Going against state bankers, New York Gov. David A. Paterson has signed into law a measure that will allow prevailing homeowners in many foreclosure actions to claim attorney fees from lenders.
The Access to Justice in Lending Act, A1239/S2614, will put defendants in foreclosure proceedings on the same footing as lenders, who often include in mortgage documents the right to recoup reasonable attorney fees if they bring a successful action.
Supporters of the new requirement say that it will encourage attorneys to volunteer their services to homeowners facing foreclosure, many of them who cannot afford to hire their own lawyers. At the same time, they say the measure will give the homeowners leverage to negotiate concessions from lenders seeking to avoid the potential costs of litigation.
"At a time when not-for-profits and counselors are flooded with these cases, this is an important step in bringing parity for homeowners," the governor's office said in an e-mailed statement.
The new law, Real Property Law §282, provides that all mortgage agreements giving prevailing lenders the right to attorney fees, must be read to grant that right to borrowers as well. Although it goes into effect 60 days after its signing, it applies to all mortgages in effect on or after Oct. 20 and all proceedings begun on or after that date.
Assemblyman Rory Lancman, D-Queens -- who sponsored the bill with Senator Jeffrey Klein, D-Bronx -- said in an interview that it will help "restore integrity and fairness" to a foreclosure process shadowed by revelations that many banks and their attorneys have resorted to procedural shortcuts that deny homeowners their right to due process. The measure was signed on the same day Chief Judge Jonathan Lippman ordered lender attorneys to submit affirmations in all foreclosures attesting that they have made reasonable efforts to verify the facts in the documents they submit.
The law was opposed by the state Bankers Association in a memorandum to the governor drafted by Wilson, Elser, Moskowitz, Edelman & Dicker (NYLJ, July 9). The memo argued the bill was unconstitutional in its application to existing mortgages. It contended that the two most common laws used by homeowners to fight foreclosure, the federal Truth in Lending Act, 15 USC §1640, and the federal Fair Debt Collection Practices Act, 15 USC §1692k, already allowed the recovery of attorney's fees. And it complained that the bill's "broadly drafted" language could open up the possibility of homeowners being awarded attorney's fees to which they had no right.
Roberta Kotkin, general counsel and chief operating officer of the association, said in an interview after the governor signed the law that the organization stood by its criticisms. Moreover, she said the new requirement could increase the cost of mortgages to account for lenders' added risk.
"Now it's signed into law. Obviously we're going to honor it and work with it," she said.
But organizations representing homeowners have been enthusiastic about the bill.
"I do think the biggest benefit is the leverage [the new law] gives the homeowner in getting out of foreclosure with an affordable modification," said Meghan Faux, director of the foreclosure prevention project for South Brooklyn Legal Services, which is a part of Legal Services NYC.
There were 77,815 foreclosures pending in New York courts as of Oct. 12, a 50 percent increase from the beginning of the year. Legal Services NYC, in a memo to the governor supporting the law, said the demand for its services had mounted, and "because of our limited resources, we are able to represent only a fraction of low-income homeowners, even though many of them have meritorious claims and defenses to foreclosure."
The group argued that the proposal would allow a greater number of borrowers to obtain legal representation and create an incentive for lenders to resolve more cases early in the process.
And attorneys are becoming increasingly creative in challenging foreclosures as the process comes under more scrutiny. For example, they are questioning the ownership of mortgage notes that were shuffled from entity to entity during the securitization boom.
"With so many issues of standing being questioned, it seems both the availability and the range of potential defenses is much larger today than even a couple of weeks ago," said Michael Hickey, executive director of the Center for New York City Neighborhoods.
Lancman, an attorney, said the fees to homeowners' lawyers would likely be low in most cases -- ranging from a few thousand dollars to "low five figures" -- because skilled attorneys could determine problems with the lender's case early on. He said attorneys would not make a fortune from foreclosure cases, but the profits would be enough to justify picking up the most meritorious cases.
The new program is modeled after Real Property Law §234, a 1966 law that gave prevailing tenants the right to recoup attorney's fees whenever landlords include a fee provision in the lease. A 1995 Court of Appeals decision upheld the application of the law to leases signed before it became effective. Duell v. Condon, 84 NY 2d 773.
That ruling describes the purpose of the earlier fees provision as "to level the playing field between landlords and residential tenants, creating a mutual obligation that provides an incentive to resolve disputes quickly and without undue expense."
Moreover, it said that the law tended to discourage landlords from engaging in frivolous litigation aimed at harassing tenants.