It is not the easiest time to be in the mortgage business. Mortgage investors and servicers continue to deal with the fallout from the COVID-19 pandemic and its effects on borrowers. Rising interest rates could drain the plentiful supply of refinance business from prior years and deter hopeful homebuyers from seeking new financing. Now, the New York legislature has added another layer of complexity by passing a bill that would significantly impact the residential mortgage foreclosure process in New York. The New York legislation has been approved by both houses of the New York legislature and, if enacted, would significantly constrain lenders’, servicers’ and investors’ ability to efficiently prosecute foreclosure actions and would potentially jeopardize their ability to recover their mortgage debt.
Go, and Then Stop? Accelerating and “De-accelerating” a Loan
For many Americans, obtaining a mortgage loan allows them to achieve their goal of home ownership and make what is likely to be the single biggest purchase of their lifetime. Of course, a mortgage loan is not a free lunch: the borrower must agree to make their loan payments in a timely fashion and uphold all of the borrower’s other covenants, like paying taxes or maintaining required insurance on the property. And if the borrower does not make payments as agreed, then the lender usually has the authority under the mortgage and/or promissory note to declare the borrower in default.
Nearly all residential mortgage loan agreements provide the lender with authority to accelerate the balance of the mortgage loan if the borrower defaults. The ability to accelerate the loan is a powerful tool in the lender’s kit: an acceleration provision allows the lender to declare all unpaid amounts on the loan due and payable immediately if the borrower defaults. In New York, it also allows the lender to bring a lawsuit to foreclose and sell the property securing the loan to satisfy the mortgage debt, instead of forcing the lender to enforce only the borrower’s past-due monthly payments in a separate action for missed payments. Acceleration also has one more significant consequence: it starts the clock on New York’s six-year statute of limitations for the lender to bring an action to foreclose and recover the balance of the loan through a foreclosure sale.
While a lender’s decision to accelerate a loan is not one to be taken lightly, it is also not necessarily permanent. A lender may subsequently revoke its decision to accelerate the loan. The ability to “de-accelerate” a loan can be beneficial for both the lender and the borrower—for example, a borrower and lender might be able to agree on a loss mitigation option during the pendency of the foreclosure case, and the lender can then “de-accelerate” the loan, giving the borrower another chance to resolve the delinquency and stay in their home.
Exactly how a lender may “de-accelerate” a loan in New York has largely been left to courts to decide. In 2021, the New York Court of Appeals (New York’s highest court) held that a lender’s decision to voluntarily dismiss a foreclosure action constituted a revocation of the lender’s decision to accelerate. In that case, the lender brought a foreclosure action against the borrower within six years of accelerating the borrower’s loan. However, the lender had previously accelerated the loan in 2008 and brought a foreclosure action, which it voluntarily dismissed in 2013. The lender later accelerated the loan for a second time and brought a subsequent foreclosure action in 2015. Thus, had the six-year statute of limitations continued to run from the date of the original acceleration in 2008, the lender’s second foreclosure suit would have been time-barred. The Court of Appeals, however, agreed with the lender that the lender’s voluntary dismissal of the first foreclosure suit constituted a revocation of the lender’s option to accelerate, thus re-setting the statute of limitations to bring a suit on the entire debt. Because the lender’s dismissal of the foreclosure action revoked the earlier acceleration, restoring the parties to where they were prior to acceleration, the court held that the lender only needed to bring the current foreclosure suit within six years of any subsequent acceleration—which the lender had.
