Hidden Defects in Title

But penalties in the realm of the high-cost home loan are in a more precarious arena. Most are directed at the lender, whose liability for violation includes actual damages – which encompasses consequential and incidental damages (Banking Law 6-1(7)(a)) – and statutory damages, which require forfeiture of all interest (earned or unearned), points, fees and closing costs with a refund of any of such sums already paid. (Banking Law 6-1(7)(b)). The only exceptions are that for loan flipping and ensuring borrowers' ability to pay, the damages are the greater of $5000 per violation or twice the amount of points, fees and closing costs. (Banking Law 6-1(7)(b)(1), (2)(ii)(1) and (2)). Reasonable legal fees can be awarded to a borrower prevailing on his claim, and the court is also given discretion to grant injunctive, declaratory or other equitable relief. (Banking Law 6-1(8)). Moreover, should a court conclude that a lender intentionally violated the statute, the loan is deemed void and the lender then has no right to either collect, receive or retain any principal or interest and the borrower may recover any payments made. (Banking Law 6-1(10)). Moreover, the applicable statute of limitations is 6 years (Banking Law 6-1(6), and actions to enforce the statute are not limited to the borrower; enforcement can be brought by the attorney general, the superintendent of banking, or any party to the loan. (Banking Law 6-1(5)).

Of particular relevance to the default or foreclosure situation, when the violation is raised either as an affirmative claim or a defense, the loan can be rescinded and there is no time limit to block the rescission remedy. (Banking Law 6-1(11)). Need it be asked where an insurer of title is left by a post-sale attack that results in recission of the loan? Not incidentally, an assignee of the mortgage derives no insulation because in any action brought by an assignee against a borrower more than 60 days in default, or already in foreclosure, any claims in recoupment and any defenses to payment that could have been asserted against the original lender can be made against the assignee – all without any time limitations. (Banking Law 6-1(13)).

While many of the cited penalties befall the lender, it is not at all clear that a title would survive at the same time the underlying loan is under attack. How precisely all this may play out may be to some extent uncertain, but it is that very uncertainty which portends problems for title insurers.

Loans Addressed By Statute

To be sure, not every foreclosed property presents the dangers reviewed here – only those included in the statutory definitions. First, the loan must be categorized as a “home loan,” which as a practical matter will be a typical residential mortgage. (It includes an open-end credit plan but not a reverse mortgage.)

The boundaries are clear enough on their face and include the aggregate of the following: Principal cannot exceed the lesser of the FannieMae conforming loan limit or $300,000. The borrower must be a natural person and the debt must have been incurred for personal, family or household purposes. Finally, the property must be in New York, improved by a one- to a four-family house occupied as the owners' principal residence. (Banking Law, section 6-6(1)). An immediate issue with the definitions, standard and elemental though they are, is that a title insurer's evaluation is not so readily completed upon typical file review. For example, the purpose of the financing may not be apparent without analysis of the lender's origination file, not normally done in insuring a foreclosure title. Similarly, whether it was the borrower's principal residence may be elusive. Consequently, due diligence beyond the norm may be necessary even to establish the basic first fact: is it or is it not a home loan?

A home loan, of course, does not invoke the statute unless it becomes “high cost.” It is deemed in this category when one or more of a number of thresholds are crossed; in its simplest incarnation, an interest rate exceeding eight points above the yield of treasury securities with a comparable maturity for a first mortgage or a rate that equals or exceeds nine points for a second mortgage (Banking Law 6-1(g)(i)). Points and fees have an independent role so that a home loan will become “high cost” when total points and fees exceed 5% of the loan amount when the loan is $50,000 or more, or 6% of that loan amount when it is a purchase money loan guaranteed by the FHA or the VA. (Banking Law 6-1(g)(ii)).

Meeting the Tests – Mandates and Prohibitions

When a prospective title insurer is able to affirmatively determine that it is contemplating a title derived from foreclosure of a high-interest home loan, the analysis shifts to ascertain whether the lender and its assigns meet all the tests of the statute. There are some 19 prohibitions and mandates, violation of any one of which may create title or litigation issues. Of these, some would be determinable by reading the mortgage. Others would require research into the mortgagee's files – if such records were available. Even then, there is a likelihood that some of the facts and rules would be open to interpretation.

