Proposed Law On Lender’s Standing Presents Real Danger To Mortgage Enforcement

It isn’t law yet, but it is easy to predict that it will be.  And when this bill passes, it portends not only to delay, but genuine danger to the prosecution of mortgage foreclosure actions in New York.

Bill A629 (S 697 in the Senate) addresses standing to commence a mortgage foreclosure action.  It sounds reasonable and will appear to many to be benign – but assuredly some of it is decidedly perilous.

It creates a new section 1302-a of the Real Property Actions and Proceedings Law.  The first thing it does (subsection 1) is declare that no person has standing to commence an action under the article – which means any mortgage foreclosure action, residential or commercial — unless it is the owner and holder of the note and mortgage, or has been given the authority to commence the action by that owner and holder.  Generally, this part is not so objectionable.  Being the holder was traditionally the standard in any event and being the owner and holder was typical.  With the delegation of authority clarified, no serious issues immediately appear.  There will be confusion, though – or worse – for foreclosures of equitable mortgages, condominium common charge liens and tax liens which are pursued under this article but do not match the construct of owning and holding the note and mortgage.

Of somewhat more concern is the next portion which makes the defense of lack of standing non-waivable.  As a matter of both statute and case law, standing was always a defense which could be waived.  Now preserving this defense to borrowers at all times seems innocuous enough and it is hard to quarrel with.  The hidden practical problem, however, is that it reserves to litigious borrowers the ability to hold an assertion of this defense in reserve (even if without foundation), to employ as a tactic later in a case or on the eve of sale.  Although servicers and their counsel will recognize this as a real possibility, the protest will be unsympathetically received by others.

Subsection 2 of the proposed new RPAPL §1302-a requires the complaint to contain an allegation that at commencement, the plaintiff is the owner and holder of the note and mortgage or that the authority has been delegated.  This is just practice mechanics and does not change what foreclosure complaints have typically pleaded as a matter of course.

But as the provision continues, real problems lurk.  The plaintiff must plead that the originals of the note and mortgage are in its possession ( and control, whatever that means). ¹   Now there are issues.

As to the mortgage, because it is a recorded document, an original in the file was never important.  A certified copy was always available from the county clerk (or Register in most of New York City) which is just as efficacious as an original.   While this is not an excuse for lenders and servicers to be careless about retaining original mortgages, the fact is that sometimes there will not be an original in the file.

This then presents an immediate dilemma.  If the original mortgage is not in the plaintiff’s possession, how will it fulfill the mandate – and the statute uses the word “shall” in the context – to plead that predicate?  Will it be sufficient to plead that a certified copy is in the plaintiff’s possession?  It should be, but given the very strict interpretations these statutes have been receiving, it is doubtful.  What appears certain, though, is that any deviation from the precise directive of the statute will elicit an answer in the action from the defaulting borrower – or other defendants – asserting failure to comply with statute and a demand to dismiss the complaint.

The peril is no doubt more threatening in regard to the mortgage note.  These are lost from time to time, even if there has not been a list of assignments.  A lost note affidavit has always been an appropriate substitute for the original.  Moreover, because the mortgage contains a promise to pay, there should be no doubt about the obligation.  But the new statute offers no pleading alternatives – the complaint must state that the original is in hand.  So if it is not – again, it happens – is foreclosure prohibited?  It should not be, but this will surely be litigated and delay too many foreclosures with the outcome uncertain.²

But there is more.  In many commercial cases, there can be long chains of documents, ending, for example, with a consolidated note.  Earlier notes – some from years or even decades ago – should not be needed.  Indeed, those originals are often long gone.  Need a foreclosing plaintiff plead that these notes are in its possession?  It should not, but the statute just might be read to require it.

There is still more.  Subsection (3) requires filing with the complaint a copy of the original note and mortgage.  When originals are lost, copies may be with the file – but not always.  How then to annex a copy of the original?

Proof of ownership must also be filed.  While this was likely intended to mean the assignment, the directive does not address two critical aspects of the equation.  First, a note and mortgage can be assigned by delivery of the documents alone.  An assignment as a denominated document is not required.  To be sure, use of an actual assignment is the prevailing methodology to convey a note and mortgage.  But lack of such a writing does not mean there has been no assignment. The statute fails to take this into account.

Even where there has been a written assignment, once it is recorded (although recordation is not required for its efficacy) retaining the original is no longer an imperative.  As a practical matter, therefore, original assignments are not always in the file.  This too may run afoul of the statute and be fatal to the action – at least the way the proposed law is written – even though there is no compelling reason in real estate practice to retain an original recorded assignment of mortgage.

In mentioning proof of ownership, subsection 3(a) delineates as included in that category proof not only of original assignments, but all original endorsements.  This presupposes (it seems) that a note was endorsed or that there was an allonge.  But a note and mortgage are validly assigned by a standard assignment of mortgage (or as mentioned, by delivery) so there often will not be an endorsement of the note.  Lack of this may preclude the foreclosure – if the letter of the statute is to be followed.

Conclusion

This prospective legislation assumes that lack of standing in mortgage foreclosure actions is a commonplace issue and that borrowers are somehow suffering as a result.  Lenders, servicers and their counsel would disagree.  But in attempting to remedy the perceived problem, the proposed bill simply does not comport with the reality of mortgage practice.  In missing those realities – and nuances – the potential for crushing or delaying innumerable foreclosures is very real.  To use a variation of a cliché, if there is a disease, the medicine here is far worse than the ailment.

Foreclosure legislation on its face far more dramatic than this has passed readily.  This bill looks both helpful and innocent.  It would seem impossible to argue against – unless one appreciates the noted real world consequences.  That is why it is easy to predict that the bill will pass and that lenders and servicers may expect further nightmares in the Empire State.

1.  It must also recite that the plaintiff is otherwise entitled to enforce the note and mortgage pursuant to law.  This would be inherent in its owning and holding the documents or the delegation of authority so this seems rather redundant.
2. And what about the elderly couple who sell their home and take back a purchase money mortgage? They move to a rental unit for a couple of years and then retire to North Carolina.  In the two moves they lose the note or the mortgage – or both.  Must they suffer loss of the remedy to foreclose when a mortgage default ensues?

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), 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.