Alston & Bird Consumer Finance Blog

#New York

New York Foreclosure Abuse Prevention Act Curtails Servicers’ Options

A&B ABstract:

Effective on approval by Governor Kathy Hochul on December 30, 2022, New York Assembly Bill 7737b – the Foreclosure Abuse Prevention Act (the “Act”) became law.  The Act is signifcant because it reverses judicial precedent that permitted a lender, after default, to undo the acceleration of a mortgage and stop the running of the statute of limitations in a foreclosure action through voluntary dismissal, discontinuance of foreclosure actions, or de-acceleration letters. Notably, the Act applies both prospectively and to any foreclosure action filed prior to its effective date that had not been resolved through a final judgment and order of sale. Further, unlike other provisions of New York law, the Act applies to all properties (and not only those that are owner-occupied). Public reaction has been mixed as to whether the measure will benefit consumers – but, regardless, it changes the rules of the game for lenders and servicers in New York State.

Background

Existing New York law establishes a six-year statute of limitations for the commencement of a mortgage foreclosure action, triggered when the borrower defaults on the obligation and the lender accelerates the obligation to pay the secured debt. In 2021, the New York Court of Appeals considered whether a lender can de-accelerate a loan and reset the statute of limitations.

The court decided four cases (with the opinion rendered in Freedom Mtge. Corp. v Engel, 37 N.Y.3d 1 (2021)), “each turning on the timeliness of a mortgage foreclosure claim.” The court held that the lender’s voluntary dismissal of a foreclosure suit constituted a revocation of the lender’s election to accelerate. Such revocation returned the parties to their pre-acceleration rights, reinstated the borrower’s right to repay via installments, and established a new statute of limitations period for any future default payments. According to the court, “[w]here the maturity of the debt has been validly accelerated by commencement of a foreclosure action,” the court opined, “the noteholder’s voluntary withdrawal of that action revokes the election to accelerate, absent the noteholder’s contemporaneous statement to the contrary.”

In the course of deciding Engel, the court also considered what constituted an “overt unequivocal act” sufficient to trigger a valid acceleration of debt and the six-year statute of limitations. Here, the court held that neither the issuance of a default letter nor the filing of complaints in prior discontinued foreclosure actions that failed to reference the pertinent modified loan were sufficient methods to validly accelerate debt.

The Act

Since the Engel decision, mortgagees in New York State have relied on their ability to voluntarily discontinue a foreclosure action – and effectively reset the statute of limitations– in order to engage distressed borrowers in loss mitigation efforts. However, the Act appears to eliminate a mortgagee’s ability to unilaterally reset the limitations period by voluntarily discontinuing a foreclosure action and deaccelerating the loan.

With the express intent of overturning the Engel decision, the Act amends provisions of New York’s Real Property Actions and Proceedings Law (“RPAPL,” N.Y. Real Prop. Acts. Law §§ 1301 et seq.), General Obligations Law (“GOL,” N.Y. Gen. Oblig. Law §§ 1-101 et seq.), and Civil Practice Law and Rules (“Rules,” N.Y. C.P.L.R. §§ 101 et seq.) relating to the rights of parties involved in foreclosure actions.

RPAPL:

Under previous law, Section 1301 of the RPAPL prohibited the commencement or maintenance of any action to recover any part of a mortgage debt while another action to recover part of the mortgage debt is already pending or after final judgment has been made for the plaintiff without leave of the court in which the first action was brought. Beyond clarifying that a foreclosure action falls within the scope of that prohibition, the Act provides that procurement of leave from the first court must be a condition precedent to commencing or maintaining the new action. Thus, failure to comply with the leave of court condition precedent may no longer be excused by finding that the prior action was “de facto discontin(ued)” or “effectively abandoned” (see U.S. Bank Trust, N.A. v. Humphrey, 173 AD3d 811, 812 (2d Dept 2019)); or that the defendant was not prejudiced thereby (see Wells Fargo Bank, N.A. v. Irizarry, 142 AD3d 610, 611 (2d Dept 2016)); nor by deeming the pre-action failure a mistake, omission, defect, or irregularity that could be overlooked or disregarded (see id.).