For instance, the loan may not be subject to a mandatory arbitration clause that is oppressive, unfair, unconscionable or which substantially reduces a borrower's rights. (Banking Law 6-1(2)(g)). This is certainly open to interpretation and it would be difficult to glean when the mortgage provision avoids the cited prohibitions. The loan cannot directly or indirectly finance any credit life, credit disability, credit unemployment or credit property insurance or any other health or life insurance premiums. (Banking Law 6-1(2)(h)). Here, it might be formidable to spot an indirect financing of insurance.

Loan Flipping

Loan flipping, defined as a loan that refinances an existing home loan, but where the new loan does not provide a tangible net benefit to the borrower under all the circumstances, is barred. (Banking Law 6-1(2)(i)). How does a title insurer accurately assess a tangible benefit under all the circumstances – even if all the circumstances were available to be known? The loan cannot refinance one that is a special mortgage originated, subsidized or guaranteed by or through a state, tribal or local government or non-profit organization, or one with a below market interest rate or with non-standard payment terms beneficial to the borrower. (Banking Law 6-1(2)(j)). How precisely will an insurer parse non-standard terms beneficial to the borrower?

The loan cannot be made without due regard to the borrower's ability to repay. Despite statutory guidance (Banking Law 6-1(2)(k)), the determination will not be problem-free. In addition, the lender is barred from recommending or encouraging default on an existing loan prior to and in connection with the closing of the high-cost loan that refinances all or a portion of the existing debt. (Banking Law 6-1(2)(o)). It will be close to impossible for a title insurer to divine what the original lender did or did not recommend.

The lender cannot accept from or give to a mortgage broker any fee, kickback, thing of value or split of charges other than as payment for services actually performed and that sum must be reasonably related to the value. (Banking Law 6-1(2)(p)). Some time after the fact, it will likely be difficult to ascertain the quantity or quality of services provided by a broker.

Conclusion

A reading of the new statute demonstrates convincingly a legislative intent to help and protect borrowers in high-interest home loan situations. That being so, and harkening back to our second scenario, suppose the borrower awakens after the sale and avers that this was a high-interest home loan after all (although not pleaded as such by the plaintiff)? Can the judgment be vacated for want of proof of compliance even if no violation of the statutory prohibitions and mandates is asserted? Given the thrust of the statute, it is not inconceivable that a court might not seek to invoke CPLR Rule 5015(a)(3) and find some misrepresentation or other misconduct on the mortgagee's part from not pleading a required allegation in a high-interest home loan case. The court might even stretch to employ subsection (4) and hold that failure to plead is jurisdictional. (Editorially, we observe that there appears no basis for this, but there could be some uncertainty).

Scenario Three could present similar questions. The mortgagor might rise from his slumbers, allege that the assertion of compliance was false and that in actuality there were egregious violations of the statute. Might a court wish to listen, even post-judgment? With the apparent bent of this statute one can wonder if there is room for optimism from the insurers' point of view.

Hidden defects in title are one of the nightmares of the title insurance industry – as well as one of the protections that make the purchase of title insurance the more alluring. Although only experience may supply the ultimate answer, there is a possibility that the new “predatory lending law” in New York will generate lurking infirmities in titles devolving through mortgage foreclosure actions that may render tenuous the issuance of insurance on such properties. (L.2002, ch.626, amending the banking law, the general business law and the real property actions and proceedings law.) The immediate heart of the issue relates to the new RPAPL 1302, entitled “Foreclosure of High-cost Home Loans.” Subsection (1) now requires that any complaint served for foreclosure of a high-cost home loan must affirmatively allege that the plaintiff has complied with all the provisions of banking law section 595-a and 6-1. In addition, that allegation must be proven to the satisfaction of the court before judgment (by default or otherwise) can be entered. Subsection (2) specifically denominates as a defense to foreclosure that the home loan violates any provision of section 6-1 of the banking law.

