Release In Loan Mod Saves Lender – A Salutary Reminder

Here is a not uncommon scenario known to lenders.  A once defaulting borrower (or one still in default) sues the lender for violation of the General Business Law Sections 349 and 350 alleging, as the Court recited it, that the lender “employed relaxed underwriting standards, reduced documentation requirements, false appraisals, and forgery of borrower income levels for the purpose of consummating unaffordable or high-cost home loans that were destined to fail.”

So while the money was indeed loaned to the borrower, the assertion was that the borrower should be entitled to keep the money because the lender never should have made the loan.  The borrower lost this one, however, because the lender was sage enough to include in certain documentation – a loan repayment agreement and a loan mod – and an effective release and such is the lesson of this report.  [The new case is Warmhold v. Zagarino, 2016 N.Y. App Div. LEXIS 7070]

Obviously, loan repayment plan agreements and loan modifications (there were both in this case) are oft-used avenues allowing borrowers to become current and pay off defaulted mortgages.  Every lender and attorney has their own forms and there are any number of provisions they contain.  But this case reminds that a release from the borrower of any claims against the lender is both essential, and enforceable.

The Court confirmed that a release is a contract and its construction is governed by contract law.  When there is such a release – again here from the borrower to the lender – this shifts the burden of going forward to the party making a claim to show that there has been fraud, duress or some other fact sufficient to void the release.

In this case, the loan repayment plan agreement and a loan modification agreement, both of which were executed by the borrower, contained releases which by their terms unambiguously barred the very action which this borrower brought.  Unable to raise any issue as to invalidly of the releases, those releases controlled and the borrower’s claim was dismissed.  Chalk one up for a careful lender.

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.