Allows a mortgagor to receive an assignment of mortgage in lieu of a discharge of mortgage when the mortgagor is refinancing an existing loan

Justification

Prior to 1989, § 275 of the Real Property Law allowed an owner of property covered by a mortgage to demand an assignment of a mortgage in lieu of a certificate of discharge whenever the "full amount of the principal and interest due on the mortgage is tendered or paid....". In 1989 and 1990, however, RPL § 275 was changed completely, in large part to curtail the use of "dormant mortgages" (mortgages used by mortgagors who would pay off their old mortgages and have them assigned to themselves and would use these same dormant mortgages to borrow "new" money in order to avoid paying a new mortgage tax).

When RPL § 275 was changed in 1989, however, despite the fact that the "new" § 275 still allowed for the possibility of mortgagors getting an assignment from the original bank, SEE RPL § 275.2 (C) AND 3, the right of a mortgagor to demand an assignment of mortgage upon payment in full -- in lieu of a certificate of discharge -- was deleted from the new section. Currently, many banks are taking the position that they are no longer required to deliver an assignment of the mortgage in connection with a refinancing with a new lender and, when their mortgage is paid off by a customer refinancing with a different bank, are delivering certificates of discharge only. This causes mortgagors who are refinancing existing mortgage debt with a new bank to have to pay a part of their mortgage tax twice -- not only on the amount refinanced which is "new debt" (any increase over the amount still due on the first mortgage), which has not yet been taxed, but on the "original" mortgage debt as well, which was taxed when the original mortgage was taken out, likely many years earlier.

The bill, introduced in the 220th Session (S.2787/A.73, Lack/Feldman), was vetoed by Governor Cuomo (S.6935-A/A.9115-A; Veto #32 of 1994) and Governor Pataki (S.1298/A.253; Veto #87 of 1996), both citing the severe loss in mortgage recording tax revenue as the reason for the veto. However, these vetoes ignored a memo issued by the Department of Taxation & Finance on August 3, 1989, to clarify the meaning of LPL § 275 when it was amended. That memo outlines the common route an individual might take to refinance a loan and concludes that "throughout this chain of events the property remains subject to the lien of the original mortgage, which collateralizes the debt that is owed first to the old lender and then to the new lender. The common refinancing transaction will NOT, (emphasis added) be subject to section 275 because the mortgaged property continues at all times to serve as collateral for a bona fide debt." If there is new debt added to the loan in the course of refinancing, that part of the debt would

be subject to the mortgage recording tax, and this bill does nothing to change that.

Since the veto by Governor Pataki in 1996, several Tax Tribunal decisions and a court decision, CITY OF NEW YORK V. NYS TAX TRIBUNAL, (231AD2d 267, 660 NYS2d 753), have overturned the argument that refinancing of a mortgage should require payment of a mortgage tax on the amount refinanced - which upholds the above explanation from the Department of Taxation & Finance. Therefore, the argument that this bill will cause a revenue loss to the state or localities is inaccurate. In fact, the mortgage taxes collected on refinanced amounts of mortgages since the law was changed in 1989, were illegally collected.

This bill allows mortgagors who are refinancing to demand either an assignment or a certificate of discharge from the original mortgagee bank. It would require banks to deliver either an assignment of mortgage or a certificate of discharge of a mortgage, at the mortgagor's option, as well as any necessary accompanying papers or affidavits (see current RPL § 275.3).

Legislative history

1994 - S.6935-A/A.9115-A; 1995 - S.1298/A.253; 1996 S.1298/A.253; 1997 - S.2787/A.73; 1998 - S.2787/A.73; 2001-02- S.6363/A.9989; 2003-04 S.2287; 2005-06 - S.42; 2007-08 - S.1264/A.10469; 2009-10 - S.2566; 2011-12 S.2906/A.8300; 2013-14 S.2312

Fiscal implications

None

Effective date

30 days after it shall become a law.