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BACKGROUND FACTS AND HISTORY : The State of New York (“NYS”) is a judicial foreclosure state (FN 1a) (FN 1b), where foreclosure actions need to be pursued in the form of a law suit, usually in front of the New York Supreme Court, which is the trial level court, where most legal matters, subject to state laws, are handled. Foreclosure actions in NYS, like any legal disputes, have a statute of limitations (“SOL”), which limits the time in which a legal action must commence (FN 2). The SOL is intended to prevent stale claims and therefore pressures a potential plaintiff to bring their dispute to court within a time designated and limited by state statute, and different causes of action have different statutes of limitation (FN 3). In NYS the SOL is six (6) years for foreclosure actions, under New York’s civil procedure statutory code, the Civil Practice Law and Rules (“CPLR”), Section 213(4) (FN 4), which states “The following actions must be commence within six years:…4. an action upon a bond or note, the payment of which is secure by a mortgage upon real property…”. Different states have different SOL’s for debt collection (FN 5). The SOL is commonly misunderstood. The SOL is not the length of a law suit. Rather, the SOL is the time in which the lender, after the SOL is triggered, takes to go to Court and start a legal action by filing a Summon and Complaint (FN 6).

What starts / triggers the SOL is different for each cause of action, but for NYS foreclosures it’s “acceleration” (FN 7). “Acceleration” is a legal term meaning that the lender has taken “overt action” to start a foreclosure action (FN 8). Acceleration is not a “default letter”, which just threatens a foreclosure action and demands the reinstatement (or cure) amount; rather acceleration is the actual, full and immediate demand for the entire payoff amount due to the Lender, in an “acceleration letter” and/or the actual commencement of the legal action (FN 9). The actual demanding of the immediate payment of the full balance due under the mortgage loan in an “acceleration letter”, is no longer common, so in reality, the actual acceleration of the loan, usually occurs in NYS with the filing in a foreclosure action, the summons and complaint, which initiate the legal action.

What ends the ticking of the SOL clock caused by acceleration has been subject to more controversy.  Until December 30, 2022, when the Foreclosure Abuse Prevention Act (“FAPA”) (FN 10a)(FN 10b) was passed by the NYS legislature and signed into law by NYS Governor Kathy Hochul, there was a concept called “de-acceleration” that was  accepted and explained by NYS’s highest court, the New York Court of Appeals, under the Freedom Mortgage Corp. v. Engle decision (the “Engle decision”) (FN 11), February 18, 2021, which consolidated four (4) appeals into one (1) comprehensive decision seeking to resolve issues concerning the SOL for foreclosure actions in NYS. The Engle decision firstly decided, based on mainstream precedent, that the NYS foreclosure six (6) year SOL starts to run, when the lender accelerates the mortgage loan with an “overt act”, which is usually the commencement of the foreclosure case. Secondly the Engle decision also decided, based on more contentious case law, the corollary, that the NYS foreclosure SOL stops running when the lender ends the foreclosure action, often with a voluntary dismissal, which the Engel decision held constitutes a “de-acceleration” of the mortgage. The Engel decision reasoned that if Lenders have the right through commencing a foreclosure action, to accelerate, then they logically must also have the right to do the opposite, which is to end the running of the NYS foreclosure SOL, through voluntary dismissal which constitutes a “de-acceleration” of the mortgage loan (FN 12). The Engel decision, which was decided in the middle of the Covid-19 pandemic, a time of financial uncertainty for many homeowners, was immediately politically controversial in NYS, in that it was considered to be law that overly favored mortgage lenders, by allowing mortgage lenders to have inappropriate control over the SOL, a time limit set by the NYS Legislature, which the Legislature did not want to have manipulated by the very lenders it sought to oversee and regulate through such laws. The holding in the Engel decision also severely limited the ability of mortgage borrowers, in lengthy and problematic foreclosure actions to assert the SOL defense, which was intended to curtail endless foreclosure efforts. The NYS Legislature also regarded the Engels decision to be abusive, in that it caused a two (2) tiered system, with mortgage lenders being given greater rights than mortgage borrowers, and greater rights than plaintiffs in other areas. Here, the mortgage lender was allowed to control its own SOL, something that was viewed as a manipulative and bypassing of the the SOL law, resulting in a disparity and abuse that was codified by the Engel decision (FN 13).

