MORTGAGE SERVICING IS A MINEFIELD

We want to bring to your attention two recent court decisions that bear directly upon our work for our bank and other mortgage clients.

The first case, from New York, is Negrin v. Norwest Mortgage, Inc. (AD2, 11/15/99), 1999 WL 1038597. This case was decided by our State's intermediate appellate court, the Appellate Division. It involved the fee charged for faxing a payoff letter and a "recording fee" charged by a payoff bank. The Appellate Division, in a 3-1 decision, held both fees impermissible.

The fax fee was a $10.00 charge for expedited delivery of a payoff statement for a condominium unit sale; the Court stated that §274-a(2)(a) of the Real Property Law prohibits any charge from being imposed to the mortgagor of an individual condominium unit for delivery of a payoff statement. The Court went on to state that merely because the statute requires written notice to the lender before a borrower can sue either to compel delivery of the payoff statement, or (in the case of a one-to-six family owner-occupied building or individual condominium unit) actual damages, does not mean that because a borrower telephones rather than writes, the lender can then charge a fax fee. The Court also said that advance disclosure of the fee to the borrower did not cure the problem.

The "recording fee" was challenged under General Business Law §349 as a "deceptive trade practice". The Court sustained a private (rather than governmental) right of action. The Court used the analogies of unwarranted account maintenance fees and continued collection of PMI (private mortgage insurance) premiums after the LTV (loan to value) ratio had gone below 75%. The lender never recorded anything in this case; recording was done by buyer's title insurer in this case and paid for by the seller-borrower.

Although this case involved real estate (a condominium unit) and, as to the fax fee, a specific statute prohibiting the charge, we believe it is only a matter of time before some borrower tries to attack the fax fee for cooperative apartments.

Incidentally, this case has no bearing upon courier-service fees for delivering actual collateral securing the loan, such as stock certificates, proprietary leases and loan documents, such as notes, loan security agreements and recognition agreements.

The second case involved a cooperative apartment foreclosure by the cooperative housing corporation (CHC) for nonpayment of maintenance charges. There, the lender and its counsel had received several communications from the CHC's counsel, and the foreclosure sale was advertised in the press. The lender did nothing until four days before the sale date, when lender's counsel asked for a 15-day adjournment to get an appraisal to see if the lender wanted to redeem. This was twice denied. Lender's counsel sent a fax at 6:30 p.m. on the evening before the sale, demanding notice of the time and place of the sale. CHC's counsel said their office was closed for the day when the fax came in. The lender claimed it had been deprived of any reasonable opportunity to appear at the foreclosure sale, and moved to set the sale aside. The Court (Supreme Court, Westchester County) denied the lender any relief, saying that the lender had more than enough notice, and that their failure to appear at the sale was due to their want of diligence. (Chase Manhattan Bank v. Wildwood Tenants Corp., Justice DiBlasi, NYLJ, 1/18/00, p. 35, col. 5). The facts here are so clear they require no comment.

While doing nothing and letting the CHC foreclose is always an option for a lender (and not one to be lightly discarded), the decision should be made well in advance of the sale date. In fact, one of our clients made that decision and when the CHC tried to deny our client any rights to subletting proceeds after the CHC re-let the apartment, our firm successfully sued the CHC and established that the lender has rights to sale and subletting proceeds even after foreclosure (KeyBank USA National Association v. 105 Christopher Street Owners Corp., et. al., Justice DeGrasse, Supreme Court, New York County, Index No. 601044/99, 10/6/99).

Please feel free to contact us if you have any questions. Of course, this capsule review is not intended as detailed legal advice, and we urge you to consult counsel as to specific matters.