Just over a year has passed since the enactment of the New York Foreclosure Abuse Prevention Act (“FAPA”). FAPA was enacted as a response to the New York Court of Appeals’ 2021 holding in Freedom Mortg. Corp. v. Engel, 37 N.Y.3d 926 (2021), which affirmed the (then-existing) convention under which a lender could start foreclosure proceedings and subsequently discontinue them with a concomitant renewal of the six-year statute of limitations on foreclosure. FAPA’s immediate and retroactive effect was to bring into question the remedies available to lenders (or those to whom the loans had been sold) with respect to all loans in which a mortgage foreclosure action had been begun but for which a final judgement of foreclosure and sale had not been enforced. In the year since its enactment, we have seen a host of challenges to the law, on procedural and constitutional grounds, which we covered in our previous OnPoint. Many of these cases remain ongoing, either at the trial court level or in appellate proceedings. This OnPoint will focus on the present state of constitutional challenges to FAPA’s retroactive application brought in New York courts, as well as a brief review of their implications for securitizers of mortgage-backed bonds.

On the constitutionality of the retroactive application of FAPA

No appellate division in New York has taken on an FAPA case to date, and the trial courts continue to diverge in their determinations of FAPA’s constitutionality, although approximately two-thirds of such courts currently support the retroactive application of FAPA. New York’s appellate divisions have either failed or refused to address FAPA’s constitutionality, choosing instead to remand the issue for lower courts to determine or upholding the retroactivity of the law without reaching the merits of the arguments on retroactivity. On December 19, 2023, the First Department held in Genovese, that FAPA should be applied retroactively, although the Court declined to address any challenges under the Contract and Due Process Clauses of the federal Constitution because the defendant had not informed the Attorney General of those challenges. See Genovese v. Nationstar Mortg. LLC., No. 2023-00096, 2023 N.Y. Slip Op. 06477 (1st Dept Dec. 19, 2023). The Second Department, in contrast, has both recognized FAPAs constitutional concerns and allowed for FAPA’s retroactive application without completing the analysis required under Matter of Regina Metro. Co., LLC,(discussed infra) to ascertain whether the legislation can be retroactively applied. See Regina Metro. Co., LLC v. N.Y. State Div. of Hous. & Cmty. Renewal, 2020 N.Y. Slip Op. 02127 (2d Dept Apr. 2, 2020). See e.g., U.S. Bank Nat’l Ass’n. v. Armand, 2023 WL 7007285 (2d Dep’t., Oct. 25, 2023); CIT Bank, N.A. v. Byers, 2023 WL 6451880 (2d Dept Oct. 4, 2023); UGH Mazing, LLC v. 21st Mortg. Corp., 2023 WL 6452079 (2d Dept Oct. 4, 2023); see also Johnson v. Cascade Funding Mortg. Trust 2017-1, 2023 WL 7007035 (2d Dept Oct. 25, 2023); U.S. Bank Nat’l Ass’n. v. Santos, 218 A.D.3d 827 (2d Dept 2023); Deutsche Bank Nat’l Trust Co. v. Wong, 218 A.D.3d 742 (2d Dept 2023); U.S. Bank Nat’l Ass’n. v. Simon, 216 A.D.3d 1041 (2d Dept 2023).

The Third and Fourth Departments have not yet officially addressed the issue, although the Third Department is currently considering Deutsche Bank Nat’l Tr. Co., etc. v. DeLuca, Case No. 534805 (3d Dept), which has put the constitutionality of FAPA’s retroactivity directly at issue. In DeLuca, Plaintiff-Appellant Deutsche Bank explicitly argues that FAPA should not be applied retroactively because it would violate its due process rights and constitute an unconstitutional taking. Furthermore, Deutsche Bank has directly challenged FAPA’s retroactive applicability as failing the balancing test established in Matter of Regina Metro. Co., LLC v. N.Y. State Div. of Hous. and Cmty. Renewal, 35 N.Y.3d 332 (2020).

In Regina, the New York Court of Appeals established a balancing test that looks to the relationship between the length of the retroactivity period of the statute and its purpose. The Court affirmed that a retroactive application of a newly enacted legislation must be supported by ‘“a legitimate legislative purpose furthered by rational means”’ in order to align with the requirements of due process. Id. at 375. The Court further noted that “retroactivity concerns are further heightened where, as here, the new statutory provisions ‘affect [ ] contractual or property rights, matters in which predictability and stability are of prime importance.’” Id. at 382 (quoting Landgraf v. USI Film Products, 511 U.S. 244, 271 (1994)). As a result, retroactive legislation would have to demonstrate a persuasive reason to overcome the ‘“potentially harsh”’ impacts of retroactivity, as well as overcome the presumption that legislation is meant to apply only prospectively. Id. at 375. Through its analysis, the Court identified two main instances in which a retroactive application has been deemed constitutional: (i) those employing brief, defined periods that function in an administrative manner to assist in carrying out the legislation, and (ii) statutory retroactivity that is integral to the fundamental aim of the legislation. The Third Department will most likely focus on whether the legislature has established a sufficiently clear intent and persuasive basis for allowing FAPA’s retroactivity.

What should Mortgage Securitizers do in the meanwhile?

Deutsche Bank v. DeLuca is still in process, with oral arguments having taken place on January 16, 2024. While this case is currently the strongest candidate for a definitive determination regarding FAPA’s retroactivity, new challenges continue to emerge. Furthermore, the Court of Appeals will ultimately have the final say should any cases make it that far. Until then, the courts remain divided.

In the meantime, securitizers of mortgage loans should continue to make sure their due diligence includes evaluations of the potential impacts of FAPA’s retroactivity on the enforceability of the underlying mortgage loans. Additionally, securitizers should consider disclosing the risk of the application of FAPA to mortgages in New York to put investors on notice that servicers may be disincentivized from pursuing foreclosure actions, might employ other alternatives to foreclosure, or might be time-barred from pursuing foreclosure actions altogether. Dechert will continue to monitor new developments regarding FAPA and will provide further updates as legal challenges and other news continue to develop.