‘Foreclosure Abuse Prevention Act’ awaits New York governor’s signature

Homeowners in New York who are knee-deep in foreclosure litigation may soon get a break, as a piece of legislation making its way to Gov. Kathy Hochul’s desk could discharge a swath of foreclosure cases pending in state and appellate courts.

If Hochul signs the bill as-is, the statute of limitations for a lender to start a foreclosure action will be reverted to six years, as was the case prior to the Court of Appeals’ 2021 decision in Freedom Mortgage Corporation vs. Engel.

The bill, dubbed the “Foreclosure Abuse Prevention Act,” sailed through the New York Senate in a 52-10 vote last week. In March, the assembly version of the bill passed 107-40.

But individuals familiar with the matter say there may be revisions to the bill, in part because mortgage industry stakeholders have been ramping up efforts to lobby against the legislation.

The bill is expected to be signed by early June, but the process could drag until the end of the year.

The Engel case established that a lender operating in New York has six years to initiate a foreclosure action, but if the action is dismissed for any reason, a lender can de-accelerate a loan and then reinitiate a foreclosure action at a later time.

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The bill – sponsored by Sen. James Sanders – claims the Engel case gave lenders and servicers the “ability to unilaterally manipulate, arrest, stop and restart the limitations period at will.” Sanders did not immediately respond to requests for comment.

The bill claims that as a result of the Engel decision, lenders and servicers have “bombarded” courts to re-open foreclosure cases that were previously barred by the statute of limitations.

Jacob Inwald, director of foreclosure prevention at Legal Services NYC, said although it has only been in effect about a year, Engel effectively allowed lenders to bring “ancient cases back from the dead.”

Examples of such cases, he said, are those banks first launched in 2007 and 2008 but ended up abandoning “because they couldn’t comply with New York laws governing portfolio or they couldn’t prove their foreclosure cases where they had other fatal defects.” The decision in Engel allowed banks to bring these cases back to life.

For borrowers whose foreclosure cases have been reopened, it is particularly “egregious because with each passing month, interest, late fees and lawyer fees are getting added to their indebtedness,” Inwald said.

Should Hochul sign the current iteration of the bill, cases opened as a result of Engel – and for which the statute of limitations otherwise is lapsed – would be the ones dismissed under the new law.

Brian McGrath, partner at Hinshaw & Culbertson, a law firm that represents financial institutions, said while some cases have been reopened, he hasn’t seen a massive influx.

“There are some number of loans and files where the Engel decision brought clarity and allowed the parties to refocus the legal arguments and move that litigation to a conclusion on its merits,” McGrath said. “I have not seen any data that suggest that there was some sort of bombarding of the courts with old files that were resurrected from the dead.”

McGrath said some lenders, servicers and investors in the secondary market have threatened to stop operating in New York if the legislation is passed as-is.

“Investors that buy pools of loans – that will be the first domino that we will see fall in New York,” said McGrath. “The implication of that is it gets riskier for lenders to originate loans in New York, because that secondary market where they can then offload those loans and offload the risks on those loans will start to shrink.”

The Engel ruling didn’t necessarily change the law, it clarified “the contractual rights to take a loan and accelerate it and then take an accelerated loan and reinstate it,” according to McGrath.

“The decision simply clarified the way in which that should be done, fairly and uniformly throughout the state,” McGrath said. ” So this law would potentially take away a borrower and the bank’s ability to collectively agree to stipulate to discontinue a foreclosure and reset the statute of limitations by the placing a loan into installment status.”

If the governor signs the bill as-is, McGrath warned, it could affect underwriting criteria for borrowers, as well as the number of options consumers have to get financing in the state of New York.