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In the Second

This guidance analyzes § 265-a of the Real Residential Or Commercial Property Law (” § 265-a”), which was embraced as part of the Home Equity Theft Prevention Act (“HETPA”). Section 265-a was embraced in 2006 to deal with the growing across the country problem of deed theft, home equity theft and foreclosure rescue frauds in which 3rd party investors, generally representing themselves as foreclosure professionals, aggressively pursued troubled homeowners by guaranteeing to “conserve” their home. As noted in the Sponsor’s Memorandum of Senator Hugh Farley, the legislation was meant to deal with “2 primary types of deceptive and violent practices in the purchase or transfer of distressed residential or commercial properties.” In the very first situation, the house owner was “deceived or fooled into signing over the deed” in the belief that they “were just getting a loan or refinancing. In the second, “the homeowner intentionally transfer the deed, with the expectation of briefly leasing the residential or commercial property and after that being able to buy it back, but quickly discovers that the deal is structured in such a way that the house owner can not afford it. The result is that the house owner is kicked out, loses the right to purchase the residential or commercial property back and loses all of the equity that had been constructed up in the house.”

Section 265-a consists of a variety of defenses versus home equity theft of a “residence in foreclosure”, including offering house owners with info needed to make a notified choice regarding the sale or transfer of the residential or commercial property, prohibition against unreasonable contract terms and deceit; and, most notably, where the equity sale remains in material offense of § 265-a, the chance to rescind the deal within 2 years of the date of the recording of the conveyance.

It has come to the attention of the Banking Department that particular banking organizations, foreclosure counsel and title insurers are concerned that § 265-a can be checked out as using to a deed in lieu of foreclosure granted by the mortgagor to the holder of the mortgage (i.e. the individual whose foreclosure action makes the mortgagor’s residential or commercial property a “house in foreclosure” within the meaning of § 265-a) and hence limits their capability to offer deeds in lieu to property owners 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 thinks that these interpretations are misguided.

It is an essential 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 area, explains the target of the new section:

During the time period between the default on the mortgage and the set up foreclosure sale date, property owners in financial distress, specifically poor, elderly, and economically unsophisticated homeowners, are susceptible to aggressive “equity purchasers” who induce house owners to offer their homes for a little fraction of their reasonable market worths, or in many cases even sign away their homes, through making use of plans which often involve oral and written misrepresentations, deceit, intimidation, and other unreasonable business practices.

In contrast to the expense’s clearly specified function of dealing with “the growing issue of deed theft, home equity theft and foreclosure rescue frauds,” there is no sign that the drafters expected that the bill would cover deeds in lieu of foreclosure (also called a “deed in lieu” or “DIL”) provided by a customer to the loan provider or subsequent holder of the mortgage note when the home is at danger of foreclosure. A deed in lieu of foreclosure is a typical technique to avoid lengthy foreclosure procedures, which might allow the mortgagor to get a number of advantages, as detailed listed below. Consequently, in the viewpoint of the Department, § 265-a does not use to the person who was the holder of the mortgage or was otherwise entitled to foreclose on the mortgage (or any representative of such person) at the time the deed in lieu of foreclosure was entered into, when such individual accepts accept a deed to the mortgaged residential or commercial property in full or partial satisfaction of the mortgage debt, as long as there is no agreement to reconvey the residential or commercial property to the borrower and the present market worth of the home is less than the quantity owing under the mortgage. That reality may be demonstrated by an appraisal or a broker cost opinion from an independent appraiser or broker.

A deed in lieu is an instrument in which the mortgagor communicates to the loan provider, or a subsequent transferee of the mortgage note, a deed to the mortgaged residential or commercial property completely or partial complete satisfaction of the mortgage debt. While the lending institution is anticipated to pursue home retention loss mitigation choices, such as a loan adjustment, with a delinquent debtor who wishes to remain in the home, a deed in lieu can be advantageous to the customer in specific scenarios. For example, a deed in lieu might be beneficial for the borrower where the amount owing under the mortgage surpasses the current market worth of the mortgaged residential or property, and the debtor may for that reason be legally liable for the deficiency, or where the debtor’s circumstances have altered and he or she is no longer able to manage to pay of principal, interest, taxes and insurance, and the loan does not receive an adjustment under available programs. The DIL releases the debtor from all or many of the individual indebtedness connected with the defaulted loan. Often, in return for conserving the mortgagee the time and effort to foreclose on the residential or commercial property, the mortgagee will consent to waive any shortage judgment and also will add to the debtor’s moving expenses. It likewise stops the accrual of interest and penalties on the debt, prevents the high legal costs related to foreclosure and may be less damaging to the property owner’s credit than a foreclosure.

In fact, DILs are well-accepted loss mitigation options to foreclosure and have actually been incorporated into many maintenance standards. Fannie Mae and HUD both recognize that DILs might be helpful for debtors in default who do not qualify for other loss mitigation choices. The federal Home Affordable Mortgage Program (“HAMP”) requires getting involved lenders and mortgage servicers to think about a borrower identified to be qualified for a HAMP adjustment or other home retention option for other foreclosure alternatives, including brief sales and DILs. Likewise, as part of the Helping Families Save Their Homes Act of 2009, Congress established a safe harbor for particular competent loss mitigation plans, including brief sales and deeds in lieu used under the Home Affordable Foreclosure Alternatives (“HAFA”) program.

Although § 265-an applies to a transaction with respect to a “home in foreclosure,” in the opinion of the Department, it does not apply to a DIL offered to the holder of a defaulted mortgage who otherwise would be entitled to the treatment of foreclosure. Although a purchaser of a DIL is not specifically omitted from the meaning of “equity purchaser,” as is a deed from a referee in a foreclosure sale under Article 13 of the Real Residential Or Commercial Property Actions and Proceedings Law, our company believe such omission does not indicate an intention to cover a buyer of a DIL, however rather suggests that the drafters contemplated that § 265-an applied only to the fraudsters and unscrupulous entities who stole a house owner’s equity and to bona fide buyers who might buy the residential or commercial property from them. We do not think that a statute that was intended to “pay for greater protections to homeowners faced with foreclosure,” First National Bank of Chicago v. Silver, 73 A.D. 3d 162 (2d Dep’t 2010), must be interpreted to deprive property owners of an essential option to foreclosure. Nor do we believe an interpretation that forces mortgagees who have the unassailable right to foreclose to pursue the more expensive and time-consuming judicial foreclosure process is reasonable. Such an analysis breaks an essential rule of statutory building and construction that statutes be “provided a reasonable building, it being presumed that the Legislature intended a sensible outcome.” Brown v. Brown, 860 N.Y.S. 2d 904, 907 (Sup. Ct. Nassau Co. 2008).

We have discovered no New york city case law that supports the proposal that DILs are covered by § 265-a, or that even point out DILs in the context of § 265-a. The vast majority of cases that mention HETPA include 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.3 d 247, 894 N.Y.S. 2d 720 (2010 ). The few cases that do not involve other foreclosure requirements include deceitful deed transactions that plainly 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).