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Empire Justice Letter in Support - Help New York Avoid Preventable Foreclosures


July 29, 2008

Legislative Secretary
Executive Chamber
NYS Capitol
Albany, NY 12224

Re: Letter in Support of A.10817-A/S.8143-A
Dear Legislative Secretary:

On behalf of the Empire Justice Center, I write in full support of Assembly 10817-A\Senate 8143-A.  This strong piece of legislation will help keep thousands of New York homeowners from losing their homes to foreclosure, as well as insure that New York homeowners are protected from many of the worst lending abuses in the subprime industry that lead to the current crisis.  We urge Governor Paterson to sign this legislation immediately.  

I.  A.10817-A/S.8143-A will help New York Avoid Preventable Foreclosures 

A. 90 day pre-foreclosure notice

The legislation includes several provisions that will prevent foreclosures in New York State.  We support the addition of section 1304 to the Real Property Actions and Proceedings Law (RPAPL) to require a notice be sent to homeowners ninety days prior to the initiation of the lawsuit.  This notice will provide homeowners with critical information early on in the process including contact information for the lender or mortgage servicer, as well as direct contact information for non-profit counseling agencies and the New York State Banking Department.  There is no question that homeowners have a greater chance of negotiating a work-out solution through the assistance of a professionally trained counselor.  Some lenders have created specialized units with direct phone lines for counselors and advocates, not otherwise available to homeowners. 

One of the greatest obstacles has been educating homeowners about free services housing counseling services in their communities.  For the past five years, we have been part of the HomeSave Coalition in the Capital District, a group made up mostly of four non-profit housing counseling agencies from Schenectady, Albany, and Rensselaer.  It has been a continuing challenge for us to develop marketing and advertising strategies, given our limited budgets.  The ninety-day notice is ideal in that it will give borrowers who most need the information, the contact information for non-profit organizations which can best assist them.  

B. Settlement conferences

Mandatory settlement conferences, provided through the amending to Rule 3408 of the Civil Practice Law and Rules (CPLR) will provide homeowners a fair shake in the foreclosure process.  Foreclosure lawyers in New York acknowledge that the vast majority of foreclosures end in a default judgment against the homeowner.  For a myriad of reasons, including a general lack of understanding regarding what it means to have to file an answer in a legal proceeding and a lack of affordable legal resources for consumers, homeowners are not defending foreclosure lawsuits.  The in-person settlement conference will afford homeowners an opportunity that they can understand easily, to appear before the court and defend their home.  For pending foreclosures, the opportunity to request a settlement conference should be extended to include borrowers with “non-traditional” home loans.

Judges and court personnel will play an integral role in insuring homeowners who can afford their homes do not lose them because they were given an unfair loan.  Voluntary lender programs are not working.  Though lenders proclaim they don’t want to take peoples’ homes, loss mitigation servicers don’t match this theory.  Perverse financial incentives exist for both mortgage servicers and for their lawyers to foreclose, rather than to work with borrowers.  Court supervision is necessary to make decision makers within the lending institutions come to the table and develop workable solutions that will keep homeowners in their homes.  For borrowers who have no chance of affording their home, the mandatory settlement conference can actually hasten the foreclosure process so that lenders can proceed more quickly to a resolution.  The settlement conference process will be beneficial for both parties.

The Office of Court Administration is already in the process of instituting their pilot project based on the settlement conference model in the bill in Queens.  OCA is working with consumer advocates, as well as with lenders’ attorneys, to develop a comprehensive system that will ensure that the settlements are conducted in a meaningful way.  The prospect of mandatory settlement conferences is causing legal services organizations, as well as pro bono panels across the state to ramp up their services for homeowners.  Combined with the ninety day notice and the early referrals to housing counselors and legal advocates, I am confident that more homeowners will get the assistance early on in the process, which is what they need to save their homes. 

Both the 90 day notice and the settlement conference provisions are perfect complements to the $25 million in funding that the State allocated in its 2008 budget to fortify non-profit housing counseling agencies and legal services organizations to provide direct assistance to homeowners with subprime loans. 

C. Averment of standing

We also support the amendment to section 1302 of the Real Property Actions and Proceedings Law to ensure that the plaintiffs in foreclosure actions are the actual and real owners and holders of the notes.  There has been significant news coverage regarding foreclosing parties actually lacking standing to file lawsuits.  This provision is important to enable homeowners to identify the entity that owns their loan as well.  It is unclear whether the language is sufficient to reach that end when a plaintiff is allowed to aver they have been delegated the authority.  It would be helpful to clarify this provision to require the plaintiff be the owner and holder of the loan. 

II.  The Bill Provides Additional Necessary Protections for Borrowers

Provisions in the bill regarding mortgage servicers, including the requirement that they be registered with the Banking Department and giving the Banking Department authority promulgate regulations and oversee these companies will help ensure that homeowners are treated fairly.  With the surge of subprime lending came an increase in abusive mortgage servicing practices, including the failure to properly apply payments, problems with escrow accounting and poor customer service.  Often a homeowner’s troubles with their loan are coupled with troubles with their mortgage loan servicing.  We encourage the Governor and the State to follow-through with strong oversight of this industry. 
We also support the addition of section 265-b to the Real Property Law (RPL).   Regulation of “distressed property consultants” also is a much needed provision and will prevent many homeowners from losing savings to unscrupulous players trying to profit off of the growing foreclosure crisis, savings that could be better spent helping to cure mortgage arrears.  Many consultants give unrealistic expectations and provide no greater, and often far worse, service than is provided by the housing counseling agencies that the State will be funding to provide free services to homeowners.  The regulations are very reasonable and make sense.  We support the provisions set forth to amend the Real Property Law to regulate “distressed property consultants.”  

