UPDATE ON THE FORECLOSURE ABUSE PREVENTION ACT (FAPA); CONSTITUTIONAL OR UNCONSTITUTIONAL

I. ISSUE

The purpose of the FAPA is to protect homeowners from “abuses of the judicial foreclosure process.” HSBC Bank USA, N.A. v. Nicholas, 2024 N.Y. Misc. LEXIS 71. Following the Engel decision, FAPA was enacted as a remedial statute to clarify the intended purpose of an already existing statute; the legislature claimed that the FAPA was necessary because CLPR § 205 was manipulated by the mortgage lending and servicing institutions, and poorly interpreted by the courts.

The constitutionality of FAPA’s retroactive effect is questionable. Some courts believe that applying FAPA retroactively violates the Due Process Clause of the Fourteenth and Fifth Amendments of the United States Constitution; violates the Contract Clause; and is potentially a “taking” under the Fourteenth Amendment. Other courts believe that the FAPA as a retroactive statute is constitutional.

II. ARGUMENTS AGAINST OF FAPA’S CONSTITUTIONALILITY

In U.S. Bank N.A. v. Misbah Imtiaz, the court found that applying FAPA retroactively would affect the substantive rights of the plaintiff who relied on the law at time the first case was commenced. Quoting the United States Supreme Court in Landgraf v. USI Film Products, “elementary considerations of fairness dictate that individuals should have an opportunity to know what the law is and to conform their conduct accordingly; settled expectations should not lightly be disrupted.” The standard of review is “rational basis”, so the retroactivity of the FAPA must be rationally related to further the legislatures legitimate interest. The court concluded that the retroactivity of FAPA does not comport with due process under the Fourteenth and Fifth Amendments, as there is no legitimate purpose for supporting the retroactivity of FAPA. The court found that there was no legitimate purpose because the expressed intent was to overrule the holding ‘U.S. Bank Nat’l Ass’n v. Misbah Imtiaz, 2024 NY Slip Op 30798(U) (Sup. Ct.) in Engel, and the legislators misunderstanding of long-standing case law is not a legitimate purpose for supporting FAPA as being retroactive.

In U.S. Bank National Association v. Speller2, the first foreclosure action was commenced against the plaintiff in 2009, “pursuant to [a] Repayment Plan arrangement with Mr. Speller, the foreclosure was stopped, and the 2009 foreclosure action was discontinued.” The plaintiff commenced a fourth foreclosure action against the plaintiff in 2022. The defendant asserted the statute of limitations defense, “based on the accelerations of the mortgage debt that occurred in connection with the prior foreclosure actions commenced in 2009, 2010, and 2015.” However, the 2009 foreclosure action had been revoked, so there was a question of whether FAPA impaired the lender right to revoke an acceleration. In 2009, the law was that a lender was able to change his mind and revoke their election to accelerate the mortgage, if, there was no prejudice to the borrower. The lender’s right to revoke an acceleration of the mortgage debt was based on the nature of the contract between the parties. Here, the retroactive application of the FAPA would “undermine” the parties’ contractual rights and subject the bank to harsh and unequal treatment.
The Contracts Clause analysis requires the court to find a balance between individual rights and public welfare. The court found that “the legislature took no account of the fact that mortgage lenders reasonably relying on the protections afforded by existing law routinely incur substantial expenses to protect their liens… while the foreclosure process plays out.” Furthermore, public welfare does not supersede the destruction of the security of a mortgage. There, the court found that applying the FAPA retroactively would be an unconstitutional impairment of the obligation of contracts, in violation of the Contracts Clause.

III. ARUGMENTS IN FAVOR OF FAPA’S CONSTITUTIONALITY

In 195-197 Hewes LLC v. CitiMortgage Inc., the court denied the plaintiff’s motion relying on the Engel decision and found that the retroactive application of the FAPA was constitutional. In determining whether the FAPA should be applied retroactively the court looked at whether the “remedial legislation should given retroactive effect in order to effectuate its beneficial purpose.”
‘U.S. Bank Nat’l Ass’n v. Speller, 2023 NY Slip Op 51153(U), 80 Misc. 3d 1233(A), 197 N.Y.S.3d 925 (Sup. Ct.)

To comply with due process, retroactive application of the FAPA must be supported by a legitimate legislative purpose furthered by rational means. Retroactive legislation is more likely to be unfair, so “there must be a persuasive reason for the potentially harsh impacts of retroactivity.” The court found that the “Legislature had a rational legislative purpose and ‘persuasive reason’ for the ‘potentially’ harsh impact of retroactive application.” The legislature purpose for the retroactive application of FAPA was to prevent lenders and loan services from manipulating the judicial foreclosure process, and “ensure equal application of state laws to all litigants.” Since CitiMortgage voluntarily discontinued their 2012 foreclosure action, they did not have any vested property rights, so their due process rights would not be violated by a retroactive application of FAPA. Further, the court, using the Penn Central analysis, found that there was no compensable taking. The retroactive application of the FAPA did not result in a taking, the right to unilaterally revoke an acceleration is not a core principle of New York State Property law. Therefore, FAPA did not deprived CitiMortgage of a protect property right. Additionally, statues of limitations are generally not regulatory takings since the “owner has the opportunity to enforce their rights by filing an action within the limitations period.”

In HSBC Bank USA, N.A. v. Nicholas3, stated that whenever possible courts must avoid interpreting a “presumptively valid statute in a way will needlessly render it unconstitutional.” Therefore, the court found that the retroactive application of the FAPA was constitutional. The court found that lenders reliance on Engel is not reasonable, as the legislatures expeditiously reacted to the Engel decision. There was only a twenty-two-month period between the FAPA enactment and the Engel decision, plus the holdings in Engel were question of first impression. Furthermore, the court found that the retroactive application of the FAPA does not violate due process. Legislative and judicial changes in foreclosure law “has been ubiquitous over the last fifteen years,” which should have put the lending industry on notice of a likelihood of change in this area of law. The legislatures broadly stated purpose to protect homeowners, undue judicial decisions which permitted abuse, and restore “long standing law” is clear evidence of their intent for the FAPA to be applied retrospectively. Additionally, “the desire to protect property owners from foreclosure abuses is rationally based on well documented wide-spread misconduct by certain mortgage lenders.” 3 HSBC Bank USA, N.A. v. Nicholas, 2024 NY Slip Op 30061(U) (Sup. Ct.)

IV. CONCLUSIONS, PREDICTIONS AND TRENDS

With exceptions, the FAPA has been well received by courts as remedial statute. The FAPA’s legitimate purpose is to restore the Statute of Limitations provision of judicial foreclosures. Prior to the FAPA, the statute of limitations time period was practically left to the court’s discretion, and the legislature never intended for the courts to have such power. The lack of clarity regarding the statute of limitations in foreclosure actions led to manipulation and abuse by lending servicers at the expense of everyday New Yorkers; nowhere else in the law has a party had the ability to unilaterally stop and start the statute of limitations. Applying the FAPA retroactively allows it to be most effective at remedying past injustices and preventing wrongful practices to continue.

The greatest take away from arguments for and against the FAPA is, determining whether a statute is unconstitutional requires a balancing for personal and public interests. Due the nature of laws, they will always harm one party and unfairness cannot be the sole reason for interpreting a statute as unconstitutional.