The Home Equity Theft Prevention Act
Encyclopedia
NY RPL §265-a, the Home Equity Theft Prevention Act ("HETPA") was passed in response to a recent scam which targeted homeowners in financial distress
(often elderly or unsophisticated homeowners). The scam has taken many forms, but it usually consists of the purchaser ("equity purchaser") convincing a homeowner who was in default or foreclosure ("equity seller") to sell on the promise (often oral) that the equity purchaser could save the equity seller's home (e.g., transfer it to me and then I will lease it back to you for a year or transfer it to me and then I will allow you to make payments on the amount you are behind and transfer the property back once you pay it off). However, once the transfer was made, the equity seller would then sell off the property and cash in on the equity seller's equity. For example, suppose an equity seller owned a home worth $300,000 with a mortgage of $250,000 on which the equity seller was in default. The equity purchaser would come in and say, "I can help save you from all the costs of the foreclosure process. Just transfer it to me and I will take care of it for you." The equity purchaser would then sell the home at market value
and keep the $50,000.
A contract is covered if it is either (i) currently in foreclosure or on a tax lien
sale list; or (ii) the owner is in default (behind on mortgage payments by 2+ months) and the sale involves a reconveyance agreement.
A Reconveyance Arrangement has two elements: (i) A sale, mortgage, lien, encumbrance or any other method which allows an “equity purchaser” to obtain legal or equitable title to all or part of the property; and (ii) Some agreement or promise to the “equity seller” that he/she can regain ownership of the property (e.g., the purchase agreement, option to purchase, lease, etc.)
There are some key requirements for a valid reconveyance agreement. The equity purchaser needs the equity seller’s permission to resell the property to anyone else for so long as the equity seller has a right to buy the property back.
Either (i) title to the property must eventually be reconveyed to the equity seller; or (ii) the equity purchaser must have paid seller at least 82% of the fair market value
of the property within 120 days of the eviction or voluntary relinquishment by the equity seller.
The equity purchaser must confirm that the equity seller has the “reasonable ability” to buy back the property and the deed must recite that the property is subject to reconveyance and the terms of the reconveyance arrangement.
The contract must contain the ENTIRE AGREEMENT between the parties and must meet the following format requirements:�
Contract must be fully completed (i.e., no blank spaces); Font size
equal to at least 12-point bold type
; In English or in both English or Spanish if Spanish is the primary language of the equity seller; Name, address and phone number
of the buyer; Address of the subject property; Consideration to be paid; List of all services that buyer has promised; Terms for payment of the consideration; Time at which possession of the property must be surrendered; Terms of any rental or lease agreement; Terms of any reconveyance agreement; Notice of right to cancellation in the immediate proximity of signature line and font in at least 14-point bold type (form in HEPTA); and Notice of cancellation form to be attached to the contract (form in HEPTA)
Any provision which purports to limit the liability of the equity purchaser shall be null and void. Inclusion of such a provision shall, at the option of the equity seller, render the covered contract void. Any provision which purports to require arbitration shall be void at the option of the equity seller. Any waiver of any or all HEPTA shall be void and unenforceable as contrary to the public policy.
after the contract is executed, the equity purchaser cannot: Accept a deed; Record any document with the county clerk; Transfer any interest in the residence; Pay the equity seller any consideration; Suggest that the equity seller waive his/her right to cancel or rescind.
The equity purchaser is prohibited from representing (directly or indirectly) that: Equity purchaser is an advisor or acting on behalf of the equity seller; Equity purchaser has certification that buyer actually does not have or that buyer is not a member of a licensed profession when he actually is a member of that profession; Equity purchaser is helping the equity seller “save” the residence, unless equity purchaser has a good faith
basis for such representation; or Equity purchaser is helping the equity seller in preventing a foreclosure unless the equity purchaser has a good faith basis for such representation
An equity purchaser shall make no false or misleading statement regarding: The value of the property; The amount of proceeds the equity seller will receive after a foreclosure sale
; The timing of the judicial foreclosure process; Any contract term
The equity seller’s rights and obligations; The nature of any document which the equity purchaser induces the equity seller to sign; Any other false or misleading statement concerning the sale of the property or concerning a reconveyance arrangement
The equity purchaser is prohibited from making any contract that takes unconscionable advantage of the equitable seller.
- Generally, a violation of the contractual requirements or any of the prohibited acts in Subdivision 7 makes the conveyance voidable and may be rescinded within 2 years of the date the deed was recorded. The statute then gives the equity purchaser (or its successor) twenty days to reconvey the property on the condition of repayment of any consideration paid to the equity seller. HEPTA does not affect the rights of a bona-fide purchaser or encumbrancer for value if their conveyance occurred before the recording of the notice of rescission.
