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Roberts v. The Millville Savings and Loan Association

A-5627-03T3 (N.J. Super. App. Div. 2005) (Unpublished)

LOANS; MORTGAGES; TILA—Where it is undisputed that the periodic mortgage payments were calculated incorrectly and the maturity date is at hand, a court can use its equitable powers to extend the term of the loan such that the entire principal balance can be paid and it isn’t a violation of the Truth in Lending Act to do so.

A borrower took a construction loan from a bank. After taking all of the draws, the bank told the borrower what the monthly payment would be for the ten year loan. The bank miscalculated the amount because it used a 15 year amortization period. The borrower made the incorrect monthly payments and throughout the course of its ten year loan, received year-end annual statements listing the amount allocated to principal, interest, and taxes. Occasionally there was a tax escrow surplus. Near the end of the ten year term, the borrower spoke to a bank employee and the employee allegedly admitted that the bank “had made a mistake and this had happened a couple of times with other loans.” At that time, the bank offered to restructure the loan by reducing the annual interest rate. The borrower rejected the offer and stopped making payments on the loan. The bank then filed a foreclosure complaint and calculated the amount due. In response, the borrower “alleged that by applying all [its] monthly payments, including the tax payments, towards principal and interest, at a ten-year amortized rate, [it] had paid off the mortgage and only owed [the bank]” unpaid taxes which the borrower characterized as a “tax escrow balance.” The lower court found that the bank had amortized the loan on a 15-year, not 10-year term as intended by the parties. If the calculations had been done correctly, the borrower “would have been paying an extra $200 a month over the 10-year period and the loan would have been paid off.” Consequently, it found that the borrower owed the bank the entire remaining mortgage balance. The lower court also thought it would be equitable for the balance to be paid over another five years and also though that the mistake was not a violation under the Federal Truth-In-Lending Act (TILA), even thought, as a mistake, “might give rise to some sort of administrative claim against the bank.” The borrower appealed, arguing that the lower court should have applied all of the payments against principal and interest, including the portion of the payment that was earmarked as payment of the tax escrow. It also argued that the lower court’s decision “recasting the note and mortgage for an additional five years violate[d] TILA.”

On appeal, the Appellate Division found that “it was undisputed that the parties intended to amortize the $85,000 loan over ten, not fifteen years. It was also undisputed that [the borrower] owed [the bank] some amount of money as a result of [the bank’s] mistake in calculation on [the borrower’s] monthly mortgage payments.” Both the lower court and the Appellate Division looked to an almost identical earlier case where the Appellate Division required that a lower court “establish a fair method of payment.” Citing from that earlier opinion, the Court said: “We are of the view that the interests of justice require us to remand the matter to the trial court for the fixing of a fair and reasonable schedule for the payment of the balance due. If defendants are able to establish that the error in the monthly amount caused them to pay more by way of interest than they would otherwise have paid, or that they suffered any other loss directly attributable to the error, and that they are thus entitled to a set off, they should be given an opportunity to do so.” In this case, the Appellate Division agreed with the lower court that the borrower “would have discovered the error if [it] had reviewed [its] annual statement, which revealed that after several years of payments, [it] still owed a substantial balance.” As to the method of calculation, the mortgage specifically provided that payments were to be applied to taxes before application to interest or principal. The borrower never sought reformation of the mortgage and there was “no indication that the mortgage failed to express the true intent of the parties.” As to the borrower’s allegation that the lower court violated TILA when it ordered the recasting of the mortgage over an additional five years, the Appellate Division pointed out that “nothing in TILA limits a lender’s remedy to recovery of only the finance charges listed in the disclosure statement. That is so because the finance charge, including interest, is based upon prompt and complete monthly mortgage payments.” Here, the mandated disclosures were made in the TILA statement and, further, TILA arguably provides a defense for unintentional clerical and mathematical errors.

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