Locke Lord QuickStudy: New York Opens Significant New ‎Lending Market by Authorizing Reverse Mortgages Secured ‎by ‎Co-Op Apartments‎

The law does not take effect until mid-2022 and is subject to regulations to be promulgated by the ‎New ‎York Department of Financial Services. ‎

On December 1, 2021, New York Governor Kathy Hochul signed into law a bill (New York ‎‎A01508/S00760) authorizing lenders to make reverse mortgages secured by ownership of a New ‎‎York cooperative apartment. This law (which former Governor Cuomo vetoed in 2019) ‎represents a ‎substantial expansion of the market for reverse mortgages in New York where a ‎significant portion of ‎the elderly population lives in cooperative apartment units. The new law ‎won’t take effect until May ‎‎30, 2022, and will be subject to small, agreed, legislative changes as ‎well as regulations promulgated ‎by the New York Department of Financial Services.

Interaction with Federal Requirements

Federal Home Equity Conversion Mortgages insured by the Department of Housing and Urban ‎‎Developments continue to be restricted to loans secured by real property. 24 CFR 206.45(a). ‎Thus, ‎lenders wishing to take advantage of this expansion of reverse mortgages in New York ‎must do so ‎with a proprietary, non-federally insured, product.‎

Unlike HUD’s regulations, the federal Truth-in-Lending Act defines reverse mortgage broadly to ‎‎include loans secured by an interest in a cooperative apartment. 15 USC § 1602(cc) (defining ‎reverse ‎mortgages as loan secured by “the consumer’s principal dwelling”); 15 USC § 1602(w) ‎‎(defining ‎dwelling to include “individual units of … cooperatives”). Thus, reverse mortgages ‎secured by ‎cooperatives will be treated as reverse mortgages under federal law.‎

Unique Provisions of New Law

The new law has significant overlap with New York’s existing requirements for reverse mortgages ‎secured by real property, but it also has some unique provisions applicable only to loans secured by ‎co-ops. ‎Citations are to newly amended sections of the New York Banking Law and existing ‎provisions ‎of the New York Real Property Law and New York Administrative Code.‎

Unique provisions of the new law (which do not change the existing requirements applicable to ‎‎reverse mortgages secured by real property) are as follows:‎

• ‎Lenders may make reverse mortgages secured by shares or membership in a cooperative ‎‎apartment, subject to the restrictions in the law and forthcoming regulations. NY Banking ‎‎Law, § 6-o(1)(a).‎
  
  
• Reverse mortgages secured by co-ops must be approved by the co-op board of directors. ‎‎Id., ¶ 6-o(2)(n). ‎
  
  
• Co-op reverse borrowers must be at least 62 years old, whereas real-property reverse ‎borrowers currently must be only 60. Id., § 6-o(1)(d); NY RPL § 280(e). ‎
  
  
• While maturity events are generally the same (death, sale, or lack of ‎occupancy), the new ‎law for co-op reverse mortgages has a broad definition of a borrower ‎default that can trigger ‎maturity. NY Banking Law § 6-o(2)(l)(ii)(3) (loan may become ‎due and payable if “an ‎obligation of the borrower under the loan note is not met”). The ‎current law for real-property ‎reverse mortgages has a defined set of defaults ‎that can trigger maturity: tax or insurance ‎arrearage, bankruptcy, or lack of maintenance. 3 ‎NYCRR § 79.7(4), (5), (6). ‎
  
  
• The lender-default provision is substantially more onerous for co-op reverse mortgages. ‎‎Currently, a lender on a real-property reverse mortgage that fails to make ‎required ‎payments to a borrower forfeits twice the interest that ‎would have been earned during the ‎default. NY RPL § 280(2)(b). Under the new ‎law, a lender in such a default on a co-op ‎reverse mortgage forfeits all interest or service ‎charges due under the loan, including ‎interest previously accrued. NY Banking Law § 6-‎o(2)(e). ‎
  
  
• Unlike the current law for proprietary (i.e., not federally insured) reverse mortgages ‎secured ‎by real property, compliance with each provision of the new law for co-ops is a ‎‎“condition ‎precedent” to foreclosure, and “failure to comply therewith shall be a complete ‎defense” to ‎a foreclosure. Id., § 6-o(13). ‎
  
  

Forthcoming Regulations

The law directs the NY DFS to convene a working group to study counselors for the new co-op loans ‎‎and “to address any other matters the superintendent deems necessary pursuant to this act.” This ‎‎working group may assist the NY DFS in developing regulations. Those regulations may ‎reconcile ‎some of the discrepancies, described above, between how real-property and co-op ‎reverse mortgages ‎are regulated. ‎

Moving Forward

Lenders wishing to take advantage of this significantly expanded market for New York reverse-‎mortgage loans ‎will need an appropriate set of loan documents and disclosures that comply with the ‎statute and ‎the forthcoming regulations, as well as effective internal procedures for advertising, ‎‎origination, and servicing such loans. The authors have substantial experience creating such ‎‎documents and procedures for reverse mortgages in New York and in states across the country. ‎