Ballard Spahr LLP: NJ Supreme Court Rules Deficient Foreclosure Notices Not Fatal to Foreclosure Action

By the Consumer Financial Services Group

A mortgage servicer's failure to identify the name and address of the lender on the required Notice of Intention to Foreclose (Notice) does not require that the court dismiss a subsequent foreclosure action, the Supreme Court of New Jersey ruled on February 27.

The decision in US Bank National Association v. Guillaume gives trial courts in New Jersey broad discretion to fashion an appropriate remedy for deficient Notices, including dismissal without prejudice, service of a corrected Notice, or any other remedy appropriate under the circumstances of a given case. The Supreme Court directed trial courts to consider the impact of the defective Notice on the borrower's information about the status of the loan, and on his or her opportunity to cure the default.

In most situations where the Notice fails to identify the lender, the borrower will interact with the servicer and consequently there will be no negative impact. This is what happened in Guillaume and it is anticipated that most courts will now follow the decision of that trial court and direct lenders to file corrected Notices.

In Guillaume, the Notice identified the name and address of the servicer, but not the lender. After a foreclosure suit was instituted by the lender, the borrowers negotiated with the servicer in an unsuccessful attempt to modify the loan. The borrowers failed to answer the foreclosure complaint and a default judgment was entered.

The borrowers then moved to vacate the default judgment on grounds that the Notice did not identify the name and address of the lender, as required by the New Jersey Fair Foreclosure Act (FFA). The trial court refused to vacate the judgment and instead directed that the lender serve a corrected Notice on the borrowers.

On appeal, the lender argued, alternatively, that: (1) the original Notice complied with the FFA because the servicer met the statute's definition of "lender"; and (2) the allegedly defective Notice demonstrated "substantial compliance" with the statute's requirements. The court rejected both arguments and held that the Notice required by the FFA must include the name and address of the actual lender, in addition to contact information for any loan servicer who is collecting mortgage payments and/or negotiating the resolution of any dispute between the lender and borrower.

However, the Supreme Court held that the trial court had properly exercised its discretion in allowing the lender to cure the deficiency by sending a revised Notice. This decision is significant because it expressly overrules the Appellate Division's contrary decision in Bank of New York v. Laks, 422 N.J. Super. 201 (App. Div. 2011) [enhanced version available to lexis.com subscribers], which held that the only remedy available to a trial court for such a violation of the FFA was a dismissal without prejudice. Had theGuillaume Court affirmed the decision in Laks, thousands of pending foreclosure cases would likely have been dismissed causing lenders to have to start from scratch by serving new Notices and filing new lawsuits.

Finally, the borrowers also asserted that the original lender violated Sections 1601 to 1667f of the Truth in Lending Act because it overcharged them for recording fees. Based on this violation, the borrowers contended that they were entitled to the remedy of rescission, as provided for by TILA's Section 1635. The Supreme Court agreed with the trial court and Appellate Division that the remedy of rescission was not available to the borrowers because they did not tender the principal due under the loan. The Supreme Court's decision is consistent with numerous decisions in the federal courts.

Ballard Spahr lawyers have substantial experience in defending banks and servicers against documentation issues that have arisen in litigation. Since foreclosure documentation concerns surfaced last year, several clients have retained Ballard to conduct due diligence reviews of their mortgage foreclosure procedures and files and to help them respond to regulatory inquiries.

Ballard Spahr has created the Collection Documentation Task Force to assist clients with the rapidly developing spread of documentation-related challenges, from the mortgage foreclosure process to the collection of credit card, student loan, and other types of consumer debts. Composed of lawyers from Ballard Spahr's Consumer Financial Services Group, the task force brings together litigators with experience defending mortgage lenders in documentation-related lawsuits nationwide and regulatory lawyers with deep knowledge of the Office of the Comptroller of the Currency's national bank foreclosure review process.

The group also produces the CFPB Monitor, a blog that focuses exclusively on important Consumer Financial Protection Bureau developments. To subscribe, use the link provided to the right.

For more information, please contact Practice Leader Alan S. Kaplinsky, 215.864.8544 or kaplinsky@ballardspahr.com; Martin C. Bryce, Jr., 215.864.8238 or bryce@ballardspahr.com; or William J. DeSantis at 856.761.3483 or desantisw@ballardspahr.com.


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