Moreover, failure to obtain leave is a defense to the new action. If a party brings a new action without leave of the court, the section declares that the previous action is deemed discontinued unless prior to the entry of final judgment in the original action the defendant: (a) raises the failure to comply with the condition precedent, or (b) seeks dismissal of the action based upon one of the grounds set forth in Section 3211(a)(4) of the Rules.

Section 1301 of the RPAPL is further amended to provide that if the mortgage securing the bond or note representing the debt so secured by the mortgage is adjudicated as time barred by a court of competent jurisdiction, any other action to recover any part of the same mortgage debt is equally time barred. As a result, if the statute of limitations acts to bar a foreclosure action or any other action to recover on mortgage debt, an investor or servicer cannot bring any other action to recover the same part of the mortgage debt, including another foreclosure action or an action to recover a personal judgment against the borrower on the note.

GOL:

Under Section 17-105 of the GOL, an agreement to waive the statute of limitations to foreclose on a mortgage is effective if expressly set forth in writing and signed by the party to be charged.

The Act amends Section 17-105 by: (1) clarifying that the GOL is the exclusive means by which parties are enabled to postpone, cancel, reset, toll, revive or otherwise effectuate an extension of the limitations period for the commencement of an action or proceeding upon a mortgage instrument; (2) clarifying that unless effectuated in strict accordance with Section 17-105, the discontinuance of an action upon a mortgage instrument, by any means, shall not, in form or effect, function as a waiver, postponement, cancellation, resetting, tolling, or extension of the statute of limitations; and (3) codifying certain judicial rulings holding as much.

While not included or otherwise referenced in the Act, it is also worth noting that Part 419 of the New York Department of Financial Services’ mortgage loan servicer business conduct rules prohibit a mortgage servicer from requiring a homeowner to waive legal claims and defenses as a condition of a loan modification, reinstatement, forbearance or repayment plan. It is unclear whether Part 419 would be interpreted to prohibit servicers from seeking a waiver of the limitations period pursuant to Section 17-105, especially with respect to loans where the limitations period has already run. To further complicate matters, the New York legislature is currently considering a bill that would (1) create an express private right of action for violations of Part 419; (2) make compliance with Part 419’s requirements a condition precedent to commencing a foreclosure action; and (3) render failure to materially comply with Part 419 to be a defense to a foreclosure action or an action on the note, even if servicing of the loan has been transferred to a different servicer when a foreclosure action or action on the note is commenced.

Rules:

The Act amends and adds several provisions of the Rules relating to the application of the statute of limitations in actions relating to mortgage debt.

First, the Act adds Section 203(h) to the Rules, which terminates the ability of a lender or servicer to extend the statute of limitations on a foreclosure action by any form of unilateral action. No voluntary discontinuation of an action to enforce a mortgage may “in form or effect, waive, postpone, cancel, toll, extend, revive or reset the limitations period to commence an action and to interpose a claim, unless expressly prescribed by statute.” In other words, the amended section appears to prohibit a mortgagee from “de-accruing” a cause of action or otherwise effectuating a unilateral extension of the limitations period by suspending a foreclosure action – and providing loss mitigation opportunities to the borrower – once the six-year statute of limitations has begun to run after the loan is accelerated. The methods by which the statute of limitations in a mortgage foreclosure action can be waived or extended are exclusively set forth in Article 17 of the GOL (see GOL 17-105 (express written agreement to extend, waive or not plead as a defense the statute of limitations); 17-107 (unqualified payment on account of mortgage indebtedness effective to revive statute of limitations)). Accordingly, a bare stipulation of discontinuance or a lender’s unilateral decision to revoke its demand for full payment is no longer a permissible method for waiving, extending, or modifying the statute of limitations.

