Introducing the Foreclosure Abuse Prevention Act
In a recent move to safeguard both borrowers and lenders, New York State Governor Kathy Hochul signed into law the Foreclosure Abuse Prevention Act. Effective immediately, this legislation applies to all foreclosure actions in New York, including both residential and commercial properties.
Potential Impact on Lenders
Although intended to aid borrowers, the Act has raised concerns within the banking industry. Lenders fear that the Act may hinder their ability to assist borrowers after initiating foreclosure proceedings. Negotiating workouts becomes riskier for lenders, as they may face restrictions on the relief they can offer. Ultimately, the Act may prove to be of limited assistance to both borrowers and lenders, creating challenges for all parties involved.
I. Discontinuing Foreclosure and the Statute of Limitations
Under New York law, lenders have six years to initiate a mortgage foreclosure action from the date of loan acceleration or the maturity date. If a foreclosure action is commenced and parties later reach a workout agreement, it is crucial to stop the statute of limitations from expiring. Failure to do so might prevent lenders from initiating future foreclosure actions.
Previously, a voluntary discontinuance of a foreclosure action effectively stopped the running of the statute of limitations. However, the Act has modified this rule, prohibiting the discontinuance from revoking acceleration or resetting the statute of limitations. This change poses challenges for lenders seeking to maintain their ability to foreclose in the future.
A Hypothetical Scenario
Let’s consider a hypothetical situation. A lender accelerates a loan on January 1, 2023, initiates a foreclosure action on February 1, 2023, and then settles the foreclosure by entering into a loan modification with the borrower on March 1, 2023. This loan modification extends the loan’s maturity date until January 1, 2030.
Consequences of the Act
Prior to the Act, the lender could discontinue the foreclosure action, de-accelerating the loan and stopping the statute of limitations from running. If the borrower defaulted in the seventh year, the lender could then re-accelerate the loan and commence a new foreclosure action within the six-year period. However, under the Act, the voluntary discontinuance no longer de-accelerates the loan. Consequently, the statute of limitations continues to run, potentially expiring before the lender can initiate a foreclosure action. This may prevent lenders from collecting on the loan or pursuing foreclosure.
To protect themselves, lenders must exercise caution when entering into workout agreements, especially when the remaining loan term exceeds six years. Limiting the loan term to less than six years or renegotiating a reset of the statute of limitations can help lenders preserve their foreclosure rights.
Borrower’s Agreement and Resetting the Statute of Limitations
While the Act limits a lender’s ability to stop the statute of limitations, borrowers can agree to postpone, cancel, reset, toll, revive, or extend the six-year period. However, the effectiveness of such an agreement is subject to New York’s General Obligations Law (GOL) Section 17-105.
GOL Section 17-105 sets a reset of the statute of limitations to run from the date of the agreement, rather than indefinitely stopping the period from continuing to run. This poses a potential challenge for lenders, as subsequent agreements may become ineffective in resetting the statute of limitations. Until clarified by courts or legislative amendments, lenders should exercise caution when entering into workout agreements that extend the loan term beyond six years.
Other Provisions of the Act
The Foreclosure Abuse Prevention Act also introduces amendments to New York’s “election of remedies” statute. Previously, lenders could choose between initiating a foreclosure action or pursuing an action on the mortgage note. Now, if a foreclosure action is barred by the statute of limitations, the Act prohibits lenders from bringing any subsequent action to recover the same portion of the debt, whether through foreclosure or a note action.
Furthermore, the Act requires lenders to obtain court permission before initiating any other action during a pending foreclosure or after final judgment. Failure to obtain such permission may serve as a defense to the second action, and in specific circumstances, the first action may be deemed discontinued.
To navigate these potential complexities, lenders must carefully analyze the interplay between the Act and existing laws. Creating a chronology of relevant events and using a reliable calendaring system can help lenders track critical deadlines and take appropriate action.
Cullen and Dykman’s Loan Workout Practice Group
At Cullen and Dykman LLP, we understand the challenges surrounding distressed loans and properties. Our Loan Workout Practice Group collaborates with clients in all stages of loan restructuring and workout processes. We develop tailored strategies in conjunction with our Banking and Financial Services, Bankruptcy and Creditors’ Rights, Corporate, Real Estate, Taxation, and Commercial Litigation practices to provide comprehensive solutions.
By staying informed about critical developments in this area of the law, we can provide you with the guidance necessary to navigate potential obstacles. Please note that this overview does not constitute legal advice, and consulting with your attorney or reaching out to us directly is advisable when dealing with the Foreclosure Abuse Prevention Act.
Contact Cullen and Dykman LLP at (516) 357-3700 for more information.
About Cullen and Dykman’s Loan Workout Practice Group
To maximize value in distressed loan situations, it’s essential to have a comprehensive approach. Our Loan Workout Practice Group assists clients facing distressed loans, companies, or properties by developing and executing strategies tailored to their unique circumstances. We work closely with our Banking and Financial Services, Bankruptcy and Creditors’ Rights, Corporate, Real Estate, Taxation, and Commercial Litigation practices to provide comprehensive solutions. Our experienced team handles complex transactions nationwide and has appeared before federal and state courts across the country.