As of December 15, 2009, New York promulgated a civil practice rule1 that requires the parties to a foreclosure action to participate in a mandatory settlement conference with the court within the first 60 days after service of process. The purpose of this conference is to determine whether the parties can reach an agreement to help the defendant avoid losing his or her home. The statute recommends the parties consider a loan modification in reaching a resolution. However, prior to initiating a foreclosure action, the lender is required to send a 90-day notice letter that essentially offers the same option to the defaulting borrower. This includes information pertaining to loan modification and non-profit financial counseling. So if the parties were unable to reach an agreement prior to litigation, is there a benefit to judicial oversight of a mandatory compromise negotiation to ensure the parties negotiated in good faith?
The statute directs the court to hold a compromise conference as a means of explaining the rights and obligations of the parties under the mortgage and “reach a mutually agreeable resolution to help the defendant avoid losing his or her home.” The legislature recommends the parties consider the following:
In order to ensure the negotiations are conducted in good faith, the legislature further requires the lender to provide the court with the following documents:
After the financial crash in 2008, New York has taken a strong stance on ensuring that the parties to a residential foreclosure proceeding have negotiated in “good faith.” As such, the lender is also required to bring to the compromise any information available regarding what the borrower has left outstanding after applying and being rejected for a loan modification. This includes the reasons for the denial and the data and value used in the evaluation. The borrower is also required to submit documentation to the court, including his income tax returns, expenses, benefits, and information regarding any additional sources of income. Lastly, the statute actually mandates that the parties negotiate in “good faith” to reach an agreement, but what is “good faith” at this stage?
The State of New York has one of the longest foreclosure processes2 in the United States, often taking several years. Accordingly, the parties would have had ample time prior to litigation to discuss the potential for loan modification. While some lenders may legitimately attempt to assist defaulting borrowers in keeping their homes, others may make a minimum effort as a means of eventually forcing a short sale or foreclosure. For this reason, the courts require documentation of the process itself to determine whether negotiations have been undertaken in “good faith.” This term is defined subjectively as the states of mind of the parties during negotiation. “Good faith” includes honesty in purpose, faithfulness to the obligation, observance of reasonable commercial standards of fair dealing in the business, and lack of an intent to defraud or seek an unconscionable advantage.
A recent case3 out of King’s County—Deutsche Bank Natl. Trust Co. v. Husband (2015)— sheds light on what New York courts consider to be a “good faith” negotiation. In that case, the plaintiff lender was required to produce an itemized breakdown of all amounts claimed to be due and owed on the defaulting mortgage note for the compromise conference, including all relevant files concerning the loan and any modification requests. Not only did the plaintiff lender fail to comply with the full terms of the court’s request, a review of the evidence led the court to discover that the defendant’s rejection of a previous loan modification offer was proper because the plaintiff lender did not act in good faith when it presented the defendant with the loan modification terms. For example, the court found that the loan modification offer was not based on the defendant’s well-documented income, as the monthly payment requested constituted nearly 60% of it; the interest rate offered was too high; and the defendant was only given nine days to accept or reject the modification.
As is often the case, because “good faith” in New York is a relatively subjective standard, it is often defined as what not to do. There is an abundance of case law on the matter of “bad faith” negotiations in the context of foreclosure litigation, which includes providing conflicting information, refusing to honor agreements, unexcused delay, unexplained charges, and misrepresentations to the other party. Good faith typically entails approaching negotiations with an honest purpose, an intention to deal with the opposing party fairly, and an absence of intent to defraud or mislead.
An amendment to CPLR 34085 that became effective December 20, 2016 states that good faith will be measured by the totality of the circumstances when considering a variety of factors, including compliance with Rule 3408’s requirements; compliance with applicable court rules and orders; compliance with applicable mortgage servicing laws, rules, and loss mitigation standards; and whether the parties have conducted themselves in a way that demonstrates efforts to reach a mutually agreeable outcome, such as not causing unreasonable delay and providing accurate information.
As the primary goal of the compromise hearing required under CPLR 3408 is to keep the borrower in his or her home and ensure that all previous modification offers were made in good faith, failure of the lender to negotiate in good faith can result in sanctions. Such sanctions can generally include a reduction of the interest rate on any balance that has accrued since the date of the bad faith, payment of a civil penalty to the state, actual damages payable to the defendant, or a denial of all attorneys’ fees and costs.
Whether you are in the process of working with your bank on a loan modification, have recently received a 90-day foreclosure notice, or a foreclosure complaint has recently been filed against you, it is important to note that the goal of a foreclosure compromise hearing is to help you remain in your home. As such, your lender must adhere to strict standards of good faith negotiations intended to help you make fair, affordable payments on your mortgage. If your HAMP application has been rejected or you believe your lender is not negotiating with you in good faith, contact Ronald D. Weiss, P.C., Attorney at Law. He is your premier foreclosure attorney on Long Island, specializing in Nassau and Suffolk Counties, and he can analyze the specific facts of your case in order to determine whether your lender is abiding by federal and New York modification standards. Contact us today online or at 631.271.3737 for a no-risk consultation.