The subprime mortgage crisis triggered an onslaught of residential foreclosure actions.  The New York State Legislature responded in 2008 by enacting the “Subprime Residential Loan and Foreclosure Laws.” One of these provisions, CPLR 3408(a), requires that an early settlement conference be held in every residential foreclosure action for the purpose of ascertaining “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.” In 2009, the Legislature further provided in CPLR 3408(f) that “[b]oth the plaintiff and defendant shall negotiate in good faith to reach a mutually agreeable resolution, including a loan modification, if possible.”  These principles are reiterated in the court system’s internal rules as well.

 

Although these laws and rules do not set forth any specific remedy for a party’s failure to negotiate in good faith, both provisions have been interpreted as provide the courts with authority to take some action where a party fails to satisfy that obligation. Recently, in US Bank National Association v. Williams, 2014 N.Y. App. Div. LEXIS 7310, 2014 N.Y. Slip Op. 7349 (2d Dep’t Oct. 29, 2014), the Appellate Division affirmed that part of the trial court’s order that imposed monetary penalties on the foreclosing bank for engaging in what the court described as bad-faith settlement negotiations. In that case, the parties had participated in ten settlement conferences over a 13-month period, during which the bank repeatedly requested documentation from the homeowner regarding a possible modification of the mortgage terms or interest rate, but thereafter claimed that the note’s pooling and servicing agreement prohibited modification of the loan’s terms.

 

As a remedy for the bank’s “bad faith, the trial court had directed the bank to submit a proposed loan modification order to the homeowner, and barred the bank from collecting interest, legal fees, and costs incurred from the date of the initial settlement conference through the date on which the parties agreed to a loan modification.  The Appellate Division modified that directive.  It affirmed the trial court’s decision insofar as it denied the bank interest and attorneys’ fees accrued during the period between the first settlement conference and the date on which settlement discussions resumed.  However, it vacated the trial court’s order insofar as it directed the bank to grant the borrowers a loan modification, holding that a court may not require a lender to modify the terms of the loan.  Thus, despite the Legislature’s and court administrators’ unambiguous desire that lenders consider loan modifications in foreclosure actions, the appellate court held that the courts do not have the authority to impose such an outcome itself.