Amd §§595-a, 347 & 592-a, Bank L; add §254-e, RP L; add §§1316 & 1317, RPAP L; amd §771, add §771-c, Gen Bus
L; add §5-338, Gen Ob L
Enacts the "Home Equity Fraud Act" to control improper activities by home improvement contractors and finance companies; prohibits mortgage brokers or agents from acting as home improvement contractors; provides additional protections for mortgagors and homeowners.
NEW YORK STATE ASSEMBLY MEMORANDUM IN SUPPORT OF LEGISLATION submitted in accordance with Assembly Rule III, Sec 1(f)
BILL NUMBER: A2063
SPONSOR: Zinerman TITLE OF BILL:
An act to amend the banking law, the real property law, the real proper-
ty actions and proceedings law, the general business law and the general
obligations law, in relation to enacting the "Home Equity Fraud Act"
PURPOSE OR GENERAL IDEA OF BILL:
The purpose of the bill is to end the practice of allowing mortgage,
companies, mortgage brokers and home improvement contractors to join
together to encourage lower or fixed income New Yorkers with substantial
equity in their homes, to obtain mortgages with unaffordable terms which
ultimately result in the loss of their homes.
SUMMARY OF SPECIFIC PROVISIONS:
Section 1. Short Title
Section 2. Legislative findings
Section 3. Amends the Banking Law, section 595-a, subdivision 1 by
adding four new paragraphs (i),(k) and (1). Requires mortgage bankers
and brokers to disclose their affiliation with home improvement contrac-
tors and limits the fees they can charge for their services rendered in
connection with the financing or refinancing of home equity loans. It
also restricts the practice of flipping a mortgage, i.e. refinancing the
same mortgage in order to charge additional fees.
Section 4. Amends the banking law, section 595-a, subdivision 3, para-
graph (d), is relettered paragraph (e) and a new paragraph (d) is added.
Requires bankers and brokers to disclose whether the loan will be sold
and if so to whom it will be sold and thereafter prohibits any sale of
the loan until thirty days after such disclosures are made. It also
requires bankers and brokers to give all borrowers a notice setting
forth their right to designate a third party to receive copies of all
written communications regarding the loan.
Section 5. Amends the banking law, section 347 by adding a new subdivi-
sion (e). Requires that licensed lenders shall not be allowed to accept
any money from home improvement contractors without fully disclosing
their relationship and getting the customer's permission.
Section 6. Amends the banking law, section 592-a by adding a new subdi-
vision 3. Provides that mortgage brokers shall be deemed to be agents of
mortgage bankers making the bankers responsible for their actions.
Section 7. Amends the real property law by adding a new section 254-e.
Prohibits the inclusion of a provision allowing for balloon payments,
negative amortizations and increased interest after default in any mort-
gage which refinances a primary residence.
Section 8. Amends the real property actions and proceedings law by
adding a new section 1308. Requires that all defendants in foreclosure
actions be served with a notice stating clearly that the action may
result in the loss of their home and listing certain defenses that may
be available..
Section 9. Amends the real property actions and proceedings law by
adding a new section 1309 Requires that a plaintiff in a foreclosure
action to affirmatively plead compliance with all the provisions of
section 595-a of the banking law. It also creates certain affirmative
defenses to a mortgage foreclosure action, namely: (1) that at the time
of the origination of the loan the mortgagor did not have the ability to
afford the loan and the financial institution making the loan knew or
should have known this, (2) that the lender violated section 595-a of
the banking law and (3) that the mortgage document contains a provision
prohibited by section 254-e of the real property law. Employment status,
fixed income, receipt of public assistance and payments in excess of
fifty per cent of income are all factors that can be considered by the
court. In addition, the court may award reasonable attorney fees to the
defendant in such foreclosure action.
Section 10. Amends the general business law, of section 771, subdivision
1, paragraph (h). Requires that the buyer shall have 15 days to cancel a
home improvement contract.
