does not necessarily have to be a natural person.  Further, if you are an attorney, a Lender, Servicer, Mortgage Banker, Mortgage Broker, Judgment Creditor, Title Insurer, or a Non-Profit you are exempt.

In my next post, I’ll discuss Distressed Property Consultant compliance, proscribed activities and more. Stay tuned!

Related posts:

1. DON’T SAY I DIDN’T WARN YOU! NY Attorney General’s Crackdown on the Loan Modification Industry
2. Mortgage Assignments are Not the Real Estate Investor’s Dream!
3. Seasoning and FHA’s Time Restrictions on Resales – a Legal Analysis

Governor Patterson signed Governor’s Program Bill #44 into law today as it was passed by the NY Assembly (A.10817-A) and Senate (S.8143-A).  The law affects notice provisions in foreclosure actions including extending a “grace period” by adding a 90 Day Pre-Foreclosure Notice. It also extends restrictions and prohibitions to “subprime mortgages”, mortgage brokers, prohibits prepayment penalties on high-cost and subprime mortgages, and criminalizes residential mortgage fraud.  Lastly, it institutes certain requirements and restrictions on “Distressed Property Consultants” (those who seek to negotiate small sales, loan modifications etc.) including numerous strict requirements such as requiring written, notarized contracts with a right to cancel, prohibiting collection of upfront fees or collecting Powers of Attorney from distressed homeowners etc.  Attorneys, non-profit organizations, and lenders are exempt from these requirements.  , The NY legislative site contains the following summary:

SUMMARY:
FARLEY, MALTESE, PADAVAN, FLANAGAN, GOLDEN, LANZA, MORAHAN, RATH, TRUNZO
Amd SS1303 & 1302, add S1304, RPAP L; add R3408, CPLR; amd Bank L, generally; amd S5-501, Gen Ob L; add Art 187 SS187.00 – 187.25, amd S460.10, Pen L; amd S700.05, CP L; add S265-b, RP L
Requires lender and mortgage loan servicers to give borrowers with high-cost home loans or higher-priced home loans ninety days notice before certain actions are taken; establishes all home loans shall be subject to certain standards and limitations; makes the crimes of residential mortgage fraud in the first, second, third, fourth and fifth degrees; relates to distressed property consulting contracts.
CRIMINAL SANCTION IMPACT.
Governor’s Program

The  bill provides new protections for foreclosures of high cost loans. subprime  home loans and non-traditional home loans. See new RPAPL 1304, and definition of Lender in(5)(g) which seems to exclude the occasional private lender. But , the bill would also amend the form of notice currently required to be issued in the  foreclosure of 1-4 family owner occupied residential properties per RPAPL 1303 and it  adds a new Rule 3408 re mandatory judicial conferences in certain foreclosure actions. You would need to look at the definitions in each of these provisions to see if private lenders are ” exempt.”

 The following is a link to the legislative web site where you can obtain a copy of the bill  and the memorandum in support :

http://public.leginfo.state.ny.us/menugetf.cgi  (enter in the bill number: A.10817-A).

The Empire Justice Center, which advocates on behalf of New Yorkers, has provided a preliminary summary of the pertinent parts of the new law and provides an brilliant starting point for digesting the contents of this sweeping change to our real property laws:

119 Washington Ave.¿ Albany, NY 12210

Phone 518.462.6831 ¿ Fax 518.462.6687

www.empirejustice.org

Foreclosure Prevention and Responsible Lending Act of 2008

Summary of Program Bill #44 (A.10817-A/S.8143-A)

Sec. 1 – Amendment to Notice Required Under the Home Equity Theft Prevention Act   (amends RPAPL § 1303)

Amends the notice required under the Home Equity Theft Prevention Act (RPAPL  §  1303) to include language advising the homeowner to immediately contact a lawyer or legal aid office upon receipt of the summons and complaint to obtain advice on how to protect themselves.  Language also is added to warn homeowners about a broader array of foreclosure rescue scams.  The amended notice must be included with the foreclosure summons and complaint starting September 1, 2008.

Sec. 2 – Ninety-Day Pre-Foreclosure Notice (adds RPAPL § 1304)

Starting September 1, 2008, lenders or mortgage loan servicers will be required to send homeowners with high-cost,[i] subprime,[ii] and non-traditional[iii] home loans a notice at least 90 days prior to the commencement of a legal action.  Notices must be sent to the borrower by registered or certified mail and by first-class mail, to the last known address of the borrower.     

