A mortgage servicer cannot elicit from a borrower a waiver of defenses as part of a settlement agreement – at least where a home loan is the subject of the foreclosure. This is a dismaying notion, but it is so as a matter of New York State regulation – not statute.
The imposition comes from NYCRR Section 419.11, entitled AResidential mortgage loan delinquencies and loss mitigation efforts@. Subsection (h) reads as follows:
“Waiver of legal claims and defenses. A Servicer shall not require a homeowner to waive legal claims and defenses as a condition of a loan modification, forbearance or repayment plan.”
The danger of such a prohibition to mortgage holders should be immediately apparent. Lenders and servicers understand that an integral, indeed indispensible, aspect of any settlement of a mortgage foreclosure action is the waiver by the defaulting borrower both of defenses already interposed in the case and such defenses as the borrower might be holding in reserve to interpose later on in the action. Servicers recognize that blasts of facile defenses, most often without foundation, are a common defensive tactic.
Should a lender enter into a mortgage modification, forbearance agreement or other repayment plan, howsoever it might be denominated, there is no assurance that the agreement will be fulfilled on the borrower=s part. Indeed, lenders and servicers know that default by borrowers on such agreements occurs in a majority of cases. Were defenses not to be waived, then on most occasions, upon failure of the settlement (again in whatever form), the lender could expect to see the meritless defenses raised anew. Even if a rare defense has some basis, a servicer should be entitled to some quid pro quo for its making concessions it would not otherwise be obliged to give.
In the first instance, a lender may have expended considerable sums by way of legal expense in endeavoring to strike the defenses – which could of course be in the form not only of denials, but of affirmative defenses and counterclaims as well. Assuming those were not yet disposed of, upon failure of a settlement, encountering those defenses yet again would elicit a second layer of legal cost. In those instances where the value of the property was less than the mortgage debt, inability to recover the additional legal fees on the lender=s part would be assured. Hence, endeavoring to banish defenses is the mentioned necessary aspect of any settlement arrangement.
The noted section of the NYCRR, however, removes the ability to protect against renewed or newly minted defenses upon settlement where this section applies – the home loan. (Consult NYCRR §s 418.3 and 419.1 for relevant definitions.)
Should a servicer decline to settle a case because it does not wish to face yet again the necessity to litigate a borrower=s defenses, it may encounter censure from the court on the ground that the servicer is not bargaining in good faith. This then places a servicer in an essentially impossible situation; it cannot avoid duplication of assault by defenses but, if it seeks to avoid that trap, it can suffer various penalties for failing to settle (among those, loss of legal fee expenses and/or accrual of interest).
Highlighting these concerns in terms of actual steps in a foreclosure action should focus the analysis. In a home loan foreclosure (unlike the commercial case) the first step is the scheduling of a settlement conference. Whether or not an answer has been interposed by the borrower, if some settlement agreement ensues, the servicer knows that upon renewed default the borrower remains fully armed to contest the case for years, even in the absence of any real basis. If concessions are to be made, the servicer would be unwise to volitionally remain exposed to a multi-year consuming defensive counter thrust. The regulation, however, insists that the servicer do just that.
If an answer is submitted, it may often contain a host of supposed defenses, sometimes up to twenty or more. But servicers know, for example, that they have not waived the right to foreclose, that they have done nothing to be estopped, that they do not have unclean hands, that the action is not barred by laches, that the statute of limitations has not expired and so on, at length. Faced with such an answer, should settlement ensue, all these defenses repose in reserve to be launched the moment the borrower defaults upon the settlement.
Perhaps most compelling is the case where the settlement conference brings no result, the borrower does then answer and the servicer proceeds with a motion for summary judgment. With responses and the inevitable adjournments, this process can readily consume six months or even up to a year. If during these contretemps a settlement emerges, the servicer recognizes that it will yet again face this morass – the remarkable time it consumes and expense it generates – if the borrower fails to honor the settlement. The servicer finds this unpalatable, but is barred by regulation from eliminating future warring on the defenses.
In some limited cases there may be rescue from this dilemma for the mortgage holder.
First, a reading of the definition seems to exclude from the ban a lender collecting for its own account.
Next, interpretation of the rule in context indicates that it does not apply to “banking organizations”.
Of course, this still leaves mortgage servicers subject to the prohibition and while there may be some practical techniques in the litigation process which might supply a solution in some instances, the main thrust of the regulation remains pointedly troublesome.
Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.