Insights

All the parties involved in a mortgage have strong incentives to avoid foreclosure. Many states have worked to promote mediation as a means to find solutions that are amenable to creditors and borrowers. Requiring mediation, however, inevitably leads to questions about a mortgagee’s willingness to modify a loan and negotiate in good faith. The use of preset internal guidelines and calculations to determine whether a borrower’s loan should be modified further complicates matters and also potentially inhibits the effectiveness of mediation. A New Jersey court recently heard a case regarding mediation, internal guidelines, and good faith.

Mark Colyer and Donna Colyer obtained a home mortgage loan from Hudson City Savings Bank. The Colyers defaulted on the loan, and Hudson sued to foreclose in the Superior Court of New Jersey, Chancery Division, Bergen County. The Colyers applied for and were granted foreclosure mediation pursuant to New Jersey’s Foreclosure Mediation Program. The Colyers and Hudson were scheduled for three telephone conferences in accord with the mediation program. Before the third meeting, the Colyers received notification that Hudson had denied their loan modification application because the loan-to-value ratio exceeded that allowable under internal guidelines. The Colyers’ debt-to-income ratio and housing debt-to-income ratios fell within the standards set by Hudson. The Colyers alleged that Hudson failed to mediate in good faith and moved the court to dismiss Hudson’s foreclosure complaint.

The New Jersey Rules of Court require mediation to be conducted in good faith. N.J. Court Rules, R. 1:40-4(g). However, the term “good faith” is not defined as applicable to the rule. Hudson argued that because it followed its internal guidelines and refused to modify the loan based on pre-existing loan-to-value ratio standards, it had acted in good faith. The Superior Court of New Jersey found that strict adherence to internal procedures does not necessarily constitute good faith. The court noted that the guidelines used by Hudson could still potentially lead to unreasonable outcomes, such as denying modification for a mortgagor with exceedingly healthy debt-to-income and housing debt-to-income ratios accompanied by a slightly below par loan-to-value ratio. The court also stated that while the use of strict internal guidelines for making modification decisions was “troubling,” it was not impermissible on its face. The court explained that it was hesitant to determine on record what was reasonable in the highly regulated mortgage industry. The court noted that the Colyers offered no evidence of what was reasonable in the circumstances, or whether Hudson’s standards and application of those standards were as unreasonable. As such, the court stated that it had insufficient evidence to find that Hudson had failed to act in good faith and denied the Colyers’ motion to dismiss.

The noncommittal take of the court belies the difficulty of determining whether mediation is conducted in good faith and the weight that should be given to a creditor’s internal guidelines. While the court seemed uncomfortable with a strict adherence to internal guidelines in making modification decisions, the court was unwilling to state that such adherence is evidence of lack of good faith when it comes to mediations. Crucially, the court left it up to borrower to prove that a creditor failed to act in good faith, and would not assume bad faith because of adherence to internal guidelines.

Hudson City Savings Bank v. Colyer, 2013 N.J. Super. Unpub. LEXIS 263 (N.J. Super. Ch.Div. February 4, 2013)

Latif Zaman is an associate in the Hanover, MD office of Hudson Cook, LLP. Latif can be reached at 410-782-2346 or by email at lzaman@hudco.com.