Effective March 5, 2020, New York Assembly Bill 5626 (“AB 5626”) regulates the origination and servicing of the federal U.S. Department of Housing and Urban Development (“HUD”) home equity conversion mortgages (“HECMs”).
Significant Impact to Mortgage Lenders and Servicers
With the stated purpose of providing “new regulations on reverse mortgage products pertaining to the marketing, origination, and management” of HECMs, AB 5626 will expand New York’s reverse mortgage law to apply to HECMs. The following provides a brief summary of AB 5626’s substantive provisions:
The measure applies to an “authorized lender,” as defined in section 280 of the Real Property Law. Under current law, authorized lenders of proprietary reverse mortgage loans are subject to additional approval by the Superintendent of the New York Department of Financial Services. It is unclear if such additional approval will now be required to originate or service HECMs.
Advertising and Offering of Reverse Mortgages:
In addition to imposing new disclosure obligations and prohibiting an authorized lender or any other party from engaging in any unfair or deceptive practices in connection with the marketing or offering of reverse mortgage loans, AB 5626 prohibits using the words “government insured” or other similar language representing that reverse mortgage loans are insured, supported and sponsored by any governmental entity in any solicitation, or representing that any reverse mortgage loan is other than a commercial product. This may prove challenging given that HUD characterizes its own HECM loan product as a “reverse mortgage insured by the U.S. Federal Government.”
The measure requires an authorized lender to provide additional disclosures on the borrower’s periodic statement when the authorized lender administers payments for property obligations (such as tax payments or mortgage or homeowners insurance) and when those payments are derived from the proceeds of the mortgage.
Life Expectancy Set Aside (“LESA”):
Under AB 5626, an authorized lender must provide notice to the borrower by telephone and first-class mail when the borrower’s home equity line of credit or LESA is depleted to ten percent or less of its value (and again when the borrower’s line of credit or LESA is depleted entirely). The measure does not specify the timeframe for providing this notice.
The measure prohibits an authorized lender from making an advance payment for any obligation arising from the mortgaged real property and, if there is an insurance or tax default, the authorized lender may only pay those premiums and/or taxes which are in arrears. It is unclear if this provision applies to borrowers who have established a LESA, as HUD’s HECM regulations require a mortgagee to make disbursements for property charges before the bills become delinquent.
The measure addresses situations where an authorized lender seeks to foreclose on a HECM loan because the property is no longer the primary residence of, or occupied by, the borrower.
If the authorized lender does not receive any responses to mailings related to verification of the borrower’s primary residence and/or occupancy, prior to commencing any foreclosure proceeding the authorized lender must: (a) call the borrower (or, if the borrower cannot be reached by telephone, a designated third party specified by the borrower), and (b) visit the property, in person. During such visit, the authorized lender or its agent must provide clear information as to who they are, that the visit pertains to the reverse mortgage, the reason for the home visit, and the telephone number to call for further information.
Further, the authorized lender must wait at least 30 days following such visit, in addition to any additional time or notice requirements specified by any other provision of law, before initiating a foreclosure action on the basis that the mortgaged property is no longer the primary residence of the borrower. If the borrower contacts the authorized lender and provides proof of residence or occupancy after such visit, but before the commencement of a foreclosure action, the authorized lender is barred from initiating such foreclosure action. Presumably, this provision would not require an authorized lender to violate privacy laws, debt collection laws (which may only permit the authorized lender to obtain contact information and not discuss the debt), or trespassing laws.
AB 5626 prohibits an authorized lender from charging the borrower any fee for the visit or inspection, including any and all inspections conducted by the authorized lender to verify the status of the reverse mortgage, or any suspected or actual default condition.
The measure requires both the authorized lender and the borrower to be represented at closing by an attorney, and to have at least one attorney present to conduct the closing. It is unclear who is responsible for the cost of the borrower’s attorney.
Failure to comply with the requirements of AB 5626 could result in significant penalties. For example, any person injured by new Section 280-b of the Real Property Law (which the measure creates) or HUD’s HECM regulations may bring an individual action to recover treble actual damages plus the prevailing plaintiff’s reasonable attorney’s fees. Moreover, compliance with the provisions is a condition precedent to bringing a foreclosure action; failure to comply is a complete defense to a foreclosure. Accordingly, AB 5626 could have a significant impact on mortgage lenders and servicers of HECMs.
By adding several new obligations on top of HUD’s existing requirements, this law may impose significant burdens on lenders and servicers. We anticipate amendments to existing Banking Regulation Part 79 that, hopefully, will clarify many ambiguities.