Sweeping N.Y. Reverse Mortgage Bill Leads Law Firm to Advise Compliance

Reverse mortgage originators and servicers that conduct business in the state of New York should act now to comply with a bill passed by that state’s assembly — and that will soon be submitted for the signature of Governor Andrew Cuomo to become law.

That’s according to a notice written by a partner at international law firm Hogan Lovells, headquartered in Washington, D.C. and London.

“Originators and servicers of Home Equity Conversion Mortgages (HECMs) who do business in New York should take action now to prepare to comply with the new bill’s requirements,” writes partner Allison J. Schoenthal. “Ensuring compliance may require a thorough review of commercial advertisements and mailings, adapting communications with mortgagors to incorporate required notices, and modifying procedures employed to verify a mortgagor’s continued residence in a mortgaged property.”

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Once the law becomes enforceable, its effects on the reverse mortgage industry will be “significant,” Schoenthal says. Some of the provisions of the bill include prohibition for what it describes as “unfair or deceptive practices,” new requirements concerning consumer notices, and the imposition of restrictions related to occupancy verification and related foreclosures.

Authorized lenders and any associated parties or entities will be prohibited from engaging “in any unfair or deceptive practices in connection with the marketing or offering of reverse mortgage loans,” the bill’s language reads. These include the use in promotional materials of phrases like “public service announcement” and “government insured.”

“The HECM bill also requires that every authorized lender or its agent provide ‘supplemental consumer protection materials’ with any solicitation for a reverse mortgage that is mailed to a physical address within New York,” Schoenthal writes. “The content of the ‘supplemental consumer protection materials’ will be specified by the Superintendent of the New York Department of Financial Services.”

Lenders operating within the state will also be required to provide each applicant for a reverse mortgage, potential or otherwise, with the phone number and web address provided by the Department of Housing and Urban Development (HUD) so they can easily seek out the required counseling for a HECM loan.

Other notable provisions include a prohibition on lenders from making advance tax or insurance premium payments, or any other related obligations arising from a mortgaged property.

“When a mortgagor defaults on mortgage insurance premiums, homeowners’ insurance premiums, or real property tax, the lender may only pay those premiums and/or taxes which are in arrears,” Schoenthal says. “The bill further requires that both authorized lenders and mortgagors be represented by an attorney or attorneys at the time of closing and shall have at least one attorney present to conduct the closing.”

Schoenthal concludes by advising lenders that originate or service reverse mortgages — and who are covered by this bill — to take steps now to ensure compliance with the new requirements. A failure to do so could open lenders up to the possibility of private lawsuits from borrowers. If signed into law, compliance with this bill will be “a condition precedent for mortgagees to bring a foreclosure action upon a covered home equity conversion mortgage,” Scheonthal says.

Failure to comply with this legislation could subject lenders in the future to damages, and even “prevent them from pursuing [an] otherwise legitimate foreclosure proceeding.”

The bill, known as Assembly Bill 5626 or “the HECM bill,” passed the New York State Assembly on May 15. It moved forward to the State Senate as Senate Bill 4407 and passed on May 21. While the bill has yet to be delivered to Governor Cuomo’s office for his signature, the governor will have 10 business days to either sign or veto the bill upon its delivery to his office. If he does neither, the bill automatically becomes law after those 10 days have elapsed.

“By its own provisions, the HECM bill will become effective on the nineteenth day after it becomes law,” Schoenthal writes. “The HECM bill further provides that the Superintendent of the New York Department of Financial Services is authorized and directed to amend and appeal any rules and regulations necessary to implement the act within 180 days of its becoming law.”

Read the full notice at Hogan Lovells, and the House bill at the New York State Assembly.

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  • The legislature approved bill addresses a specific term commonly used in industry ads, “government insured.”

    Despite originator statements to the contrary, the amount of MIP due at closing has nothing to do with insurance for the borrower. The insurance insures the lender against loss, NOT the borrower. So why are borrowers charged for it? That is simple, FHA MIP is a reimbursable cost of the lender.

    A HECM is nonrecourse because the lender pledges the following:

    “No Deficiency Judgments.

    Borrower shall have no personal liability for payment of the debt secured by this Security Instrument. Lender may enforce the debt only through sale of the
    Property. Lender shall not be permitted to obtain a deficiency judgment against Borrower if the Security Instrument is foreclosed. If this Security Instrument is assigned to the Secretary upon demand by the Secretary, Borrower shall not be liable for any difference between the mortgage
    insurance benefits paid to Lender and the outstanding indebtedness, including accrued interest, owed by Borrower at the time of the assignment.”

    The quoted covenant means the homeowner/borrower and heirs can have no recourse liability under the loan agreement with the lender.

    I hope NRMLA’s Ethics Committee bans the term “government insured.”

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