Dealing With Mortgage Lenders who Engage in Unfair Business Practices

If you are taking out a mortgage to finance areal estate purchase, it is always a good idea to work with an attorney, in part to protect yourself against potentially predatory lending practices such as excessive fees or hidden payments that can cost you thousands of dollars. Many buyers lack experience with real estate laws, making them susceptible to such practices. But even sophisticated investors may find themselves at odds with a mortgage lender over certain unfair business practices.

“Sophisticated Investor” Alleges Mortgage Lender Duress

Here is arecent example. A real estate investor took out a $3.3 million mortgage to finance the purchase of a Manhattan condominium. The loan featured a 7.5% annual interest rate, which would increase to 16% in the event of default. The lender could also charge a 5% fee for any late payment, and in the event of any foreclosure or other litigation, the borrower could be held responsible for the lender's legal fees.

The borrower defaulted on the loan on several occasions, prompting two separate foreclosure actions. The lender dismissed the first foreclosure and reinstated the original loan after the borrower made the necessary back payments. After the lender filed the second foreclosure, the borrower moved to refinance by obtaining a new loan from a different lender. After negotiations, the lender agreed to release its mortgage and other claims for approximately $3.5 million. In a subsequent letter, the lender demanded an additional $18,000, ostensibly representing a final interest payment on the mortgage. The borrower and lender held a closing at which time the borrower paid both amounts.

The borrower later sued the lender, arguing the latter demanded “improper” overcharges of approximately $186,000, including the $18,000 interest payment, above and beyond what was necessary to satisfy the mortgage. Manhattan Supreme Court dismissed the complaint, however, citing a rule in New York law known as the “voluntary payment doctrine,” which holds a person may not recover any payment made to another “with full knowledge of the facts, in the absence of fraud or mistake of material fact or law.”

On appeal, a divided panel of the Appellate Division, Second Department, upheld the Supreme Court's decision. The majority agreed the voluntary payment doctrine applied here, notwithstanding the borrower's claim he paid the full amount demanded by the lender “under duress.” The court noted the borrower was a “sophisticated” investor represented by counsel, and he could have protested the additional fees at the time of closing. His failure to do so did not indicate fraud, the court said, but rather a “calculated decision” to pay off the full amount demanded by the lender. One judge dissented, noting that “a sophisticated investor can still be subjected to duress,” and explaining the borrower offered sufficient proof to survive a motion to dismiss at this time.

Need Help With a Real Estate Matter?

The majority agreed with the dissenting judge that a “sophisticated investor” may still be subject to a lender's duress; the two sides merely disagreed on whether that occurred in this case. This should serve as an important lesson to less sophisticated investors, such as first-time home buyers, of the importance of working with an experienced New York real estate attorney. Contact the offices of Waldhasuer & Nisar, LLP, today if you need help with any type of real estate matter.