Unsettled times make well-settled law: recent developments in New York state's residential mortgage foreclosure statutes and case law.

• Author: Dillon, Mark C.
• Position: IV. HEPTA's Housing Counselor Notice Requirement Under RPAPL Section through IX. Conclusions, with footnotes, p. 1114-1139

4. HEPTA's HOUSING COUNSELOR NOTICE REQUIREMENT UNDER RPAPL SECTION 1303

   The RPAPL portion of HETPA, set forth in section 1303, requires foreclosing parties to provide statutory-specific notice to residential homeowners and tenants, together with the summons and complaint by which foreclosure is sought. (160) RPAPL section 1303 was enacted in 2006, originally effective as of February 1, 2007, (161) and underwent some tweaking by amendments enacted in 2007, (162) 2008, (163) 2009, (164) 2010, (165) and 2011. (166) Naturally, the statute and its amendments apply to all foreclosure actions commenced on or after their effective dates of the enactments. (167)

   RPAPL section 1303 triggers at one of the earliest stages of foreclosure actions, when the summons and complaint are served upon the defendant(s) in the action. (168) The statute requires that the notice accompanying the summons and complaint advise the defendant against mortgage foreclosure rescue scams, (169) by which it dovetails the purpose of RPL section 265-a. (170) The notice also must advise the defendant homeowner, inter alia, that he or she is in danger of losing the home; that the failure to respond to the summons and complaint may result in the loss of the home; that an attorney or local legal aid office should be contacted for advice; and that in addition to consulting an attorney or legal aid office, the defendant homeowner may contact specified government agencies and non-profit organizations for information about options, for which phone numbers are given. (171) The statute affords additional protections to tenants of properties subject to foreclosure that are, for the most part, outside the scope of this article. (172)

   To help assure that the RPAPL section 1303 notice is seen and read by the defendant homeowner, the statute requires that the notice be printed in fourteen-point bold typeface, on colored paper of a different color than the summons and complaint. (173) In this regard, there are similarities between RPAPL sections 1303 and 1304. (174) The protections of the statute only apply to mortgage foreclosure proceedings involving owner-occupied one to four family dwellings. (175)

   Decisional authority has developed that to prove delivery of the RPAPL section 1303 notice upon defendant homeowners, it is not sufficient to merely attach a copy of the notice, with its fourteen-point sized print and colored paper, to the copy of the summons and complaint filed with the court. (176) The reason, apparently, is that the attachment of the notice to the filed copy of the summons and complaint does not evidence its delivery to the defendant homeowner. (177) The required notice is not part of the complaint, but merely accompanies the complaint. (178) RPAPL section 1303 does not require "service" of the notice in the sense of CPLR section 308, but rather, uses the looser standard of "delivery." (179) As a practical matter, the delivery of the RPAPL section 1303 notice will typically be accomplished at the same time and in the same manner as the service of the plaintiffs' summonses and complaints. (180) Nevertheless, the "delivery" of the notice must be established in order for the plaintiff to satisfy the requirements of the statute, either by attorney affirmation (181) or, alternatively, by an affidavit of service from the person that served process upon the homeowner defendant. (182) The absence of sufficient proof of delivery proved fatal to the plaintiffs motions for a default judgment in, inter alia, Butler Capital Corp. v. Cannistra, (183) Countrywide Home Loans, Inc. v. Taylor, (184) or, alternatively, by an affidavit of service from the person that served process upon the homeowner defendant. (185) The absence of sufficient proof of delivery proved fatal to the plaintiffs motions for a default judgments in, inter alia, Butler Capital Corp. v. Cannistra, Countrywide Home Loans, Inc. v. Taylor, and to a plaintiffs motion to amend a complaint in WMC Mortgage Corp. v. Thompson. (186)

   A Second Department decision that is of importance to RPAPL section 1303 is First National Bank of Chicago v. Silver, an opinion by Justice Anita Florio released by the court on March 23, 2010. (187) The appeal addressed the question of whether compliance with RPAPL section 1303 is a condition precedent that plaintiffs must affirmatively prove in order to prevail in a foreclosure action, or whether non-compliance is an affirmative defense that must be raised and litigated by the defendant. (188) The appeal addressed "an issue of first impression." (189) The Second Department concluded that compliance with RPAPL section 1303 was a condition precedent that must be affirmatively proven by foreclosure plaintiffs, akin to condition precedents that are found in actions or proceedings involving RPAPL 735(1), RPL section 232-a, Vehicle and Traffic Law ("VTL") section 313, and General Municipal Law ("GML") section 50-e. (190) The court noted that the language of RPAPL section 1303 expressly provides that the required notice "shall" be delivered to the defendant, the same word as appears in the other statutes that involve conditions precedent. (191) Proof of compliance can be established by means of attorney affirmations and process server affidavits. (192)

