The Home Equity Theft Prevention Act became effective on February 1, 2007. It amends 595 of the Banking Law, and adds new sections to both the Real Property Actions and Proceedings Law (RPAPL). This article will examine the new provisions created by the Act.
What is home equity theft? Home equity theft, also known as deed theft, occurs when investors agree to pay off the arrearage owed on a home and in return, require the homeowner sign the deed over to them. The investors search court foreclosure records and call or send direct market mailings to vulnerable homeowners. Promises are made that the homeowner may continue to live in the property renting it from the investor, and then buy back the property in a year or so once their credit has improved. The reality, however, is that homeowners are often evicted within months and the investor sells the property to a third-party, keeping all the equity. In other instances, the investor cashes out on the equity in the home upfront with a new mortgage, leaving the homeowner with a monthly payment that is wholly unaffordable.
Definitions and Covered Transactions: Under the Act, the homeowner is referred to as the Equity Seller. An Equity Purchaser is defined as any person who acquires title to any residence in foreclosure or, where applicable, default, or his or her representatives [as defined in the law]. In an attempt to exempt genuine transfers of property for real value, the law exempts from the definition those who purchase a property so be used as their primary residence, lenders who receive a property through foreclosure proceedings or others who acquire a property through a referee sale, a transfer to a relative, the transfer of a property to a non-profit or governmental housing organization and bona fide purchases who pay real value for a home. Thus, the vast majority of real estate transactions between sellers and buyers are not affected by this law.
The Contract of Sale: Agreement for the transfer of property between both parties must be in writing, sighed, and dated by both the equity purchaser. If Spanish is primary language of the seller, the agreement must be provided in English and in Spanish. The Agreement must contain the following: the name, business address and telephone numbers of the purchaser, address of residence, total consideration to be given to the seller, a complete description of the terms of payment and services to be provided by the purchased, the time which physical possession is to be transferred, the terms of any conveyance agreement, and the notice of cancellation.
The seller has a non-negotiable right to cancel the transaction within five business days of the date of the transaction. Specific language regarding the seller’s right to cancel is provided in the law and must be printed in 14-point type on the Agreement, including instructions for how to cancel. Two copies of the contract and a separate notice of cancellation must be given to the seller. The law also includes several acts that are prohibited to be taken by the purchaser during this five day period.
The seller has a two year extended right to rescind the transaction for violations of certain sections of the law, including failure to provide a complete and accurate Agreement. If the purchaser or an affiliate still owns the property at the time a seller exercises their extended right to rescind, the property shall be returned to the purchaser. If the property has been sold to a bona fide third party, rescission does not affect the interest of this party, and the sellers remedy is to pursue claims or damages against the equality purchaser, including attorneys’ fees and cost.
Reconveyance Agreements: If the Contract of Sale grants the seller an option to repurchase the property, unless otherwise shown, the Agreement is deemed to be a loan transaction. In such reconveyance arrangements the equity purchaser must verify that the seller has a reasonable ability to repurchase the property within the term set forth in the Agreement. A formal closing must be conducted by an attorney not affiliated with the purchaser. The seller must also sign off on any transfer of the property to a third party within the term set forth in the Agreement. Lease and rental agreement terms during the reconveyance period must be commercially fair and reasonable.
If the property is reconveyed to the seller, the purchaser must ensure that the title is properly transferred. Should the seller be unable to repurchase the property at the terms end, then the seller is entitled to receive 82% of the fair market value (FMV) of the property, minus expenses paid by the purchaser. The time for determining FMV must be determined at the time of the original contract and set forth in the reconeyance agreement- it can be either at the time of the original transfer, or at the time the property is ultimately sold to a third party. The law sets standards for determining FMV, as well.
All deeds or conveyances subject to a reconveyance arrangement must state explicitly on the face of the document that the conveyance is subject to a reconveyance arrangement. Reconveyance arrangements must be simultaneously recorded by the purchaser along with the deed in the county clerks’ office, as well, to give title insurers and subsequent purchases or potential lien holders adequate notice.
Foreclosure Notice: One of the strongest pieces in the law is the foreclosure notice. In an attempt to prevent vulnerable homeowners from falling prey to the enticement of foreclosure rescue schemes that might not be in their best interest, the law mandates that foreclosing parties send a consumer education notice with the summons and complaint. The notice must be on colored paper and in bold 14-point type and state:
Help for homeowners in foreclosure New York state law requires that we send you this notice about the foreclosure process. Please read it carefully. Mortgage foreclosure is a complex process. Some people may approach you about saving your home. You should be extremely careful about any such promises.
The state encourages you to become informed about you options in foreclosure. There are government agencies, legal aid entities and other non-profit organizations that you may contact for information about foreclosure while you are working with your lender during this process.
To locate an entity near you, you may call the helpline maintained by the New York State of Banking Department. The State does not guarantee the advice or there agencies.
The Banking Department is responsible for providing a telephone number and web address, and this information is readily available for lenders.
Remedies: In addition to the five day right to cancel the Agreement, and the two year extended right to rescission for violations of certain sections of this law, sellers may bring a private cause of action for damage or equitable relief, treble damages and attorneys fees and costs within six years after the date of the violation. In addition to civil penalties, and equity purchaser can be held criminally liable for violations of the law as either a Class E Felony or a Class A misdemeanor.
The Attorney General is also empowered to bring an action against an equity purchaser for violations of this law.