by Nicole M. Legere, Esq.*, October 31, 2011
On October 14, 2011, New York State revised their current banking laws to include new amendments governing the relationship between mortgage brokers and home improvement contractors. These amendments are designed to clarify the ways in which mortgage brokers and home improvement contractors interact, and are aimed at protecting the borrower from any potential pressure to use the services of a specific mortgage broker or home improvement contractor.
For the purpose of these amendments, a home improvement contractor is defined as “a person, firm or corporation which owns or operates a home improvement business or who undertakes, offers to undertake or agrees to perform any home improvement for a fee and for whom the total price for all labor, materials and other items is equal to or greater than two hundred dollars.” (N.Y. Banking Law 12-D §595-c (4).) However, the amendment specifically excludes anyone who owns in whole, or part, the property to be improved.
Acting as an Agent for the Mortgage Broker
The amendment now specifically prohibits a home improvement contractor from acting as an agent for, advertising, promoting or arranging for the services of the mortgage broker while soliciting home improvement contracts.
The home improvement contractor may not receive anything of value from a mortgage broker in return for the referral of a borrower, nor can a contractor act on behalf of a mortgage broker in any transaction.
Payment to the Home Improvement Contractor
When the mortgage broker does secure a mortgage loan, the home improvement contractor may not be paid directly. Rather, the proceeds of the loan should be made payable directly to the borrower. The loan proceeds are then used by the borrower to pay the home improvement contractor. The contractor can also be paid by a third party, such as an escrow agent, so long as it is in accordance with a written agreement signed by the lender, borrower and contractor prior to the loan being disbursed.
Any agreement regarding the payment of the home improvement contractor by a third party must state, in a clear and conspicuous manner, that the borrower is not required to sign the agreement and can be paid directly. Furthermore, it should also state that the mortgage broker cannot offer a borrower different terms in return for executing such an agreement.
Acting as a Cosigner
Finally, the mortgage broker shall not allow a home improvement contractor to act as a co-signer or guarantor on any loan made for the purpose of home improvement.
These new amendments will become effective on January 12, 2012. These amendments can be read on AllRegs by visiting: http://www.allregs.com/ao/main.aspx?did2=c0cb78b2-f40f-4fd3-88f0-04bc4e3905c1%20
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* Nicole Legere is Associate Counsel at Bankers Advisory. She is a graduate of the University of Massachusetts at Amhurst and received her Juris Doctor from Roger Williams School of Law. She is a member of the Bar Association for the states of Massachusetts and New York.
Disclaimer: The information presented in this article represents the opinion of the author and not that of AllRegs. This article is not meant to be nor should it be construed as advice of legal counsel. The applicability of the information contained herein will vary based on the nature of each lending institution's business, under what law it was created, and its loan products and procedures. Readers are strongly urged to consult with their legal counsel and/or contact local counsel as appropriate in the various states and jurisdictions to determine the applicability of the materials contained herein to the specific facts and circumstances of each organization's programs and products and to identify other law applicable to its business operations. The information contained herein was not reviewed or approved by counsel in the respective jurisdictions.