A&B ABstract: In response to the economic fallout of the COVID-19 pandemic, state executives and legislatures have seriously restricted residential foreclosures and evictions. These restrictions have included requiring forbearance for private mortgage loans and placing moratoria on foreclosures.
While these restrictions generally apply to residential mortgages lapsed in the wake of the global pandemic, they do not protect consumers who were facing foreclosure prior to the crisis. To pick up the slack in this area, various state judiciaries are tightening the reigns on mortgage servicers, demanding servicers’ strict compliance with the notice provisions of mortgage agreements and state foreclosure procedures. Courts have even gone so far as to void foreclosure actions where the breach notices sent to consumers were technically deficient but substantively sound.
Alabama Court of Civil Appeals Decision
In June 2020, the Alabama Court of Civil Appeals voided a foreclosure sale because of a servicer’s failure to strictly comply with the notice provision in the mortgage agreement. In Barnes v. U.S. Bank N.A., as Trustee for NRZ Pass-Through Trust V, No. CV-17-901127, the mortgage agreement required any notice of default to inform the borrower of “the right to bring a court action to assert the non-existence of a default or any other defense of Borrower to acceleration and sale” of the mortgaged property.
The servicer’s notice, however, employed equivocal language concerning the borrower’s rights, informing the borrower only that they “may have the right” to challenge the default. As a result, the court found the foreclosure sale was void, cementing the law in Alabama that a defect in the form of a default notice vitiates the legality of an ensuing foreclosure.
Rhode Island Supreme Court Decision:
Similarly in June 2020, in a matter of first impression, the Rhode Island Supreme Court vacated a foreclosure because the notice of default did not strictly comply with the requirements set forth in the mortgage agreement. In Woel v. Christiana Trust, as Trustee for Stanwhich Mortgage Loan Trust Series 2017-17, et al., No. 2018-347-Appeal (PM 16-921), the mortgage agreement contained a nonuniform covenant developed for Rhode Island mortgages. According to the covenant, in the event of a default, the mortgagee must provide a notice of default informing the borrower of “the right to reinstate after acceleration.”
The borrower defaulted and received a notice of default informing the borrower that they had “the right to cure the default after acceleration,” not the specific right to reinstate. Based on this minor discrepancy in language, the Rhode Island Court concluded that there had not been strict compliance with the covenant’s notice requirements, rendering the foreclosure a nullity.
New York Appellate Division Decision:
Finally, in July 2020, the Second Department of the New York Appellate Division reversed a judgment of foreclosure and sale because the notice the borrowers received did not strictly comply with New York’s Real Property Actions and Proceeds Law (“RPAPL”). The version of RPAPL at issue required notices to provide a list of five housing counseling agencies serving the region where the borrowers reside. The notice to the borrower, however, included three agencies serving the region and two agencies serving different regions.
Even though there was no evidence that any of the three compliant agencies denied the borrowers service, the Appellate Division held that under a strict compliance standard, a technical deficiency in the notice was dispositive, regardless of its substantive effect.
These decisions are not necessarily groundbreaking, as courts have generally required strict compliance in the foreclosure context. However, the above decisions indicate a growing willingness among the judiciary to prevent foreclosure on even the narrowest technical grounds. As such, servicers should ensure that any notice of default sent to a borrower strictly complies with the terms of the mortgage agreement and state foreclosure proceedings because in a post-COVID-19 world, any technical deficiency will likely be fatal to a servicer’s efforts.