New York Bill Aims to Add Lender Requirement Prior to HECM Foreclosure

New York Bill Aims to Add Lender Requirement Prior to HECM Foreclosure

Legislation Update
July 22, 2020

Source: The New York State Senate (full bill text)

Sponsor Memo

BILL NUMBER: S4408

SPONSOR: GOUNARDES

TITLE OF BILL: An act to amend the real property law, in relation to the regulation of default and foreclosure of reverse mortgages issued under the federal home equity conversion mortgage for seniors program

PURPOSE:

This bill will regulate certain activities of lenders when defaults take place on reverse mortgages issued in New York State under HUD’s home equity conversion mortgage for seniors program.

SUMMARY OF PROVISIONS:

Section 1: Lenders must now notify the Department of Financial Services when engaging in foreclosure proceedings against a borrower, and must also provide proof to the department that HUD has granted prior approval to accelerate the loan, proof of the default and notice to the borrower, and any other information required by the department. The Department of Financial Services must then provide notice of the foreclosure directly

Lenders will also be required to engage in loss mitigation, as specified by the Department of Financial Services, before foreclosing.

This section also prevents lenders from making advance payments on mortgage insurance or tax liabilities. Lenders will only be entitled to pay those moneys which are currently in arrears.

The new requirements will be conditions precedent to bringing a foreclosure action against an HUD reverse mortgage. The provisions will be enforceable by providing treble damages and attorney’s fees to prevailing plaintiffs. Section 2: The act will take effect one hundred and twenty days after it becomes law, but the Department of Financial Services is authorized to immediately take any actions necessary to ensure the law’s implementation.

CURRENT LAW:

Under current law, lenders are not required to notify DFS, and DFS is not required to inform seniors of services available to help them in the event of a default. Lenders are also currently allowed to make advance payments on obligations associated with these reverse mortgages.

JUSTIFICATION:

Reverse mortgages are complicated and expensive financial products. Many seniors do not understand how they work or what their true long- term costs are. Exacerbating this problem are unscrupulous lenders who market reverse mortgages as public services or government- sponsored products. Inadequate regulation of this industry resulted in a sharp uptick in defaults in 2016, as more seniors fell into foreclosure on these products, losing not only their homes, but also their most signif- icant financial assets.

Foreclosures in the reverse mortgage industry have taken place against seniors for making payments mere cents short of their tax, homeowners insurance, or mortgage insurance bills. Lenders eager to tap the equity in these homes are sometimes aggressive to foreclose and see a return on their investment. Seniors can be better protected by providing for stricter regulation of the foreclosure process.

Currently, lenders are not required to notify the Department of Finan- cial Services in the event of a default, and DFS does not regularly provide information to seniors in reverse mortgage default scenarios that can help seniors to keep their homes. This bill will change that by requiring a notification to DFS, and by requiring DFS to help seniors get in touch with a legal services organization to help them manage the process.

Lenders sometimes also make large advance payments on obligations tied to reverse mortgages in the event of a default. Then, to resolve the default, lenders will demand that the advance payments be paid back, resulting in massive financial liabilities to seniors that they may not have the cash on hand to satisfy in order to become current on their mortgage payments and cure a default. This new section would allow lenders to make payments only on obligations that are currently in arrears.

LEGISLATIVE HISTORY:

2017-18: S.4452 – Referred to Judiciary

FISCAL IMPLICATIONS FOR STATE AND LOCAL GOVERNMENTS:

To be determined.

EFFECTIVE DATE: 120th day after it shall have become a law.