Second, the Act adds Section 205-a to the Rules, limiting reliance on the savings statute for time-barred claims. After termination of an action, the new section permits the original named plaintiff to commence a new action upon the same transaction or occurrence or series of transactions only if: (a) the plaintiff brings the new action within six months of the termination; and (b) the termination of the prior action occurred in any manner other than a voluntary discontinuance, a failure to obtain personal jurisdiction over the defendant, dismissal for any form of neglect, for violation of any court rules or individual part rules, failure to comply with any court scheduling orders, failure to appear for a conference or at a calendar call, failure to timely submit any order or judgment, or a final judgment upon the merits. Further, only one six-month extension will be available to the plaintiff.

Under new Section 205-a, a successor-in-interest or an assignee of the original plaintiff can only commence a new action if such party pleads and proves that the assignee is acting on behalf of the original plaintiff. Further, if the defendant has served an answer and the action has been terminated, in a new action based on the same transaction or occurrence or series of transactions (whether brought by the original plaintiff or a successor-in-interest or assignee thereof) any cause of action or defense that the defendant asserts will be considered timely “if such cause of action or defense was timely asserted in the prior action.” Section 205-a also provides that, where applicable, the original plaintiff (or a successor-in-interest acting on behalf of the original plaintiff) may only receive one six-month extension and no court shall allow the original plaintiff to receive more than one six-month extension.

Third, the Act amends Section 213(4) of the Rules to clarify that in any action where the statute of limitations is raised as a defense – and if that defense is based on a claim that the indebtedness was accelerated prior to or through commencement of a prior action – a plaintiff will be estopped from asserting that a mortgage instrument was not validly accelerated prior to or by way of commencement of a prior action. An exception exists if the prior action “was dismissed based on an expressed judicial determination, made upon a timely interposed defense, that the instrument was not validly accelerated.”

Further, in any quiet title action seeking cancellation and discharge of record of a mortgage instrument, a defendant will be estopped from asserting that the applicable statute of limitations period for commencement of an action has not expired because instrument was not validly accelerated prior to or by way of commencement of a prior action, “unless the prior action was dismissed based on an expressed judicial determination, made upon a timely interposed defense, that the instrument was not validly accelerated.”

Finally, the Act amends Section 3217 of the Rules, by adding a new Subsection (e), which clarifies that if the statute of limitations is raised as a defense in an action, and if the defense rests on a claim that the instrument was accelerated prior to or by virtue of the commencement of a prior action, the plaintiff cannot stop the tolling of the statute of limitations by asserting that the instrument was not validly accelerated unless the prior action was dismissed based on an express judicial determination regarding invalid acceleration.

Takeaway

In light of the Act’s curtailment of a servicer’s or investor’s ability to unilaterally suspend a foreclosure action, we recommend that mortgagees carefully review their pending mortgage foreclosure actions in New York state. At a minimum, the Act removes the ability of a holder or servicer in New York state to voluntarily discontinue a foreclosure action after acceleration of the indebtedness triggers the running of the statute of limitations.

Whether this will interfere with servicers’ contractual rights and ability – and obligations under the CFPB rules and New York Part 419 – to offer meaningful loss mitigation opportunities to borrowers remains to be seen. At least one judge thinks so. In a recent Order to Show Cause, a New York Supreme Court judge concluded that the Act violates the Contracts Clause of the U.S. Constitution and included an invitation for the New York Attorney General to weigh in.

New York Amends Disclosure Requirements for Telemarketers

A&B Abstract:

New York Governor Kathy Hochul signed legislation in December designed to limit unwanted telemarking calls by providing consumers the option to be added to a company’s do-not-call list at the outset of a call. The new law takes effect March 6, 2023.

Updated Requirements for New York Telemarketers:

The new legislation (S.8450-B/A.8319-C) amends New York General Business Law § 399-z as it relates to telemarketers.  New York currently regulates telemarketers, defined generally as entities that engage in solicitation by telephone call or electronic messaging text to a customer located in New York or that control or supervise such entities.  The law requires certain disclosures to be made at the time of the call.

The law is amended by the legislation to require telemarketers to give customers the option to be added to the company’s do-not-call list at the beginning of telemarketing sales calls, right after providing the telemarketer’s name and solicitor’s name. Currently, the law requires telemarketers to inform customers that they may request to be added to the company’s do-not-call list, but it does not specify when this disclosure must be made.

