New York State Passes the “Home Equity Theft Prevention Act”

August 1, 2006

Author: Kirsten E. Keefe

On July 26, 2006, after unanimous votes in both the New York State Assembly and Senate, Governor George Pataki signed into law the “Home Equity Theft Prevention Act.”  The bill was sponsored by Assemblyman Darryl Towns and Senator Hugh Farley, chairs of the Banking Committees in their respective houses.  The new law (Chapter __ of the Laws of 2006) regulates the growing industry of “foreclosure assistance” –  for-profit companies that target people in foreclosure and promise to rescue them from losing their homes.   

“Deed Theft” Scams

Home equity theft, also known as “deed theft,” occurs when investors agree to pay off the arrearage owed on a home and in return, require the homeowner sign the deed over to them.  The investors comb court foreclosure records and call or send direct market mailings to vulnerable homeowners.  Promises are made that the homeowner may continue to live in the property “renting” it from the investor, and then buy back the property in a year or so, once their credit has improved.  The reality, however, is that homeowners are often evicted within months and the investor sells the property to a third-party, keeping all the equity.  In other instances,  the investor cashes out on the equity in the home upfront with a new mortgage, leaving the homeowner with a monthly payment that is wholly unaffordable.

While these scenarios have been proliferating in areas such as Brooklyn where property values have soared and many homeowners face trouble because of predatory loans they got in the ‘90’s, these scams are increasingly occurring across the state.  In Troy, for example, a homeowner facing real property tax foreclosure was offered $12,000 in assistance in exchange for adding the investor’s name to the deed.  In a year, the contract would have obligated her to buy the investor out of his half of the $80,000 property value, paying him $40,000 for the loan of $12,000.  Described by a representative of one company as “a creative way around the lending system”, these investors view themselves as saviors to homeowners in trouble, seeing the excessive profits they recognize as simply their ingenuity to profit in a free-marketplace.1  As foreclosure rates continue to rise, it is likely these businesses will only expand their marketplaces.

Summary of the New Law

The “Home Equity Theft Prevention Act” amends the banking law, the real property law and real property actions and proceedings law.2  It does not prohibit genuine and fair offers of assistance; rather, the law regulates this growing industry and requires the investors, referred to as “equity purchasers” in the law, to commit the agreement to writing making these transactions more transparent for consumers.  The law goes into effect February 1, 2007.

Who is Covered

All transactions between a homeowner, referred to as the “equity seller” in the law, and “equity purchasers” are covered under the law.  An “equity purchaser” is defined as “any person who acquires title to any residence in foreclosure or, where applicable, default, or his or her representatives as defined [in the law].” 3  In an attempt to exempt genuine transfers of property for real value, the law exempts from the definition those who purchase a property to be used as their primary residence, lenders who receive a property through foreclosure proceedings or others who acquire a property through a referee sale, a transfer to a relative, the transfer of a property to a non-profit or governmental housing organization and bona fide purchasers who pay real value for a home.4  Thus, the vast majority of real estate transactions between sellers and buyers are not affected by this law.  

The Written Contract (The “Agreement”)

Agreements for the transfer of property between equity sellers and equity purchasers must be in writing, and signed and dated by both parties.  If Spanish is the primary language of the seller, the agreement must be provided in English and in Spanish.5  The Agreement must contain the following:  the name, business address and telephone number of the purchaser, address of residence, total consideration to be given to the seller, a complete description of the terms of payment and services to be provided by the purchaser, the time which physical possession is to be transferred, the terms of any rental agreement, the terms of the conveyance agreement, and a notice of cancellation.6

The seller has a non-negotiable right to cancel the transaction within five business days of the date of the transaction.7  Specific language regarding the seller’s right to cancel is provided in the law and must be printed in 14 point type on the Agreement, including instructions for how to cancel.8  Two copies of the contract a separate notice of cancellation must be given to the seller.9  The law also includes several acts that are prohibited to be taken by the purchaser during this five day period.10

Extended Right to Rescission

The seller has a two year extended right to rescind the transaction for violations of certain sections of the law, including failure to provide a complete and accurate Agreement.  If the purchaser or an affiliate still owns the property at the time a purchaser exercises their extended right to rescind, the property shall be returned to the purchaser.  If the property has been sold to a bona fide third party, rescission does not affect the interest of this party, and the seller’s remedy is to pursue claims for damages against the equity purchaser, including attorneys’ fees and costs.11

Reconveyance Agreements If the Agreement grants the seller an option to repurchase the property, unless otherwise shown, the Agreement is deemed to be a loan transaction.12  In such reconveyance arrangements, the equity purchaser must verify that the seller has a reasonable ability to repurchase the property within the term set forth in the Agreement.13  A formal closing must be conducted for any reconveyance arrangement that is conducted by an attorney not affiliated with the purchaser.14  The seller must also sign off on any transfer of the property to a third party within the term set forth in the Agreement.15  Lease and rental agreement terms during the reconveyance period must be commercially fair and reasonable.16

If the property is reconveyed to the seller, the purchaser must ensure that the title is properly transferred.17  Should the seller be unable to repurchase the property at the term’s end, then the seller is entitled to receive 82% of the fair market value (FMV) of the property, minus expenses paid by the purchaser.18  The time for determining FMV must be determined at the time of the original contract and set forth in the reconveyance agreement – it can be either at the time of the original transfer, or at the time the property is ultimately sold to a third party.19  The law sets standards for determining FMV, as well.20 

All deeds or conveyances subject to a reconveyance arrangement must state explicitly on the face of the document that the conveyance is subject to a reconveyance arrangement, including the terms of the arrangement.21  Reconveyance arrangements must be simultaneously recorded by the purchaser along with the deed in the county clerk’s office, as well, to give title insurers and subsequent purchasers or potential lien holders adequate notice.22 

Foreclosure Notice

One of the strongest pieces in the law is the “foreclosure notice.”  In an attempt to prevent vulnerable homeowners from falling prey to the enticement of “foreclosure rescue” schemes that might not be in their best interest, the law mandates that foreclosing parties send a consumer education notice with the summons and complaint.23  The notice must be on colored paper and in bold 14 point type and state:

“Help for homeowners in foreclosure New York state law requires that we send you this notice about the foreclosure process.  Please read it carefully.