6-Year Statute of Limitations
- Within 6 years, an equity seller may bring an action for the recovery of damages or equitable relief against an equity purchaser for a violation of HEPTA. A court may award actual damages plus reasonable attorneys’ fees and costs. The court is also authorized to award equitable relief of up to 3 times the actual damages.
There are also criminal penalties for violation of prohibited behavior listed in Subdivision 7:
Violation “with intent to defraud” = class E felony, subject to imprisonment and a fine of not more than $25,000. “Knowingly violates” = Class A misdemeanor, subject to a fine of not more than $25,000 and imprisonment in accordance with the penal law
, or both.
A mortgage broker
or bank making a loan with knowledge that the equity purchaser is not complying with HEPTA is subject to penalties under Banking Law §595-a. These criminal penalties are in addition to the risk that the equity seller will rescind and thereby jeopardize the encumbrancer’s interest in the property.
(i) To use, and then actually uses, the property as his/her primary residence
;
(ii) By a deed from a referee in a foreclosure sale;
(iii) At any sale of property authorized by statute;
(iv) By order or judgment of any court;
(v) From a spouse, or from a parent, grandparent, child, grandchild or sibling of such person or such person’s spouse;
(vi) As a not-for-profit
housing organization or as a public housing agency; or
(vii) As a bona fide purchaser
or encumbrancer for value (e.g. a lienholder)
What is a Bona Fide Purchaser? One who (i) acts in good faith; (ii) purchases for valuable consideration
or provide a mortgage; (iii) has no notice of the equity seller’s continuing right to, or equity in, the property prior to the acquisition of title or encumbrance; (iv) has no notice of any violation of HETPA by the equity purchaser as related to the property. Generally, this is one who either purchases from or provides a loan to the equity purchaser.
An equity purchaser has a defense to a violation of Subdivision 7 if he/she (i) acted in good faith; (ii) proves that the violation was not intentional (iii) proves that the violation resulted from a bona fide error despite procedures adapted to avoid such errors; (iv) notifies the equity seller within ninety days of the contract date of the compliance failure; Makes appropriate restitution within ninety days of the contract date.
Examples of bona fide errors include clerical, calculation, computer malfunction and programming, and printing errors. An error of legal judgment is NOT a bona fide error, nor is a failure to provide notices or other material information.
Financial distress
Financial distress is a term in Corporate Finance used to indicate a condition when promises to creditors of a company are broken or honored with difficulty. Sometimes financial distress can lead to bankruptcy...
(often elderly or unsophisticated homeowners). The scam has taken many forms, but it usually consists of the purchaser ("equity purchaser") convincing a homeowner who was in default or foreclosure ("equity seller") to sell on the promise (often oral) that the equity purchaser could save the equity seller's home (e.g., transfer it to me and then I will lease it back to you for a year or transfer it to me and then I will allow you to make payments on the amount you are behind and transfer the property back once you pay it off). However, once the transfer was made, the equity seller would then sell off the property and cash in on the equity seller's equity. For example, suppose an equity seller owned a home worth $300,000 with a mortgage of $250,000 on which the equity seller was in default. The equity purchaser would come in and say, "I can help save you from all the costs of the foreclosure process. Just transfer it to me and I will take care of it for you." The equity purchaser would then sell the home at market value
Market capitalization
Market capitalization is a measurement of the value of the ownership interest that shareholders hold in a business enterprise. It is equal to the share price times the number of shares outstanding of a publicly traded company...
and keep the $50,000.
Covered Contract
The Act aims to prevent this scam by adding additional protections to those contracts that are considered "covered."A contract is covered if it is either (i) currently in foreclosure or on a tax lien
Tax lien
A tax lien is a lien imposed by law upon a property to secure the payment of taxes. A tax lien may be imposed for delinquent taxes owed on real property or personal property, or as a result of failure to pay income taxes or other taxes....
sale list; or (ii) the owner is in default (behind on mortgage payments by 2+ months) and the sale involves a reconveyance agreement.
A Reconveyance Arrangement has two elements: (i) A sale, mortgage, lien, encumbrance or any other method which allows an “equity purchaser” to obtain legal or equitable title to all or part of the property; and (ii) Some agreement or promise to the “equity seller” that he/she can regain ownership of the property (e.g., the purchase agreement, option to purchase, lease, etc.)