Takeaway:

Telemarketers doing business in New York should update their procedures and scripts to comply with this new requirement by March 6, 2023, as each violation of this rule can incur a fine of up to $11,000.

CFPB Sues MoneyLion over Membership Program, Uses Military Lending Act as Hook

A&B Abstract:

On September 29, 2022, the Consumer Financial Protection Bureau (“CFPB”), sued MoneyLion Technologies Inc. and 37 of its subsidiaries (“MoneyLion”) in New York federal court for violations of the Military Lending Act (the “MLA”) and Consumer Financial Protection Act (“CFPA”).

The Allegations

The CFPB alleges that MoneyLion offered installment loans that consumers could not access unless they enrolled in a membership program with monthly membership fees.  While MoneyLion represented to consumers that they “had the right to cancel their memberships for any reason,” it “maintained a policy prohibiting consumers with unpaid loan balances from canceling their memberships.”

According to the CFPB, MoneyLion’s membership model resulted in violations of the MLA’s 36% APR cap.  Under the MLA’s implementing regulation, APR is calculated as including “fee[s] imposed for participation in [an] arrangement for consumer credit.”  Based on this, the CFPB argues that the membership fees MoneyLion required servicemembers to pay to gain access to installment loans must be included in those loans’ APR.  If correct, those loans’ APR would unlawfully exceed 36%.

The CFPB also alleges that the installment loans to servicemembers violated the MLA by containing unlawful arbitration clauses and failing to contain required disclosures.

Lastly, the CFPB alleges that MoneyLion’s membership model resulted in unfair, deceptive, and abusive acts or practices under the CFPA. Particularly, the CFPB alleges that MoneyLion misled and injured consumers by representing to consumers that they had the right to cancel their memberships when, in fact, they did not.

Takeaways

The MoneyLion suit serves as a good reminder that every lending program should: (i) account for the additional protections provided to uniquely situated borrowers, such as servicemembers under the MLA; (ii) scrutinize any fees paid by consumers that could be viewed as increasing a loan’s APR; and (iii) review representations they make to consumers to align with the commercial realities and the regulatory requirements of the products they offer.

State Community Reinvestment Acts Reaching Beyond Banks

A&B ABstract:

When Congress passed the federal Community Reinvestment Act (“CRA”) in 1977 to address redlining, it imposed affirmative requirements on insured depository institutions to serve the credit needs of the communities where they receive deposits. At that time, banks were extending the vast majority of mortgages nationally. However, non-banks have become the dominant mortgage lenders, by some estimates accounting for more than two thirds of residential mortgage loans in 2021.

Indeed, the non-bank mortgage market share has been increasing steadily since 2007, when non-banks were originating approximately 20 percent of mortgage loans. That year, Massachusetts became the first state to extend the scope of its state CRA to non-bank mortgage lenders, notwithstanding the proviso of the federal statute that tied credit obligations to depository activities.  Historically, deposits were gathered primarily from areas surrounding bank branches, and thus a bank’s CRA performance responsibilities were likewise focused on those same areas.  But today, both lending and depository activities can be conducted nationally.  In recognition of the more attenuated connection between bank branches serving the credit needs of communities, the Massachusetts CRA became the first state to impose CRA responsibilities on non-bank lenders.

In March 2021, Illinois passed its CRA which also applies beyond banks to non-bank mortgage lenders, followed shortly by New York in November 2021.  (Note that this expansion has not taken mortgage servicers into the fold, as CRA is more focused on an institution’s loan originations and purchases than its loan servicing.)  Relatedly, other state CRA statutes apply to credit unions and banks, though not to other financial institutions.  Below is a brief update on where various state CRAs currently stand:

