Mortgage Lender Has Implied Duty of Good Faith and Fair Dealing
Nov 2, 2021 | Written by: Share|
In a small victory for common sense and fairness, the NJ Appellate Division re-affirmed the principle that a mortgage lender owes an implied duty of good faith and fair dealing to the borrower and cannot cause the borrower to incur additional damages by its actions, even if the additional expenses were unintentionally incurred.
In Wilmington Savings Fund Society v. Daw, A-0829-19 (Approved for Publication October 22, 2021), the borrowers obtained a $350,000.00 mortgage in 2007 for their shore home in Point Pleasant. Unfortunately, their home sustained extensive flood damage from Superstorm Sandy five years later. The borrowers attempted emergency repairs at their own costs, and the bank refinanced the mortgage. Due to market changes and injuries that adversely affected the borrower’s work ability, the borrowers were not able to make the mortgage payments and defaulted in 2014.
In the interim, the borrowers sought to repair the damages and obtained a Reconstruction, Rehabilitation, Elevation and Mitigation (RREM) grant of $150,000.00 in 2014 to rebuild the home, and applied for flood insurance proceeds of which $150,000.00 were granted in 2015. Pursuant to the mortgage contract, the flood insurance proceeds were paid in escrow for the benefit of the bank to use to rebuild the home or pay down the debt, depending upon which was reasonable under the terms of the contract.
The mortgage remained in arrears and the bank filed for foreclosure in 2016. The borrowers failed to answer the foreclosure action but continued their efforts to convince the bank to permit them to repair the home from the flood insurance proceeds and the RREM grant. The bank denied the borrowers’ application to once again refinance their mortgage, and determined that repairing the home was not economically feasible and was adverse to its security interest in the property. Eventually, the bank obtained a default judgment for the balance of the mortgage, interest costs and fees, including the mortgage interest that accrued during the three years the flood insurance proceeds were escrowed. The borrowers then changed their request to repair the home and demanded the bank use the flood proceeds to pay down the mortgage and to obtain a credit against the foreclosure judgment for the amount of interest that allegedly accrued during the three years the bank’s agent held the flood insurance proceeds in escrow, plus the interest earned on those proceeds.
The Trial Court denied the borrowers’ requests and entered judgment for the full amount sought by the bank. The borrowers appealed, claiming the bank did not exercise good faith and fair dealing in allowing the proceeds from the flood insurance to remain in escrow for three years instead of timely using those funds to pay down the mortgage. The Bank did not dispute it owed the borrowers an obligation to act in good faith and to deal fairly with them. The Bank claimed it acted in good faith at all times, and it was reasonably trying to determine whether the borrowers’ request to rebuild was reasonable for both parties.
The Appellate Division agreed the bank owed an implied duty of good faith and fair dealing to the borrowers. The Panel determined that the Bank’s three-year delay in deciding how to ultimately use the escrowed proceeds was plainly unreasonable, and unfairly permitted mortgage interest to accrue against the borrowers. The Panel also noted the asserted inconsistent positions regarding whether repairing the property was feasible. The Panel finally determined the record was not sufficient to determine the remedy, and remanded the matter to the Trial Court to determine when it became unreasonable for the bank to keep the flood insurance proceeds in escrow in order to determine the amount of credit the borrowers should receive. The Panel noted the bank was entitled to a reasonable amount of time to decide whether to repair the property or apply the proceeds to the mortgage. Nonetheless, the bank cannot delay in obtaining the information necessary to make that decision, or in making the decision.
The Wilmington Savings Fund opinion stands for the proposition that equitable behavior is expected of lenders regardless of their right to judgment against the borrower.