Relates to actions upon a subordinate bond or note

• Democratic7

◆ The sponsor's argument

Why Brian Kavanagh says this is needed

This bill seeks to address the growing prevalence of "zombie second mortgage" foreclosures -debt-collection actions initiated by holders of a home's subordinate, high-interest second mortgage loan in default that can result in foreclosure if the homeowner/borrower fails to repay the loan's outstanding balance along with interest and fees. When the holder of a defaulted second mortgage chooses not to collect on the loan because any prospect of recovery is subordinant to a first mortgage, the second mortgage becomes dormant. Many holders of these loans cease sending mortgage statements and "charge off" and warehouse these loans. Borrowers, many of whom never even knew that their homes were encumbered by second mortgages because they were marketed simul- taneously with their first mortgages as "80/20" loans, receive no state- ments on these loans, sometimes for a decade or longer. And if a home- owner in default of a first mortgage successfully avoids foreclosure by obtaining a loan modification, they may reasonably believe that the loan modification has also resolved their second mortgage. Second mortgage loans left uncollected for years are often sold to debt buyers "for pennies on the dollar," according to an advisory opinion on this issue released by the U.S. Consumer Financial Protection Bureau (CFPB) in April 2023. The same opinion further explains that " Such sales often occurred unbeknownst to borrowers, who continued to receive no communications regarding the loans. Many borrowers, having not received any notices or periodic statements for years, concluded that their second mortgages had been modified along with the first mortgage, discharged in bankruptcy, or forgiven." As home prices have increased over the years and borrowers have paid down their first mortgages, thousands of homeowners are now being sued by debt collection firms and private equity investors claiming to own or have the right to collect on their homes' dormant second mortgages. These debt collectors demand the outstanding balance on the second mort- gage -regardless of whether the mortgage was acquired from a previous debt holder at a steep discount -- plus high fees and interest. Homeown- ers face a choice between entering into onerous payment plans or losing their homes and the equity they have diligently built. This bill would address the lack of transparency in the mortgage lien process, which currently allows debt collectors to purchase liens for pennies on the dollar and then demand collection on the full value of the defaulted loan while piling on unreasonable fees and interest, all without notice to the borrower. This bill requires the sharing of accu- rate payment and chain of title records between parties before any fore- closure action may be brought, providing homeowners with proper notice regarding the status of their debt. In addition to the procedural protections afforded by transparency, this bill would substantively reduce the amount of fees and interest chargea- ble on the zombie second mortgage loan not to exceed the amount paid for the subject loan by the debt holder, plus the maximum rate of interest permitted under section 14(a) of the Banking Law accruing from the date of the subject loan's purchase. The CFPB's advisory opinion also discusses how a state's statute of limitations on debt collection practices may provide a jurisdictional hook into federal law. Debt collectors as defined in section 803(6) of the federal Fair Debt Collection Practices Act (FDCPA) and implemented in Regulation F, 12 CFR 1006.2(i) prohibits a debt collector from bring- ing suit or threatening to sue to collect a time-barred debt. According- ly, an FDCPA debt collector who brings or threatens to bring a State court foreclosure action to collect a time-barred mortgage debt may violate the FDCPA and Regulation F. The existing six-year statute of limitations for foreclosure actions operates as an injustice in these zombie second foreclosure actions, as hom

This is the sponsor's own case for the bill, quoted from their memorandum. It is not Agora's description of what the bill does.