III.  Regulations for Prospective Lending Practices Will Prevent Abusive Lending

A. Limitations and prohibitions for “high-cost” and “subprime” home loans

Empire Justice strongly supports the prohibitions on “high-cost” home loans added in the bill, and the limitations and prohibitions set forth for “subprime” home loans in S.8143-A/A.10817-A.  These provisions will get rid of some of the worst abusive lending practices that lead to the current subprime mortgage lending crisis in New York State. 

One of the most important of these provisions is the mandate that lenders make loans that borrowers can afford, a simple, straight-forward concept that was abused more than any other lending practice, in the subprime boom.  A borrower’s ability to repay needs to be judged realistically, honestly and for the foreseeable future of the loan.  It is not difficult to verify a borrower’s income.  When assessing the affordability of loans with adjustable rate mortgages, the lender should be looking at whether the borrower will be able to afford the monthly payment once the initial fixed rate ends and the payment readjusts.  We support the definition of “fully indexed rate” and suggest that it be further clarified to ensure that lenders take into account market variables such as an uncharacteristically low index that may exist at a given point in time.

The other limitations and prohibitions set forth in Sections 4 and 5 of the bill applying to will go a long way to protecting homeowners.  We support all of these provisions including prohibiting loans that negatively amortize, limiting advanced payments, no financing of credit insurance and other products that have been historically abused as a way to increase profits, no prepayment penalties and the mandatory disclosure of and inclusion of a tax and insurance escrow into the monthly payment.  We encourage lenders to initiate this practice sooner than the effective date of July 1, 2010 as set forth in the bill.  It would be helpful for all prohibitions for “high-cost” home loans to be explicitly extended to “subprime loans” including restrictions on balloon payments and home improvement contracts, limitations on points and fees financed up front in the loan, and the statutory notice language to be sent to homeowners being sold subprime loans.

We’d like to note that significant abusive lending practices that are not explicitly prohibited in the bill still exist.  Lenders should be prohibited from steering borrowers into more expensive loans than their credit warrants.  In addition, yield spread premiums should be prohibited outright in “high-cost,” “subprime,” and “non-traditional,” home loans.  While yield spread premiums may be a tool in the prime lending world for borrowers to negotiate terms, in the subprime world they are a nefarious and almost uniformly abused product to push homeowners into higher cost loans.  Homeowners have no understanding what “YSP” on their loan document means.  We also have never seen a loan in which a yield spread premium was paid in which a borrower didn’t also pay a separate fee to the broker out of the loan proceeds.    

B. Covered loans

We support the definition of “subprime” home loan at 175 basis points over the prime rate for first lien loans.  This threshold will ensure that the prime market will not be affected by these new regulations.  We recommend these limitations and prohibitions be extended to cover the full gamut of abusive lending products including payment option adjustable rate mortgages that will not fall within the definition.  We also encourage the extension of these prohibitions to cover home equity lines of credit (HELOC’s). 

C. Mortgage brokers and appraisals

We support the addition of section 590-b to the Banking Law to regulate mortgage brokers.  These regulations are long overdue and will ensure that mortgage brokers truly are putting the interest of their customers before their own interest.  These basic standards will foster good competition in the marketplace allow honest brokers to thrive.  Provisions prohibiting lenders and mortgage brokers from unduly influencing the appraisal process are also necessary and supported by us.  These provisions will hopefully prevent the practice most notably seen in upstate communities of inflated house appraisals that have left many New Yorkers “upside down” in their homes, owing more than the value of their homes. 
D.  Remedies

Regarding remedies, we believe the bill falls short in providing adequate remedies for homeowners.  We support provisions that allow the borrower to raise defensive claims in foreclosure against the current holder of the loan.  It is critical that the legislation has provided this remedy for homeowners.  These provisions also will hold Wall Street accountable for their role in underwriting and securitizing these loans and will ultimately foster greater self-policing of the lending process by the mortgage lending industry. 
However, statutory damages should be included for violations of the law for all loans.  Actual damages are difficult to prove and may not provide borrowers with real relief.  The right to rescind the loan should be explicitly extended to homeowners with subprime loans for violations of the act.  Rescission is a powerful too that allows homeowners a real opportunity to negotiate a reasonable loan modification with the current holder of their loan. 

IV. Conclusion

Thank you very much for the opportunity to comment on this critical piece of legislation.  We commend the legislature and the Governor’s office for their hard work in reaching this historical agreement.  While we have identified a number of areas we would like to see strengthened over the course of the coming year, Empire Justice remains strongly supportive of A.10817-A/S.8143-A and we encourage the Governor to sign the bill into law.

cc: Honorable Terryl Brown Clemons
     Acting Counsel to the Governor
     Executive Chamber
     Albany, New York 12224         

For more information, please contact:

Kirsten E. Keefe

Empire Justice Center
119 Washington Avenue
Albany, NY  12210 

P:(518) 462-6831
F:(518) 935-2852

Kristin Brown

Empire Justice Center
119 Washington Avenue
Albany, NY  12210 

P:(518) 462-6831
F:(518) 935-2852

July 29, 2008