Foreclosure Exposure

New York recently passed new legislation surrounding foreclosure law, but questions linger about how much it will help—or hurt—those it affects.

Wallet, safe and house in front of blue background

Lindsay Mesh Lotito and Zachary J. Manasia

February 20, 2023 12:00 AM

On December 30, 2022, Governor Kathy Hochul signed into law legislation that drastically changed the landscape of New York Foreclosure Law. The “Foreclosure Abuse Prevention Act” strengthens a borrower/mortgagor’s legal defense to knock out a foreclosure action on the grounds of the passing of the statute of limitations and codifies when a lender no longer has a right or remedy to collect a debt. The Foreclosure Abuse Prevention Act effectively extinguishes rights and remedies provided to mortgagees by the New York State Court of Appeals.

Ironically, the new law may actually deter lenders from entering into forbearance situations with defaulted borrowers for fear they will have waived their remedy to foreclose.

Presently, the Statute of Limitations to foreclose on a debt is six years from “acceleration” of the debt, or when the lender declares the entire sum of principal and interest due and owing. This sounds simple and straightforward; however, since the 2007-2008 Financial Crisis, the courts have been backlogged with foreclosure cases, and lines have become blurred as to when a debt was actually accelerated if, in a workout situation, it was de-accelerated (which would start the clock running again) and if a lender has a right to reinstitute an action.

Previously, the New York Court of Appeals, through a series of cases, created clear rules to enable mortgage lenders and borrowers to work together to take the borrower out of default and back into good standing under the terms of the mortgage after an event of default and acceleration of the loan amount. In Freedom Mortgage Corp. v. Engel, the court examined four cases on appeal to create hardline rules that state: (i) the parameters for a lawful acceleration of the debt by demanding immediate payment in full of the then outstanding principal at the time of default, thus triggering the statute of limitations period; and (ii) the parameters for a lawful revocation, or de-acceleration, of that valid acceleration. Ultimately, the analysis rests on what constitutes a clear and unequivocal, lawful acceleration or de-acceleration, which had implications for the statute of limitations.

In the first of the series of cases, the court relied on the established case law that a verified foreclosure complaint is valid as a clear and unequivocal act to accelerate the outstanding debt. In supplementing this precedent, the court held that a deficiency in the foreclosure complaint that “renders it unclear what debt was being accelerated” does not constitute a clear and unequivocal, lawful acceleration under foreclosure law. (Freedom Mortg. Corp. v. Engel, 37 N.Y.3d (2021)).

These precedents were applied first in Wells Fargo v. Ferrato, where the loan in question was modified after an initial default by increasing the loan amount and changing the interest rate. (Freedom Mortg. Corp. v. Engel, 37 N.Y.3d (2021)). Upon default on the modified loan, the lender attempted to accelerate the debt by commencing a foreclosure action but failed to attach the modified note and mortgage to the complaint, thus invalidating the acceleration, according to the court. Because the acceleration was deemed legally invalid, the court held the statute of limitations never commenced, and the plaintiff was able to commence a new action on the modified mortgage and outstanding loan balance.

Second, the court applied the rule to Deutsche National Trust Company v. Vargas, deciding that the default notice was not a clear and unequivocal acceleration because “the letter did not seek immediate payment of the entire, outstanding loan, but referred to acceleration only as a future event, indicating the debt was not accelerated at the time the letter was written.” (Freedom Mortg. Corp. v. Engel, 37 N.Y.3d (2021)).

Finally, the court applied the same legal framework to de-acceleration as it did to acceleration, that an unequivocal, overt act to de-accelerate must match the unequivocal, overt act to accelerate. The court said, “… when a bank effectuated an acceleration via the commencement of a foreclosure action, a voluntary discontinuance of that action—i.e., the withdrawal of the complaint—constitutes a revocation of that acceleration.” (Freedom Mortg. Corp. v. Engel, 37 N.Y.3d (2021)).

