New York Law Mends Foreclosure Settlement Loophole

The New York legislature and Governor Cuomo should be applauded for taking an important step to stem the tide of the foreclosure crisis. A law signed yesterday will help foreclosure victims gain prompt access to settlement conferences after years of delay tactics by banks.

Since 2008, state law has required banks and homeowners to participate in foreclosure settlement conferences, where both sides can explore whether it’s feasible to avoid foreclosure by changing the terms of a mortgage. But a loophole in the original law, which was designed to protect homeowners from unnecessary foreclosures, has made it difficult for many to access these important conferences.

The loophole comes from filing requirements put in place to prevent fraudulent foreclosures. Previously, courts required banks to file documents before a settlement conference could take place, but didn’t specify when banks had to file their paperwork. As a result, banks were filing foreclosure cases without submitting the paperwork that triggers a settlement conference, leaving homeowners in legal limbo.

Stalled foreclosure cases then accumulated in the courts, creating a vast “shadow docket.” By one estimate, 25,000 families statewide have foreclosure cases pending on court dockets that cannot proceed to settlement conferences because banks have not filed the required paperwork. According to a study by MFY Legal Services, as of April 2012, “almost 75% of all residential foreclosures brought in Brooklyn and Queens in October 2011 remain in limbo in the shadow docket.” Attorney General Schneiderman is suing HSBC over its brazen abuse of this process.

The new Certificate of Merit Law closes this loophole for new cases by requiring banks’ attorneys to file their due diligence paperwork at the time they initiate a foreclosure action in court. The foreclosure settlement conference then must take place within 80 days. If banks fail to comply, courts can stop them from charging the homeowner additional fees. New Yorkers for Responsible Lending has a quick primer on the law.

At a press conference reported by Brooklyn News Corp, one foreclosure victim, Daisy Vargas, spoke about her experience on the shadow docket. Vargas lives in a Bronx home with four generations of her family. When a bank filed a foreclosure action against her, without filing the forms that enable a settlement conference, they left her family in limbo for three-and-a-half years. Nearly $60,000 of interest charges and late fees mounted. Vargas was able to keep her home by offering to pay the full amount owed on the loan plus the $60,000 charge for the bank’s delay as a balloon payment. The new law ensures that cases like Vargas’s will now move forward without lingering on dockets as fees mount.

The bill passed the Assembly and Senate with overwhelming bipartisan support late in the session. Although the law will not help homeowners already stuck on the shadow docket, it will provide important protections to homeowners going forward.

Photo by gilsonrome.