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Court of Appeals Addresses Loan Acceleration Issue

Residential mortgage loan documents typically provide that if the borrower goes into default, the lender may accelerate the loan, meaning that the entire loan balance is due and payable immediately. This frequently occurs, for example, when the lender commences a foreclosure action. Sometimes, however, the lender does not proceed with the foreclosure action and the action is withdrawn. Several court decisions had held that the lender’s discontinuance of the foreclosure action did not reverse the acceleration of the loan. This created a trap for unwary lenders, because on the date of acceleration, the six-year statute of limitations began to run on the entire balance due – meaning that if the lender sought to bring a new action more than six years later, the entire action could be dismissed as time-barred, leaving the lender unpaid and unable to foreclose.

New York’s highest court, the Court of Appeals, has now addressed this issue in Freedom Mortgage Corp v. Engel, 2021 N.Y. LEXIS 103, 2021 NY Slip Op 01090 (Feb. 18, 2021). The Court stated that “[a]dopting a clear rule that will be easily understood by the parties and can be consistently applied by the courts, we hold that where the maturity of the debt has been validly accelerated by commencement of a foreclosure action, the noteholder’s voluntary withdrawal of that action revokes the election to accelerate, absent the noteholder’s contemporaneous statement to the contrary.”

Even with the benefit of this holding, lenders must remain careful. For example, the Court’s holding may not apply when the lender has accelerated the loan in communications other than the pleadings in the foreclosure action itself, or if the dismissal of the foreclosure action is other than voluntary. It is also not clear whether the ruling will apply to commercial foreclosures. The safest course, where a lender wishes to reverse an acceleration, is to provide the borrower with clear notice that the lender is doing so. For example, in Carter v. U.S. Bank Trust, N.A., 2021 N.Y. Misc. LEXIS 335, 2021 N.Y. Slip Op. 30258(U) (Sup. Ct. Kings Co. Jan. 27, 2021), a lower court held that a lender had validly decelerated the loan, thus avoiding the bar of the statute of limitations, where it advised the borrower of the deceleration in a written notice sent to the borrower before the statute of limitations would have expired. In addition, lenders and other parties must always be attentive to the specific terms of the loan documents in any given transaction, and be certain to comply with any requirements imposed by their terms.