Bulletin: NY000169

Dear Associates:

There appears to be a good deal of confusion as to how to deal with loans that are guaranteed under the federal § 203 (k) loan guarantee program (12 U.S.C. § 1709(k)) for rehabilitation of residential 1-4 family structures. The 203(k) program is a mortgage insurance program, and there is no federal preemption of state law involved.

These loans are made for rehabilitation of existing structures, and, unless the entire amount is advanced to the borrower at closing without a holdback or special disbursement account being set up, they must be treated as building loans, which means:

(1) The building loan rate applies in connection with the calculation of the premium for the loan policy;

(2) A "Pending Disbursements Clause" must be added to the policy; and

(3) A Building Loan Contract with a Section 22 Affidavit must be filed with the County Clerk (even in counties where instruments are recorded with a different office), prior to the recording of the mortgage. A failure to file the Building Loan Contract with the Section 22 Affidavit prior to the recording of the mortgage may result in a loss of priority of the mortgage to any later-filed mechanic's liens.

The generic "Rehabilitation Loan Agreement" form used by at least some participating lenders provides:

"The borrower will cause either this instrument or the construction contract under which the improvements are to be made to be filed in the public records, if the effect of the recording will be to relieve the mortgaged property from mechanics and materialmen's liens."

Under New York law, the affidavit required to be filed under Lien Law §22 must be added to the Agreement before filing.

In the event a lender or closing attorney is unwilling to cooperate, an exception must be added to the policy:

Policy excepts all loss, cost or damage, including attorney's fees, resulting from the failure to comply with the provisions of Section 22 of the New York Lien Law.