A branch of the onslaught of borrower protective legislation is a stealth component lurking in the Banking Department Regulations, NYCRR §419.11(h).1 Part 419 contains fourteen subsections with yet further subsections of those relating to mortgage servicing and its definitions.

Of particular concern here is Section 419.11, entitled “Residential mortgage loan delinquencies and loss mitigation efforts.” Subsection (h) reads as follows:

Waiver of legal claims and defenses. A Servicer shall not require a homeowner to waive legal claims and defenses as a condition of a loan modification, forbearance or repayment plan.

The danger of such a prohibition to mortgage holders should be immediately apparent. Lenders and servicers understand that an integral, indeed indispensable, settlement aspect of a mortgage foreclosure action is the waiver by the defaulting borrower both of defenses already interposed in the case and such defenses as the borrower might be holding in reserve to interpose later on in the action. Servicers recognize that blasts of facile defenses, most often without foundation, are a common defensive tactic.

Should a lender enter into a mortgage modification, forbearance agreement or other repayment plan, howsoever it might be denominated, there is no assurance that the agreement will be fulfilled on the borrower’s part. In actuality, servicers would relate that default by borrowers on such agreements occurs in a majority of cases.

Were defenses not to be waived, then in most instances, upon failure of the settlement (again in whatever form), the lender could expect to see the meritless defenses raised anew. Even if an occasional defense has some basis, a servicer should be entitled to some quid pro quo for its making concessions it would not otherwise be obliged to do.

Initially, a lender may have expended considerable sums towards legal expense in endeavoring to strike the defenses—which could of course be in the form not only of denials, but of affirmative defenses and counterclaims as well. Assuming those were not yet disposed of, upon failure of a settlement, encountering those defenses still again would elicit a second layer of legal cost. In those instances where the value of the property was less than the mortgage debt, inability to recover the additional legal fees on the lender’s part would be assured. Hence, striving to banish defenses is the mentioned necessary aspect of any settlement arrangement.

The noted section of NYCRR, however, removes the ability to protect against renewed or newly minted defenses upon settlement where this section applies—the home loan.2

Should a servicer decline to settle a case because it does not wish to face yet again the necessity to litigate a borrower’s defenses, it may encounter censure from the court on the ground that the servicer is not bargaining in good faith. This then places a servicer in an essentially impossible situation; it cannot avoid duplication of assault by defenses but, if it seeks to avoid that trap, it can suffer various penalties for failing to settle (among those, loss of legal fee expenses and/or accrual of interest).

Scenario

Highlighting these concerns in terms of actual steps in a foreclosure action should focus the analysis. In a home loan foreclosure (unlike the commercial case) the first step after service of process is the scheduling of a settlement conference. Whether or not an answer has been interposed by the borrower, if some form of settlement ensues, the servicer knows that upon renewed default the borrower stands fully armed to contest the case for years, even in the absence of any real basis. If concessions are to be made, the servicer would be unwise to volitionally remain exposed to a multi-year consuming defensive counter-thrust. The regulation, however, insists that the servicer do just that.

If an answer is submitted, it may often contain a host of supposed defenses, sometimes up to 20 or more. But servicers typically know, for example, that they have not waived the right to foreclose, that they have done nothing to be estopped, that they do not have unclean hands, that the action is not barred by laches, that the statute of limitations has not expired and so on, at length. Faced with such an answer, should settlement emerge, all these defenses repose in reserve to be launched the moment the borrower defaults upon the settlement, again, the commonplace result.

Perhaps most compelling is the situation where the settlement conference brings no result, the borrower does then answer and the servicer proceeds with a motion for summary judgment. With responses and the inevitable adjournments, this process can readily consume six months or even up to a year. If during these contretemps a settlement emerges, the servicer recognizes that it will yet again face this morass—the remarkable time it consumes and the expense it generates—if the borrower fails to honor the settlement. The servicer finds this unpalatable, but is barred by regulation from eliminating future warring on the defenses.

Faced with this dilemma, the question arises as to what remedies there might be for servicers?

