Finally, courts across New York will now have uniform guidelines to help homeowners in foreclosure!
Since 2009 many homes were lost to foreclosure due to variations in how courts dealt with borrowers during FCP conferences (Foreclosure Conference Part). Obviously, unproductive settlement conferences were surely to blame as well.
One of the more important revisions revolves around "bad faith". Now that the courts have somewhat addressed this issue and provided some much needed direction we can hopefully see both parties (especially the banks) come to the table ready to settle. And, surprisingly it is sometimes the borrower who behaves as if they do not want to save their homes. I believe though, this is more due to frustration than anything else. Most of these "bad faith" issues revolve around lenders sending in per diem attorneys to conferences with little to no information regarding the case. Along with the banks invoking the famous "phantom investor restrictions" excuse. Clearly, this makes it impossible to settle. A tactic long used by the banking industry. Which when you think about it makes no sense. Aren't banks in the business of collecting money, not properties??
And, finally the most problematic issue we see is the failure to answer the summons and complaint. Unfortunately, many borrowers mistakenly believed that showing up in court and providing the bank with loan modification documents is the same as filing a written answer. The problem here is the borrower usually discovers after their case is removed from FCP that they failed to file an answer. Thankfully, the court will now address this problem by advising the homeowner at the first conference of the need to file an answer. Time to answer is limited though to 30 days from the initial FCP appearance. Clearly, the borrower must have a valid reason for not answering the summons and complaint.
Since their inception in 2009, settlement conferences under New York's judicial residential foreclosure conference process, the mandatory mediation program New York enacted in response to the foreclosure crisis, have allowed thousands of New York homeowners to achieve settlements and loan modifications, thereby averting foreclosures and sparing New York's communities their adverse effects. But many homes have been needlessly lost to foreclosure because of unproductive settlement conferences, with erratic implementation of the law leading to dramatic variations in the efficacy of the conferences (see Divergent Paths: The Need For More Uniform Standards and Practices in New York State's Residential Foreclosure Conference Process (New Yorkers for Responsible Lending), available at http://www.legalservicesnyc.org/storage/PDFs/divergent paths.pdf).
Legislation enacted in the waning hours of the 2016 session included significant changes to the foreclosure conference process. These amendments fill many of the gaps that the original legislation left open, so there is now hope that the settlement conference law will be more rigorously implemented in all jurisdictions, with uniform consequences to deter its violation, and the legislature's intent to prevent avoidable foreclosures and encourage home-saving loan modification solutions more effectively implemented across New York State. The amendments clarify the courts' obligation to ensure a meaningful negotiation process that prevents avoidable foreclosures by clarifying the obligations to appear with required information and authority, defining the good faith negotiation standard, detailing the remedies when the negotiation process is subverted, and preserving homeowners' ability to defend foreclosure actions on the merits, among other changes.
CPLR 3408 was enacted in 2008 and amended in 2009. It provides for mandatory residential foreclosure settlement conferences at which the parties are encouraged to negotiate, at face-to face court-supervised settlement conferences, foreclosure-avoiding solutions such as loan modification agreements (CPLR 3408(a), (f)). It requires parties appearing at conferences to appear with authority to dispose of the case (CPLR 3408(c)), and requires the courts to provide notice to the parties of the scheduling of the conference and the documents to be brought to the conference (CPLR 3408(e)).
Although CPLR 3408(f) presently expresses a preference for home-saving loan modifications, specifying that "the plaintiff and defendant shall negotiate in good faith to reach a mutually agreeable resolution, including a loan modification, if possible," for some homeowners other options such as "deeds in lieu of foreclosure" or "short sales" are more viable.
Some courts denied defendants settlement conferences based on a determination that the homeowners could not qualify for a loan modification, depriving homeowners of the opportunity to avoid foreclosure with a negotiated settlement as the Legislature intended. The amendments clarify that other loss mitigation options, not just loan modifications, are proper subjects of settlement conferences (CPLR 3408(a)).
Following amendment in 2009, the law imposed an affirmative obligation to negotiate "in good faith" to achieve such loan modifications, if possible (CPLR 3408(f)), but the law left "good faith negotiation" undefined, and prescribed no remedies when that standard is violated, leaving the courts to devise their own, sometimes idiosyncratic, definitions of good faith and to craft remedies when parties did not fulfill the mandate to negotiate in good faith. The recent amendments fill some of the gaps left by the original law.
The amendments adopt a good faith definition evolved from case law, stating that it "shall be measured by the totality of the circumstances." Courts determining good faith shall now consider: (1) compliance with the requirements of CPLR 3408 and applicable court rules, orders or directives of the court or its designees; (2) compliance with applicable mortgage servicing laws, rules or regulations and loss mitigation standards; and (3) conduct consistent with efforts to reach a mutually agreeable resolution, including avoiding unreasonable delay, appearing at conferences with authority to settle, avoiding prosecution of foreclosure proceedings while loss mitigation applications are proceeding (known as "dual tracking"), and providing accurate information to the court and parties (CPLR 3408 (f)).1 In light of some courts' reluctance to consider conduct preceding the formal start of settlement conferences when assessing good faith, the reference to dual tracking is significant, because it by definition authorizes consideration of conduct preceding the settlement conference process.
