Using a Predatory Lending Defense Against Foreclosure in NY

Like any type of legal claim, homeowners have the opportunity to defend against an action against them to foreclose on their homes. The specific legal defenses that may be available are dictated by New York law and the court interpretations of those laws. One potential defense is that the mortgage lender used predatory tactics in originated or servicing the loan and, therefore, the homeowner should be absolved of the obligation to pay. The following is some additional information to help you better understands how a predatory lending defense works in New York courts.

What Constitutes Predatory Lending in New York?

The Industry Standards and Prohibited Acts and Practices §226.34 (a)(4)1 sets out standards for consumer lending, as do the banking regulations of the state of New York,2 the Homeownership and Equity Protection Act (“HOEPA”),3 the Truth in Lending Act (TILA),4 and the Real Estate Settlement Procedures Act (RESPA).5 Specifically, the law requires that before a lender can loan money to a consumer, it must review information regarding the applicant’s ability to repay the debt. Such factors that must be considered include the following:

  • Documents indicating borrower’s income and expected income
  • Existing debts and expenses
  • Employment status
  • Other monetary resources

For any high-cost home loans, New York law requires that all mortgage lenders use “due diligence” in reviewing all information necessary to determine a homeowner’s ability to repay the loan. Specifically, NY law states as follows:

“A lender or mortgage broker shall not make or arrange a high-cost home loan without due regard to repayment ability, based upon consideration of the resident borrower or borrowers’ current and expected income, current obligations, employment status, and other financial resources (other than the borrower’s equity in the dwelling which secures repayment of the loan), as verified by detailed documentation of all sources of income and corroborated by independent verification.” New York Banking Law §6-L(2)(k)6

In addition to fully considering whether an applicant can repay a loan, a mortgage lender must also provide the homeowner with proper notices and information to ensure that the homeowners fully understand all of the terms of the mortgage loan and their obligations.

Signs that Predatory Lending Occurred

Predatory lending can occur in many ways and during many different stages of the mortgage loan process. Some signs that a lender engaged in predatory and unlawful tactics including:

  • The property was appraised for far more than the actual value of the property, which results in an inflated loan amount and unjustified benefits to the lender
  • Lenders that require very little to put down for new construction homes
  • Allowing a borrower to refinance personal debts into a mortgage loan
  • Loans that have high fees and costs
  • Selling disability insurance or life insurance with a mortgage loan
  • Not disclosing which brokers to which fees will be paid
  • Allowing refinancing multiple times and charging high fees
  • Not requiring all appropriate income documentation
  • Charging excessive title insurance fees or not disclosing fees to the borrower

There are many other signs of predatory lending and an experienced attorney can review your situation and identify whether or not you may have been a victim and whether such practices can be used against your lender in a foreclosure case or in an affirmative claim.

Practical Application of the Defense

Before 2008, there were significantly fewer restrictions regarding predatory lending in the United States and, therefore, the number of victims of such tactics was higher. Many people who found themselves in foreclosure court had the opportunity to present a predatory lending defense if their mortgage lender or servicer engaged in misconduct. However, with stricter consumer protection laws in place on both the federal and state level, many mortgage lenders have made moves to avoid predatory lending. For this reason, the defense is used less often than it used to be, even though the number of foreclosure cases has increased.

Courts have a high standard when determining whether predatory lending occurred and whether such lending should result in a cancellation of a mortgage loan. This does not mean that this type of defense should never be considered, however. In cases involving true predatory tactics that harmed a homeowner, this defense can be successful but must be presented carefully with adequate supporting evidence. The state of New York takes cases of actual predatory lending so seriously that the state banking regulations7 do not place a time limitation on a homeowner to seek a rescission of a mortgage loan.

One recent case demonstrates that while courts can look unfavorably on frivolous attempts to claim that homeowners were the victims of predatory lending, New York courts will still work to protect the rights of homeowners from true predatory mortgage lenders. In addition to protecting such homeowners from foreclosure, the courts will, in fact, award victims of predatory lending significant damages.

In the case of Barkley v. Olympia Mortgage Co.,8 eight homebuyers together brought a claim against a property “flipper” who caused the over-appraisal of properties by hiding defects in the properties with cosmetic finishes and updates. He then fraudulently passed off the properties as new and renovated and intentionally concealed defects that would have lowered the value of the homes. After a jury awarded the homeowners $1 million in damages and $2 million in attorney’s fees, an appellate court in New York upheld the decision. This case demonstrates that victims of predatory lending can still find recourse in the courts, including as a defense against foreclosure proceedings. The fact that these cases are becoming rarer does not invalidate the claims of victims who have suffered financial issues because of predatory lending practices.

Discuss Your Legal Options with an Experienced New York Foreclosure Defense Attorney Today

If you have received notice of a foreclosure or you believe that a foreclosure is imminent, you should call a skilled foreclosure defense lawyer who fully understands New York law right away. There are different options for defending against and preventing foreclosure of your home. Even if your loan was not predatory, attorney Ronald Weiss can review your case and identify any possible legal strategies and options you have. We will explore every possibility to help you solve your mortgage and financial struggles, including a possible bankruptcy if that may help in your situation. We will represent your interests as a homeowner and borrower through every step of the legal proceedings. Please call our office at 631-271-3737 for more information.

1https://www.law.cornell.edu/cfr/text/12/226.34

2http://www.dfs.ny.gov/legal/regulations/adoptions/banking/ar3&11reg.pdf

3http://files.consumerfinance.gov/f/201310_cfpb_compliance-guide_home-ownership-and-equity-protection-act-rule.pdf

4http://files.consumerfinance.gov/f/201503_cfpb_truth-in-lending-act.pdf

5http://files.consumerfinance.gov/f/201503_cfpb_regulation-x-real-estate-settlement-procedures-act.pdf

6http://codes.findlaw.com/ny/banking-law/bnk-sect-6-l.html

7http://www.dfs.ny.gov/legal/regulations/adoptions/banking/ar3&11reg.pdf

8http://www.leagle.com/decision/In%20FDCO%2020100914864/BARKLEY%20v.%20OLYMPIA%20MORTGAGE%20CO.