There are some key requirements for a valid reconveyance agreement. The equity purchaser needs the equity seller’s permission to resell the property to anyone else for so long as the equity seller has a right to buy the property back.
Either (i) title to the property must eventually be reconveyed to the equity seller; or (ii) the equity purchaser must have paid seller at least 82% of the fair market value
Fair market value
Fair market value is an estimate of the market value of a property, based on what a knowledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the market. An estimate of fair market value may be founded either on precedent or...
of the property within 120 days of the eviction or voluntary relinquishment by the equity seller.
The equity purchaser must confirm that the equity seller has the “reasonable ability” to buy back the property and the deed must recite that the property is subject to reconveyance and the terms of the reconveyance arrangement.
Contractual Requirements
Once a contract is determined to be covered by the Act, there are some strict contractual requirements that must be met:The contract must contain the ENTIRE AGREEMENT between the parties and must meet the following format requirements:�
Contract must be fully completed (i.e., no blank spaces); Font size
Point (typography)
In typography, a point is the smallest unit of measure, being a subdivision of the larger pica. It is commonly abbreviated as pt. The point has long been the usual unit for measuring font size and leading and other minute items on a printed page....
equal to at least 12-point bold type
Emphasis (typography)
In typography, emphasis is the exaggeration of words in a text with a font in a different style from the rest of the text—to emphasize them.- Methods and use :...
; In English or in both English or Spanish if Spanish is the primary language of the equity seller; Name, address and phone number
Telephone number
A telephone number or phone number is a sequence of digits used to call from one telephone line to another in a public switched telephone network. When telephone numbers were invented, they were short — as few as one, two or three digits — and were given orally to a switchboard operator...
of the buyer; Address of the subject property; Consideration to be paid; List of all services that buyer has promised; Terms for payment of the consideration; Time at which possession of the property must be surrendered; Terms of any rental or lease agreement; Terms of any reconveyance agreement; Notice of right to cancellation in the immediate proximity of signature line and font in at least 14-point bold type (form in HEPTA); and Notice of cancellation form to be attached to the contract (form in HEPTA)
Any provision which purports to limit the liability of the equity purchaser shall be null and void. Inclusion of such a provision shall, at the option of the equity seller, render the covered contract void. Any provision which purports to require arbitration shall be void at the option of the equity seller. Any waiver of any or all HEPTA shall be void and unenforceable as contrary to the public policy.
5-Day Right of Recission
The Act also gives the equity seller a five-day right to cancel the contract; a “cooling off” period. Once an equity seller cancels the contract by sending the cancellation form or otherwise indicating such an intention, the equity purchaser must return all original contracts and other documents signed by the equity seller within 10 days, as well as any fee or other consideration received by the equity purchaser from the equity seller. Cancellation of the contract releases the equity seller of all obligations to pay fees to the equity purchaser.Prohibited Behavior–Subdivision 7
Before Midnight on the 5th business dayBusiness day
A business day is considered every official working day of the week. Another common term is working day. Typically, these are the days between and including Monday to Friday and do not include public holidays and weekends....
after the contract is executed, the equity purchaser cannot: Accept a deed; Record any document with the county clerk; Transfer any interest in the residence; Pay the equity seller any consideration; Suggest that the equity seller waive his/her right to cancel or rescind.
The equity purchaser is prohibited from representing (directly or indirectly) that: Equity purchaser is an advisor or acting on behalf of the equity seller; Equity purchaser has certification that buyer actually does not have or that buyer is not a member of a licensed profession when he actually is a member of that profession; Equity purchaser is helping the equity seller “save” the residence, unless equity purchaser has a good faith
Good faith
In philosophy, the concept of Good faith—Latin bona fides “good faith”, bona fide “in good faith”—denotes sincere, honest intention or belief, regardless of the outcome of an action; the opposed concepts are bad faith, mala fides and perfidy...
basis for such representation; or Equity purchaser is helping the equity seller in preventing a foreclosure unless the equity purchaser has a good faith basis for such representation
An equity purchaser shall make no false or misleading statement regarding: The value of the property; The amount of proceeds the equity seller will receive after a foreclosure sale
Foreclosure
Foreclosure is the legal process by which a mortgage lender , or other lien holder, obtains a termination of a mortgage borrower 's equitable right of redemption, either by court order or by operation of law...
; The timing of the judicial foreclosure process; Any contract term
The equity seller’s rights and obligations; The nature of any document which the equity purchaser induces the equity seller to sign; Any other false or misleading statement concerning the sale of the property or concerning a reconveyance arrangement
The equity purchaser is prohibited from making any contract that takes unconscionable advantage of the equitable seller.