Ultimately, the practical effect of these rules allows for flexibility between the lender and borrower to return the parties to their pre-acceleration rights under the terms of the mortgage by de-acceleration after an event of default and acceleration. If the aforementioned sequence of events occurs and the lender allows the borrower to resume installment payments upon de-acceleration via a mortgage modification or otherwise, a subsequent default on the loan balance and a second acceleration will not be time-barred by the statute of limitations because the second action is brought for the payment of a new debt. Despite the practicality of the rulings by the Court of Appeals in Freedom Mortgage v. Engel, the legislature interpreted this flexibility as ripe for potential abuse by lenders.

Lenders will need to think carefully before unequivocally accelerating a loan so that the statute of limitations does not start running to their disadvantage."

As a result of these decisions, the New York legislature made sweeping changes to the Real Property Actions and Proceedings Law (“RPAPL”), the Civil Practice Laws and Rules (“CPLR”) and the General Obligations Law (“GOL”), including the Foreclosure Abuse Prevention Act.

In the RPAPL, section 1301 was amended so that no lender may file a second foreclosure action under the same mortgage without leave of court in which the first action was brought. Furthermore, the failure of a foreclosing lender to obtain leave of court will be a defense for the plaintiff in the second action and will automatically end the first action unless the defendant in the first action raises the same defense. Additionally, validly obtaining leave of court does not stop the statute of limitations from running. The final amendment to the section states that a lender cannot bring a second action to foreclose under the same mortgage if the first action has been adjudicated beyond the six-year statute of limitations.

Most changes affecting foreclosures were made in the CPLR. First, the legislature amended section 203, stating that once the statute of limitations starts to accrue by a valid acceleration, no party may unilaterally stop or reset the accrual. Second, section 205-a adds that a plaintiff may commence a second foreclosure action on the same mortgage within six months of the termination of the prior action, provided that the commencement is timely under the statute of limitations. However, the plaintiff may not commence the second action if the first action was terminated for voluntary discontinuance or de-acceleration. Third, section 213 states that a foreclosing lender cannot argue that a prior action brought by the lender did not validly accelerate the debt if the defendant raises a statute of limitations defense. The lender may assert this claim only in the instance of the prior action’s dismissal based on an express judicial determination that the acceleration was invalid. Finally, section 3217 was amended to add a section that voluntary discontinuance by stipulation or notice does not toll or reset the statute of limitations.

The final changes came to the GOL where two subdivisions were added to section 17-105 that supplement the amendments in the RPAPL and CPLR. First, subdivision four was amended to say that an express or implied acknowledgment, waiver or agreement shall not toll, postpone or reset the statute of limitations unless made in accordance with 17-105(1)-(3). Finally, subdivision 5 states a payment or part payment of the principal or a stipulation made in an action or proceeding of foreclosure does not affect the statute of limitations or stop its accrual.

These particular provisions undo the court’s application of the clear and unequivocal rule for de-acceleration in Freedom Mortgage v. Engel, thus preventing the parties from utilizing the flexibility of their contractual rights under the mortgage. Effectively, once the initial acceleration is brought, the statute of limitations accrues and cannot be stopped. This will result in lenders having to follow through on foreclosure actions once the debt is accelerated, preventing lenders from working with borrowers to return the parties to their pre-acceleration rights.

The changes to the New York laws may benefit borrowers in that once an action commences, the statute of limitations starts running, but could be a detriment in that lenders may not be so willing to withdraw a complaint and work out a modification of the loan. Lenders will need to think carefully before unequivocally accelerating a loan so that the statute of limitations does not start running to their disadvantage.

As a result, we anticipate lenders will be more reluctant to enter into a forbearance, or any type of workout arrangement with a defaulted borrower, unless there is a clear, mutually agreed upon, court-recognized de-acceleration of the debt. Lenders may require more, and the threshold for borrowers will be higher in order to be worth the risk. The question arises whether the Foreclosure Abuse Prevention Act helps or hurts the individuals it is meant to serve.

Lindsay Mesh Lotito is a Banking & Finance and Real Estate partner at Forchelli Deegan Terrana LLP in Uniondale, NY. She was most recently included in Best Lawyers: Ones to Watch® in America for 2023 in Banking and Finance Law.

