Does Lender’s Wrongful Demand Stop Interest?

There are some very critical rules arising from a court’s ability to reduce or eliminate interest which can hurt a lender or servicer.

One rule in this regard is that if a lender wrongfully rejects or imposes unsupportable conditions upon a payoff, interest can stop accruing at that very moment.

Another maxim is that if a lender unduly delays in prosecuting the action, interest can be reduced or eliminated for the delay period.

So what happens if a lender is prosecuting a foreclosure, the borrower claims a desire to payoff the debt and the lender includes in its demand (for example) a prepayment penalty which it says the note requires?

The borrower years later accuses the lender of wrongful conduct because after the payoff demand both the referee and the court found that the prepayment could not be collected (because of the careless drafting of the provision).  Is this the kind of wrongful conduct which can lead to a cutoff of interest way back to when the flawed demand was made?

“No” said the court [in a case our firm recently won, available as published online:  NF Acquisitions v. Oakdale Motorsports, 2006 WL 2055741 (N.Y. Supp.)]. At the time the payoff letter was sent, no judicial determination had been made.  In any event, the borrower would have paid the full sum or paid the money into court to seek a ruling then.  Instead, they waited years to make the claim.  Result; no reduction of interest; the lender must be paid in full.^[1]

^[1]The case turned out to be a primer on New York law regarding tender of sums due on a mortgage.  Among the important principles reaffirmed by the case were these:

• A valid tender requires an actual delivery of all mortgage arrears.
• Once a mortgage balance has been accelerated, a mortgagee is not bound to accept less than the full accelerated balance demanded. (But note this would be different with a Fannie Mae/Freddie Mac form of residential mortgage.
• The burden of showing tender and refusal is on the party pleading the tender.
• For the borrower to prevail, he must offer evidence that the monies were actually tendered and rejected.

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.