In direct reaction to the Engel decision, the NYS legislature passed the Foreclosure Abuse Prevention Act or FAPA, which signed by the Governor and became law on December 30, 2023. FAPA, per its boldly stated legislative purpose, FAPA clearly delineated in its introductory sections, that it was specifically geared to stop lenders and Courts from manipulating the six (6) year foreclosure SOL. FAPA decisively and unambiguously stated that there is no right for Lenders to de-accelerate. Since its passing some cases have closely followed FAPA’s language in giving retroactive effect to pending foreclosure actions where the law would support a finding that the SOL was violated (FN 14). However, the acceptance of FAPA has not been uniform and it has been criticized by lenders counsel as overly generous to borrowers (FN 15), and has raised questions as to whether FAPA’s retroactive effect is constitutional. (FN 16a)(FN 16b) Yet, despite the ongoing controversy, FAPA has been the controlling legislation and law, as to the SOL for foreclosures in NYS, since it was  passed. 

(For information about the CARES Act, see FN # 1). Forbearance agreements — in the form of both formal written agreements and oral understandings — were readily given in the beginning of the Pandemic, by not only government backed lenders, pursuant to the CARES Act, but also voluntarily by non-government backed lenders, and temporarily excused a certain number of monthly mortgage payments. Forbearance Agreements, were often periodically extended every several months, but usually were only focused on the present emergency, so often lasted between six (6) to eighteen (18) months. While the Forbearance Agreements did not permanently excuse these amounts, they also did not commit the lender or the borrower to any specific method of later repaying the amounts temporarily excused. (For information about Forbearance Agreements given during the Pandemic under the CARES Act, See FN #2 and FN#3, and for information about forbearance of government backed loans under specific government programs, see FN #4 ). The CARES Act ended on December 26, 2020, and while some of the same help it provided, continued as help in other forms and under additional laws and programs, the federal response to the Covid-19 Pandemic, as a crisis focused response, was intense and impressive in terms of resources and size, but at the same time had an inherent expiration. Now, post-Pandemic, the question has been how to deal with these Covid-caused mortgage defaults (hereinafter “Covid Defaults” or “Covid Arrears”), which were often temporarily allowed and to some extent encouraged by widespread and readily available Forbearance Agreements. Could Covid Arrears, now be demanded by the lenders and how could they be demanded? Should lenders be allowed to demand that these Covid Arrears be paid all at once, or over a period of time, or should lenders be required and/or incentivized to put Covid Arrears into a modification agreement, if the borrower is eligible?

The legislative response to the Covid-19 Pandemic was both on a federal and on a state level and often involved cooperation between the federal and state governments, including the Homeowner Assistance Fund (“HAF”), a federal program of $9.961 billion to help households throughout the United States who were behind on their mortgages due to the impact of Covid-19. (See, FN #5 for information about the Homeowner Assistance Fund (“HAF”), a federal program to help homeowners impacted by Covid-19 catch up on mortgage and housing payments). Often the longer term and/or more direct response was handled on a state level. For example, the State of New York had a federally funded program based on HAF, the New York State Homeowner Assistance Fund (“NYSHAF”), which starting on January 3, 2022, began accepting applications in order to distribute up to $539 million in funds to eligible homeowners impacted by the Pandemic to “avert mortgage delinquency, default, foreclosure, and displacement…” The program was intended to give eligible homeowners, with a Covid Default, a grant (not requiring repayment) of up to $50,000. per eligible household. While this program increased its contribution size by increasing the cap per household, it was very short lasting; because it was first come, first serve, it quickly ran out of funds and stopped accepting applications on February 18, 2022, or within a month and a half. (See, FN # 6 for information regarding NYSHAF; and see FN # 7 for the results of NYSHAF ).