Zachary J. Manasia is an associate in the Banking & Finance and Real Estate practice groups at Forchelli Deegan Terrana LLP.

Headline Image: iStock/Phiwath Jittamas

Related Articles

Inflation Escalation

by Ashley S. Wagner

Inflation and rising costs are at the forefront of everyone’s mind as we enter 2023. The current volatile market makes it more important than ever to understand the rent escalation clauses in current and future commercial lease agreements.

Suited figure in front of rising market and inflated balloon

The Commercial Conundrum

by Brion J. Kirsch

Even prior to 2020, commercial real estate was experiencing setbacks. Coupled with the challenges of new working environments and less need for commercial spaces, landlords are left with increasingly vacant buildings to fill. Below is a primer on how to move forward.

Pile of old chairs and office equipment with blue backdrop

Big Updates in the Big Apple

by Nina M. Roket and Thomas D. Kearns

A Post-COVID-19 update on the commercial market for landlords, building investors and retail developers in New York.

Abstract skyscrapers and buildings in multi-color

Electric Vehicles and Zoning Laws

by Aaron S. Evenchik and Robert A. Cooper

As electric vehicles become more common among drivers, so too will charging stations, both in abundance and location. Where these stations are placed, though, could present several challenges and potential impacts on zoning laws.

Fuel pump and electric car charger with red and blue backdrop

Rising Transfer Taxes

by Angus C. Beverly

Transfer taxes in California are becoming a statewide trend with potentially national implications. Here is a breakdown of the effects in several cities.

State of California in orange with city in backdrop

A Look Ahead

by Jarred Boyer

The future of U.S. rental markets may seem uncertain as we continue to grapple with the after-effects of COVID-19, but renters and landlords alike can look toward a more hopeful few years as inflation already begins to recede and the promise of stabilization is on the horizon.

Paper houses and crane sitting amongst coins and money

Does the Crystal Ball Predict a Fall?

by Kathleen Bernardo

In the post-pandemic climate, economists are making many predictions about what’s to come for the housing market. But one real estate lawyer with decades of experience says that this reset was crucial and not necessarily indicative of the doom and gloom we thought we were facing.

Multi-colored houses with purple backdrop

Brace for Impact

by Ray Young, Jr. and Scott Hetrick

The 2021 independent contractor rule might have major impacts on employers and upend compliance issues, especially as the DOL’s definition of an independent contractor is about to change.

Silhouetted figure holding the hands of a clock

Employers Are Budding Heads on Marijuana in the Workplace

by M. Tae Phillips and Melanie C. Cormier

As employment lawyers, we receive many questions from employers navigating marijuana legalization. Below, we answer the top three most asked questions.

Statue of Liberty holding a marijuana joint

Noncompete Extinct

by Mark W. Bakker

The Federal Trade Commission has proposed a blanket ban on noncompete agreements that could radicalize post-termination protections afforded to employers.

Dark figure walking up red staircase to open door

Rights and Wrongs

by Shannon Pierce

Antidiscrimination enforcement agencies, both federal and state, are likely going to be highly active in the next five years. Are Nevada businesses ready?

Faces of women overlapping in multi-color

Withstand the Ban

by Jeffrey A. Calabrese and Kirby Black

With the recent Federal Trade Commission’s announcement proposing a complete ban on noncompete agreements, we offer advice to companies moving forward.

Figure out of frame signing a non-descript contract

The Top 7 Things to Know Before Filing for Divorce

by Best Lawyers

Consulting with a qualified divorce attorney can help you understand your rights and obligations when filing for divorce. Here are 7 things you should know.

Two golden wedding bands with a crack down the middle

5 Mistakes to Avoid In a Slip and Fall Lawsuit

by Best Lawyers

Learn how to avoid common mistakes during a slip and fall lawsuit. Report the accident, seek medical attention, gather evidence and speak to an attorney.