The amendments provide additional guidance about other settlement conference requirements. CPLR 3408(c) clarifies that any party's representative at the conference must appear with authority to dispose of the case. In the past, plaintiffs routinely appeared by per diem lawyers or representatives lacking required authority or information needed for meaningful negotiations. As a result, the settlement conference process is often needlessly protracted. See Stalled Settlement Conferences: Banks Frustrate New York's Foreclosure Settlement Conferences, April 29, 2014, available at http://nylawyer.nylj.com/adgifs/decisions14/050214report.pdf.
The amendment revises the language to make the appearance with authority requirement applicable to all representatives appearing at conferences. Also, while the original statute allowed only plaintiff's representative to appear telephonically or by video conference, as amended, either party's representative may be permitted to appear by video or telephone.
The amendments also add stronger language concerning the obligation to bring required information needed for meaningful settlement negotiations to conferences, for both defendants and plaintiffs (CPLR 3408(e). The amendments require plaintiffs' representatives to appear with a summary of the status of the plaintiffs' evaluation of any pending loan modification or loss mitigation applications, including a list of outstanding items required for completion of the application; an expected date for completion of the review of the application; and, if the application was denied, a denial letter or other document explaining the basis for denial and documentation supporting denials.
Plaintiffs' invocation of phantom investor restrictions, and refusals to seek waiver of such restrictions as is required by the federal Home Affordable Modification Program (HAMP) governing most loan servicers, has been an impediment to settlements and has led to much litigation concerning failure to negotiate in good faith,2 so the requirement that plaintiffs supply this back-up for modification denials provides greater transparency and should prevent litigation on these issues.
Addressing the statute's failure to specify a remedy for violation of the statute,3 the amendments provide a process for adjudicating disputes under the statute and enumerate prescribed remedies for its violation. A new section, CPLR 3408(i), empowers the court to determine good faith and order remedies either on motion or sua sponte, on notice, and also provides that referees, judicial hearing officers or other court staff may hear and report findings of fact and conclusions of law, and may make reports and recommendations for relief to the court. New subsections (j) and (k) enumerate remedies when both plaintiffs and defendants fail to negotiate in good faith.
CPLR 3408(j) mandates that when plaintiffs fail to negotiate in good faith, the court shall, at a minimum, toll interest and fees during any undue delay caused by the plaintiff, codifying the most commonly granted remedy under the case law construing CPLR 3408(f).4 The court may also compel production of documents requested during conferences, impose a civil penalty not to exceed $25,000, and award any other relief deemed just and proper (CPLR 3408(j)).
For defendants who fail to negotiate in good faith, CPLR 3408(k) specifies that the court shall remove the case from the conference calendar, but cautions that the court shall take into account "equitable factors," including whether the defendant was represented by counsel. This is important recognition of the disparity in bargaining power at settlement conferences, where foreclosing lenders are among the world's largest financial institutions and are always represented by counsel, while defendants are among the most vulnerable, and often are left to fend for themselves without access to counsel or understanding of the court proceedings in which they find themselves.
Assistance for Homeowners
Foreclosure actions historically proceeded on default in most cases, with no homeowner defendant participation. With the advent of settlement conferences, defendants have become participants in the process, as homeowners lacking access to counsel or the wherewithal to answer a complaint are nonetheless able to—and do—appear in court for settlement conferences when they receive notice from the court of a scheduled conference date.5 But homeowners who have participated in conferences and believed they had "answered" by attempting to negotiate a settlement in court and complying with onerous application processes and documentation requests from their mortgage servicers have, upon exhaustion of settlement conferences, been prevented by the courts from submitting answers and litigating their cases on the merits.6 The amendments address that unintended problem.
CPLR 3408(l) now obligates the court, at the first settlement conference, to advise the defendant of the requirement to answer the complaint, to explain what "answering" a complaint entails, that the ability to contest the foreclosure and assert defenses may be lost if an answer is not interposed, and to provide information about available resources for assistance. Also, a new Section 3-a of RPAPL 1303 directs the Department of Financial Services to publish a Consumer Bill of Rights detailing the rights and responsibilities of parties to foreclosure proceedings, which the court must provide to foreclosure defendants at the first settlement conference, pursuant to CPLR 3408(l).
A new subsection (m) of CPLR 3408 overrules much of the appellate case law effectively barring non-answering defendants who participated in settlement conferences from vacating defaults and interposing late answers, providing that a defendant who has defaulted in answering but appears at settlement conferences is presumed to have a reasonable excuse for the default and shall be permitted to serve and file an answer, without any substantive defenses deemed waived, within 30 days of the initial appearance at a settlement conference, and with the defendant's default being deemed vacated upon service of such late answer (CPLR 3408(m)). This will spare the courts adjudication of motions for leave to vacate defaults and serve late answers, which currently flood the dockets of both the trial and intermediate appellate courts and will better implement the preference of disposition of cases on the merits.
Subsection (m) of CPLR 3408 also codifies existing practice under the Uniform Court Rules (Uniform Rules for the Supreme Court and the County Court §202.12-a (c) (7)) specifying that motions shall be held in abeyance while the settlement conference process is ongoing, except for motions concerning compliance with CPLR 3408 or its implementing rules. This makes clear that parties participating in the settlement conference process have redress for violations of the settlement conference law even if other motion practice pertaining to the case is held in abeyance (and even if they have not answered the complaint).