Interpretation of Definition

Section 418.3 defines “Servicing mortgage loans” as

receiving any scheduled periodic payments from a borrower pursuant to the terms of any mortgage loan, including amounts for escrow accounts under section 6-k of the Banking Law, title 3-A of article IX of the Real Property Tax Law or section 10 of 12 U.S.C. 2609, and making payments to the owner of the loan or other third parties of principal and interest and such other payments with respect to the amounts received from the borrower as may be required pursuant to the terms of the mortgage loan documents or servicing contract. In the case of a home equity conversion mortgage or reverse mortgage as referenced in section 6-h of the Banking Law, sections 280 and 280-a of the Real Property Law or 24 CFR 3500.2, servicing includes making payments to the borrower. (Emphasis supplied)

This could be interpreted to mean that the definition of a mortgage servicer requires that money received from a borrower is in turn paid over to the owner of the loan—or to other representatives of the owner of the loan. This would seem to exclude sums obtained by a lender for its own account, in which event while it is servicing its own loan it would not fit the definition of a servicer under this regulation.

This may very well be analogous to the Fair Debt Collection Practices Act which requires debt collectors to include various warnings in correspondence to debtors, but does not impose such a requirement upon the party to whom the debt is owed because the latter is not a separate debt collector.

In the absence of case law testing the cited construction, to the extent that a lender itself, as opposed to a servicer or a servicing arm of that lender, enters into any type of settlement agreement upon a home loan, the noted language should support an argument that there is no ban upon imposing a waiver of defenses as a condition of the settlement. While obviously this would offer no relief to a servicer handling a mortgage account, it does seem to exempt the lender servicing its own account.

Non-Application to Banks

The regulation at issue is found under Sub-Chapter B of the Superintendent’s Regulations entitled and covering “Non-Banking Organizations” but does not appear to have an equivalent in Sub-Chapter A of the Superintendent’s Regulations entitled and covering “Banking Organizations.” This leads to the reasonable conclusion that the regulation barring the waiver of defenses was not intended to and does not regulate “banking organizations” because there is a separate section addressing regulations concerning the latter.

In turn, this suggests as a reasonable argument that a banking organization would have the authority to elicit from a borrower as part of settlements a waiver of defenses and claims free of any prohibition.

Stipulation Alternative

It is not inconceivable that a servicer and a borrower could arrive at an amicable, acceptable settlement whereby the borrower is knowledgably willing to provide the servicer with the comfort that no defenses will be interposed in the future, that is, a waiver of defenses as part of the settlement agreement. This understanding could come to fruition either before or after a motion for summary judgment is made.

Therefore, either as an adjunct, if applicable, or as an alternative, pursuit of either a “so-ordered” stipulation or an order upon a motion for summary judgment could present a viable alternative.

Relevant here is recognizing the compelling law regarding the unassailability of a stipulation of settlement:

A lender entering into a stipulation may proceed with considerable assurance as to the enforceability of the document. The accepted maxim is that stipulations of settlement which put an end to litigation are favored by the courts and are rarely set aside, absent fraud, collusion, mistake or other grounds which typically void a contract.3

That a stipulation fairly entered into is not lightly set aside by the courts is a concept well worthy of emphasis. To nullify the effect of a binding stipulation would undermine well established policy favoring the non-judicial resolution of disputes.4

A stipulation is an agreement which becomes a contract binding on the parties and becomes the measure of the parties’ obligations.5 Similarly stated, a stipulation is essentially a contract to be enforced as such.6 That agreement/stipulation is governed by the principles of contract law for interpretation and effect.7 In sum, a stipulation is a binding contract.8

As the Second Department has expressed it in Raphael v. Booth Memorial Hospital:9

The stipulation of settlement, which was definite and complete on its face…constituted a valid and binding contract between (the parties)…

Moreover, an attack upon such a stipulation—which might be anticipated from a defaulting borrower:

…does violence to the well-settled principle that stipulations of settlement which put an end to litigation meet with judicial favor…and the party who later seeks to vacate it was represented by counsel.10

Thus, when a defendant waives defenses in a foreclosure action, that waiver is to be specifically enforced. In National Loan Investors v. Goertzel,11 the court observed that in the stipulation the mortgagors agreed to waive any defenses to the foreclosure action. Therefore:

…the terms of the stipulation and the subsequent judgment of foreclosure and sale precluded the mortgagors from raising any defenses…

Based upon the foregoing, the question becomes, might a stipulation so-ordered by the court trump the regulation that a waiver of defenses is unavailable? While the answer may indeed be “perhaps not,” the comfort of a so-ordered stipulation might be compelling. The theory is that the borrower wanted a settlement, recognized that its defenses were baseless (which the stipulation should recite) and sought the imprimatur of the court in that regard. That was forthcoming and the sacred stipulation (per all the cases cited) was then specifically confirmed by the court.

