As lenders are aware, foreclosure proceedings in New York have changed considerably subsequent to the enactment of CPLR § 3408 and similar legislation, which placed additional obligations on lenders commencing a foreclosure action with respect to a homeowner’s primary residence.  Enacted in 2008 to deal with the mortgage foreclosure and underlying financial crisis, CPLR § 3408 originally applied only to foreclosure actions involving high-cost, subprime or nontraditional home loans.  However, in November 2009, the New York Legislature extended the applicability of this statute to encompass all residential home loans.

CPLR § 3408 requires, among other things, that the court hold a mandatory conference within sixty days after the date when proof of service is filed with the county clerk.[1]  CPLR § 3408(a).  In addition, CPLR § 3408(f) mandates that the lender and homeowner “negotiate in good faith to reach a mutually agreeable resolution, including a loan modification, if possible.” CPLR § 3408(f).  The corresponding rule states that the court “shall ensure that each party fulfills its obligation to negotiate in good faith and shall see that conferences not be unduly delayed or subject to willful dilatory tactics so that the rights of both parties may be adjudicated in a timely manner.”  22 NYCRR 202.12-a.

Several recent cases demonstrate the variety of penalties courts have imposed on lenders who exhibit bad faith in settlement negotiations, including banning them from collecting legal fees and expenses, imposing exemplary damages, indefinitely staying the foreclosure proceeding, imposing monetary sanctions and even dismissing the foreclosure proceeding entirely.  See Bank of Am., N.A. v. Lucido, 950 N.Y.S.2d 721 (N.Y. Sup. 2012) (granting defendant exemplary damages and barring plaintiff from collecting any interest, attorney’s fees, legal fees or costs); One West Bank, FSB v. Greenhut, 957 N.Y.S.2d 265 (N.Y. Sup. 2012) (sanctioning plaintiff in the amount of $1,000.00); Deutsche Bank Trust Co. of Am. V. Davis, 934 N.Y.S.2d 33 (N.Y. Sup. 2011) (staying foreclosure proceeding until such a date that plaintiff moves the court to resume settlement negotiations in good faith); BAC Home Loans Servicing v. Westervelt, 920 N.Y.S.2d 239 (N.Y. Sup. 2010) (barring plaintiff from collecting certain mortgage arrears, interest, late fees and any modification fees); Wells Fargo Bank, N.A. v. Hughes, 897 N.Y.S.2d 605 (N.Y. Sup. 2010) (dismissing foreclosure action without prejudice).

 In U.S. Bank, N.A. v. Padilla, the parties attended settlement conferences for over one year, during which the lender made several disjointed requests for documentation but failed to provide a final determination regarding the homeowner’s request for a loan modification.  U.S. Bank, N.A. v. Padilla, 929 N.Y.S.2d 203 (N.Y. Sup. 2011).  In ordering the lender to re-open the homeowner’s file and consider her again for a modification, the court stated that it has “power, upon a finding of bad faith, to impose a equitable remedy commensurate with the Bank’s conduct regarding the loan modification.”  Id. at * 3.  The court concluded that if the lender failed to give a full and detailed explanation of its answer at the next conference, it would refer the matter for a bad faith hearing.  In addition, the court barred the lender from collecting certain interest.  Id. 

More recently, New York Attorney General Eric Schneiderman commenced a lawsuit against HSBC Holdings, Plc, accusing the lender of purposefully delaying filing requests for judicial intervention (“RJI”). By delaying the filing of the RJI – which triggers the scheduling of the settlement conference – HSBC was able to continue charging homeowners interest and fees.  New York requires lenders to file an RJI at the same time they file proof of service of the summons and complaint in the foreclosure action.  See 22 NYCRR 202.12-a(b).  In spite of this, Mr. Schneiderman’s investigation demonstrated that HSBC failed to file an RJI in many cases for more than two years, causing such cases to linger unnecessarily in foreclosure.  Mr. Schneiderman sought damages for homeowners “injured by HSBC’s illegal practices” and to compel the bank to file the required documentation in pending and future foreclosure cases.  See New York v. HSBC Bank USA, Index No. 1660/2013, New York State Supreme Court, Erie County.  Earlier this year, Mr. Schneiderman also asserted he may sue Bank of America Corporation and Wells Fargo & Company for violations of the 2012 $25 billion settlement agreement between the Justice Department, Department of Housing and Urban Development, 49 attorney generals and the country’s five largest mortgage servicers.[2]  HSBC was not a party to the settlement agreement, which placed numerous requirements on those lenders and provided financial relief for homeowners with regard to, among other things, loan modifications.

