Should The Lender Lose When It Goofs?

Servicers are well aware that when borrowers are in default, one of the many defenses they may try to use is the claim that somehow the lender or servicer is the one who made a mistake and caused the default in the first place.  While almost invariably such a charge is absolutely without foundation, sometimes the servicer can make a error and then the question becomes whether the miscue is sufficient to torpedo the entire foreclosure action – a point raised and explored in a new case [Standard Federal Bank v. Healy, 7 A.D.3d 610 , 777 N.Y.S.2d 499 (2d Dept. 2004)].

Here, the lender bank really did make a mistake.  It was taking an escrow for taxes but then erroneously paid those taxes to the wrong village.  The bank also paid the full amount of annual taxes (in January, 1997) even though only half of the sum was due.  By March of 1997 the borrower had ceased making mortgage payments, although it was not until July of that year when the borrower gave written notice to the bank of the mistaken tax escrow payments.

By March, 1998 – with mortgage payments in arrears for a year – the bank finally began a foreclosure action.  Of course, the defendant not only answered, but counterclaimed for damages asserting the lender’s failure to pay taxes to the proper governmental authority, claiming too that her credit had been damaged, thus denying her the ability to refinance the mortgage at a more favorable rate.

The key to the bank’s ultimate success, we are happy to report, was the very prompt attention to correcting the conceded error.  As the court recited it, one week after the bank’s receipt of written notice of the mistaken tax payments, the bank took corrective action, including notifying major credit reporting agencies to remove unfavorable information from the defendant’s credit report.  The bank also waived its late fees which had accrued due to the defendant’s failure to make mortgage payments.

To be sure, there was danger to the bank here.  The court mentioned that the defendant borrower could have prevailed if she had sustained actual damages as a probable consequence of any breach by the bank of its obligation.  But as a matter of fact that did not occur in this case. The bank was saved by its prompt good will and attention to detail.

Although it would be impossible to say such a wise approach by a lender or servicer will always save the day, it certainly makes sense. Perhaps the ultimate lesson is that the best way to solve any problem is to rapidly and forthrightly approach a solution.  Because as a general rule servicers tend to take this approach in any event, maybe the heartening message of all this is that the way servicers typically do business should be able to defeat the unfortunate claims of litigious defaulting borrowers.

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.