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Hidden Defects in Title
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.
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