The New York Legislature’s Response: S5473
The Court of Appeals’ decision has proven to be controversial. Consumer advocates argued that the decision granted mortgage lenders a “super-right” to reset the statute of limitations that was not available to other litigants.1 And, in February 2022, the New York legislature introduced S5473 (and its companion bill in the lower house of the legislature, A7737), the so-called “Foreclosure Abuse Prevention Act,” to remedy what it saw as the Court of Appeals’ “undermin[ing]” of the law governing acceleration and the statute of limitations.2 The bill would effectively overturn the Court of Appeals’ decision by codifying that a lender’s voluntary discontinuance of an action to foreclose a mortgage does not stop the six-year statute of limitations period from running.3 This would result in a lender being time-barred from foreclosing the mortgage after six years from the first date the lender accelerates the loan—even if the lender subsequently dismisses the foreclosure suit on its own accord. S5473 provides that the lender can have a second chance at foreclosure only if the first action was terminated for a reason other than a voluntary dismissal, lack of personal jurisdiction, or a dismissal for neglect or failure to comply with court rules or orders, and the lender brings the new action within six months of termination of the prior case—and even then, only if the new action is commenced within the statute of limitations that applied to the original action.4 The bill would also codify that a lender cannot unilaterally reset the statute of limitations once a foreclosure action has commenced.5 Nor could lenders rely on a promise to pay from the borrower to revive or re-start the statute of limitations. Under S5473, a promise to pay will re-start or revive the statute of limitations only if the borrower also agrees in writing to extend the statute of limitations in accordance with the New York General Obligations Law.6
Furthermore, S5473 also provides that, once a foreclosure action is barred by the statute of limitations, the lender is prohibited from bringing any other action to recover the same part of the debt—including both another foreclosure action as well as an action to recover a personal judgment against the borrower on the promissory note.7 New York legislators noted that this provision of the bill is intended to overrule recent case law holding that New York’s election-of-remedies statute tolled the statute of limitations during the lender’s foreclosure proceeding, allowing the lender to later recover a money judgment on the note later than six years after the lender initiated foreclosure. Essentially, once a lender makes the decision to exercise its right to accelerate the loan, it has six years to complete the foreclosure action before it loses its right to recover the debt in court, either through a foreclosure or a judgment on the promissory note. While consumer advocacy groups tend to be proponents of the legislation, the bill may actually have the opposite effect: when faced with a decision whether to complete a foreclosure action, or work with a borrower on a mutually agreeable loss mitigation option and dismiss the foreclosure—and potentially risk losing the ability to later foreclose if the borrower re-defaults—lenders may be incentivized to proceed with foreclosure rather than seek to engage with borrowers on a possible home retention option, if permissible under applicable law.
In addition, the bill significantly limits lenders’ ability to assert in litigation that the lender did not accelerate the loan and commence the statute of limitations.8 The bill would prohibit lenders from asserting a defense that the statute of limitations did not expire because the lender did not validly accelerate the loan in an action to quiet title in the borrower—or in response to a borrower’s defense in a foreclosure action—that is based on an assertion that the six-year statute of limitations to foreclose the mortgage has expired.9 Lenders would be permitted to present a defense, or a response to the borrower’s defense, that the acceleration was invalid only if a prior foreclosure action was dismissed based on a court ruling that the lender’s acceleration was invalid.10
Perhaps the most controversial feature of the bill is that it would not only take effect immediately if enacted, but would also apply retroactively to any pending foreclosure action for which a final judgment and order of sale has not been enforced.11 The retroactivity aspect of the bill, if enacted into law, is likely to face legal challenges, including on a constitutional basis. In its 2020 ruling in Regina Metropolitan Co. LLC v. New York State Division of Housing and Community Renewal, the New York Court of Appeals held that retroactive application of certain portions of the Housing Stability and Tenant Protection Act of 2019 related to overcharges would violate due process.12 The Court of Appeals emphasized that, “in order to comport with due process, there must be a persuasive reason for the potentially harsh impacts of retroactivity.”13 In addition to due process challenges, one could imagine potential constitutional challenges to the bill based on the Contracts Clause14 as well as under the Takings Clause15 as a regulatory taking.
S5473 has passed both houses of the New York legislature, and awaits delivery to Governor Kathy Hochul.
S2143 to Amend the New York Banking Law
While S5473 has understandably attracted significant attention from the mortgage industry, it is not the only piece of legislation pending in New York with the potential to significantly affect the industry. On May 3, 2022, the New York Senate passed S2143, a bill which could, if enacted, dramatically expand mortgage servicers’—and potentially mortgage holders’—liability to borrowers for violations of New York’s mortgage servicing laws and regulations, as well as further complicate foreclosure proceedings.16 S2143 amends the New York Banking Law to grant borrowers a private right of action to enforce New York’s mortgage servicing laws and regulations, or to bring counterclaims or actions for injunctive relief.17 Under S2143, borrowers would be able to recover statutory damages of $1,000 per violation, the borrower’s actual damages (which are subject to trebling) and lawyers’ fees and costs.18 Notably, S2143 expressly states that both the mortgage servicer and the mortgagee are jointly and severally liable for damages.19
Finally, S2143 provides that compliance with New York mortgage servicing laws and regulations is a condition precedent to bringing a foreclosure action or an action for a money judgment on the promissory note.20 Under S2143, the borrower may assert any noncompliance during the course of servicing the borrower’s loan as a defense to a foreclosure action or an action on the note—regardless of whether the alleged violation was committed by the current servicer or any other predecessor servicer.21 Like S5473, S2143 would take effect immediately if enacted, although S2143 does not contain an express retroactivity provision.22 S2143 is pending before the New York State Assembly.
While neither piece of legislation has been enacted, participants in the New York residential mortgage market should carefully review the legislation and begin preparing for the possibility that the bills become law.