            Notice language is set forth in the Act and must be in fourteen-point font.  The notice must state the number of days in default, the amount owed and the telephone number of the lender or servicer.  If the matter is not resolved in 90 days the lender can take action against the homeowner.  The lender or servicer must attach a list of at least five government approved housing counseling agencies in the homeowner’s geographic region that provide free or low-cost counseling.[iv]  The notice directs the homeowner to call the Banking Department’s Toll-Free Helpline or go to their website for more information. 

The 90-day period generally does not apply to mortgagors in bankruptcy, or if the borrower does not occupy that residence as their principal dwelling.  The notice and the ninety-day period must be provided once per year to the same borrower for the same loan.

Remedies:  A defendant may raise a violation of this section as a defense to a foreclosure action. 

Sec. 3 – Mandatory Settlement Conferences (amends CPLR Rule 3408)

Effective September 1, 2008, for residential foreclosure actions involving a high-cost home loan made between January 1, 2003 and September 1, 2008, or a subprime,[v] or a nontraditional[vi] loan where the defendant is a resident of the property, there must be a mandatory conference held by the court, within sixty days after the date proof of service of the foreclosure is filed with the county clerk, or on an adjourned date agreed to by the parties.  If the defendant appears pro se at the conference, the court may assign counsel.  The plaintiff may appear in person or by counsel, but if appearing by counsel the representative must be fully authorized to dispose of the case.  The court may allow the plaintiff’s representative to participate by telephone or video conference. 

For foreclosure actions which started prior to September 1, 2008, but where there is no final order of judgment, the defendant has a right to request a settlement conference.  The court shall request the plaintiff to identify if the loan is a high-cost or subprime loan and will send a notice to the defendant.  When requested, the conference must be held as soon as practicable.

Sec. 4 – High-Cost Home Loans (amends Banking Law § 6-1)

            >Additional prohibitions on “high-cost home loans”[vii] are added to Banking Law § 6-l, effective September 1, 2008, including a ban on payment option loans, prepayment penalties, teaser rates with a duration less than six months, and yield spread premiums (unless properly told and used to offset up front costs).  Lenders also are required to tell the taxes and insurance payment when they first present a potential monthly payment.  Starting July 1, 2010, lenders will be required to escrow for taxes and insurance.[viii]  

            Remedies:  Remedies for violations of Banking Law § 6-l remain the same.  These include actual, consequential and incidental hurts, statutory hurts, rescission, injunctive, declaratory or other equitable relief, and attorneys’ fees, depending on the nature of the violation.  Defendants may raise violations as a defense to a foreclosure action, as well.  The Attorney General and Superintendent of the Banking Department (“Superintendent”) are authorized to enforce the law.  

Sec. 5 – Subprime Home Loans (adds Banking Law § 6-m)

            Prohibitions and regulations are extended to “subprime home loans,”[ix] effective September 1, 2008.  Generally the prohibitions and regulations are the same as set forth for “high-cost home loans” including:  no negatively amortizing loans, including payment option loans; no financing insurance or other products unrelated to loan; no refinancing special mortgages; no loan flipping; no kickbacks or other payments to mortgage brokers for services not rendered, or not reasonably related to the value of excellent or services; no yield spread premiums that do not offset up front costs and are not properly told;  no prepayment penalties; and no teaser rates with a duration of less than six months.  Additional prohibitions are set forth in the Act.

Lenders making subprime loans must verify that the borrower has the ability to repay the loan, taking into account escrow payments, current and expected income, credit history, current obligations, employment status and other financial resources apart from the home.  If the loan is an adjustable rate mortgage (ARM), payment ability must be based on the monthly payment calculated at the fully indexed rate.[x]    

            Lenders must provide borrowers a counseling notice with a list of counselors, similar to the notice provided for “high-cost” loans and must tell the taxes and insurance payment amount the first time borrower is informed of monthly payment amount.  Starting July 1, 2010, lenders will be required to escrow for taxes and insurance.  Subprime home loans must include a legend at the top that the mortgage is a subprime home loan subject to Banking Law § 6-m.  Lenders are also explicitly prohibited from splitting loans or otherwise attempting in terrible faith to avoid coverage under the act.  

            Remedies:   Borrowers are entitled to actual hurts for violations of Banking Law § 6-m, and may also be awarded injunctive, declaratory and such other equitable relief the court deems appropriate in an action to enforce compliance with this the law.  Borrowers may raise violations as a defense to a foreclosure action and the court may award, in addition to other hurts, attorneys’ fees to the defendant.  The Attorney General and Superintendent also may bring enforcement actions.   

