Until now, demand letters, notices of acceleration and acceleration notices have largely been taken as synonymous in the mortgage servicing industry—a notice required by most mortgages informing a defaulting borrower that a foreclosure filing is on the horizon. However, a recent case sends a powerful message to servicers; when it comes to these notices, it is critical to follow the exact language of the mortgage itself, or risk the unwinding of an entire legal action. In Cathay Bank v. Accetturo[i], the ruling court held that Cathay Bank’s failure to “strictly comply” with the mortgage “divested the lender of its right to file” its foreclosure action. [ii] In essence, the court’s 2016 ruling wiped out a three-year foreclosure action stemming all the way back to a 2011 default.
Cathay Bank’s mortgage required the lender to give notice “prior to acceleration.” [iii] The mortgage also required that the notice: 1) state the default, 2) provide at least 30 days to cure the default, 3) inform the borrower that the “failure to cure the default on or before the date specified in the notice may result in acceleration of the sums secured…”, 4) and inform the borrower of their right to reinstate and assert defenses to a foreclosure proceeding.[iv] Although mortgage instruments vary, this language is fairly common in the industry.
And in fact, Cathay Bank did send several notices to the borrower. The first three identified the loan as being “seriously delinquent.”[v] The court quickly dismissed these since they “failed to incorporate the specific information” required by the mortgage. The fourth notice was entitled “Notice of Intent to Foreclose” and stated that unless Cathay Bank received the amount owed by a certain date, that the bank “may exercise its rights and remedies as provided for in the Guaranty and other related loan documents.”[vi] However, the notice provided only 21 days to cure the default. This notice, in the eyes of the court, “failed to mention acceleration”, failed to provide the full 30 days to cure, and failed to list the specific wording required by the mortgage.[vii] So, generally referencing wording that could be found in the loan documents was not deemed to be sufficient. The fifth and final notice was entitled “Notice of Default and Acceleration” and informed the borrower that the loan had now been accelerated. The court dismissed this as well, since the letter stated that the note had already been accelerated, and therefore could not be a notice “prior to acceleration” as dictated by the mortgage.[viii]
Moreover, the court held that the failure to strictly comply with the mortgage was more than just a technical defect, alluding to case law which permitted foreclosure actions despite the fact that perfect notices weren’t present.
Defense counsels will surely take note of this case and will likely make much of the court’s strict compliance ruling. Therefore, to avoid possibly similar complications, acceleration notices should track their related mortgages as closely as possible, and should ideally include verbatim phrases required by the mortgage. Additionally, and perhaps most importantly in terms of servicing practice, servicers must now recognize the difference between a notice that advises of a possible upcoming acceleration versus a notice that advises that an acceleration has already occurred.