Remedies
2-Year Right of RescissionRescission
In contract law, rescission has been defined as the unmaking of a contract between parties. Rescission is the unwinding of a transaction. This is done to bring the parties, as far as possible, back to the position in which they were before they entered into a contract .-In court:Rescission is an...
- Generally, a violation of the contractual requirements or any of the prohibited acts in Subdivision 7 makes the conveyance voidable and may be rescinded within 2 years of the date the deed was recorded. The statute then gives the equity purchaser (or its successor) twenty days to reconvey the property on the condition of repayment of any consideration paid to the equity seller. HEPTA does not affect the rights of a bona-fide purchaser or encumbrancer for value if their conveyance occurred before the recording of the notice of rescission.
6-Year Statute of Limitations
Statute of limitations
A statute of limitations is an enactment in a common law legal system that sets the maximum time after an event that legal proceedings based on that event may be initiated...
- Within 6 years, an equity seller may bring an action for the recovery of damages or equitable relief against an equity purchaser for a violation of HEPTA. A court may award actual damages plus reasonable attorneys’ fees and costs. The court is also authorized to award equitable relief of up to 3 times the actual damages.
There are also criminal penalties for violation of prohibited behavior listed in Subdivision 7:
Violation “with intent to defraud” = class E felony, subject to imprisonment and a fine of not more than $25,000. “Knowingly violates” = Class A misdemeanor, subject to a fine of not more than $25,000 and imprisonment in accordance with the penal law
Penal law
In the most general sense, penal is the body of laws that are enforced by the State in its own name and impose penalties for their violation, as opposed to civil law that seeks to redress private wrongs...
, or both.
A mortgage broker
Mortgage broker
A mortgage broker acts as an intermediary whose brokers mortgage loans on behalf of individuals or businesses.Traditionally, banks and other lending institutions have sold their own products. However as markets for mortgages have become more competitive, the role of the mortgage broker has become...
or bank making a loan with knowledge that the equity purchaser is not complying with HEPTA is subject to penalties under Banking Law §595-a. These criminal penalties are in addition to the risk that the equity seller will rescind and thereby jeopardize the encumbrancer’s interest in the property.
Exclusions
Those who acquire title as follows are excluded from HETPA:(i) To use, and then actually uses, the property as his/her primary residence
Primary residence
A person's primary residence is the dwelling where they usually live, typically a house or an apartment. A person can only have one primary residence at any given time, though they may share the residence with other people...
;
(ii) By a deed from a referee in a foreclosure sale;
(iii) At any sale of property authorized by statute;
(iv) By order or judgment of any court;
(v) From a spouse, or from a parent, grandparent, child, grandchild or sibling of such person or such person’s spouse;
(vi) As a not-for-profit
Non-profit organization
Nonprofit organization is neither a legal nor technical definition but generally refers to an organization that uses surplus revenues to achieve its goals, rather than distributing them as profit or dividends...
housing organization or as a public housing agency; or
(vii) As a bona fide purchaser
Bona fide purchaser
A bona fide purchaser referred to more completely as a bona fide purchaser for value without notice is a term used in the law of real property and personal property to refer to an innocent party who purchases property without notice of any other party's claim to the title of that property...
or encumbrancer for value (e.g. a lienholder)
What is a Bona Fide Purchaser? One who (i) acts in good faith; (ii) purchases for valuable consideration
Consideration
Consideration is the central concept in the common law of contracts and is required, in most cases, for a contract to be enforceable. Consideration is the price one pays for another's promise. It can take a number of forms: money, property, a promise, the doing of an act, or even refraining from...
or provide a mortgage; (iii) has no notice of the equity seller’s continuing right to, or equity in, the property prior to the acquisition of title or encumbrance; (iv) has no notice of any violation of HETPA by the equity purchaser as related to the property. Generally, this is one who either purchases from or provides a loan to the equity purchaser.
An equity purchaser has a defense to a violation of Subdivision 7 if he/she (i) acted in good faith; (ii) proves that the violation was not intentional (iii) proves that the violation resulted from a bona fide error despite procedures adapted to avoid such errors; (iv) notifies the equity seller within ninety days of the contract date of the compliance failure; Makes appropriate restitution within ninety days of the contract date.
Examples of bona fide errors include clerical, calculation, computer malfunction and programming, and printing errors. An error of legal judgment is NOT a bona fide error, nor is a failure to provide notices or other material information.