Lenders became concerned by the new HETPA enacted as they feared that this would cause problems with deed-in-lieu transfers in foreclosure actions. However, the Banking Department have put these fears at ease with a further explanation of the statute, its possible interpretations, and the legislative intent.
In recent years, there have been issues with deed theft, home equity theft, and foreclosure rescue scams in which loan modification companies scam distressed homeowners. Legislature enacted the Home Equity Theft Prevention Act (HETPA) which includes Real Property Law 265-a. The purpose of the act was to protect homeowners where a homeowner mistakenly deeds their property to a loan modification company by coercion from the same under the guise that this will assist in obtaining a modification, refinancing, or a new loan. Another situation the legislature protects against is where the homeowner is told to sign over the deed, and knowingly does so, under the misapprehension that the loan modification company will deed it back to them in a more affordable way, after “renting” the property from them, but the loan modification company makes this impossible and unaffordable.
The aforementioned act creates protection in a few different ways. First, by ensuring that homeowners are provided with essential information in making an informed decision when transferring their property. There are also prohibitions against unconscionable contract terms, fraud and deceit. There is also a two year statutory right to rescind a contract (from the date of recording) where an equity sale is in material violation.
Issues have arisen wherein banks, foreclosure counsel, and title insurance companies have become concerned about the potential misapplication of the subject statute. Specifically, they are concerned that “deed in lieu of foreclosure” (a/k/a “deed in lieu” or “DIL”) transfers will be subject to the same. A DIL is an instrument wherein a mortgagor conveys the property to the lender to avoid costly foreclosure proceedings, and releases them of all or most of the personal liability on the note. This option is useful to homeowners/borrowers who are not financially able to participate in a loan modification process or cannot otherwise afford a foreclosure proceeding. HAMP (Home Affordable Mortgage Program), HAFA (Home Affordable Foreclosure Alternatives), HUD and Fannie Mae all acknowledge that DILs may be useful and necessary in some foreclosure situations.
The Banking Department has put these fears at ease by pointing out that with statutory interpretation, it is essential to pay careful attention to legislative intent. Conspicuous in its absence in this bill is any mention of deeds in lieu of foreclosure. Although this statute does apply to a “residence in foreclosure”, it does not apply to DIL which gives the holder of the mortgage in default the property, as they might be entitled to it in a foreclosure proceeding anyway. Although the language does not specifically exclude them, the intent of the drafters evidences the fact that the purpose was to apply to “scammers and unscrupulous entities who stole a homeowner’s equity and to bona fide purchasers who might buy the property from them”. Further, case law does not support the contention that this bill was meant to be applied to DILs with lenders.