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Proposed Regulation Issued Under New York State’s “Zombie Properties” Law

September 28, 2016
Joseph D. Simon
Garden City

The New York State Department of Financial Services (“DFS”) has proposed a new regulation (the “Proposed Regulation”) that will require mortgage lenders and servicers to report vacant and abandoned properties in accordance with the New York State “zombie properties” legislation signed into law in June.  The “zombie properties” legislation obligates mortgage lenders and servicers to inspect, monitor, and maintain certain residential properties that are believed to be vacant and abandoned.  The Proposed Regulation is intended to establish reporting requirements to complement the recently passed legislation. 

The Proposed Regulation is subject to a 45-day notice and public comment period following the October 12, 2016 publication in the New York State Register.  Accordingly, both the Proposed Regulation and the “zombie properties” legislation are scheduled to take effect on December 20, 2016. 

The Proposed Regulation expands upon the provisions of the “zombie properties” legislation by imposing certain reporting requirements on mortgagees and mortgage loan servicers with respect to vacant and abandoned property.  Under the Proposed Regulation, “mortgagee” is defined as “the holder of a mortgage[1] secured by residential real property[2] and may include the original lender under a mortgage, its successors and assigns, and includes all credit instruments issued under a trust indenture, mortgage or deed of trust pursuant to which such holders act by and through a trustee therein named.”  “Mortgage loan servicer” means “an individual or entity engaged in mortgage servicing.”[3]

Specifically, the Proposed Regulation would require: (1) mortgagees and mortgage loan servicers to report vacant and abandoned property to the DFS; and (2) mortgagees to submit a quarterly report to the DFS.

(1)   Vacant and Abandoned Property Reporting

Under the Proposed Regulation, every mortgagee (or mortgage loan servicer), within 21 business days of when the mortgagee (or mortgage loan servicer) of a property learns, or should have learned, that a property is vacant and abandoned, would be required to submit on a DFS-prescribed form the following information:

(i)        the current name, address and contact information for the lender, assignee or mortgage loan servicer responsible for maintaining the subject property;

(ii)      whether a foreclosure proceeding has been commenced as to the subject property, and, if so, the date the proceeding was commenced and the status of the proceeding;

(iii)    the last known address and contact information for the mortgagor(s) of record; and

(iv)    any additional information requested by the superintendent.

The Proposed Regulation provides that a mortgagee (or mortgage loan servicer) learns, or should have learned, that a property is vacant and abandoned when it knew or should have known one or more of the following:

(i)        that three inspections of the subject residential real property conducted 25 to 35 days apart and at different times of the day indicated, or would have indicated, that (a) no occupant was present and there was no evidence of occupancy on the property to indicate that any persons were residing there; and (b) the residential real property was not being maintained in a manner consistent with the standards set forth in New York property maintenance code chapter sections 301, 302;

(ii)      that a court or other appropriate state or local governmental entity has formally determined, following due notice to the borrower at the property address and any other known addresses, that such residential real property is vacant and abandoned; or

(iii)    that each borrower and owner has separately issued a sworn written statement, expressing his or her intent to vacate and abandon the property and an inspection of the property shows no evidence of occupancy to indicate that any persons are residing there.

Every mortgagee (or mortgage loan servicer) would be required to exercise due diligence to determine whether a property is vacant and abandoned.

(2)   Quarterly Reporting

Under the Proposed Regulation, every mortgagee (that is not exempt from New York Real Property Actions and Proceedings Law (RPAPL) Section 1308(1), as provided in the “zombie properties” legislation[4]) would be required to file with the DFS superintendent a quarterly report containing the following information:

(i)        identification of all loans secured by a mortgage on residential real property held by the mortgagee where the borrower has been delinquent for 90 or more days;

(ii)      for each loan identified pursuant to the above provision:

(a)       The date on which each inspection of the subject property to determine occupancy was conducted as required by RPAPL Section 1308(1), and the identity and employer of the person who performed the inspection.

(b)      The date on which a determination was made that the subject property was vacant and abandoned.

(c)       The date on which the notice required by RPAPL Section 1308(3) was posted on the subject property.

