Feb 22, 2009

New York's Home Equity Theft Prevention Act

The Home Equity Theft Prevention Act ("HETPA") has been in effect since February 1, 2007. Its purpose is to protect distressed homeowners from potentially fraudulent "foreclosure rescue" programs by assuring that the homeowner has sufficient information to make an informed decision about the transfer of title to his or her home (see Chapter 308 of the Laws of 2006 for the Legislature's statement of purpose). HETPA is codified in

RPL 265-a and RPAPL 1303.

The circumstances under which HEPTA will apply can be summarized as follows:

a natural person (called an "Equity Seller") enters into a contract (called a "Covered Contract") to sell his or her principal residence to a buyer (called an "Equity Purchaser") which residence consists of land improved by a one to four family dwelling and (i) the premises is in Foreclosure (as defined below) or (ii) the Equity Seller is in Default (as defined below) under financing secured by the premises and the Covered Contract includes a Reconveyance Agreement (as defined below).

There is little confusion regarding the first three requirements - in order for HETPA to apply, the seller must be a natural person who is the record title holder of a one to four family dwelling one unit of which "the equity seller occupies or occupied at a time immediately prior to the equity sale as his or her primary residence." RPL 265-a(k).

The act becomes trickier with regard to the circumstances comprising a Covered Contract and what is mandated for transactions which do consist of Covered Contracts. The following outline will aid in the analysis of this portion of the act.

I. As a primary condition, the contract must be "incident to" the sale of premises that are either in Foreclosure or in Default (as defined). Although this suggests that the transaction, in order to be defined as a Covered Contract, must arise out of the foreclosure or default, the safe approach is to analyze any transaction in which the seller is in Default or in Foreclosure for compliance with HETPA.

Additionally, under RPL 265-a(e) the term "Equity Purchaser" specifically does notinclude a person or entity acquiring title as follows: (i) for use as a primary residence (natural persons only); (ii) by referee's deed in an Article 13 foreclosure sale or at any sale of property authorized by statute; (iii) by order or judgment of any court; (iv) from a spouse, or from a parent, grandparent, child, grandchild or sibling of such person or such person's spouse; (v) as a not-for-profit housing organization or as a public housing agency; or (vi) a bona fide purchaser or encumbrancer for value.

Thus, a purchase under the foregoing circumstances is not subject to the act. The key exceptions to the act here are that, in addition to government sanctioned sales, non-profits and relatives, anyone purchasing the premises for use as the purchaser's own primary residence and any bona fide purchaser or encumbrancer for value is not deemed to be an Equity Purchaser. Transactions involving the foregoing are not covered by the act.

Pursuant to RPL 265-a(e), the term "bona fide purchaser or encumbrancer for value" includes "anyone acting in good faith who purchases the residential real property from the Equity Purchaser for valuable consideration or provides the Equity Purchaser with a mortgage or provides a subsequent bona fide purchaser with a mortgage, provided that he or she had no notice of the Equity Seller's continuing right in, or equity in, the property prior to the acquisition of title or encumbrance, or of any violation of this section by the Equity Purchaser as related to the subject property."

II. Once the foregoing threshold is met, one of two conditions must also exist in order for the transaction to be covered by HETPA.

(a) If the premises are in Foreclosure, then any contract for the sale of the premises is deemed to be a Covered Contract subject to the act. HEPTA defines Foreclosure to mean that "there is an active lis pendens filed in court pursuant to article thirteen of the real property actions and proceedings law against the subject property, or the subject property is on an active property tax lien sale list" (emphasis added).

(b) Alternatively, if the Equity Seller is in Default (as opposed to Foreclosure), then a contract to sell the premises will only be deemed a Covered Contract if it contains a Reconveyance Agreement. An Equity Seller is deemed to be in "Default" if he or she is two months or more behind in his or her mortgage payments. HETPA defines a "Reconveyance Agreement" as an agreement under which the Equity Purchaser agrees to reconvey an interest in the residence back to the Equity Seller to enable the Equity Seller to regain possession of the residence. Although the Reconveyance Agreement can be in any form, typical structures include sale/leaseback arrangements or the grant of an option to repurchase. HETPA also provides that an arrangement whereby an Equity Seller mortgages a principal residence to an Equity Purchaser may also be deemed to be a Reconveyance Agreement . However, the act does not clarify what type of arrangement is targeted by this language.

III. If the foregoing circumstances exist, the contract of sale should be treated as a Covered Contract. The main implication of coverage by the act is that the Equity Seller is entitled to a five day right of cancellation of the Covered Contract (RPL 265-a(5)). The Equity Purchaser must, within ten days following receipt of a notice of cancellation, "return without condition any original covered contract and any other documents signed by the equity seller as well as any fee or other consideration received by the equity purchaser from the equity seller. Cancellation of the contract shall release the equity seller of all obligations to pay fees to the equity purchaser." Id.

IV. To ensure that protection under the act is effectuated, HETPA sets forth several requirements (see RPL 265-a(3) - (7)). These include the following:

(a) Covered Contracts must contain the entire agreement of the parties, including: the total consideration; a complete description of the terms of payment or other consideration; the time for delivery of possession; the terms of any rental or lease agreement; the terms of any reconveyance arrangement;

(b) Covered Contracts must also include a statutory form of Notice of Cancellation and specific statutory language alerting the Equity Seller to their right to cancel (These forms may be found in RPL 265-a(6)(a) and (4)(i) respectively;

(c) All Covered Contracts and Notice of Cancellation attached thereto must be written in at least twelve-point bold type, in English or in both English and Spanish if Spanish is the primary language of the equity seller;

(d) HETPA prohibits the Equity Purchaser from engaging in certain activities during the five day rescission period. See RPL 265-a(7)(a).

(e) The act also restricts the information and representations that may be made at any time by an Equity Purchaser to an Equity Seller. See RPL 265-a(7)(b)-(d).

The provisions of HETPA may not be waived. RPL 265-a(17).

V. The real teeth in HETPA comes in RPL 265-a(8), which provides that any transaction which is in material violation of its provisions "is voidable and . . . may be rescinded by the Equity Seller within two years of the date of the recording of the conveyance of the residential real property". In order to rescind, the Equity Seller must give a Notice of Rescission to the Equity Purchaser and his or her successors in interest (other than bona fide purchasers or encumbrancers, discussed below), and record the Notice of Rescission in the recording office of the County in which the property is located.

Therefore, any Equity Purchaser who fails to maintain compliance with HETPA in connection with a covered transaction leaves itself open to cancellation of the transaction for up to two years. Of course, it is likely that, by that time, the premises will have been sold to a third party. HETPA provides that the two year right of cancellation shall not affect the rights of any (as defined above). See RPL 265-a(8)(c).

VI. One other protective measure that HETPA provides, which is unrelated to its provisions regarding Covered Contracts, is the addition of RPAPL 1303, which requires the plaintiff in a mortgage foreclosure action to include a notice entitled "Help or Homeowners in Foreclosure." with the summons and complaint served upon the defendant. (This form may be found in RPAPL §1303.)

The notice must be on a separate page of colored paper in bold, fourteen-point type. Note that HETPA does not specify the types of property classifications for which the notice must be included.

Starvaggi & Starr, PC is a law firm that provides services in the areas of education law, adoption, labor & employment law, real estate law, civil litigation, matrimonial and family law in New York and New Jersey. Please vivit our Website at http://www.starlawpc.com for more information about our firm.

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