Abraham Neuhaus, 1L

Contributor

In 2002, the New York legislature enacted New York Banking Law § 6-L in an attempt to protect borrowers from predatory lending. Recently, however, a significant issue has arisen as to the proper way to determine if a residential home loan will be protected by the statute. Although the predatory lending statute has been in effect since 2002 (with some amendments added along the way), only recently has there been a reported instance of a court applying it. As the courts begin to do so, both borrowers and lenders are bracing for the judiciary’s interpretation, in anticipation of an expected onslaught of litigation.

Lasalle Bank v. Shearon, 850 N.Y.S.2d 871 (N.Y. Sup. Ct. Jan. 28, 2008) (“Shearon”); adhered to in LaSalle Bank, N.A., II v. Shearon, 2009 N.Y. Misc. LEXIS 249 (N.Y. Sup. Ct. Feb. 9, 2009), the leading case on the subject, has received a lot of attention. From write-ups by prominent law firms, law blogs and even warnings proclaimed on mortgage companies’ websites, all point to Shearon as a harbinger of things to come.

In Shearon, Judge Maltese granted summary judgment against a bank moving for foreclosure, declaring that the bank had broken at least three laws: 1) it had not adequately advised and cautioned the borrower, 2) it did not meet the burden of conducting due diligence in researching whether the borrower had sufficient income, and 3) it had financed excessive closing costs.

The importance of this decision cannot be underscored. In addition to ruling that the bank cannot foreclose on the house, the court set a date to determine what sanctions the bank might receive, even suggesting the possibility of nullifying the mortgage and giving restitution of all tendered premiums to the borrower.

However, in another decision soon thereafter, where the defendant-borrower relied exclusively on Shearon, Judge Palmieri ruled that Shearon did not apply because the statute did not cover the borrower’s mortgage, which was in excess of $300,000. Alliance Mtge. Banking Corp. v. Dobkin, 862 N.Y.S.2d 812, 2008 N.Y. Slip Op. 50793U (N.Y. Sup. Ct. Mar. 28, 2008). (Additionally, the court noted that the loan was not a high cost loan, another threshold required by the statute.)

Unfortunately, there are troubling ambiguities in the formulation of the Shearon opinion and, absent undisclosed information, the court’s holding can be characterized as questionable at best; some commentators, probably unclear as to the methodology of the Shearon court, note that Dobkin presented a trial level split.

After discussing Shearon with Judge Maltese’s clerk and counsel from both parties, there remains a significant question of law facing the courts in this matter. In fact, the lawyers representing Lasalle Bank indicated that they are currently appealing the decision to the Second Department.)

At the time of the transaction under question in Shearon, New York Banking Law § 6-L(1)(e)(i), as originally enacted in 2002, was still in effect. A threshold provision excluded certain mortgages from protection under the statute. The relevant portion stated (with emphases added):

(i) The principal amount of the loan does not exceed the lesser of: (A) conforming loan size limit for a comparable dwelling as established from time to time by the federal national mortgage association [“FNMA”]; or (B) three hundred thousand dollars.

Subsequent amendments (in October 2007) removed the $300,000 cap (i.e., the statute now uses the FNMA confirming loan limit exclusively), but that cap was still relevant in the Shearon loan, which took place in 2006.

The court was faced with a major question of judicial interpretation in determining whether the Shearon home loan was in excess of $300,000. In Shearon, as well as in Dobkin, the whole or majority of the purchase price was financed by the bank. For complex reasons related to the current subprime debacle, the lender had a monetary incentive to break the loan in two. Therefore, at the closing the borrower accepted two separate loans toward the complete purchase price of the house. Both loans, on their own terms were less than the $300,000 cap, but when combined totaled more than $300,000. The essential question was whether the statutes usage of the term “home loan,” as opposed to the words “home loans” or “totaL home loans” would mandate separating the two loans, thereby removing the cap from applicability, or, rather, should the two loans be aggregated and considered one loan in excess of $300,000?

This matter has caused great confusion to observers of the Shearon court, for in its opinion the court never justified why the Shearons were not excluded from the relevant cap. Only in the court’s affirmance relating to the “high cost” provision, did it take the position that, as a matter of law, the two loans are separate.

It appears that the court took two sides of the issue presented above; namely, whether to treat the loans separately or as one, and in one decision adopted both arguments. The court first assumed that, for purposes of the cap, the statute does not allow aggregation of the loans; therefore, there were two separate loans and the cap was not reached. Conversely, in calculating the bank’s financing violation, the court did combine the loans and calculated using the aggregate.

While the Shearon court’s specific methodology may remain unclear, the underlying issue is a basic question of policy that ought to be addressed: should two loans that occurred through one transaction be considered a single loan, subject to the predatory lending statute; or, they be considered two separate loans with their respective terms, in accordance with the loans’ documentation?

It may seem natural to aggregate the loans, since the reality of a home purchase is that though a buyer might sign for two separate loans on paper, he is borrowing one total sum. As the Shearon court noted, the lender and the borrower at closing agreed to sign for two separate loans instead of one for the entire purchase price of the house; the court found that the lender had an incentive to split the loans on paper for complex financial reasons. As Judge Palmieri noted, “even if one were to treat the lower amount as a separate transaction . . . , [that] would be ignoring the reality of the home purchase.” Dobkin, 2008 N.Y. Slip Op. 50793U, at *2.

Separating the loans, as the literal interpretation of the word “loan” suggests, would exclude certain borrowers from protection under the statute, as in Shearon and Dobkin. Excluding such borrowers would defeat the legislature’s intent to protect borrowers from predatory lending.

Arguments can be made either way, and in reality the legislature should correc
t this ambiguity by amending the statute. However, for the time being, borrowers and lenders are left anticipating a dec
ision from the Second Department.