  • Connecticut.  Connecticut’s CRA initially applied only to banks but was amended in 2001 to cover state credit unions as well.  It does not cover any other financial institutions, however.  Its provisions are similar to the federal CRA.
  • District of Columbia.  The District of Columbia’s CRA applies to deposit-receiving institutions, which includes federal, state, or District-chartered banks, savings institutions, and credit unions.  It is also similar to the federal CRA.
  • Illinois.  The Illinois CRA applies to financial institutions, which includes state banks, credit unions, and non-bank mortgage entities that are licensed under the state’s Residential Mortgage Lending Act that lent or originated 50 or more residential mortgage loans in the previous calendar year.  Following the expansion of its CRA (205 ILCS 735) last year, Illinois solicited comments and facilitated roundtables to assist the Department of Financial and Professional Regulation in developing rulemaking for non-bank entities. In particular, the Department’s August 31, 2021 Advance Notice of Proposed Rulemaking sought comment on whether the assessment areas of these non-bank entities should include the entire state of Illinois.  Importantly, the Department has referenced the potential suitability of either the federal CRA rules or Massachusetts’ CRA rules as a model for Illinois.  No proposed rule has been published as of the date of this writing.
  • Massachusetts.  Despite mortgage lender concerns raised today regarding the feasibility and inapplicability of different elements of the general CRA examination framework, Massachusetts has imposed meaningful CRA requirements on non-bank lenders for more than a decade.  Indeed, Massachusetts has succeeded in implementing and conducting separate CRA examination processes for banks and non-banks. Yet despite this distinction, Massachusetts CRA exams for mortgage companies remain rigorous.
  • New York.  In November last year, New York Governor Kathy Hochul signed legislation (S.5246-A/A.6247-A) to expand the scope of the state’s CRA to cover non-bank mortgage lenders. Specifically, the legislation creates a new section, 28-bb of the New York Banking Law, that requires non-depository lenders to “meet the credit needs of local communities.” Further, section 28-bb provides for an assessment of lender performance by the Superintendent that considers the activities conducted by the lender to ascertain the credit needs of its community, along with the extent of the lender’s marketing, special programs, and participation in community outreach, educational programs, and subsidized housing programs. This assessment also may consider the geographic distribution of the lender’s loan applications and originations; the lender’s record of office locations and service offerings; and any evidence of discriminatory conduct, including any practices intended to discourage prospective loan applicants.  The provisions of section 28-bb will go into effect on November 1, 2022.

Worth noting also is that while these state CRAs are generally aligned with the federal CRA requirements, the regulations implementing the federal CRA are expected to change.  The Federal Reserve Board, FDIC, and OCC are currently working on promulgating a modernized interagency CRA framework.  Once the federal CRA regulations change, the state CRAs may follow or risk subjecting their banks and any other covered financial institutions to the burden of complying with two different regulatory regimes.

Takeaway:

Much like in Massachusetts, non-bank lenders originating a significant number of loans in Illinois and New York should be developing a CRA compliance strategy that makes sense for their size and business model to comply with the state CRAs.  That said, all non-bank lenders would do well to contemplate whether Massachusetts, Illinois, and New York are a harbinger of what is to come.  Finally, state CRA covered financial institutions in Connecticut, the District of Columbia, Illinois, Massachusetts, and New York should be planning for potential compliance framework shifts once the federal CRA regulations are revised.

State Community Reinvestment Acts Reaching Beyond Banks

A&B ABstract:

When Congress passed the federal Community Reinvestment Act (“CRA”) in 1977 to address redlining, it imposed affirmative requirements on insured depository institutions to serve the credit needs of the communities where they receive deposits. At that time, banks were extending the vast majority of mortgages nationally. However, non-banks have become the dominant mortgage lenders, by some estimates accounting for more than two thirds of residential mortgage loans in 2021.

Indeed, the non-bank mortgage market share has been increasing steadily since 2007, when non-banks were originating approximately 20 percent of mortgage loans. That year, Massachusetts became the first state to extend the scope of its state CRA to non-bank mortgage lenders, notwithstanding the proviso of the federal statute that tied credit obligations to depository activities.  Historically, deposits were gathered primarily from areas surrounding bank branches, and thus a bank’s CRA performance responsibilities were likewise focused on those same areas.  But today, both lending and depository activities can be conducted nationally.  In recognition of the more attenuated connection between bank branches serving the credit needs of communities, the Massachusetts CRA became the first state to impose CRA responsibilities on non-bank lenders.