As illustrated above, lenders who fail to comply with the requirements of CPLR § 3408 may face a number of penalties.  However, courts have acknowledged that CPLR § 3408 does not compel a lender to modify a mortgage if it is not financially feasible for either party.  In fact, the Second Department has recently imposed certain limits on a court’s authority to order sanctions and other remedies upon a lender for bad faith, confirming that a court must employ “appropriate, permissible, and authorized remedies, tailored to the circumstances of each given case.”  Wells Fargo Bank, N.A. v. Meyers, 2013 WL 1811781, at * 9 (N.Y. A.D. 2 Dep’t. 2013).

In fact, in Wells Fargo Bank, N.A. v. Meyers, the Appellate Division, Second Department, reversed the trial court’s ruling that compelled the lender to execute a loan modification and directed dismissal of the foreclosure complaint.  Id.  While they affirmed the trial court’s holding that the lender did not negotiate in good faith, the Appellate Division clarified that CPLR § 3408 does not mandate the parties reach a settlement and that “courts may not endeavor to force an agreement upon the parties.”  Id. at * 7.  Moreover, judges lack any authority to  “rewrite the contract that the parties freely entered into … upon a finding that one of those parties failed to satisfy its obligation to negotiate in good faith,” as doing so would violate the Contract Clause of the United States Constitution.[3]  Id.

To the same effect, in IndyMac Bank, F.S.B. v. Yano-Horoski, the Appellate Division, Second Department, reversed the trial court’s order to cancel a note and mortgage due to the lender’s failure to negotiate in good faith pursuant to CPLR § 3408.  IndyMac Bank, F.S.B. v. Yano-Horoski, 78 A.D.3d 895, 896 ((N.Y. A.D. 2 Dep’t. 2010).  The Appellate Division explained that the New York Supreme Court’s equitable powers do not include the authority to cancel the loan documents and that there was “no acceptable basis for relieving the homeowner of her contractual obligation to the bank, particularly after a judgment had already been rendered in the plaintiff’s favor.” Id.

Although the Meyers and Yano-Horoski decisions refine and constrain a trial court’s remedies with respect to violations of CPLR § 3408, lenders who are not mindful of its requirements may be prohibited from collecting interest, legal fees and expenses, and may face exemplary damages, and/or a stay or dismissal of the foreclosure proceeding.  If denying a loan modification request, a prudent lender will provide a legitimate and reasonable explanation to support such a determination.  The bottom line is that lenders must establish protocols to ensure strict compliance with the requirements of CPLR § 3408 and its corresponding rules or risk the consequences set forth above.

With offices in New York City, Long Island and New Jersey, Weltman & Moskowitz represents its bank and credit union clients with their foreclosure needs from workouts to loan modifications to deed-in-lieu agreements, and, finally, foreclosure litigation. If you are in need of assistance with a foreclosure matter, one of our experienced attorneys can give you the assistance you need. You can reach us at 212-684-7800 or 201-794-7500 or email Michael Moskowitz, Richard Weltman, Melissa Guseynov or Michele Jaspan.

[1] Specifically, the court must convene the settlement conference to examine “ the relative rights and obligations of the parties under the mortgage loan documents, including, but not limited to determining whether the parties can reach a mutually agreeable resolution to help the defendant avoid losing his or her home, and evaluating the potential for a resolution in which payment schedules or amounts may be modified or other workout options may be agreed to, and for whatever other purposes the court deems appropriate.”  CPLR § 3408(a).

[2] Bank of America Corporation, J.P. Morgan Chase & Co., Wells Fargo & Company, Citigroup Inc. and Ally Financial Inc. were the mortgage servicers that were parties to the settlement agreement.

[3] Article I, Section 10 of the U.S. Constitution provides that no state shall pass any law impairing the obligation of contracts.  See U.S.C.A. Const. Art. I. §10(1).