The Peril Of Taking Lesser Payments After Borrower’s Default

A new case reminds of the hidden dangers of a foreclosing lender taking smaller payments from a defaulting borrower. [U.S. Bank N.A. v. McEntee, 176 A.D.3d 1136, 111 N.Y.S.3d 41 (2d Dept. 2019)].  What does this really mean?

Over past years we have emphasized the notion that any settlement between lender and borrower must be reduced to a writing.  If it is not, it affords the borrower the opportunity to argue that some settlement existed thereby creating a roadblock to foreclosure should the court believe the borrower’s version.  And it has happened.  But this is a lesson readily learned some time ago by lenders so that they recognize the need for that writing.

More disturbing, however are the facts, at least to the extent they can be determined from the written decision of the new case mentioned.  There, a plaintiff found summary judgment denied when the court concluded that the borrowers presented evidence demonstrating that, after their alleged default on the mortgage, the plaintiff accepted mortgage payments in a lesser amount than originally required.  The court ruled that this raised triable issues of fact as to whether the parties entered into a modification agreement after the default and whether there was a continuing default by the defendants from that time.

It was not at all clear that a modification had been pursued, nor was it apparent what position in this regard the plaintiff had taken to refute the borrowers’ allegations.  The mere fact that the lender accepted lesser payments over some considerable period of time gave rise to the possibility that there was a modification and that perhaps the borrowers were led to believe that they could continue to make these lesser payments.

The lesson, then, is that the foreclosing lender or servicer needs to be rather strict.  If post default payments are forthcoming, unless they are in the proper amounts due (which should be accepted with a letter each time stating that it is not a waiver of the default), accepting any smaller sum could lead to the same conclusion as in the cited case – that perhaps there was a modification agreement which meant that the foreclosure could not continue.

Caution is in order in such a scenario.

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2019), 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.