Lender Must TreatMortgagee with Utmost Good Faith.

• Author: Zalma, Barry
• Position: [ON MY RADAR]

* When a mortgaged residence is damaged by a storm and the homeowners' property or flood insurer pays benefits for the storm damages, how should the mortgage company determine whether to use those insurance funds to pay down the delinquent mortgage principal and interest, or, alternatively, use the funds to repair the property, as provided by the loan agreement? In Wilmington Savings Fund Society, FSB, d/b/a Christiana Trust, not individually but as trustee for Pretium Mortgage Acquisition Trust, Plaintiff-Respondent v. Patricia E. Daw and Richard C. Daw, and TD Bank, N.A., and State Of New Jersey, No. A-0829-19, Superior Court of New Jersey, Appellate Division (October 22, 2021) the court established a duty of good faith and fair dealing between a lender and mortgagee with regard to the proceeds of an insurance claims.

When the loan agreement states the lender may choose to apply the funds to the outstanding debt if either repairs are "economically infeasible" or if such expenditures would impair the lender's security interest, the lender has an obligation to the borrower to make that decision promptly and in good faith?

FACTS

The lender's assignee held the storm insurance proceeds for over three years before ultimately applying them to the homeowners' outstanding debt. During that lengthy interval, an estimated sum of $40,000 in mortgage interest accrued. Negotiations to modify the terms of the loan failed when the assignee demanded that two thirds of the insurance funds be applied to the debt upfront as a condition of the loan modification, which the homeowners contend would have left them with insufficient funds to complete all the repairs and disqualify them for a state grant that they had conditionally received.

ANALYSIS

Once the lender is provided with adequate information to determine how the insurance funds should be used-such as the estimated costs of repairs and market values-the lender is obligated to clearly advise the borrower within a reasonable period of time as to whether the requested use of insurance monies for repairs is economically infeasible or will impair its security in the property. The time to notify the borrower of the disposition may be extended if the parties mutually undertake good-faith negotiations to modify the loan terms. If the lender unreasonably delays making a decision to approve the proposed use of the insurance funds for repairs, the court has the equitable power to abate the mortgage interest that...