Maybe The Default Notice Need Not Be Perfect

This obligation upon the foreclosing party to first afford the borrower notice of default can be finely diced and chopped to create considerable consternation for lenders and servicers.  Indeed, two of our recent alerts highlighted how pointedly strict the courts in New York are about complying precisely with the new foreclosure statute.  And yet, we have a recent case which elicits this alert – stating that “substantial compliance” with the notice to cure requirement, so long as the opportunity to cure was given, is sufficient. [Indymac Bank v. Kamen, 68 A.D.3d 931, 890 N.Y.S.2d 649 (2d Dept. 2009)].  So what is a servicer to believe?

Let’s clarify.

Once upon a time in New York, a lender did not have to send any notice to begin a foreclosure.  Of course it would call and send letters – not only because most investors and best practices required it – but because it made good business sense and was in any event the right thing to do.  The media may not recognize it, but mortgage servicers do not want foreclosures, they want performing loans.

But then came the FannieMae/FreddieMac uniform instrument which imposed as a matter of contract (nothing to do with any statute) the obligation upon the servicer to send a 30 day cure (or breach) letter to the borrower as a condition of accelerating the mortgage balance. (This applies to residential mortgages but commercial mortgages could have somewhat similar provisions.)  It is this letter to which the new (and perhaps more lenient) ruling applies.  We will return to it in a moment.

More recently, statute in New York required a special 90 day notice as a pre-requisite to beginning a foreclosure, but only for mortgages defined as subprime (and certain others).  This statute was extended in December 2009, effective as of January 14, 2010, to apply to all home loans (the usual mortgages that residential servicers see.)  We have reviewed this obligation in recent alerts as well.

The 90 day letter is not exactly a cure letter; it is informational and must be sent – separate from any other letter (such as the 30 day cure needed per the Fannie/Freddie mortgage) – to contain precisely the language supplied by the law itself.  No servicer should take a chance in changing this language.  It is the obligation to send this 90 day letter which is one of the aspects so strictly interpreted by New York case law.  We bring no new news on that.

Returning, though, to the 30 day breach letter, servicers should be familiar with the mortgage provision which requires the cure notice and which recites all the things the servicer must say in the letter, such as about the borrower’s rights, defenses, etc..  There is no doubt that servicers should be very careful to assure that their letter is very closely tailored to the words in the mortgage provision.  It could only be potentially dangerous to digress – and for what good purpose?

Because this obligation has been with us for years, most servicers will long ago have created a form, and hopefully it is so close to the mortgage terms there will be no issue about it.  In the new case, though, there was some variation between what the words in the mortgage were and those that appeared in the breach letter.  In today’s climate, one might have despaired for the less than punctilious servicer – but not so here, as we mentioned.

The most important part – the notice to cure was given.   The balance of the letter “substantially complied” with the requirements.  That is, it wasn’t exact, but it was close enough.  For the new statute, close enough will not likely do the trick.  For the cure letter, though, it is apparently good enough.

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.