The Various State CRAs

In March 2021, Illinois passed its CRA which also applies beyond banks to non-bank mortgage lenders, followed shortly by New York in November 2021.  (Note that this expansion has not taken mortgage servicers into the fold, as CRA is more focused on an institution’s loan originations and purchases than its loan servicing.)  Relatedly, other state CRA statutes apply to credit unions and banks, though not to other financial institutions.  Below is a brief update on where various state CRAs currently stand:

  • Connecticut. Connecticut’s CRA initially applied only to banks but was amended in 2001 to cover state credit unions as well.  It does not cover any other financial institutions, however.  Its provisions are similar to the federal CRA.
  • District of Columbia. The District of Columbia’s CRA applies to deposit-receiving institutions, which includes federal, state, or District-chartered banks, savings institutions, and credit unions.  It is also similar to the federal CRA.
  • Illinois. The Illinois CRA applies to financial institutions, which includes state banks, credit unions, and non-bank mortgage entities that are licensed under the state’s Residential Mortgage Lending Act that lent or originated 50 or more residential mortgage loans in the previous calendar year.  Following the expansion of its CRA (205 ILCS 735) last year, Illinois solicited comments and facilitated roundtables to assist the Department of Financial and Professional Regulation in developing rulemaking for non-bank entities. In particular, the Department’s August 31, 2021 Advance Notice of Proposed Rulemaking sought comment on whether the assessment areas of these non-bank entities should include the entire state of Illinois.  Importantly, the Department has referenced the potential suitability of either the federal CRA rules or Massachusetts’ CRA rules as a model for Illinois.  No proposed rule has been published as of the date of this writing.
  • Massachusetts. Despite mortgage lender concerns raised today regarding the feasibility and inapplicability of different elements of the general CRA examination framework, Massachusetts has imposed meaningful CRA requirements on non-bank lenders for more than a decade.  Indeed, Massachusetts has succeeded in implementing and conducting separate CRA examination processes for banks and non-banks. Yet despite this distinction, Massachusetts CRA exams for mortgage companies remain rigorous.
  • New York. In November last year, New York Governor Kathy Hochul signed legislation (S.5246-A/A.6247-A) to expand the scope of the state’s CRA to cover non-bank mortgage lenders. Specifically, the legislation creates a new section, 28-bb of the New York Banking Law, that requires non-depository lenders to “meet the credit needs of local communities.” Further, section 28-bb provides for an assessment of lender performance by the Superintendent that considers the activities conducted by the lender to ascertain the credit needs of its community, along with the extent of the lender’s marketing, special programs, and participation in community outreach, educational programs, and subsidized housing programs. This assessment also may consider the geographic distribution of the lender’s loan applications and originations; the lender’s record of office locations and service offerings; and any evidence of discriminatory conduct, including any practices intended to discourage prospective loan applicants.  The provisions of section 28-bb will go into effect on November 1, 2022.

Worth noting also is that while these state CRAs are generally aligned with the federal CRA requirements, the regulations implementing the federal CRA are expected to change.  The Federal Reserve Board, FDIC, and OCC are currently working on promulgating a modernized interagency CRA framework.  Once the federal CRA regulations change, the state CRAs may follow or risk subjecting their banks and any other covered financial institutions to the burden of complying with two different regulatory regimes.

Takeaway:

Much like in Massachusetts, non-bank lenders originating a significant number of loans in Illinois and New York should be developing a CRA compliance strategy that makes sense for their size and business model to comply with the state CRAs.  That said, all non-bank lenders would do well to contemplate whether Massachusetts, Illinois, and New York are a harbinger of what is to come.  Finally, state CRA covered financial institutions in Connecticut, the District of Columbia, Illinois, Massachusetts, and New York should be planning for potential compliance framework shifts once the federal CRA regulations are revised.