Subprime Loans – What Does Owner Occupied Mean?

One of the points in our recent alert providing Q. and A. for the new subprime statute was that a loan does not fall into this category (thereby will not require notice and a settlement conference) if it is not “owner occupied”.  That remains true, but then there is the question of when the borrower has to be in occupancy.  A new case (the first addressing this issue) finds the statutory language ambiguous and thereby mandates a settlement conference even though when the foreclosure action was begun the borrower did not live at the house; the two units were occupied by tenants! [Accredited Home Lenders v. Hughes, ___ Misc. 3d ___. 866 N.Y.S. 2d 860 (Sup. Ct. 2008)]

Regarding “owner occupied”, the statute [RPAPL §1304(5)(b)(iv)], includes in the controlling definition of a home loan as one “…which is or will be occupied by the borrower as the borrower’s principal dwelling.”

In this case where the property was in New York, the borrowers resided in New Jersey, renting the mortgaged house to two tenants.  But the borrowers’ attorney (not even the borrowers) apparently stated that their residing in New Jersey with family was only temporary. The mortgage obliged the borrowers to occupy the property as their principal residence within 60 days of signing the mortgage, to reside there for at least a year.  Finding that the mortgagee-plaintiff did not demonstrate that the borrowers never used the residence as their principal dwelling, the importance of the mortgage provision was discarded.  (But how could the plaintiff prove this negative, and why should it have to?  Would it not have been easy for the borrowers to have shown that they lived there if it were true?)

The court then turned to the underlying issue of when the residence must be used as the principal dwelling.  It noted that because the statute employs both present and future tense “…is or will be occupied…”, such is not clear as whether it means when the loan is entered into or the present day.  Some statutory language, the court observed, refers to the inception, but then there is direction in the statute that the 90 day notice must be sent to the borrowers last known address, and if that is other than the premises, then as well to the residence which is the subject of the mortgage.

This was interpreted by the court to mean that the borrower did not have to presently reside at the mortgaged premises for the loan to fit the definition of subprime.

Thus, the language of the statute was found ambiguous and looking to the intent of the statute, the court concluded that a settlement conference must be held.

The upshot of all this should be troubling to lenders.  If a loan is indeed subprime, then lenders must bear the burden (the time and expense) of both sending a 90 day notice and attending a settlement conference.  But if the loan is not within the subprime category, then the time and expense should not be imposed.  The borrower who misstates his intention to live at the property, or the investor/speculator who never intended to reside there, is not entitled to the protection of the statute.

In the cited case, the only question was must there be a conference or not, meaningful though that is.  But what is a lender to do when a borrower in default has never resided at the premises and presently still does not?  Should not that circumstance remove the loan from subprime so that the lender can refrain from wasting 90 days with the special notice?  Likely not if the new case is to become precedent.  All a borrower need recite (through counsel) is a future intention to occupy the home.  To a great extent this nullifies the “owner occupied” requirement.

We suggest that the legislature take a look at this loophole.

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.