BILL NUMBER: S6971
SPONSOR: KAVANAGH
 
TITLE OF BILL:
An act to amend the real property actions and proceedings law and the
civil practice law and rules, in relation to actions upon a subordinate
bond or note
 
PURPOSE:
The bill limits the ability of mortgage debt speculators to strip equity
from homeowners by strengthening existing foreclosure laws to require
increased consumer transparency, mandate compliance with existing duties
to negotiate in good faith at foreclosure settlement conferences, and
conform the statute of limitations for such cases with those governing
other analogous consumer debt collection cases.
 
SUMMARY OF SPECIFIC PROVISIONS:
Section 1 of the bill amends section 1302 of the real property actions
and proceedings law (RPAPL).
Subdivision 1 of section 1302 of the RPAPL is amended to make its
provisions applicable to any complaint served in a proceeding involving
a home loan, as defined in RPAPL section 1304, and to add new paragraphs
(c) and (d) to establish new affirmative allegation requirements for the
foreclosure complaint to prevent abuse of the foreclosure process and
the court system.
A new paragraph (c) is added to subdivision 1 of section 1302 of the
RPAPL to require the holder of the debt to allege in a foreclosure
complaint that it has a complete record of all transactions of the
subject loan.
A new paragraph (d) is added to subdivision 1 section 1302 of the RPAPL
to require the holder of the debt to document the chain of ownership of
the subject loan.
Subdivision 2 of section 1302 of the RPAPL is amended by adding new
paragraphs (b) and (c) to establish additional defenses to a foreclosure
action.
A new paragraph (b) is added to subdivision 2 of section 1302 of the
RPAPL to add as a defense where the debt holder does not keep and main-
tain a complete record of all transactions of the subject loan.
A new paragraph (c) is added to subdivision 2 of section 1302 of the
RPAPL to add as a defense where the holder of the debt does not document
the chain of ownership of the subject loan.
Section 1 of the bill also adds a new subdivision 3 to section 1302 of
the RPAPL to require a foreclosing party who purchased the subject loan
when that loan was in default to affirmatively allege the date and
amount of the purchase. If the subject loan was purchased as part of a
portfolio of loans, the amount paid for the subject loan shall be deter-
mined by a formula based on a ratio of unpaid-to-paid loan balance at
the time of default for all the loans in the portfolio.
Section 2 of the bill amends section 1302-a of the RPAPL and adds a new
subdivision (1) to the section to specify that statute of limitations is
not waived in a foreclosure proceeding, regardless of whether the
defendant fails to raise the defense in a responsive pleading.
Section 3 of the bill amends the opening paragraph and subdivision 3 of
section 1311 of the RPAPL by making every person having a lien or encum-
brance upon the subject real property a necessary and indispensable
party to the foreclosure action.
Section 4 of the bill amends section 1321 of the RPAPL by adding a new
subdivision 3 to limit the amount recoverable in a foreclose on a subor-
dinate loan where such plaintiff purchased the subject subordinate loan
when that loan was in default. The limit is the amount the plaintiff
paid for the subject loan, as determined under new subdivision 3 of
section 1302, and the maximum rate of interest is as provided under
section 14-a of the banking law accruing from the date the plaintiff
purchased the subject loan.
Section 5 of the bill amends the opening paragraph of subdivision 4 of
section 213 of the civil practice law and rules (CPLR) to exclude from
covered actions a subordinate bond or note purchased when such bond or
note was in default in order to conform with the adjustment to the stat-
ute of limitations for such loans in Section 6 of the bill.
Section 6 of the bill amends the CPLR by adding a new section 213-e to
establish a statute of limitations for actions on a subordinate bond or
note purchased in default, which shall be commenced within the shorter
of (a) three years of the purchase of the bond or note or (b) the rele-
vant time limit as provided by subdivision 4 of section 213 of the CPLR.
This conforms the statute of limitations for such actions with other
categories of cases that have a three-year limitations period, such as
consumer credit collection actions (CPLR section 214-i).
Section 7 of the bill amends Subdivision (h) of section 203 of the CPLR
to conform the existing prohibition on unilateral extensions of the
statute of limitations to reflect the bill's addition of CPLR section
213-e.
Section 8 of the bill amends the opening paragraph of subdivision (a) of
section 205-a of the CPLR to conform the existing provision to reflect
this bill's addition of CPLR section 213-e.
Section 9 of the bill amends subdivision (a) of section 3012-b of the
CPLR to conform the existing certificate of merit provision with the
amended pleading requirements enacted by this bill.
Section 10 of the bill amends rule 3408 of the CPLR governing foreclo-
sure settlement conferences to conform to the provisions of this bill
and to clarify that the existing good faith negotiation standard in
subdivision (t) is violated if a plaintiff demands payment in excess of
the limit set out in section 1321 of the RPAPL, and establishes that any
demand made for a payment in excess of this amount, whether to reinstate
the loan or through a repayment plan, loan modification or other loss
mitigation option, would also constitute a failure to negotiate in good
faith.
Section 11 of the bill sets forth the effective date.
 