Secs. 6, 13 – Restrictions on Mortgage Brokers (adds Banking Law § 590-b)

Mortgage brokers must act in the borrower’s interest, with reasonable skill, care and diligence and in excellent faith and with
honest dealing.  Brokers are prohibited from directly or indirectly accepting, giving or charging any undisclosed compensation, and must clearly tell to the borrower within three days of the loan application all material information that could affect the borrower’s ability to get the loan.  Brokers must present borrowers with a range of potential appropriate loan products.  Mortgage brokers and lenders, are prohibited from improperly influencing or attempting to influence the appraisal process relating to a home loan.

Remedies:  Borrowers are entitled to actual hurts, injunctive, declaratory and other equitable relief deemed appropriate by a court for violations of these duties by the broker, or for violations by a lender of the appraisal provisions.  The law allows for a prevailing defendant in a foreclosure action to be awarded attorneys’ fees, implying a right to raise violations as part of a foreclosure defense.  The Attorney General and the Superintendent may bring enforcement actions.

Secs. 7 – 12, and 14-16 – Regulation of Mortgage Loan Servicers. 

Mortgage loan servicers must be registered with the Superintendent, effective July 1, 2009.  The Superintendent must set up registration procedures, and is authorized to promulgate regulations for servicers including requirements for disclosures to homeowners regarding interest rate resets; requirements regarding pay-off statements time frames for which servicers must apply payments; and requirements for servicers to file reports with the Banking Department.  Also, the right of the Superintendent to examine the business records of licensees, and related provisions regarding business practice, are extended to cover servicers. 

Remedies:  The Banking Board may prescribe regulations, as well, including grounds for the imposition of fines or other penalty.  Other remedies are available to the Superintendent and the Banking Board already available in law for violations by other registered entities including an additional penalty to be paid to the people of New York. 

Sec. 17 – Affirmative Allegation of Standing (amends RPAPL § 1302)

            Foreclosure complaints filed on or after September 1, 2008 for high-cost and subprime home loans must include an affirmative allegation that at the time the proceeding was commenced, the plaintiff was the owner and holder of the subject mortgage and note, or has authority to institute the foreclosure lawsuit.  The plaintiff also must aver that they have complied with Banking Law Section 595-a and its regulations, Banking Law § 6-1 and § 6-m, and with the 90 day notice provision (RPAPL Sec. 1304). 

Sec. 18 – Prepayment Penalties (amends General Obligations Law, § 5-501(3)(b))

            Amends current prohibition on prepayment penalties on home loans that are prepaid after one year from the date of loan origination, to specify that “high-cost” and “subprime” loans cannot contain any prepayment penalties, pursuant to Banking Law § 6-l or § 6-m.

Secs. 19–25 – Criminalization of “Residential Mortgage Fraud” (Penal Law Article § 187)

            “Residential mortgage fraud” becomes a new criminal action for fraudulent loans originated on or after November 1, 2008.  The crime is committed by any person who prepares or provides materially fake information for purposes of getting a loan, or in filing documents containing fake information with a county clerk.[xi]  Borrowers applying for a residential mortgage loan who intend to live in the property are exempted
from the definition, unless they act as an accessory.

            Penalties:  Penalties vary based on the compensation received by the offender and range from a Class A misdemeanor to a Class B felony.  Various sections of Criminal Procedure Law, Penal Law and the Banking Law are amended to include “residential mortgage fraud” within their coverage.

Sec. 26 – Requirements for “Distressed Property Consultants” (adds Real Property Law § 265-b)

 “Distressed property consultants” solicit homeowners in default and promise to help them with a work-out, responding to a complaint, or other activities regarding negotiating with the lender.  The definition does not include attorneys, lenders generally, and bona fide not-for-profits such as housing counseling and legal services agencies. 

Effective September 1, 2008, there must be a written contract between the consultant and the homeowner that sets forth the nature of the service, compensation expected and contact information for the consultant.  The homeowner has a right to cancel the contract within five days and must be given a notice of their right to rescind, referrals to non-profit and government agencies, along with two copies of a “Notice of Cancellation” form that the homeowner may use to cancel the contract (language for the notice and form is set forth in the bill).  Consultants are prohibited from receiving payment for services before the full completion of such services, taking power of attorney from the homeowner and retaining original loan documents of the homeowner, among other things.

Remedies:  Violation may result in voidance of the contract, as well as actual and consequential hurts and costs should the homeowner be harmed.  If the violation was intentional or reckless, a court may award treble hurts and attorneys’ fees.  The Attorney General also may bring an action, including an action to enjoin the offender.  

Tags: Foreclosurelaw, distressed property consultant, new york, Governor Patterson, subprime, mortgage, settlement conference, high-cost loan, small sale, loan modification, real estate

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