“Totality of the Circumstances” Standard Used in New York to Sanction Mortgagee for Lack of “Good Faith” Negotiation in Foreclosure Matter

By: Jill E. Alward and Timothy W. Salter

New York’s Appellate Division, Second Department, recently ruled that a mortgagee’s conduct in evaluating a borrower’s loan modification application should be judged using the “totality of the circumstances” standard to determine whether the mortgagee negotiated in good faith during mandatory foreclosure settlement conferences. Applying that standard in US Bank N.A. v. Sarmiento, 2014 NY Slip Op 05533 (2d Dep’t July 30, 2014), the Appellate Division affirmed a lower court’s holding that a foreclosing plaintiff failed to negotiate in good faith.

In Sarmiento, the plaintiff, over the course of a series of settlement conferences, offered the borrower an in-house loan modification but denied the borrower’s HAMP application four times. The borrower, after refusing to accept the in-house modification, moved for sanctions, which sought to bar the plaintiff from collecting any interest, costs, or attorneys’ fees from the date of the first settlement conference (December 1, 2009). In addition, the borrower asked the court to direct the plaintiff to review the borrower’s loan for HAMP “using correct information and without regard to interest or fees that have accrued on the subject loan since December 1, 2009.” The lower court granted the borrower’s motion in its entirety.
On appeal, the plaintiff argued that the lower court lacked the authority to impose sanctions for violating the good faith requirement of CPLR 3408(f) and further applied the wrong standard in support of its holding. The Second Department rejected both arguments.

In summarizing the offending conduct, the Second Department held that “[w]here a plaintiff fails to expeditiously review submitted financial information, sends inconsistent and contradictory communications, and denies requests for a loan modification without adequate grounds…such conduct could constitute the failure to negotiate in good faith to reach a mutually agreeable resolution.” The court further held that while “any one of the plaintiff’s various delays and miscommunications, considered in isolation, [did] not rise to the level of lack of good faith,” the plaintiff’s conduct, when reviewed using the “totality of the circumstances” standard, “evidenced a disregard for the settlement negotiation[,]” regardless of whether the borrower ultimately qualified for a HAMP modification.

While the court warned that its holding should be construed as a deviation from the principal limiting a court’s role in a foreclosure action “to interpretation and enforcement of the terms agreed to by the parties,” it ultimately alters and expands the standard of review for determining a mortgagee’s “good faith” during the foreclosure settlement process. The court’s holding has already been cited by at least one court, and does not appear to be an isolated ruling.

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