Benjamin Lawsky Declares New York’s Foreclosure System ‘Broken’
On May 20, the New York Law Journal published an article titled State Banking Regulator Calls for Foreclosure Changes.
State Banking Regulator Calls for Foreclosure Changes
Despite years of judicial, legislative and industry attention, the home mortgage foreclosure process in New York remains “broken and badly in need of change,” state Financial Services Superintendent Benjamin Lawsky declared Tuesday morning.
Lawsky proposed a series of changes he said would improve the process for both homeowners who want to hold onto their dwellings and for lenders who want to rescue their properties from financial loss and, in some cases, abandonment.
Lawsky told a conference sponsored by the Mortgage Bankers Association in Manhattan that a study released Tuesday by the Department of Financial Services found that mandated settlement conferences—enacted in 2009 as a way of protecting consumers’ interests—were the biggest cause of delay in the foreclosure process.
He said there were 115,000 such conferences held last year, and that it takes an average of nine months from the time the foreclosure filing is made to when the settlement conference process is complete.
“For borrowers that are already at the end of their rope, any interruption—let alone nine months of start-and-stop delays— can be the death knell to any chance of saving their home,” Lawsky said.
The Department of Financial Services study said that while current law, CPLR 3408(a)(f), requires that both parties “negotiate in good faith,” a precise definition of “good faith” is probably the biggest cause of the costly delays in the settlement process.
Courts, confronted with lenders whose representatives are not authorized to reach settlements at these conferences or consumers who don’t have the right paperwork with them, often simply adjourn the conferences, Lawsky said. That further delays the process and makes it that much harder for consumers to hold onto their homes as interest and late charges on overdue mortgage payments continue to mount, he said.
“This is not a flaw in the court system; it is a flaw in the law,” Lawsky said. “The unintended consequences of this legal flaw are unproductive conference sessions, useless delays, waste of court resources, and, most importantly, needless foreclosures.”
Lawsky proposed legislation that would better define what negotiating in good faith means, in practical terms, for those sitting at the court-supervised settlement conference table.
He also said courts should be allowed to sanction parties who fail to bargain in good faith.
For lenders, Lawsky proposed, the sanction should be a tolling of interest, costs and fees when delays are being caused by plaintiffs. Borrowers who are responsible for failing to negotiate in good faith should have their right to the conference terminated, he said.
The question of what constitutes “good faith” in mortgage foreclosure negotiations has been increasingly under consideration by courts.
In November, an Appellate Division, Second Department, panel ruled in a case where a lender was found to have intentionally dragged out the settlement process that the borrower was not entitled to accruing interest or to legal fees (NYLJ, Nov. 5, 2014).
Lawsky also proposed that courts should conduct a “surge” of activity where they devote special judicial and court resources to clearing the backlog of foreclosures currently on court dockets.
“The Office of Court Administration and several courts around the state already know the effectiveness of a judicial fast track, because they have trialed such programs in Suffolk, Nassau and the Bronx,” he said. “Now it’s time to take the best of these trial programs and employ them statewide.”
Lawsky said special attention should be paid to expediting foreclosure processing on so-called “zombie homes” which have been abandoned by mortgage-holders. He said that the homes are doing their communities no good sitting vacant and “rotting” for years as foreclosures wind their way through the legal system.
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