JUSTIFICATION:
This bill seeks to address the growing prevalence of "zombie second
mortgage" foreclosures -debt-collection actions initiated by holders of
a home's subordinate, high-interest second mortgage loan in default that
can result in foreclosure if the homeowner/borrower fails to repay the
loan's outstanding balance along with interest and fees.
When the holder of a defaulted second mortgage chooses not to collect on
the loan because any prospect of recovery is subordinant to a first
mortgage, the second mortgage becomes dormant. Many holders of these
loans cease sending mortgage statements and "charge off" and warehouse
these loans. Borrowers, many of whom never even knew that their homes
were encumbered by second mortgages because they were marketed simul-
taneously with their first mortgages as "80/20" loans, receive no state-
ments on these loans, sometimes for a decade or longer. And if a home-
owner in default of a first mortgage successfully avoids foreclosure by
obtaining a loan modification, they may reasonably believe that the loan
modification has also resolved their second mortgage.
Second mortgage loans left uncollected for years are often sold to debt
buyers "for pennies on the dollar," according to an advisory opinion on
this issue released by the U.S. Consumer Financial Protection Bureau
(CFPB) in April 2023. The same opinion further explains that " 
Such
sales often occurred unbeknownst to borrowers, who continued to receive
no communications regarding the loans. Many borrowers, having not
received any notices or periodic statements for years, concluded that
their second mortgages had been modified along with the first mortgage,
discharged in bankruptcy, or forgiven."
As home prices have increased over the years and borrowers have paid
down their first mortgages, thousands of homeowners are now being sued
by debt collection firms and private equity investors claiming to own or
have the right to collect on their homes' dormant second mortgages.
These debt collectors demand the outstanding balance on the second mort-
gage -regardless of whether the mortgage was acquired from a previous
debt holder at a steep discount -- plus high fees and interest. Homeown-
ers face a choice between entering into onerous payment plans or losing
their homes and the equity they have diligently built.
This bill would address the lack of transparency in the mortgage lien
process, which currently allows debt collectors to purchase liens for
pennies on the dollar and then demand collection on the full value of
the defaulted loan while piling on unreasonable fees and interest, all
without notice to the borrower. This bill requires the sharing of accu-
rate payment and chain of title records between parties before any fore-
closure action may be brought, providing homeowners with proper notice
regarding the status of their debt.
In addition to the procedural protections afforded by transparency, this
bill would substantively reduce the amount of fees and interest chargea-
ble on the zombie second mortgage loan not to exceed the amount paid for
the subject loan by the debt holder, plus the maximum rate of interest
permitted under section 14(a) of the Banking Law accruing from the date
of the subject loan's purchase.
The CFPB's advisory opinion also discusses how a state's statute of
limitations on debt collection practices may provide a jurisdictional
hook into federal law. Debt collectors as defined in section 803(6) of
the federal Fair Debt Collection Practices Act (FDCPA) and implemented
in Regulation F, 12 CFR 1006.2(i) prohibits a debt collector from bring-
ing suit or threatening to sue to collect a time-barred debt. According-
ly, an FDCPA debt collector who brings or threatens to bring a State
court foreclosure action to collect a time-barred mortgage debt may
violate the FDCPA and Regulation F.
The existing six-year statute of limitations for foreclosure actions
operates as an injustice in these zombie second foreclosure actions, as
homeowner defendants who have received no statements or communications
from their lender for many years lack access to any payment records with
which to challenge these actions, and the debt-buyer plaintiffs often
have no documentation and routinely flout the discovery process when
they bring judicial foreclosure actions. By conforming the statute of
limitations for these cases to the three-year limitations period govern-
ing consumer credit cases, which are also typically brought by debt
buyers paying pennies on the dollar for the debts, this bill would
ensure that zombie second mortgage foreclosure defendants receive simi-
lar protections to those already extended to consumer credit case
defendants.
As a matter of fairness and in view of the ongoing homelessness and
affordability crisis in New York, homeowners should be protected from
abusive and unfair debt collection practices and be given the opportu-
nity to defend these actions in a fair and transparent judicial foreclo-
sure process.
 
LEGISLATIVE HISTORY:
This is a new bill.
 
FISCAL IMPLICATIONS:
None.
 
EFFECTIVE DATE:
This act shall take effect on the one hundred twentieth day after it
shall have become a law and shall apply to all actions filed on or after
such effective date.

Statutes affected:
S6971: 1302 real property actions and proceedings law, 1302-a real property actions and proceedings law, 213 civil practice law, 213(4) civil practice law, 203 civil practice law, 205-a civil practice law, 3012-b civil practice law