This article explains the lender’s foreclosure rights on receipt of a partial payment on a note in default.
The lender can continue to foreclose
The owner of real estate, which is subject to a trust deed lien, loses his major source of income.
As a result, the owner is unable to make his loan payments. Negotiations with the lender to restructure the payment schedule in a pre-foreclosure workout are futile. The lender records a Notice of Default (NOD).
On receipt of the NOD, the owner tenders some of the delinquent payments referenced in the NOD, but does not submit all delinquent installments and charges required to reinstate the loan.
The lender accepts the partial payments, and immediately sends the owner a letter notifying him the loan remains in default and in foreclosure.
The letter states the additional amount which must be paid to cure the default, and informs the owner the lender intends to continue with the foreclosure unless the loan is brought current. Ultimately a trustee’s sale is set by recording a Notice of Trustee’s Sale (NOTS).
The owner challenges the NOTS, claiming the notice of the foreclosure sale is invalid since the lender waived its right to complete the foreclosure by accepting partial loan payments after recording the NOD.
The lender claims the foreclosure should be allowed to continue to sale since the owner paid only part of the amount noticed as delinquent in the NOD, and thus the loan continuously remained in default.
Can the lender proceed with the foreclosure sale despite accepting partial payments of the delinquent amounts noticed in the NOD?
Yes! By accepting partial payments after recording an NOD and promptly demanding the additional amounts required to reinstate, the lender does not waive its right to complete the foreclosure. Only a full payment of the delinquent amounts and foreclosure charges reinstates the loan. The lender is not required to rescind the NOD until the loan is reinstated. [Sellman v. Crosby (1937) 20 CA2d 562]
A non-waiver clause , in the lender’s trust deed sets out the lender’s right to accept partial payments without waiving its right to foreclose if the loan is not brought fully current. [M.E. Hersch v. Citizens Savings and Loan Association (1983) 146 CA3d 1002; See first tuesday Form 450 §B.2]
Also, if the trust deed contains an assignment of rents provision, the lender on a default may collect rents from the landlord or the tenants and apply the rents collected to the amount needed to cure the default – while foreclosing on the real estate at the same time.
However, the borrower must be promptly informed any partial payment made by him or from rents does not cure the default.
If the lender accepts partial payments after recording an NOD, he must give reasonable notice and demand for the amount remaining due before completing a foreclosure.
Thus, the lender on accepting a partial payment should immediately notify the owner:
- the payment does not reinstate the loan and the owner remains in default;
- the amount due to reinstate; and
- the lender retains the right to complete the foreclosure on the property if the amount remaining due to cure the default is not paid during the reinstatement period. [Hunt v. Smyth (1972) 25 CA3d 807]
If the borrower is led to believe the default has been cured, such as by the lender failing to notify him the amount tendered is insufficient to bring the loan current, the lender will be barred from continuing the foreclosure. [Altman v. McCollum (1951) 107 CA2d Supp. 847]
Lender waives right to foreclose
A lender is not always able to accept partial payments from the borrower without waiving its right to foreclose due to a default in payment.
For example, a buyer acquires a property which is subject to a trust deed loan with a due-on-sale clause. The buyer takes over loan payments, but does not obtain the lender’s waiver of the clause by formally assuming the loan.
The lender on learning of the new ownership, proposes a loan assumption agreement which would modify the terms of the loan. The buyer rejects the assumption agreement and continues to make payments under the existing loan agreement, payments which the lender accepts without qualification.
A year later, the lender sends the buyer a letter calling the loan and informing him the continued acceptance of payments does not constitute a waiver of the call. The lender continues to accept payments and starts foreclosure for the buyer’s failure to pay the loan in full.
However, the lender, on learning of the sale, failed to promptly enforce its rights under the due-on-sale clause by doing nothing for nearly one year after discovery of the sale.
Thus, the lender by its conduct waived its right to enforce its due-on-sale clause. On discovery of the sale, the lender demanded an assumption which was rejected by the buyer. The lender then continued to accept payments and did not attempt to foreclose for a year after learning of the sale of the property. [Rubin v. Los Angeles Federal Savings and Loan Assn. (1984) 159 CA3d 292]
The remedy for the lender on a due-on clause acceleration is to call the loan first, then attempt to negotiate a restructuring of the loan if they so desire, and accept no payments in the interim (without a reservation of rights agreement) since the loan cannot be reinstated as only one payment is due – the entire loan balance.
Take the money
Some lenders will return partial payments tendered by a borrower after default, in the mistaken belief acceptance of the payment will bar them from foreclosing. The lender should always accept payments tendered by the borrower when the loan can be reinstated – unless the tender is conditional.
The borrower, in an attempt to evade the lender’s foreclosure rights, might put conditions on the check tendered, such as stating the amount of the check is intended to fully cure the default or constitutes a rescission of the NOD. However, the lender is not required to accept the borrower’s conditional tender. [Calif. Civil Code §1494]
The lender can return the conditional payment and inform the buyer only a full payment of the amount due will cure the default and terminate the lender’s foreclosure rights.
Consider an owner of real estate who enters into a service contract with a business, employing it to obtain a lower property assessment for the current and the prior year.
The owner agrees to pay the business a percentage of the tax savings received. However, the owner believes he will only owe a percentage on one tax year’s savings.
The business obtains reduced assessments for two taxable years. The owner pays the business based on one tax year’s tax savings and writes on the back of the check, “payment in full for all services.”
The business sends a letter to the owner stating the check is not payment in full for all services performed.
A creditor cashes the check without deleting the endorsement. The creditor makes a claim against the owner for the unpaid amount.
The owner claims the amount must be disallowed since the check was deposited with “payment in full” printed on it.
The creditor claims the acceptance of the check following notice the amount was insufficient does not constitute payment in full.
The business’ claim for the payment of services must be allowed since the business clearly communicated the acceptance of the check did not constitute payment in full. [In re Van Buren Plaza, LLC. (1996) 200 BR 384]
Additionally, a lender might be motivated to refuse to accept any funds from a borrower until the loan is brought current, in order to trigger additional monthly late charges – a source of low-cost revenue.
Reinstatement and redemption
When an owner defaults on a real estate loan, the lender must record an NOD to start the trustee’s foreclosure process. [CC §2924]
After the NOD is recorded, the owner has five business days before the date set for the trustee’s sale to cure the default, called the reinstatement period. [CC §2924c]
In addition, the owner has the right to pay the full amount due on the loan at any time before the foreclosure sale is completed, called the redemption period. Tender of the full amount remaining due on the note and trust deed extinguishes the trust deed lien since no debt remains to support the trust deed lien. [Winnett v. Roberts (1986) 179 CA3d 909]
However, to cure the default and reinstate after an NOD is recorded, the lender must receive full payment of the amounts due as though the loan had not been in default, including all delinquent payments of principal, interest, insurance and taxes, plus late charges and foreclosure costs such as trustee’s or attorney fees. [CC §2924c]
If any amount less than the full amount due to reinstate under the NOD is paid and received by the lender, the default is not cured, and the lender may complete the foreclosure – after demanding the amount remaining due to cure the default.