New York Department of Financial Services Offers Guidance On Banking Law 9-X Print PDF

On June 17, 2020, Governor Andrew Cuomo signed into law Banking Law 9-x requiring New York regulated mortgagors and mortgage servicers to provide forbearances on residential mortgage loans for up to 180 days where the mortgagor has suffered a financial hardship due to the COVID-19 pandemic and has requested the forbearance.

A regulated institution is required to enter into a forbearance with a requesting qualified mortgagor who, on or after March 7, 2020 and until the end of the state of emergency: (1) is in arrears; (2) is in a trial period plan; or (3) has applied for loss mitigation. The Department of Financial Services (”DFS”) has released a FAQ providing further guidance as to the obligations of regulated institutions under Banking Law 9-x. Below is a detailed discussion of the FAQ.

CRITERIA FOR DETERMINING HARDSHIP: The FAQ does not establish specific criteria for demonstrating hardship. Instead, the FAQ states that “the purpose of Section 9-x is to help homeowners who, as a result of COVID-19, have suffered a ‘financial hardship’ that may make it difficult for them to pay their mortgage and other living expenses.”

Standards may include “borrower’s financial resources, payment history and current circumstances.” DFS “encourages” institutions to “take a reasonable approach in establishing such standards and criteria to help those who are facing financial resource constraints due to COVID-19.”

Regulated institutions are not required to request documents in advance of granting the forbearance. Thus, the institution may approve a forbearance over the phone and then request the confirming paperwork be sent.

TYPE OF MORTGAGES TO WHICH BANKING LAW 9-X APPLIES: The Statute applies only to a residential mortgage loan, including a home equity line of credit, on a 1 to 4 family property that is the primary residence of the borrower. This includes co-ops and condominiums. Section 9-x does not apply to vacation homes, investment properties that do not meet the aforementioned criteria, or commercial/industrial loans.

LOANS IN DEFAULT OR FORECLOSURE PRIOR TO MARCH 7, 2020: Forbearance relief is not limited to loans that were current as of March 7, 2020. Loans that were accelerated or already in foreclosure prior to March 7, 2020, however, are not subject to the forbearance requirements. Thus, regulated institutions are required to offer forbearance on loans that were already in default as of March 7, 2020, but not yet in foreclosure or accelerated, where the borrower can show financial hardship as a result of the pandemic.

ESCROW UNDER THE FORBEARANCE AGREEMENT: “All monthly payments due with respect to the mortgage” must be forborne, including escrow payments for taxes and insurance. The FAQ further states that the “institution cannot require a borrower to remit such funds to the regulated institution or to make such payments to third parties.”

FORBEARANCE TERM: Regulated institutions must grant the forbearance “for a period up to 180 days”, and extend it for an additional 180 days if the borrower requests and demonstrates an ongoing COVID-19 hardship.

The borrower has the discretion to request a shorter forbearance period. The lender, however, is not permitted to split the potential 360 days of forbearance relief into multiple periods shorter than 180 days so as to require the borrower to demonstrate a current hardship at the beginning of each period.

FORBEARANCES UNDER EXECUTIVE ORDER 202.9: On March 21, 2020, Governor Cuomo issued Executive Order 202.9 (“EO 202.9”), deeming it an unsound business practice to deny a forbearance of up to 90 days to any person suffering a hardship due to the pandemic. If a borrower received a forbearance under EO 202.9, the institution is required to extend it to 180-days at the borrower’s request. The institution may require the borrower demonstrate an ongoing COVID-19 hardship to qualify for the extended forbearance.

The FAQ directs that “when discussing the repayment options on the initial forbearance, the regulated institution should discuss with the borrower the option to extend the forbearance pursuant to Section 9-x.” The 180-day forbearance under Banking Law 9-x shall have commenced to run on the date the EO 202.9 forbearance was granted. A borrower under an EO 202.9 forbearance is entitled, at their request, to repay the forbearance under one of the three repayment options listed in Banking Law 9-x(3).

LOANS IN FORBEARANCE PRIOR TO MARCH 7, 2020: Borrowers already in forbearance prior to March 7, 2020 are entitled to additional forbearance under Section 9-x. In calculating the required 180-day period for the forbearance, the lender is only allowed to include the time under which the loan was in forbearance from March 7, 2020 onward. For example, if a borrower entered into a 60-day forbearance on February 1, 2020, the lender cannot apply the 35 days the loan was in forbearance between February 1[1] and March 6 in calculating the 180-day forbearance period.

DENIAL OF FORBEARANCE: Banking Law 9-x(6) provides that “the obligation to grant the forbearance relief required by this section shall be subject to the regulated institution having sufficient capital and liquidity to meet its obligations and to operate in a safe and sound manner.” If the institution is unable to do so, it must notify, and provide certain information to, DFS within five days of its determination. The FAQ expounds on this notice requirement to require a regulated institution to notify DFS if it denies a forbearance for any reason. In addition, the regulated institution should advise the borrower of the right to file a complaint with DFS by visiting DFS’s website at www.dfs.ny.gov.

REPAYMENT: Banking Law 9-x(3) allows a mortgagor to select one of three options for repaying the loan:

• Extend the term of the loan for the number of months the loan was in forbearance. The institution is not allowed to capitalize the interest due as part of each monthly forborne payment and charge interest on such capitalized amount. Nor may the institution charge any late fees or penalties. At the end of the forbearance period, the borrower will resume their payments under the existing amortization schedule, and repay the forborne amount via equal monthly installments during the extended term of the loan.
  
  
• Monthly payments of the arrears, with the amount to be spread out in even increments for the remaining term of the loan. The institution may not charge interest on the forborne amount.

• Loan modification. The institution must ensure that modifications are affordable and sustainable. If a borrower declines a loan modification, the institution “must evaluate the borrower’s reason for declining to accept the loan modification offered to determine whether there are circumstances the regulated institution did not consider in its loan modification determination.” If the regulated institution determines that the borrower’s rejection of an offered loan modification is unreasonable it must simultaneously advise the mortgagor of its determination and inform the mortgagor that they may file a complaint with the Department at dfs.ny.gov.

If the parties are unable to agree on a modification, the institution must offer to defer the forbearance amount into a non-interest bearing balloon note due at the maturity of the loan or when the loan is satisfied through a refinance or sale. If a borrower subsequently defaults on the loan, and it is accelerated, the institution may also accelerate the balloon note.

Lenders must notify borrowers of the three options, and are prohibited from prioritizing or encouraging borrowers to select one repayment option over another.

CLOSING THOUGHTS: In conclusion, while the FAQ offers significant guidance on the workings of Banking Law 9-x, it also expands the scope of what is required by regulated institutions under Banking Law 9-x and leaves material gaps. For example, the FAQ requires institutions to take additional steps not set forth in Banking Law 9-x when a borrower rejects an offered loan modification, and contains additional notice requirements to DFS when rejecting a forbearance application.

Likewise, the lack of clarification as to the factors to be considered in determining hardship makes it difficult for lenders and mortgage service providers to feel confident that they have established standards that will withstand regulator scrutiny.

The FAQ and Banking Law 9-x are also silent as to the effect of a Banking Law 9-x forbearance on the statute of limitations – an issue that is frequently litigated in New York. A forbearance under Banking Law 9-x should be considered a statutory stay to toll the statute of limitations under CPLR 204(a)) (“[W]here the commencement of an action has been stayed by a court or by statutory prohibition, the duration of the stay is not a part of the time within which the action must be commenced”).

[1]  2020 is a leap year.