Although there is much more about the new statute yet to analyze, here are some scenarios, and the questions they raise, which might give pause to underwriting counsel:

• First scenario. A property is struck down in foreclosure to the highest bidder. That bidder solicits a title search and title insurance. The complaint did not allege, not did mortgagee prove, compliance with all the provision of banking law sections 595-a and 6-1. If the mortgage was not a high-cost home loan (an analysis the title company must undertake), there is presumably no issue because the affirmative allegation could not have been required.
• Second scenario. If the title company confirms that the mortgage was in the high-cost category, but the foreclosing mortgage holder neither asserted nor proved compliance with the statute, the possibility of serious danger prowls so presumably an insurer would be reluctant to insure the title.
• Third scenario. Change the facts to a case where the mortgage is concededly a high-cost home loan but the allegation is both pleaded and proven, a predicate for judgment of foreclosure and sale. Can the title company evaluate whether compliance with statutory dictates really exists – just in case a defaulting borrower (or some other party) surfaces after the sale to challenge the action? Mindful that the new statute imposes a plethora of mandates and prohibitions, as well as harsh and extensive enforcement mechanisms, there may be room for doubt in resolving scenario number three.

Dangers in Enforcement

In the usual mortgage foreclosure situation, an insurer of the title would typically be concerned only about assaults from named defendants in the foreclosure action. (For unnamed defendants the issues, of course, involve strict foreclosure or reforeclosure actions.) And most often this attack will come from a disgruntled borrower. Such are the expected vicissitudes of insuring titles devolving through foreclosure; insurers are accustomed to them and surprises may not be unduly frequent.

But penalties in the realm of the high-cost home loan are in a more precarious arena. Most are directed at the lender, whose liability for violation includes actual damages – which encompasses consequential and incidental damages (Banking Law 6-1(7)(a)) – and statutory damages, which require forfeiture of all interest (earned or unearned), points, fees and closing costs with a refund of any of such sums already paid. (Banking Law 6-1(7)(b)). The only exceptions are that for loan flipping and ensuring borrowers' ability to pay, the damages are the greater of $5000 per violation or twice the amount of points, fees and closing costs. (Banking Law 6-1(7)(b)(1), (2)(ii)(1) and (2)). Reasonable legal fees can be awarded to a borrower prevailing on his claim, and the court is also given discretion to grant injunctive, declaratory or other equitable relief. (Banking Law 6-1(8)). Moreover, should a court conclude that a lender intentionally violated the statute, the loan is deemed void and the lender then has no right to either collect, receive or retain any principal or interest and the borrower may recover any payments made. (Banking Law 6-1(10)). Moreover, the applicable statute of limitations is 6 years (Banking Law 6-1(6), and actions to enforce the statute are not limited to the borrower; enforcement can be brought by the attorney general, the superintendent of banking, or any party to the loan. (Banking Law 6-1(5)).

Of particular relevance to the default or foreclosure situation, when the violation is raised either as an affirmative claim or a defense, the loan can be rescinded and there is no time limit to block the rescission remedy. (Banking Law 6-1(11)). Need it be asked where an insurer of title is left by a post-sale attack that results in recission of the loan? Not incidentally, an assignee of the mortgage derives no insulation because in any action brought by an assignee against a borrower more than 60 days in default, or already in foreclosure, any claims in recoupment and any defenses to payment that could have been asserted against the original lender can be made against the assignee – all without any time limitations. (Banking Law 6-1(13)).

While many of the cited penalties befall the lender, it is not at all clear that a title would survive at the same time the underlying loan is under attack. How precisely all this may play out may be to some extent uncertain, but it is that very uncertainty which portends problems for title insurers.

Loans Addressed By Statute

To be sure, not every foreclosed property presents the dangers reviewed here – only those included in the statutory definitions. First, the loan must be categorized as a “home loan,” which as a practical matter will be a typical residential mortgage. (It includes an open-end credit plan but not a reverse mortgage.)

The boundaries are clear enough on their face and include the aggregate of the following: Principal cannot exceed the lesser of the FannieMae conforming loan limit or $300,000. The borrower must be a natural person and the debt must have been incurred for personal, family or household purposes. Finally, the property must be in New York, improved by a one- to a four-family house occupied as the owners' principal residence. (Banking Law, section 6-6(1)). An immediate issue with the definitions, standard and elemental though they are, is that a title insurer's evaluation is not so readily completed upon typical file review. For example, the purpose of the financing may not be apparent without analysis of the lender's origination file, not normally done in insuring a foreclosure title. Similarly, whether it was the borrower's principal residence may be elusive. Consequently, due diligence beyond the norm may be necessary even to establish the basic first fact: is it or is it not a home loan?