Of course, if the stipulation was still violative of the offending regulation, whether it rises above the regulation because it was so-ordered by a court might be problematic. But note in particular that settlement agreements so-ordered by a court have the same effect as if the court had rendered a decision in the case.12 Therefore, it may be an avenue to consider.

Furthermore, upon those not uncommon occasions where the borrower will have interposed defenses in an answer, the lender may have moved for summary judgment. Indeed, a servicer would be well counseled to notice a motion for summary judgment prior to any settlement conclusion to help assure that time will not be wasted. As part of the settlement, a stipulation could be entered into which in turn would be the basis of the court’s granting the motion for summary judgment. Thus, there would be an order of the court awarding summary judgment which perhaps nudges the situational dilemma one step further from a mere waiver in return for a settlement. Whether this provides ultimate insulation may not be possible to say with certainty, but it presents a viable alternative to consider.

Conclusion

The inability of mortgage servicers to proscribe defenses as a condition of settlement is an onerous imposition, one which would tend to discourage settlements—presumably antithetical to what the state would have intended. Whether the anomalous peril created by this regulation was recognized by the promulgators or not is unknown, although it may be that their concern for borrowers was greater than any deleterious consequences which might have been perceived to be visited upon the lender’s side. Either way it is a reality to be addressed.

For lenders servicing their own accounts, the recited definitional aspects may solve the problem. For banks as well there may not be a concern. Where it is an actual mortgage servicer involved in the foreclosure, however, then the suggestion of a so-ordered stipulation or, better, an order of the court granting summary judgment may be a practical solution.

Bruce J. Bergman, a partner with Berkman, Henoch, Peterson, Peddy & Fenchel of Garden City, is the author of “Bergman on New York Mortgage Foreclosures” (three vols., LexisNexis Matthew Bender, rev. 2011).

Endnotes:

1. Title 3 (Banking Department) of the New York Codes, Rules and Regulations (NYCRR), Chapter III, Superintendent Regulations, Sub-Chapter 13, Non-Banking Organizations, Part 419, Servicing Mortgage Loans, Business Conduct Rules.

2. “Mortgage Loan” is defined in NYCRR §418.3 as “a loan to a natural person made primarily for personal, family or household use, secured by a mortgage or other consensual security interest on residential real property or certificates of stock or other evidence of ownership interests in, and a proprietary lease from, a corporation or partnership formed for the purpose of cooperative ownership of residential real property and, if determined by the banking board by regulation, shall include such a loan secured by a security interest on a manufactured home.”

That same provision defines residential real property as “real property located in this State improved by a one-to-four family residence or residential unit in a building used or occupied, or intended to be used or occupied, wholly or partly, as the home or residence of one or more persons, but shall not refer to unimproved real property upon which such dwellings are to be constructed.”

See also §419.1 for definition of servicer, §4.18 for definition of person (included in describing “servicer”).