Mortgage foreclosure is a complex process. Some people may approach you about “saving” your home.  You should be extremely careful about any such promises. 

The state encourages you to become informed about  your options in foreclosure.  There are government agencies, legal aid entities and other non-profit organizations that you may contact for information about foreclosure while you are working with your lender during this process. 

To locate an entity near you, you may call the toll-free helpline maintained by the New York State Banking Department at 1-800-BANK-NYS or 1-800-226-5697 or visit the Department’s website at www.banking.state.ny.us/.  The State does not guarantee the advice or these agencies.”24

The Banking Department is responsible for providing a telephone number and web address, and shall make this information readily available for lenders.25

Remedies

In addition to the five day right to cancel the Agreement, and the two year extended right to rescission for violations of certain sections of this law, sellers may bring a private cause of action for damages or equitable relief, treble damages and attorneys’ fees and costs within six years after the date of the violation.26

The Attorney General is also empowered to bring an action against an equity purchaser for violations of this law.27 

Criminal Penalties

In addition to civil penalties, an equity purchaser can be held criminally liable for violations of the law as either a Class E Felony or a Class A misdemeanor.28

Alternatives

Businessmen and women in this burgeoning industry see themselves as saviors to homeowners who would otherwise lose their home to foreclosure. 

While that might be true, lawyers at South Brooklyn Legal Services who have seen the majority of these cases, have yet to learn of a single homeowner who successfully repurchased their home.  In the Capital District, one homeowner was forced to buy back her property for $40,000 more than the mortgage which was paid off by the purchaser. 

New York State has a comprehensive system of housing counseling agencies to which homeowners in trouble can turn for free assistance.  Repayment agreements or loan modifications may be available to the homeowner, or there may be viable defenses to the foreclosure.  If the default was caused by a temporary financial hardship, a chapter 13 bankruptcy may provide the homeowner with a chance to cure the arrearage over time.    The hard truth in many cases, however, may be that the home has become unaffordable and the only option is to sell the property.  It is the rare instance that a homeowner will be able to turn their credit around in a year’s time, a typical term for  re-conveyance agreements, to enable them to obtain affordable financing to buy back the property from the investor.  However, if the homeowner sells the home up front, they – not the investor – will receive and benefit from their earned equity in the home.   

New Yorkers for Responsible Lending

Empire Justice is a member of New Yorkers for Responsible Lending (“NYRL”), a statewide coalition of legal services, housing counseling, advocacy, credit unions and other grassroots organizations lead by the Neighborhood Economic Development Advocacy Project (NEDAP) in New York City that was the driving force behind this bill.  NYRL was convened around 2001 in an effort to get New York State’s anti-predatory lending bill passed.  NYRL has three main focus areas:  mortgages and home issues, insurance, and financial service products (such as payday lending and refund anticipation loans).  To learn more about NYRL or become a member, see NEDAP’s website at http://www.nedap.org/programs/nyrl.html or by call NEDAP at (212) 680-5100. 

Conclusion

With the passage of this law, New York became the sixth state in the nation to provide homeowners with meaningful protections against home equity theft.  (Other states with such laws are California, Minnesota, Maryland, Georgia and Illinois.)  More information about deed theft, as well as a detailed summary of the law can be found on the Empire Justice website at www.empirejustice.org.  For a copy of the law, go to the New York State legislature’s websites at  http://assembly.state.ny.us/ or http://www.senate.state.ny.us and type in bill numbers A.10057B or S. 4744A.

End Notes

1 See Jim Schlett, Investors to Focus on Foreclosures, Schenectady Gazette, June 30, 2006; Michael DeMasi, New Trade Group Will be Advocate for Buyers/Resellers of Real Estate, The Business Review, June 16-22, 2006, at 8.

2 The law amends New York State banking law, Section 595-a(1) by amending paragraphs (e), (f) and (g)  (paragraphs (e) and (f) as added by chapter 571 of the laws of 1986, paragraph (g) as added by chapter 445 of the laws of 1990), and by adding paragraph (h).  The law amends the real property law by adding section 265-a.  The law amends the real property actions and proceedings law by adding section 1303.

3 Real Property Law, §265-a(3).

4 Id.

5 Id. at §265-a(3).

6 Id. at §265-a(4).

7 Id. at §265-a(5).

8 Id. at §265a(4)(I).

9 Id. at §265-a(6).

10 Id. at §265-a(7).

11 Id. at §265-a(8).

12 Id. at §265-a(11)(A).

13 Id. at §265-a(11)(B)(I).

14 Id. at §265-a(11)(B)(II).

15 Id. at §265-a(11)(B)(III).

16 Id. at §265-a(11)(C).

17 Id. at §265-a(11)(D)(I).

18 Id. at §265-a(11)(D)(II).

19 Id. at §265-a(11)(D)(II)(B).

20 See Id.

21 Id. at §265-a(11)(F).

22 Id.

23 RPAPL §1303.

24 Id. at §1303(3).

25 Id. at §1303(4)-(5).

26 Real Property Law §265-a(9).

27 Id. at 265-a(13).

28 NYS Real Property Law §265-a(10).