A home loan, of course, does not invoke the statute unless it becomes “high cost.” It is deemed in this category when one or more of a number of thresholds are crossed; in its simplest incarnation, an interest rate exceeding eight points above the yield of treasury securities with a comparable maturity for a first mortgage or a rate that equals or exceeds nine points for a second mortgage (Banking Law 6-1(g)(i)). Points and fees have an independent role so that a home loan will become “high cost” when total points and fees exceed 5% of the loan amount when the loan is $50,000 or more, or 6% of that loan amount when it is a purchase money loan guaranteed by the FHA or the VA. (Banking Law 6-1(g)(ii)).

Meeting the Tests – Mandates and Prohibitions

When a prospective title insurer is able to affirmatively determine that it is contemplating a title derived from foreclosure of a high-interest home loan, the analysis shifts to ascertain whether the lender and its assigns meet all the tests of the statute. There are some 19 prohibitions and mandates, violation of any one of which may create title or litigation issues. Of these, some would be determinable by reading the mortgage. Others would require research into the mortgagee's files – if such records were available. Even then, there is a likelihood that some of the facts and rules would be open to interpretation.

For instance, the loan may not be subject to a mandatory arbitration clause that is oppressive, unfair, unconscionable or which substantially reduces a borrower's rights. (Banking Law 6-1(2)(g)). This is certainly open to interpretation and it would be difficult to glean when the mortgage provision avoids the cited prohibitions. The loan cannot directly or indirectly finance any credit life, credit disability, credit unemployment or credit property insurance or any other health or life insurance premiums. (Banking Law 6-1(2)(h)). Here, it might be formidable to spot an indirect financing of insurance.

Loan Flipping

Loan flipping, defined as a loan that refinances an existing home loan, but where the new loan does not provide a tangible net benefit to the borrower under all the circumstances, is barred. (Banking Law 6-1(2)(i)). How does a title insurer accurately assess a tangible benefit under all the circumstances – even if all the circumstances were available to be known? The loan cannot refinance one that is a special mortgage originated, subsidized or guaranteed by or through a state, tribal or local government or non-profit organization, or one with a below market interest rate or with non-standard payment terms beneficial to the borrower. (Banking Law 6-1(2)(j)). How precisely will an insurer parse non-standard terms beneficial to the borrower?

The loan cannot be made without due regard to the borrower's ability to repay. Despite statutory guidance (Banking Law 6-1(2)(k)), the determination will not be problem-free. In addition, the lender is barred from recommending or encouraging default on an existing loan prior to and in connection with the closing of the high-cost loan that refinances all or a portion of the existing debt. (Banking Law 6-1(2)(o)). It will be close to impossible for a title insurer to divine what the original lender did or did not recommend.

The lender cannot accept from or give to a mortgage broker any fee, kickback, thing of value or split of charges other than as payment for services actually performed and that sum must be reasonably related to the value. (Banking Law 6-1(2)(p)). Some time after the fact, it will likely be difficult to ascertain the quantity or quality of services provided by a broker.

Conclusion

A reading of the new statute demonstrates convincingly a legislative intent to help and protect borrowers in high-interest home loan situations. That being so, and harkening back to our second scenario, suppose the borrower awakens after the sale and avers that this was a high-interest home loan after all (although not pleaded as such by the plaintiff)? Can the judgment be vacated for want of proof of compliance even if no violation of the statutory prohibitions and mandates is asserted? Given the thrust of the statute, it is not inconceivable that a court might not seek to invoke CPLR Rule 5015(a)(3) and find some misrepresentation or other misconduct on the mortgagee's part from not pleading a required allegation in a high-interest home loan case. The court might even stretch to employ subsection (4) and hold that failure to plead is jurisdictional. (Editorially, we observe that there appears no basis for this, but there could be some uncertainty).

Scenario Three could present similar questions. The mortgagor might rise from his slumbers, allege that the assertion of compliance was false and that in actuality there were egregious violations of the statute. Might a court wish to listen, even post-judgment? With the apparent bent of this statute one can wonder if there is room for optimism from the insurers' point of view.