On February 1, 2007 the Home Equity Theft Prevention Act (the "Act") becomes effective in the State ofNew York. The Act 1) amends paragraphs (e), (f), (g) of Section 595-a of the Banking Law and adds a new paragraph (h) thereto; 2) adds a new section 265-a to the Real Property Law; and 3) adds a new section 1303 to the RPAPL.
The Legislative intent of the Act is to eradicate the practice of foreclosure rescue scams perpetrated on unwitting homeowners whose properties are in distress as a result of a mortgage that is in default (as defined in the Act) or in foreclosure. Typically, these scams unfold in one of several ways. The rescue entity gets a deed to the property promising that title will be returned as soon as the distressed owner's credit is restored and immediately mortgages the property (sometimes with the benefit of an inflated appraisal) and cashes out the distressed owner's equity and walks/defaults, or flips the property to a third party who obtains a mortgage in excess of the value (again at an inflated appraisal). In either instance the distressed homeowner will be confronted with eviction and the loss of his/her home without even knowing a deed was signed over to the foreclosure rescue entity.
The stated purpose of the Act is to give distressed owners all of the information required to "make an informed and intelligent decision regarding the sale transfer to an Equity Purchaser." Defined terms in the Act are designated by quotation marks below.
The Act applies when an "Equity Seller" (defined as a natural person who is a record title owner of a residential property comprised of 1-4 Family dwelling units one of which is occupied by him or her as a primary residence) enters into an agreement (a "Covered Contract") with an "Equity Purchaser" (who does not have to be a natural person) or a "Representative" to "Sell" the Residence in a transaction in which consideration is received by the Equity Seller or title is transferred for no consideration when the "Residence" is in "Foreclosure" or when the Residence is in "Foreclosure" or the Equity Seller is in "Default" and the Covered Contract includes a "Reconveyance Agreement."
A "Residence" is in "Foreclosure" when there is an active Lis Pendens filed against the subject property or the subject property is on an active property tax lien list. An equity Seller is in "Default" when an two or more months behind on mortgage payments.
An "Equity Purchaser" does not include a person who acquires title:
as a primary residence; at any sale authorized by statue; by order or judgment of a Court; from a spouse, or from a parent , grandparent, child, grandchild or sibling of such person or such person's spouse; as a not for profit or public housing agency; or as a bona fide purchaser or encumbrancer for value.
A"“Bona Fide Purchaser" or "Encumbrancer for Value" is defined as:
"…anyone acting in good faith who purchases the residential real property from the "Equity Purchaser" for valuable consideration or provides the Equity Purchaser with a mortgage or provides a subsequent BFP with a mortgage, provided that he or she had no notice of the "Equity Seller's" continuing right to, or equity in, the property prior to the acquisition of title or encumbrance, or any violation of this Section by the Equity Purchaser as related to the subject property."
The Act mandates that Covered Contracts contain the entire agreement and set forth specific stringent notice requirements. The Equity Seller is also given the right to rescind the contract within five (5) business days. In addition, it prohibits the Equity Purchaser from making certain representation to the Equity Seller.
The meat of the Act is contained in Section 8(a) which provides that:
"Any transaction…which is in material violation is voidable and the transaction may be rescinded by the Equity Seller within two years of the date of the recording of the conveyance of the residential real property in foreclosure or , where applicable, default."
Section 8c) provides that the section shall not affect the interest of a BFP but goes on to say that “This subdivision shall not be deemed to abrogate any duty of inquiry which exists as to rights or interests of persons in possession of the residential real property in foreclosure, or where applicable, default.
The Act also includes civil and criminal penalties for its violation.
Finally, the Act adds Section 1303 to the RPAPL regarding required Notices in foreclosure actions with which the plaintiff must comply by attaching a Notice entitled “Help for Homeowners in Foreclosure” to the Summons and Complaint on a different colored paper and in twenty point bold type.
The Title Issues and Stewart's Position
As a result of the Act, Stewart policy issuing offices must place increased underwriting scrutiny on covered or related transactions.
Let's start with the easiest one first. For all titles arising out of foreclosure actions that commence on or after the effective date, the following exception must be raised:
Compliance with Section 1303 of the RPAPL requiring the foreclosing lender to provide proof that a Notice to the mortgagor entitled "Help for Homeowners in Foreclosure" was delivered with the Summons and Complaint as statutorily required.