(d)      Identification of all actions to secure and maintain the subject property that have been taken, the date each action was taken, the nature of each action, and the identity and employer of the person who performed each action.

(e)       Whether a foreclosure proceeding has been commenced as to the subject property, and if so, the date the proceeding was commenced and the status of the proceeding; and

(iii)    any additional information requested by the superintendent.

Each quarterly report must be filed by a mortgagee within 30 days of the end of the quarter to which it pertains. The quarterly reporting requirement appears to only apply to mortgagees and not to mortgage servicers.

The “zombie properties” legislation and the DFS’s Proposed Regulation impose significant obligations on mortgagees and mortgage loan servicers, who will now be responsible for monitoring, maintaining, and reporting zombie properties.  Mortgagees will need to become proactive by closely monitoring delinquencies in order to determine whether properties are indeed vacant and abandoned, which would trigger the new requirements.  Penalties for violations of the “zombie properties” legislation include a $500 civil fine per property per day. 

The Proposed Regulation can be found at: http://www.dfs.ny.gov/legal/regulations/proposed/rp422t.pdf.

If you have any questions regarding the Proposed Regulation or the “zombie properties” legislation, please feel free to contact Joseph D. Simon at (516) 357-3710 or via email at jsimon@cullenanddykman.com, Kevin Patterson at (516) 296-9196 or via email at kpatterson@cullenanddykman.com, Elizabeth Murphy at (516) 296-9154 or via email at emurphy@cullenanddykman.com, or Adam Barazani at (516) 357-3767 or via email at abarazani@cullenanddykman.com


[1] “Mortgage” means “a first lien upon residential real property as is commonly given to secure advances on, or the unpaid purchase price of, real property under the laws of this state, together with the credit instrument or instruments, if any, secured thereby.”

[2] “Residential real property” means “real property located in this state improved by any building or structure that is or may be used, in whole or in part, by not less than one nor more than four families, and shall include any building or structure used for both residential and commercial purposes where no more than twenty percent of the total appraised value is attributable to the commercial purpose.” Although not entirely clear, this definition would appear to exclude any property with a structure that is or may be used by five or more families, even if the property has a mixed use where the commercial component is no more than twenty percent of the total appraised value.

[3] “Mortgage servicing” means “receiving any scheduled periodic payments from a borrower pursuant to the terms of any mortgage loan, including amounts for escrow accounts, subject to section 6-k of the Banking Law, title 3-A of article IX of the Real Property Tax Law or section 10 of 12 U.S.C. 2609. In the case of a reverse mortgage as referenced in section 6-h of the Banking Law, sections 280 and 280-a of the Real Property Law or 24 CFR 3500.2, servicing includes making payments to the borrower. The term includes making or holding a mortgage loan if such activities directly or indirectly include holding the mortgage servicing rights or having been delegated servicing functions for the mortgage loan.”

[4] The obligations imposed by RPAPL Section 1308 do not apply to state and federally-chartered banks and credit unions that (i) engage in mortgage origination, mortgage ownership, mortgaging servicing, and mortgage maintenance; and (ii) have less than three-tenths of one percent of the total loans in the state which the mortgagee either originated, owned, serviced, or maintained for the calendar year ending two years prior to the current calendar year. 

Additionally, RPAPL Section 1308’s requirements shall only apply prospectively (December 20, 2016 and onward) for all state and federally-chartered banks and credit unions that (i) engage in mortgage origination, mortgage ownership, mortgaging servicing, and mortgage maintenance; and (ii) have between three-tenths of one percent and five tenths of one percent of the total loans in the state which the mortgagee either originated, owned, serviced, or maintained for the calendar year ending two years prior to the current calendar year.

The burden of proving an exemption is upon the mortgagee claiming it. In order to establish an exemption from the requirements of RPAPL Section 1308, a mortgagee must submit to the DFS superintendent by December 31 of the year preceding the calendar year in which the exemption is being sought, on the form required by the superintendent, a statement providing the basis for which the mortgagee satisfies the requirements of the relevant exemption.