The best lenders continually adapt to whirlwind market conditions, and stay a step ahead of ever-changing legislation.

An an ideal world, borrowers would never default, and lenders could avoid the time and expense of foreclosure. Of course, defaults do happen, and lenders often find themselves facing many of the same avoidable issues that stall, or even prevent, recovery.

During the last two years, new foreclosure filings and overall foreclosure activity significantly decreased from prepandemic levels. This change was not due to an actual decrease in defaults; it was a result of various pandemic-related government moratoria, state legislation, and new regulatory requirements. However, according to an Attom Data Solutions’ April 2022 report entitled “U.S. Foreclosure Activity Sets Post Pandemic Highs in First Quarter of 2022,” foreclosure filings during the first quarter of this year have increased significantly. There’s been a 39% increase over fourth quarter 2021, and a 132% increase over first quarter 2021.

With foreclosure activity finally resuming, lenders should (1) keep abreast of ever-changing legislation and procedural and regulatory requirements, which vary from state to state, and (2) review their documents and policies and revise them as necessary to prevent snags in future litigation.

Beware of Statute of Limitations Issues

One of the main hot-button issues in New York foreclosures over the last several years has been its six-year statute of limitations (SOL) to foreclose on a mortgage. New York courts have concluded that, upon the filing of a foreclosure complaint, the six-year SOL to foreclose begins to run on the entire debt.

Due to the often-lengthy period cases spend in mandatory settlement conferencing (for borrower-occupied residential property), and the significant backlog in motions, it is not uncommon for a foreclosure case to remain pending in New York for more than six years. This delay in disposition could result in a lien loss to the lender if the SOL expired during the pendency of an action and that action is then dismissed.

As the case law currently stands in New York, once the SOL begins to run, only a lender’s “affirmative act of revocation” will be sufficient to revoke its election to accelerate the mortgage and restart the SOL period. Alternatively, a borrower’s actions may extend or reset the SOL period even after it has expired, but only under very limited circumstances, including a payment/partial payment or the borrower’s express written acknowledgment of the debt and promise to pay it.

Notably, last February, the New York Court of Appeals issued a decision in Freedom Mortgage Corp. v. Engel, holding that a lender’s voluntary discontinuance of its prior foreclosure action qualifies as an “affirmative act of revocation.” Further, the Court of Appeals held that a notice of deacceleration is sufficient to revoke acceleration.

A new bill, which has now passed both the New York Senate and Assembly, amends various New York laws related to the rights of parties involved in foreclosure actions. And, it effectively eliminates a lender’s ability to extend, toll, or revive the SOL for a foreclosure action once the cause of action has accrued. The bill also eliminates the option of an express written acknowledgment of debt to revive the SOL, leaving only a borrower’s partial payment as an effective acknowledgment. If the governor signs the bill into law as currently drafted, lenders will be left with extremely limited defenses to borrowers’ quiet title claims seeking discharge of a mortgage on SOL grounds, leaving their portfolios subject to substantial losses.

New York is just one such example; many judicial foreclosure states have faced and addressed similar SOL issues. Lenders should, therefore, be aware of certain common pitfalls in foreclosure actions and take steps to avoid or mitigate such issues to prevent losses.

Close the Gaps in Loan Documents

Lenders should review the language of their standard loan documents to ensure substantive provisions like payment, default, acceleration, and notice are clear and unequivocal.

Default. Commercial and non-residential mortgage loans may provide for an automatic event of default under certain conditions, without requiring notice to the borrower and an opportunity to cure. If the mortgage loan terms require service of a notice of default on the borrower, ensure the contents of the notice and the mailing requirements are consistent in both the note and the mortgage and they are written in simple terms that are easily carried out in case of default.

Acceleration and deacceleration. Just as the note and mortgage undoubtedly specify the actions a lender must take to accelerate a loan, so too should both documents detail the action a lender may take to revoke a prior acceleration.

Receiver. With respect to any receiver of rents provision, the language should provide that a receiver be appointed upon commencement of an action rather than upon default.

Statute of limitations. To the extent possible, the note and mortgage should include language whereby the borrower expressly waives SOL as a defense to payment of the debt or performance of any obligations under the note and mortgage, or as a bar to the enforcement of the note or mortgage, or any action brought to enforce either document.

Originate and Service with Care

Because a lender’s proofs in a foreclosure action are generally based on business records, all records must be meticulously prepared and retained so as to be admissible in court. The most common borrower defenses in foreclosure include challenging a lender’s standing to foreclose; service of required notices (both contractual and statutory); compliance with any other statutory prerequisites to foreclosure; the execution, validity, and/or recording of the loan documents; and whether a default occurred.

Have written policies and procedures for underwriting, origination, and servicing of loans, including detailed procedures for the preparation, mailing, and documenting of notices.

Mandate training in and compliance with all applicable written policies and procedures for each employee.

If revoking a prior acceleration, the loan history should clearly reflect the revocation, and the amount due following the revocation should not include the accelerated loan balance. Maintain proof of mailing, and if applicable, proof of delivery, for any deacceleration notices sent to the borrower.

Always maintain a detailed electronic business record of the location of any original loan documents (especially the note) from origination on, including any transfer of possession and the identity/authority of any agent or custodian taking possession of the originals on the lender’s behalf.

Loss Mitigation and Strict Compliance

Some states, like New York, require an election of remedies whereby a lender must choose whether to sue on the note or foreclose on the mortgage lien (or other security), but the lender is prohibited from pursuing both. Most also require strict compliance with statutory prerequisites like pre-foreclosure notices. Given private lenders’ often close relationships with borrowers, many of whom are repeat borrowers, offering early and diverse loss mitigation options like repayment or forbearance plans and loan modifications can help prevent foreclosures and maintain relationships with borrowers.

The basics of lending will always remain the same, but the best lenders continually adapt to whirlwind market conditions and stay a step ahead of ever-changing legislation. After all, complacency leads to stagnation, which is probably the biggest threat to a lender’s bottom line.