Consideration Of Borrower’s Income – A Defense To Foreclosure?

While there is a solid answer to this [as a new case reminds: M&T Bank v. Capolino, 168 A.D.3d 1045, 93 N.Y.S.3d 117 (2d Dept. 2019)], the complete response nonetheless is, “it depends”.

That is not as evasive an answer as it might seem.  If the loan fits the definition of a high cost home loan, which will seldom be encountered, then yes, the borrower’s income must be considered and failure to do so could very well be a defense.  But if the loan is otherwise, that is, not a high cost home loan, then consideration of income is not a factor.

Details follow, in inverse order of importance so we conclude with the most compelling point:

The High Cost Home Loan

This is a creature of statute, circa 2002, under the heading of Predatory Lending.  Back then, the banking law was amended (adding section 6-l) together with the general business law (adding section 771-a) and there is a great deal to it.  For those few lenders who will make such loans, attention is invited to 1 Bergman on New York Mortgage Foreclosures §1.19A which reviews the subject at length.  For our purposes here, though, the key is that the sundry strictures apply to a high cost home loan, which in turn suggests that the two definitional aspects should be mentioned so the reader can readily recognize whether they are in the realm where statute imposes.

A home loan is defined as a loan (including an open end credit plan, but other than a reverse mortgage) in which:

• The principal at origination does not exceed the conforming size limit for a comparable dwelling as established from time to time by federal national mortgage association, and
• The borrower is a natural person, and
• The debt was incurred primarily for personal, family or household purposes, and
• The mortgaged property is in New York and is secured by a mortgage or deed of trust on real estate improved by a one to four family dwelling, or by a condominium unit, or by any certificate of stock or other evidence of ownership in, and a proprietary lease from, a corporation, partnership or other entity formed for the purpose of cooperative ownership of real estate, in either case used or occupied or intended to be used or occupied, wholly or partly, as the home or residence of one or more persons and which is or will be occupied by the borrower as the borrower’s principal dwelling.

A home loan in turn becomes “high cost” when it goes beyond one or more of the following thresholds:

• If a first mortgage, the interest rate exceeds eight points above yield of treasury securities with a comparable maturity; or
• If a subordinate mortgage, the interest rate equals or exceeds nine points over the yield on treasury securities with a comparable yield; or
• Total points and fees exceed five percent of the loan amount when the loan is $50,000.00 or more, or six percent of the loan amount when the loan is $50,000.00 or more and the loan is a purchase money loan guaranteed by the FHA or the VA.  (The statute then details at length the points which can be excluded from this calculation.)

When the high cost home loan is encountered, then there are a host of requirements to be met and, relative to the subject here, one is that the loan cannot be made without due regard to the borrower’s ability to repay.  [See Banking Law Section 6-1(2)(j)]

The “Regular” Loan

Mortgage foreclosure is an action at equity and therefore it is not uncommon for defaulting borrowers to rely on equity as a defense, asserting a plethora of events which a borrower might consider unfair, that is, inequitable. Might it be inequitable for a lender to make a loan without regard to the borrower’s ability to repay? The new case comments upon that – and confirms earlier law finding that equity is not a defense when the loan is made without regard to the borrower’s income.  As the case observed, while it may be unwise to ignore ability to pay, it does not become so manifestly unfair as to invoke equity and bar an action.  For those who may need to locate a case law on this subject, the recent M&T Bank matter cites as authority, Emigrant Mtge. Co., Inc. v. Fitzpatrick, 95 A.D.3d 1168, 1171, 945 N.Y.S.2d 697; Argent Mortgage Co., LLC v. Mentesana, 79 A.D.3d 1079, 1081, 915 N.Y.S. 2D 591.

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2019), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.