The federal government has also sought to encourage lenders to give modification agreements to homeowners with Covid-caused mortgage defaults, with amendments as part of the CARES Act to RESPA’s Regulation-X, which allowed lenders to prioritize and grant “stream-line modifications” for incomplete mortgage modification applications for applicants whose mortgage defaults were Covid-caused. These amendments to RESPA’s Regulation-X, which applied to all residential lenders and servicers, were part of the CARES Act, with the Interim Final Rule (“IFR”) issued by the Consumer Financial Protection Bureau (“CFPB’) on June 23, 2020 (see FN #8 and FN #9 for the CFPB’s IFR). One year later, on June 28, 2021, after comments by mortgage and banking trade associations, the CFPB tempered some of the stricter rules in the IRF and issued the Final Rule (“FR”) to amend Regulation X to assist mortgage borrowers affected by the Covid-19 emergency. (See, FN #10 and FN #11 and FN #12 and FN #13 for for the text and commentary about the CFPB’s FR). These amendments by the federal government to Regulation-X were meant to be temporary, but they expired on December 31, 2021, only six (6) months after the Final Rule was issued. (See, Notification Letter including amendment expiration date, as FN #13). Although many of the federal responses to Covid-19 were crisis oriented and ended with the expiration of the CARES Act and its associated amendments and regulations, their policy encouragement to give Covid-caused defaults a greater opportunity for mortgage modification has been voluntarily incorporated into the decision-making of many mortgage lenders. (See, predictions as to post-pandemic future for mortgage industry, as FN #14)

In the State of New York State (“NYS”), on June 23, 2020, the governor signed into law, Banking Law Section 9-x, which like the Federal Regulation-X, was also meant to deal with Covid Defaults beyond just the initial forbearance agreement response. However, unlike the federal rule, the New York State rule was not meant to be temporary legislation, and is not only still in effect, but also more strongly seems to require lenders to give persons who fell behind with their mortgages, due to Covid-19, both temporary and permanent relief. Unlike the broader, but expired, federal law, NYS’s Rule 9-X only deals with conventional and private loans, where the lender or servicer are registered in New York State, and does not deal with federally backed loans. NYS’s Rule 9-X in 9-X(2)(a)(b) requires lenders to give those with Covid Defaults a forbearance agreement of up to 180 days with a potential extension of another 180 days, “subject to the mortgagor demonstrating continued financial hardship” for a combined 360 days, or almost a year in Covid-based forbearance. Loans subject to NYS’s Rule 9-X were required to have been current on March 7, 2020 (or if in arrears, not yet in foreclosure or accelerated) and to have fallen behind with mortgage payments based on a Covid hardship, during the “covered period” which is March 7, 2020 until December 31, 2021 (or until the date government closures due to Covid ended in the borrower’s county). See, NYS Rule 9-X(a). (See, FN #15 for the text of NYS’s Banking Law Section 9-x, and see FN #16 for Frequently Asked Questions regarding Rule 9-x).

Besides giving temporary forbearance, NYS’s Rule 9-X, under subsection 9-X(3)(a)-(d) requires the lender to give those qualifying under the rule, permanent relief in terms of giving the borrower the option of addressing the above referenced Covid forbearance amount (which is potentially 180-360 days of forborne payments) as follows: (a) an extension of the loan term for the length of the forbearance, without additional interest, late fees or penalties on the forborne amount; OR (b) repaying the arrears on a monthly basis over the remaining term of the loan, without penalties or late fees due to the forbearance; OR (c) negotiating for a “loan modification or any other option that meets the changed circumstances” of the borrower; OR (d) if the borrower and the lender cannot “reasonably agree on a mutually acceptable loan modification” the lender shall offer to defer arrears accumulated during the forbearance period as a non-interest bearing balloon loan payble at the maturity of the loan or when it is satisfied without interest being charged as a result of the forbearance. In Rule 9-X(4), the new law continues to state that, “adherence with this section shall be a condition precedent to commencing a foreclosure action stemming from missed payments which would have otherwise been subject to this section“. (See, commentary about NYS”S Rule 9-X, FN #17 and FN #18 and FN#19). How NYS’s Banking Law Section 9-x plays out and whether it will be broadly and uniformly applied by mortgage lenders to deal with NYS Covid Defaults and whether its compliance will be litigated in NYS courts, in potential, future foreclosure litigation, remains to be seen. (See, warning by NYS Attorney General to Servicers, as FN #20).

These alternative federal and state legal remedies: forbearance agreements, outright grants of the funds in arrears, liberalized standards to modify the loan and/or other remedies for permanent relief to the borrower, including, putting arrears in the back of the loan or paying arrears over additional time or repaying the arrears over the balance of the loan — all depend on the interaction of the borrower, the lender, the government and the courts in arriving at policy and laws to properly address Covid Defaults. The questions below explore what you believe is the appropriate policy and legal approach to Covid-19 related arrears? Is Covid-19, except from its scale, different from other crises? Does government have an obligation to help with Covid related mortgage arrears? If so, in what way, for how long, for how much and in what manner?