Subprime Reform Act
The Subprime Reform Act enacted in the state of New York has the potential to resolve a widespread mortgage crisis across the state and prevent another crisis like it from happening again.
This law, which has served as a model for an initiative at the federal level, has two principal goals: to provide immediate assistance to New Yorkers who are nearing foreclosure, and to reform the state’s banking regulations that were partly responsible for allowing the crisis to happen. The law is committed to finding a balance between protecting consumers and making more affordable credit available.
The process for drafting the legislation that led to the New York law also influenced the Housing and Economic Recovery Act of 2008, a comprehensive initiative to help homeowners at risk of losing their homes by refinancing their mortgages to affordable levels with government insurance. Furthermore, the measure allots funding to New York State for the purchase and renovation of foreclosed properties in the hardest hit areas, in order to promote stability and rescue communities where foreclosed properties that have been abandoned pose major problems.
About one in 200 homes in the state is in the process of being foreclosed, according to the New York State Banking Department. Some areas taking the biggest tolls are Queens, Brooklyn and Long Island, as well as Monroe and Albany Counties farther upstate.
Specifically, under the new law, lenders must send borrowers a pre-foreclosure notice within 90 days of beginning the foreclosure proceedings. With this notification, homeowners are encouraged to seek out help before too late.
Likewise, lenders must provide borrowers with a list of local housing counselors that are approved by the government.
For certain homeowners with subprime loans, the act sets up a mandatory settlement conference for handling foreclosure proceedings, and homeowners who can’t afford an attorney can have one appointed them by the court.
Another provision in the law is meant to prevent foreclosures in cases where the ownership of the mortgage is uncertain. The plaintiff who is foreclosing on the homeowner must affirm that they are doing so in compliance with all applicable laws.
Further provisions target rescue scams that exploit borrowers on the brink of foreclosure. To put a stop to these schemes, so-called “distressed property consultants” must have a contract in writing and will be prohibited from soliciting any upfront fees.
Additional sections in this law are designed to prevent another housing crisis in the future.
For one, a new provision in the Banking Law will protect borrowers concerning subprime loans and underwriting standards. One such standard requires lenders to determine in good faith if the borrower has the ability to repay the loan, as well as principal, taxes, interest, assessments, insurance, points and fees. Brokers are also required to present loans that are most fitting to the borrower’s financial situation.
To further protect consumers, any institution that services loans on residential property in New York State must be registered with the Department of Banking.
Finally, to facilitate the prosecution of such cases, the law makes mortgage fraud a crime under Penal Law, with the criminal penalty increasing with the severity of the fraud.
Gov. David A. Paterson:
“We have still seen thousands of our families lose their homes,
and no state has been hit harder by the broader effects of the
lending crisis. Wall Street’s woes have helped to drive New
York into recession…We have the responsibility to protect New York’s families who are facing
foreclosure, and we need to reform banking regulations to
ensure this does not happen again. This law does both, and
spurred the federal government to do the same.”
Senate Majority Leader Dean G. Skelos:
“This legislation successfully balances the need to help families who are facing
foreclosure of their mortgages and the loss of their homes, with
concerns raised by the banking industry about protecting the
ability of lenders to provide mortgages to future homeowners. I
applaud my colleagues, particularly Senator Frank Padavan
and Senator Hugh Farley who worked tirelessly to resolve this
complicated issue. I also want to thank Governor Paterson for
his leadership in this matter, and for signing this bill into law.”
Assembly Speaker Sheldon Silver:
“By signing this legislation, Governor Paterson and New York State take crucial
action to address the national nightmare caused by the
unethical practices of the mortgage industry. Through direct
financial assistance and counseling and legal services, our
state will take the lead in preserving our communities and
providing meaningful relief to thousands of New Yorkers
struggling to keep their homes. We must remain committed to
assisting those affected by subprime lending while preventing
further abuses of homeowners.”
Senate Minority Leader Malcolm Smith:
“The subprime lending crisis has affected all New Yorkers in some way or
another. We, the Senate Democrats, have held forums
throughout the state pairing lenders with homeowners to help
save homes. In signing this legislation, Governor Paterson
ensures that all New Yorkers will have a second chance at
saving their homes. The Governor’s action will provide
immediate help by stopping foreclosures and closing loopholes
so this will never happen again.”