Section 11. Amends the general business law by adding a new section
771-b. Makes it illegal for a home improvement contractor to receive
anything of value for placing a home improvement loan with a bank unless
such relation is disclosed to the customer and the customer's approval
is obtained for the transaction. Requires that the buyer shall have 15
days to cancel a home improvement contract and that notice of this right
to cancellation shall be given to the customer at signing or the
contract shall not be enforceable. In addition, a homeowner may waive
the right to cancel a home improvement contract if the home improvement
is needed to meet a bona fide emergency.
Section 12. Amends the general obligations law by adding a new section
5-336. Provides that loans made in violation of section 595-a of the
banking law are unenforceable and no default judgment can be rendered on
a default of such loan unless the court makes an affirmative finding
that the section has been complied with. It also provides-that the same
affirmative defenses which would be available in an action for foreclo-
sure are available in an action for default of the underlying note and
allows the court to award reasonable attorney fees.
Section 13. Effective Date
EXISTING LAW:
This bill would institute a series of changes in statute which will
prohibit the practice of lending money to be secured by a mortgage on
the home of a person who cannot afford the terms of that mortgage. It
would also limit the fees that mortgage bankers and brokers can charge
on refinancing and would limit the enforceability of loans and mortgages
made in violation of the various provisions of this bill.
JUSTIFICATION:
Many seniors on fixed incomes who own homes with substantial equity have
been approached by unscrupulous home improvement contractors working in
conjunction with fringe financial companies. The contractor talks them
into minor repairs on their homes which they may or may not need and
then arranges for "easy' financing. The mortgage company or mortgage
broker then offers to refinance the existing mortgage (often increasing
the rate), to finance the repairs and to consolidate all of the existing
credit card debt (converting unsecured debt into secured debt). Before
long the senior is signing documents refinancing their home and incur-
ring the responsibility for paying a mortgage which the senior cannot
afford. By increasing the principal of the loan and by charging high
rates, large fees are earned by the mortgage brokers and mortgage bank-
ers as well as the home improvement contractor. Shortly after the clos-
ing, the finance company sells the mortgage to a bank or combines it for
sale as mortgage securities thus relieving itself of the liability and
providing resources for the cycle to begin again. The senior, meanwhile,
is unable to make the mortgage payments and loses their home to a fore-
closure action. Often this problem is compounded
by the fact that most victims cannot afford an attorney to defend the
foreclosure action.
While the industry rate for foreclosures is about 2.6%, the rate for
some of the lenders in New York City who engage in this sort of scheme
is as high as 13%. A recent New York Times article reported that the New
York City Department of Consumer Affairs has noted that finance compa-
nies working with crooked home improvement contractors have fleeced
thousands of lower income minority New Yorkers out of the equity in
their homes by tricking them into loans for repairs. The lenders
research homeowners to find out if they have paid off their first mort-
gage and have singled out elderly homeowners with substantial equity in
their homes to make risky loans, knowing that in case of default they
can recoup the loan by taking the home. In many of these cases, the
homeowner is not aware of the fact that he or she is securing the loan
with a mortgage on their home. s.k 1 Often, finance companies engage the
services of brokers, who are paid large fees by the customer, and do not
check the accuracy of the application document. One 73 year old woman
living on social security was described in her loan papers as a 66 year
old self-employed investor, earning $7,000 per month. When the loan goes
into default the bank claims to be unaware of this deception.
This bill would make them responsible for verifying the accuracy of
information provided by brokers.
At present, the senior who is a victim of these practices has no legal
recourse. This bill will impose a series of changes that will give
seniors a weapon to fight this scam. Legitimate banking institutions
should have no problem with the requirements of this bill because the
procedures it requires are already followed in the course of good lend-
ing practices. This bill will make it illegal to prey on seniors and
lower income New Yorkers and to take from them their most valuable
possession, their home.
PRIOR LEGISLATIVE HISTORY:
A.6083 - 2021-2022
FISCAL IMPLICATIONS FOR STATE AND LOCAL GOVERNMENTS:
Nominal cost to the State.
EFFECTIVE DATE:
October 1st after it has become law.
