Enacts the Home Equity Fraud Act to control improper activities by home improvement contractors and finance companies

Summary of specific provisions

Section 1. Short Title

Section 2. Legislative findings

Section 3. Amends the banking law, subdivision 1 of section 595-a by adding four new paragraphs (i), (j), (k) and (1). Requires mortgage bankers and brokers to disclose their affiliation with home improvement contractors and limits the fees they can charge for their services rendered in connection with the financing or refinancing of home equity loans. It also restricts the practice of flipping a mortgage, i.e. refinancing the same mortgage in order to charge additional fees.

Section 4. Amends the banking law, paragraph (d) of subdivision 3 of section 595-a, as relettered by chapter 400 of the laws of 1993, is relettered paragraph (e) and a new paragraph (d) is added. Requires bankers and brokers to disclose whether the loan will be sold and if so to whom it will be sold and thereafter prohibits any sale of the loan until thirty days after such disclosures are made. It also requires bankers and brokers to give all borrowers a notice setting forth their right to designate a third party to receive copies of all written communications regarding the loan.

Section 5. Amends the banking law, section 347 by adding a new subdivision (e). Requires that licensed lenders shall not be allowed to accept any money from home improvement contractors without fully disclosing their relationship and getting the customer's permission.

Section 6. Amends the banking law, section 592-a by adding a new subdivision 3. Provides that Mortgage brokers shall be deemed to be agents of mortgage bankers making the bankers responsible for their actions.

Section 7. Amends the real property law by adding a new section 254-e. Prohibits the inclusion of a provision allowing for balloon payments, negative amortizations and increased interest after default in any mortgage which refinances a primary residence.

Section 8. Amends the real property actions and proceedings law by adding a new section 1308. Requires that all defendants in foreclosure actions be served with a notice stating clearly that the action may result in the loss of their home and listing certain defenses that may be available.

Section 9. Amends the real property actions and proceedings law by adding a new section 1309. Requires that a plaintiff in a foreclosure action to affirmatively plead compliance with all the provisions of section 595-a of the banking law. It also creates certain affirmative defenses to a mortgage foreclosure action, namely: (1) that at the time of the origination of the loan the mortgagor did not have the ability to afford the loan and the financial institution making the loan knew or should have known this, (2) that the lender violated section 595-a of the banking law and (3) that the mortgage document contains a provision prohibited by section 254-e of the real property law. Employment status, fixed income, receipt of public assistance and payments in excess of fifty per cent of income are all factors that can be considered by the court. In addition, the court may award reasonable attorney fees to the defendant in such foreclosure action.

Section 10. Amends the general business law, paragraph (h) of subdivision 1 of section 771. Requires require that the buyer shall have 15 days to cancel a home improvement contract.

Section 11. Amends the general business law by adding a new section 771-b. Makes it illegal for a home improvement contractor to receive anything of value for placing a home improvement loan with a bank unless such relation is disclosed to the customer and the customer's approval is obtained for the transaction. Requires that the buyer shall have 15 days to cancel a home improvement contract and that notice of this right to cancellation shall be given to the customer at signing or the contract shall not be enforceable. In addition, a homeowner may waive the right to cancel a home improvement contract if the home improvement is needed to meet a bona fide emergency.

Section 12. Amends the general obligations law by adding a new section 5-336. Provides that loans made in violation of section 595-a of the banking law are unenforceable and no default judgment can be rendered on a default of such loan unless the court makes an affirmative finding that the section has been complied with. It also provides that the same affirmative defenses which would be available in an action for foreclosure are available in an action for default of the underlying note and allows the court to award reasonable attorney fees.

Section 13. Effective Date

Effects of present law which this bill would alter

This bill would institute a series of changes in statute which will prohibit the practice of lending money to be secured by a mortgage on the home of a person who cannot afford the terms of that mortgage. It would also limit the fees that mortgage bankers and brokers can charge on refinancing and would limit the enforceability of loans and mortgages made in violation of the various provisions of this bill.

Justification

Many seniors on fixed incomes who own homes with substantial equity have been approached by unscrupulous home improvement contractors working in conjunction with fringe financial companies. The contractor talks them into minor repairs on their homes which they mayor may not need and then arranges for "easy" financing. The mortgage company or mortgage broker then offers to refinance the existing mortgage (often increasing the rate), to finance the repairs and to consolidate all of the existing credit card debt (converting unsecured debt into secured debt). Before long the senior is signing documents refinancing their home and incurring the responsibility for paying a mortgage which the senior cannot afford. By increasing the principal of the loan and by charging high rates, large fees are earned by the mortgage brokers and mortgage bankers as well as the home improvement contractor. Shortly after the closing, the finance company sells the mortgage to a bank or combines it for sale as mortgage securities thus relieving itself of the liability and providing resources for the cycle to begin again. The senior, meanwhile, is unable to make the mortgage payments and loses their home to a foreclosure action. Often this problem is compounded by the fact that most victims cannot afford an attorney to defend the foreclosure action.

While the industry rate for foreclosures is about 2.6%, the rate for some of the lenders in New York City who engage in this sort of scheme is as high as 13%. A recent New York Times article reported that the New York City Department of Consumer Affairs has noted that finance companies working with crooked home improvement contractors have fleeced thousands of lower income minority New Yorkers out of the equity in their homes by tricking them into loans for repairs. The lenders research homeowners to find out if they have paid off their first mortgage and have singled out elderly homeowners with substantial equity in their homes to make risky loans, knowing that in case of default they can recoup the loan by taking the home. In many of these cases, the homeowner is not aware of the fact that he or she is securing the loan with a mortgage on their home.

Often, finance companies engage the services of brokers, who are paid large fees by the customer, and do not check the accuracy of the application document. One 73 year old woman living on social security was described in her loan papers as a 66 year old self-employed investor, earning $7,000 per month. When the loan goes into default the bank claims to be unaware of this deception. This bill would make them responsible for verifying the accuracy of information provided by brokers.

At present, the senior who is a victim of these practices has no legal recourse. This bill will impose a series of changes that will give seniors a weapon to fight this scam. Legitimate banking institutions should have no problem with the requirements of this bill because the procedures it requires are already followed in the course of good lending practices. This bill will make it illegal to prey on seniors and lower income New Yorkers and to take from them their most valuable possession, their home.

Prior legislative history

2012: Senate - New bill/A.2378 - Referred to Banks 2011: A.2378 - Referred to Banks 2010-2009: A.3386 - Referred to Banks 2008-2007: A.6170 - Referred to Banks 2006-2005: A.1667 - Held for Consideration in Banks 2003-2004: A.5057 - Referred to Banks

Fiscal implications for state and local governments

Minimal cost to the State.

Effective date

October 1st after it has become law.