In order to remove this exception, you must obtain a copy of the Notice that should be in the foreclosure file at the respective Clerk's Office. It probably would not be a bad idea for prospective affidavits of service to contain a clause indicating that the required notice was served in addition to the Summons and Complaint.
Now for the harder ones…
What do we do when we are being asked to insure a) a fee policy into an Equity Purchaser; b) a mortgage policy running in favor of the Equity Purchaser's Lender; c) a fee policy in favor of a third party purchaser from an Equity Purchaser; and d) a Loan policy in favor of that Third Party's Lender?
AS A PRELIMINARY MATTER YOUR SEARCHES WILL HAVE TO RUN LPs BOTH OPEN AND DISCHARGED FOR THE PREVIOUS TWO YEARS.
A. Fee Policy to Equity Purchaser
Unless proof in the form of an affidavit and indemnity in the form attached hereto is provided that the purchaser is not an Equity Purchaser as provided under Section 2(e) subdivisions (i)-(vi) of the Act, the transaction cannot be insured without prior written Underwriter approval.
Accordingly, in all cases where the property is residential, with an unexpired Notice of Pendency*, and the transaction involves a sale from an Equity Seller (or one who could claim to be) to a possible Equity Purchaser or his/her/its Representative (a straw person), the following exception must appear in your report:
Company will require an affidavit and indemnity in the form attached that the purchaser is not an Equity Purchaser as provided in Real Property Law 265-a Section 2(e) subdivisions (i)-(vi).
*OR ONE DISCHARGED IN PREVIOUS TWO YEARS IN B, C , AND D BELOW
In order to buttress the affidavit, the contract of sale must be produced and examined. If there is an option for the equity seller to repurchase, approval must be obtained from underwriting counsel.
Accordingly, the following exception must also appear in your report:
Company must be provided with a copy of the contract of sale prior to closing verifying the transaction is either not subject to or is in compliance with the Home Equity Theft Prevention Act RPL Section 265-a.
In addition, you must alert closers to CAREFULLY review all payoff letters for signs that a potential Equity Seller's mortgage is in default. If it so appears the above exception should be raised and the appropriate affidavit and indemnity should be obtained. We should also add a clause in the Common Exception affidavit that the Seller must sign that their loan is not in foreclosure or default.
B. Mortgage Policy to Equity Purchaser's Lender
In light of the above in all such title reports, the following exception must appear in your report:
Company will require an affidavit and indemnity in the form attached that the mortgagor is not an Equity Purchaser as provided in Real Property Law 265-a Section 2(e) subdivisions (i)-(vi).
C. Fee Policy to Third Party from Equity Purchaser
If your transaction involves a property whose chain shows that within the two prior years was residential, with an unexpired Notice of Pendency, and a transaction involved a sale from an Equity Seller (or one who could claim to be) to a possible Equity Purchaser or its Representative (a straw person), the following exception must appear in your report:
Company will require an affidavit and indemnity in the form attached that the (name the Equity Purchaser in the chain) is not an Equity Purchaser as provided in Real Property Law 265-a Section 2(e) subdivisions (i)-(vi).
Any affidavit should also aver that the property is vacant i.e. Equity Seller is no longer in possession.
D. Mortgage Policy to Third Party's Lender
Again as set forth above, if your transaction involves a property whose chain shows that within the two prior years the property was residential, with an unexpired Notice of Pendency, and a transaction involved a sale from an Equity Seller (or one who could claim to be) to a possible Equity Purchaser or its Representative (a straw person), the following exception must appear in your report:
Company will require an affidavit and indemnity in the form attached that (name the Equity Purchaser in the chain) is not an Equity Purchaser as provided in Real Property Law 265-a Section 2(e) subdivisions (i)-(vi).
All of this begs the ultimate question “Well what if we get a deal where the Equity Purchaser is claiming compliance with the Act, or a third party can get us proof or claims that there was prior compliance with the Act, can we insure it?”
THE ANSWER IS PROBABLY NOT AND CERTAINLY NOT WITHOUT OBTAINING PRIOR WRITTEN APPROVAL FROM UNDERWRITING COUNSEL FOR PROOF OF STRICT ADHERENCE TO THE ACT.
In light of the serious penalties imposed, the two year right of rescission, and certain ambiguities in the Act, we believe the above procedure is the best course to chart in the short term. As the legislation and the transactions and probable litigation that flow from it see the light of day in the months and years to come we will review our position accordingly.
If you have any questions please feel free to contact Agency Legal Services at 212-922-0050.