   While the plaintiff is required by First National Bank of Chicago v. Silver to prove compliance with the mandates of RPAPL section 1303, another statute, CPLR section 3015(a), provides that conditions precedent need not be affirmatively pleaded by plaintiffs. (193) Nevertheless, Silver can be reconciled with the language of CPLR section 3015(a). Plaintiffs cannot be expected or required to affirmatively plead compliance with RPAPL section 1303, as the RPAPL section 1303 notice must be delivered to the defendant with the summons and complaint, and the complaint is necessarily drafted before service of process is accomplished. (194) Other condition precedents, such as the filing of a GML section 50-e notice of claim with a municipality for matters involving personal injury and wrongful death, can be affirmatively pleaded in a plaintiffs complaint, (195) as the notice of claim necessarily precedes the drafting, filing, and service of the complaint. (196) The Silver case should be read not with an emphasis on what may or may not be pleaded in the plaintiffs complaint, but rather, on what must or must not appear in the defendant's answer. The case ultimately holds that defendants who fail to plead the plaintiffs noncompliance with RPAPL section 1303 do not waive the defense of non-compliance. (197) Accordingly, the defendant homeowners could oppose the plaintiffs motion for summary judgment, and cross-move for summary judgment against the plaintiffs complaint, even though the plaintiffs alleged non-compliance with RPAPL section 1303 was not pleaded as an affirmative defense in the defendants' answer. (198) The defense can therefore be raised by defendants at any time, and plaintiffs, while required to comply with the statute as a condition precedent to recovery, need not affirmatively plead compliance with the statute in their complaints. (199)

   The application of RPAPL section 1303 has been interpreted expansively. In Board of Directors of House Beautiful at Woodbury Homeowners Ass'n v. Godt, (200) the Second Department addressed the question of whether RPAPL 1303, which plaintiff admittedly did not comply with, was applicable at all where the plaintiff was a homeowners' association seeking to foreclose upon an assessment lien. (201) The court concluded that homeowners' associations are within the scope of the statute, and dismissed the complaint on the ground that the non-inclusion of homeowners' associations would be inconsistent with the analyzed legislative intent. (202)

5. THE PROVISIONS OF BANKING LAW SECTIONS 6-L AND 6-M

   An additional statutory component of HETPA is found in the New York State Banking Law, and in particular, sections 6-1 and 6-m thereof. (203) The primary difference between the two statutes is that section 6-1 applies to "high-cost home loans" while section 6-m applies to "subprime home loans." (204) A high-cost home loan is one that exceeds certain thresholds defined in the statute, such as loans where the rate of interest is more than 8% above the yield on treasury securities at the approximate time of execution, or where total points and fees exceed 5% if the total loan amount of the loan is for $50,000 or more, or exceed 6% or $1500 (whichever is greater) if the total loan amount is for less than $50,000. (205) A subprime home loan, by contrast, is one where the initial interest rate or the fully-indexed rate (whichever is higher) is more than 1.75% for first lien loans, or more than 3.75% for subordinate lien loans, above the average commitment rate for loans in the northeast region based upon rates published weekly by Freddie Mac. (206)

   Section 6-l of the Banking Law contains a number of provisions designed to protect the homeowner at the time that home loans are entered into, and particularly, imposes upon the lender the due diligence obligation of inquiring into the truth of loan application statements and the ability of the borrower to repay subprime and high-cost loans. (207) Banking Law section 6-1(2)(1)(i), called the "Counseling Statute," (208) requires that at the time of the loan application, the "lender or mortgage broker ... deliver, place in the mail, fax, or electronically transmit ... [a] notice in at least twelve point type" stating: "You should consider financial counseling prior to executing loan documents. The enclosed list of counselors is provided by the New York State Banking Department." (209) Additionally, the lender or mortgage broker must provide the borrower, within three days after determining that the loan is high-cost and at least ten days before the closing, a further notice advising the borrower to shop and compare loan rates and fees, consult an...