In two recent decisions, the Superior Court of New Jersey, Chancery Division, Bergen County, held that homeowners may defend against foreclosure actions by asserting that lenders acted in bad faith with respect to post-notice of foreclosure events, such as administering the procedure of loan modification programs, even if the borrower's default is not in dispute and the lender had no obligation to provide the borrower with any potential relief.
What's The Takeaway?
Taken together, the two decisions demonstrate that New Jersey courts will closely examine all aspects and phases of a foreclosure action to ensure that lenders act in good faith, and that homeowners are being treated fairly. Lenders therefore should take care to conduct themselves in good faith at all times, whether in offering a loan modification program, mediation, or some other litigation context. Lenders who conform to that principle will increase the likelihood of successfully prosecuting foreclosure actions, and avoiding the costs and delays associated with litigating bad faith claims.
In Hudson City Savings Bank v. Colyer, homeowners moved to dismiss a foreclosure action on the grounds that the lender did not participate in foreclosure mediation in good faith. The lender contended that it had acted in good faith in denying a loan modification (sought during the mediation process) because it had done so in strict conformance to its own loan modification criteria. The Court held that "simply because a mortgagee has followed their internal guidelines may not immunize their conduct from court review or even sanction" and that "strict adherence to internal procedures may not meet the requisites of good faith." Although the Court suggested that, in some instances, a lender may need to conduct a "fact-sensitive and accommodating inquiry" to be found to have acted in good faith, and described strict adherence to internal procedures as potentially "illogical" and "troubling," it denied the homeowners' motion because the Court found insufficient evidence of bad faith.
In Wells Fargo Bank, N.A. v. Schultz, the lender moved to strike the homeowners' answer contesting the foreclosure, which included a defense that the lender acted in bad faith in denying a loan modification request. The Court found that, after being given the opportunity to apply for a loan modification, the homeowners were: (1) subjected to "months of frustrating and conflicting responses, or lack thereof, from [the lender] regarding further loan modifications" and "generally unfair treatment regarding the available loan modifications"; (2) sent numerous conflicting form letters and multiple duplicative requests for documentation that had already been provided; (3) shuffled among numerous different representatives of the lender; and (4) given the "run-around." The Court acknowledged that the homeowners did not have a legal right to a loan modification, and that the lender did not have an obligation to offer a loan modification, but nevertheless held that once the lender offered that modification, "it was obligated to act in good faith as to the provision of the modification." The Court held that the lender's conduct was "at the least highly suspect," and, as a matter of equity, the homeowners had the right to pursue the defense.
If you have questions about these decisions and how they may be applied to your particular circumstances, you should contact the authors or any member of Saul Ewing LLP's Consumer Financial Services Practice.