Yellow caution sign with blue wet floor background


Leadership and Commitment

by Justin Smulison

Malone Law leader and 2016 Medical Malpractice Law – Plaintiffs “Lawyer of the Year” Adam Malone discusses how his success transcends the courtroom and helps strengthen public and legal communities.

Suited man standing with arm resting on table

"Lawyer of the Year"

Woman with suit and blonde hair smiling

Heather Clauson Haughian

Privacy and Data Security Law

Atlanta, GA


Trending Articles

Whistleblower Legislation Opens the Doors for More International Claims

by Justin Smulison

An Anti-Money Laundering Act, part of a recently passed Omnibus Budget in the U.S. Senate, is expanding protection for whistleblowers both domestically and internationally.

Shadow figure in spotlight against red and blue brick wall

The Best Lawyers in South Africa™ 2023

by Best Lawyers

Best Lawyers proudly announces lawyers recognized in South Africa for 2023.

South African flag

Announcing the 2023 The Best Lawyers in America Honorees

by Best Lawyers

Only the top 5.3% of all practicing lawyers in the U.S. were selected by their peers for inclusion in the 29th edition of The Best Lawyers in America®.

Gold strings and dots connecting to form US map

Best Lawyers Voting Is Now Open

by Best Lawyers

Voting has begun in several countries across the globe, including the United States, the United Kingdom and Europe. Below we offer dates, details and answers to voting-related questions to assist with the voting process.

Hands holding smartphone with five stars above phone

Best Lawyers: Ones to Watch in America for 2023

by Best Lawyers

The third edition of Best Lawyers: Ones to Watch in America™ highlights the legal talent of lawyers who have been in practice less than 10 years.

Three arrows made of lines and dots on blue background

Rising Transfer Taxes

by Angus C. Beverly

Transfer taxes in California are becoming a statewide trend with potentially national implications. Here is a breakdown of the effects in several cities.

State of California in orange with city in backdrop

Could Reign Supreme End with the Queen?

by Sara Collin

Canada is revisiting the notion of abolishing the monarchy after Queen Elizabeth II’s passing, but many Canadians and lawmakers are questioning if Canada could, should and would follow through.

Teacup on saucer over image of Queen's eye

Famous Songs Unprotected by Copyright Could Mean Royalties for Some

by Michael B. Fein

A guide to navigating copyright claims on famous songs.

Can I Sing "Happy Birthday" in Public?

Announcing The Best Lawyers in Australia™ 2023

by Best Lawyers

The results include an elite field of top lawyers and firms from Australia.

The Best Lawyers in Australia™ 2023

What the Courts Say About Recording in the Classroom

by Christina Henagen Peer and Peter Zawadski

Students and parents are increasingly asking to use audio devices to record what's being said in the classroom. But is it legal? A recent ruling offer gives the answer to a question confusing parents and administrators alike.

Is It Legal for Students to Record Teachers?

Announcing the 2023 The Best Lawyers in Canada Honorees

by Best Lawyers

The Best Lawyers in Canada™ is entering its 17th edition for 2023. We highlight the elite lawyers awarded this year.

Red map of Canada with white lines and dots

The Upcycle Conundrum

by Karen Kreider Gaunt

Laudable or litigious? What you need to know about potential copyright and trademark infringement when repurposing products.

Repurposed Products and Copyright Infringemen

Caffeine Overload and DUI Tests

by Daniel Taylor

While it might come as a surprise, the over-consumption of caffeine could trigger a false positive on a breathalyzer test.

Can Caffeine Cause You to Fail DUI Test?

Wage and Overtime Laws for Truck Drivers

by Greg Mansell

For truck drivers nationwide, underpayment and overtime violations are just the beginning of a long list of problems. Below we explore the wages you are entitled to but may not be receiving.

Truck Driver Wage and Overtime Laws in the US


2022: Another Banner Year

by John Fields

Block O’Toole & Murphy continues to secure some of New York’s highest results for personal injury matters.

Three men in business suits standing in office

Choosing a Title Company: What a Seller Should Expect

by Roy D. Oppenheim

When it comes to choosing a title company, how much power exactly does a seller have?

Choosing the Title Company As Seller