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Legal Research Library > The Home Equity Theft Prevention Act ... The Home Equity Theft Prevention Act
Select an SECTION REAL PROPERTY LAW ó265 (a)
| RPAPL § 1303 On July 16, 2006, Governor Pataki signed into law the “Home Equity Theft Prevention Act” to become effective as of February 1, 2007. This law is designed to protect the homeowner who is in default on his or her mortgage or is in foreclosure who may be vulnerable to unfair dealings from investors or other home equity purchasers who induce the homeowner in default to sell his home for what may be a small fraction of what the actual market value is. This is also known as “deed theft” when investors agree to pay the arrears owed on a home and in return, require the homeowner to convey the property to them. They may promise the owner that he may continue to live in the house and pay rent and then promise them that they can repurchase the property in a year or two when they can afford to. But in reality, the owner may be evicted and the purchaser (investor) sells the property to a third party, thus keeping all the equity. A purpose of the law is to provide the homeowner with the information necessary to make an informed decision regarding the sale or transfer of his home. The act imposes strict regimented requirements on these contracts to sell the property from these foreclosed or distressed owners which include a five day cooling off period after the signing of the contract as well as a two year window in which to rescind the actual conveyance itself if the lender or equity seller does not follow the guidelines in the legislation. The act also requires written notice to mortgagors in foreclosure of their rights and of information to help them understand the foreclosure process, often called a consumer education notice. There are strict civil and criminal penalties for violating the law. This article will be a short review of the laws that were created or amended in compliance with this act. The act amended Banking Law § 595 (a), and created RPL § 265 (a) and RPAPL § 1303. For a copy of the law, go to the New York States Legislature website at http://assembly.state.ny.us. Click on Legislative Information, then New York State Law, then RPP, then Article 8, then §265-a. Section 265(a) details the intent and purposes of the law and provides precise definitions of the terms governed by the act. Covered transactions are all transactions between a homeowner ( a natural person who is the property owner or homeowner at the time of the sale) called the “equity seller” and the “equity purchaser” who is any person who acquires title to a residence in foreclosure or in default and his/her representative with a few exceptions: a person who acquires title to use as his personal residence; by a referee in a foreclosure sale; by a sale of property authorized by statute; by an order of the court; from a family member; from a not for profit housing organization or by a bona fide purchaser for value. Thus, the vast majority of transactions may not be covered by this law. A residence is defined as residential real property consisting of one to four family units, one of which the equity seller occupies at a time immediately before the equity sale as his primary residence. A covered contract is any contract, agreement, between an equity seller and equity purchaser which is incident of a sale of a residence in foreclosure or is incident to the sale of a residence in foreclosure or default where such contract or agreement includes a reconveyance arrangement. All agreements between the equity seller and equity purchaser must be in writing, be signed and dated by all parties and if Spanish is the primary language of the seller must be in English and Spanish. The agreement must contain all names, addresses and telephone numbers of all parties, a complete description of the terms of payment and services to be provided by the purchaser, the time physical possession will be transferred, the terms of any rental agreement, if any, the terms of conveyance and a notice of cancellation. The seller has a non-negotiable right to cancel the agreement within five (5) business days after the date of the agreement. (Before midnight of the fifth day after signing the contract). The act is very detailed regarding the specific language that must be in the contract, such as the seller’s right to cancel. This right to cancel must be printed in 12 point type, including instructions for how to cancel. The seller must be provided with two copies of the agreement and the law also includes several acts that are prohibited to be taken by the purchaser during these five days such as accept or induce any instrument of conveyance, record any document signed by a seller including a conveyance, pay the seller any consideration or suggest or encourage the seller to waive the right of cancellation, make any false or misleading statements such as to the value of the residence or the sale etc. If the seller desires to rescind, he must personally deliver written notice of the cancellation to the address specified in the contract or send a letter via facsimile or through the post office. Within 10 days after the equity purchaser receives notice of cancellation, he must return any original covered contract and any other documents signed by the equity seller as well as any consideration received to the equity seller. If the seller does not cancel and the agreement grants the equity seller the option to repurchase the property, the Agreement is assumed to be a loan transaction and the deed is considered to be a mortgage. The reconveyance arrangement must be recorded with the deed to give notice to title insurers and subsequent purchasers or potential lien holders. All deeds or conveyances subject to a reconveyance arrangement must state on the face of the document that the conveyance is subject to a reconveyance agreement and include the terms of the arrangement. The equity seller has a two year window to rescind the actual conveyance for violations of certain sections of the law, including the failure to provide a complete and accurate agreement. The seller must give written notice to the purchaser or the purchaser’s successor if not a bona fide purchaser for value. In addition, the notice must be recorded with the county clerk where the property is located within the two year period. If the purchaser still owns the property at the time the seller exercises his right to cancel, the property shall be returned to the seller. Failure to reconvey allows the equity seller to bring an action to enforce recission, cancel the contract and cancel the deed. However, if the property has been sold to a bona fide purchaser for value, the rescission does not affect the third party, and the seller’s remedy is to pursue claims for damages against the equity purchaser, included attorneys fees and costs, equitable relief and up to three times the actual damage. There is a six (6) year statute of limitations from the date of violation. One of the strongest aspect of the new law is the creation of RPAPL § 1303. In an effort to protect the unwary homeowner from schemes from unscrupulous lenders, the new law mandates that the foreclosing party in a mortgage foreclosure action provide notice to the owner with the summons and complaint. The purpose is to provide the owner with information and assistance about the foreclosure process. This notice shall be in bold, fourteen (14) point type and shall be printed on colored paper that is other than the color of the summons and complaint and the title of the notice must be in bold, twenty (20) point type. The notice must be on its own page. This notice is also known as a consumer education notice. The notice must state that there are government agencies, legal aid entities and other non-profit organizations that are available for information regarding the foreclosure process. The Banking Department is responsible for providing a toll free telephone number and web address to the lender to be included in the notice. This banking law regulates mortgage brokers, mortgage bankers and exempt organizations by imposing a fine for the failure to comply with the banking regulations. This law amends paragraphs (e), (f) and (g) and adds (h) of the Banking Law. A mortgage broker or banker may not make a mortgage loan, to an equity purchaser if they know or have knowledge that the equity purchaser was not complying with Section 265 (a) of the RPL in connection with said transaction.
As a title insurance underwriter, this act causes some concern. Although the intent of the legislature is to be applauded: to give added protection to the homeowner who may be cheated out of the equity in their home by foreclosure rescue scams. From a title company perspective, it may be extremely difficult to insure title to these transactions as borrowers may claim that the lenders failed to comply with the strict letter of the law and may attack the foreclosure process or even seek to overturn the foreclosure sale claiming that the special notice was never received or it wasn’t in the correct font as well as the two year window for which covered transactions may be voided by the seller.. Title companies may have to meticulously review the foreclosure process and become familiar with the rules and regulations of this statute such as making sure that all notices were properly given by the foreclosing party and checking to make sure that no notice of rescission was filed with the county clerk. It remains to be seen if the title policies will contain exceptions to coverage for these transactions or will even insure these transactions at all.
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