3. 2 Bergman on New York Mortgage Foreclosures, (24.09[2], LexisNexis Matthew Bender (rev. 2011) [citing, inter alia Royal New York Realty v. Ancona, 280 A.D.2d 593, 720 N.Y.S.2d 544 (2d Dept. 2001), citing, inter alia, Hallock v. State of New York, 64 N.Y.2d 224, 230, 485 N.Y.S.2d 410, N.E.2d 1178; Matter of Galasso, 35 N.Y.2d 319, 321, 361 N.Y.S.2d 871, 320 N.E.2d 618; Robison v. Borelli, 239 A.D.2d 656, 657 N.Y.S.2d 783 (3d Dept. 1997); Citibank v. Rathjen, 202 A.D.2d 235, 608 N.Y.S.2d 453 (1st Dept. 1994); Lazich v. Victoria & Parker, 196 A.D.2d 526, 601 N.Y.S.2d 492 (2d Dept. 1993); Matter of Nicastro, 150 A.D.2d 454, 541 N.Y.S.2d 63 (2d Dept. 1989); Hirsch v. Manzione, 130 A.D.2d 714, 516 N.Y.S.2d 28 (2d Dept. 1987); Zisser v. Noah Indus. Marine & Ship Repair Inc., 129 A.D.2d 795, 514 N.Y.S.2d 786 (2d Dept. 1987); Fourth Ocean Putnam Corp. v. Suburbia Fed. Sav. & Loan Ass’n, 124 A.D.2d 550, 507 N.Y.S.2d 695 (2d Dept. 1986); Heimller v. Amoco Oil Co., 92 A.D.2d 882, 459 N.Y.S.2d 868 (2d Dept. 1983); Tetenbaum v. Tetenbaum, 78 A.D.2d 851, 432 N.Y.S.2d 720 (2d Dept. 1980), Stiber v. Stiber, 65 A.D.2d 758, 409 N.Y.S.2d 765 (2d Dept. 1978); Elyachar v. Elyachar, 43 A.D.2d 832, 250 N.Y.S.2d 742 (2d Dept. 1974); Myers v. Bernard, 38 A.D.2d 619, 326 N.Y.S.2d 279 (3d Dept. 1971); Bankers Trust Co. v. Castaneda, NYLJ, July 23, 2003, at 19, col. 6 (Sup. Ct., Bronx Co.,Silver, J.).

4. See, Orlich v. Helm Bros. Inc., 160 A.D.2d 135, 560 N.Y.S.2d 10 (1st Dept. 1990); Bankers Trust Co. v. Castaneda, NYLJ, July 23, 2003, at 19, col. 6 (Sup. Ct., Bronx Co., Silver, J.).

5. Ianielli v. North River Ins. Co., 119 A.D.2d 317, 506 N.Y.S.2d 970 (2d Dept. 1986); Benjamin Elec. Engineering Works v. Rampart Const. Assoc., 173 A.D.2d 370, 569 N.Y.S.2d 739 (1st Dept. 1991); Charles A. Gaetano Const. Corp. v. Citizens Developers of Oneonta, 175 A.D.2d 465, 572 N.Y.S.2d 515 (3d Dept. 1991).

6. Varveris v. Fisher, 229 A.D.2d 573, 645 N.Y.S.2d 853 (2d Dept. 1996), citing New York Bank for Sav. v. Howard Cortlandt St., 106 A.D.2d 496, 482 N.Y.2d 836.

7. Trustco Bank of New York v. S/N Precision Enterprises, 234 A.D.2d 665, 650 N.Y.S.2d 846 (3d Dept. 1996), citing Matter of Caruso v. Ward, 146 A.D.2d 22, 29, 539 N.Y.S.2d 313.

8. EMC Mortgage Corporation v. Bobb, 296 A.F.2d 476, 745 N.Y.S.2d 204 (2d Dept. 2002), citing Charter Realty & Dev. Corp. v. New Roc. Assocs., 293 A.D. 438, 739 N.Y.S.2d 456; Capello v. Capello, 286 A.D.2d 360, 729 N.Y.S.2d 175; Iacobacci v. McAleavey, 222 A.D.2d 406, 634 N.Y.S.2d 515; Bellefleur v. Gervais, 201 A.D.2d 524, 609 N.Y.S.2d 617; Lazich v. Vittoria & Parker, 196 A.D.2d 526, 527, 601 N.Y.S.2d 493l New York Bank for Sav. v. Howard Cortlandt St., 106 A.D.2d 496, 482 N.Y.2d 836.

9. Raphael v. Booth Memorial Hospital, 67 A.D.2d 702, 412 N.Y.S.2d 409 (2d Dept. 1979).

10. Ianielli v. North River Ins. Co., 119 A.D.2d 317, 506 N.Y.S.2d 970 (2d Dept. 1986).

11. National Loan Investors v. Goertzel, 251 A.D.2d 639, 676 N.Y.S.2d 605 (2d Dept. 1998).

12. Metroeb Rlty. Corp. & Realty Mgmt. Co. v. Fuller, 32 Misc.3d 941, 928 N.Y.S.2d 814 (Civ. Ct. 2011), citing, Joseph v. Nationwide Ins. Co., 2002 WL 31748591 (Civ. Ct. 2002).