The New Jersey common law "litigation privilege" (LP) bars claims based on any communication (1) made in judicial or quasi-judicial proceedings; (2) by litigants or other participants authorized by law; (3) to achieve the objects of the litigation; and (4) that have some connection or logical relation to the action.

Statements by attorneys, parties and their representatives made in the course of a judicial or quasi-judicial proceeding are absolutely privileged. While the LP protects attorneys from civil liability for defamation, fraud and a wide range of tort-related and statutory claims, attorneys remain subject to disciplinary sanctions under the court rules.

While it may seem surprising to the uninitiated, it is black letter law in New Jersey that mortgage payoff statements issued pending foreclosure are privileged communications protected by the LP. Even if willfully false, the LP bars mortgagor claims for incorrect mortgage payoff amounts. During the course of a foreclosure, notwithstanding the alleged falsity of information in the statements, the LP protects a foreclosing law firm and their attorneys furnishing the mortgagor or mortgagor's attorneys with allegedly excessive payoff letters containing improper fees and costs against many tort and statutory claims based on these statements, including fraud, negligence, intentional misrepresentation, breach of contract, and violation of the New Jersey Consumer Fraud Act.

And since a party is entitled to the same protection under the LP as its representative, the LP protects the foreclosing law firm's creditor, assignee and servicer as well.

Claims against a foreclosing mortgage assignee have been barred by the LP, not just for excessive fees and costs, but also for an incorrect mortgage payoff figure $61,825.23 higher than the judgment amount.

Importantly, mortgage reinstatement statements furnished during foreclosure (the normal situation) are also subject to LP immunity. See Rickenbach v. Wells Fargo Bank, 2010 WL 920869 at *6 (D.N.J. 2010) (dismissal of any claims by plaintiff Rickenbach "that arise from reinstatement statements made to resolve the foreclosure proceedings against him.").

Under the Fair Foreclosure Act, N.J.S.A. 2A:50-53 et seq., mortgage reinstatements—a major statutory right afforded residential mortgage debtors—are permitted up until judgment, in accordance with N.J.S.A. 2A:50-57. Reinstatements are an important way for residential mortgage debtors to cure their defaults and resolve their foreclosures. The Fannie Mae/Freddie Mac Uniform Mortgage Instrument (No. 3031, para. 19, 1/01) also gives borrowers the right to reinstate their mortgage loans up until judgment without limitation. Giving foreclosing parties and their agents immunity for any false or excessive mortgage reinstatement amounts they furnish—likely more common than mortgage payoffs—undercuts the statute and weakens an important Fair Foreclosure Act right.

A payoff or reinstatement amount is ordinarily furnished outside of the foreclosure action by letter of the foreclosing law firm—not in affidavit or certification form—to the mortgagor or mortgagor's attorney on request. In the residential mortgage  foreclosure action itself, however, the foreclosing attorneys must annex an affidavit of diligent inquiry, R. 4:64-2(d), to every motion to enter judgment averring that the attorney communicated with the plaintiff's (or servicer's) employee confirming in part the accuracy of the affidavit of amount due, for which the attorney may be punished if willfully false. No similar borrower protection is mandated for a payoff or reinstatement letter from a foreclosing law firm, although the author believes such protection should be mandated.

While the LP is broadly applicable, the Third Circuit, in acknowledging that the payoff letters in question fell within the ambit of the LP, nevertheless held that the LP did not protect a mortgage servicer's law firm from Fair Debt Collection Practices Act (FDCPA) liability where the firm sent payoff letters to the debtor's attorney if those letters attempted to collect any amount not expressly authorized by the agreement creating the debt or permitted by law, 15 U.S.C.A. §1692f(1).

But FDCPA application is technical and entirely limited: Statutory damages (in the absence of actual damages) are a scant $1,000 and reasonable counsel fees and costs, 15 U.S.C.A. §1692k(a). Further, FDCPA liability is limited to the collection of a consumer debt by a debt collector. Consumer debts are debts primarily for personal, family, or household purposes, not corporate, business or agricultural debts. This excludes commercial mortgages and even residential mortgages securing corporate or business debts. And not all attorneys are debt collectors, only attorneys who regularly collect debts on behalf of others, §1692a(6). Creditors, as opposed to debt collectors, generally are not subject to the FDCPA. And for a servicer or assignee to be a debt collector, it's principal purpose must be debt collection (usually not the case) or, if collecting another person's debts, the servicer or assignee must regularly do so and must obtain the debt while in default, §1692a(6), (F)(ii), (iii).

Because of the LP, then, a mortgage payoff/reinstatement statement pending foreclosure should contain the following notice—"Warning: This payoff statement/or reinstatement statement is a privileged communication. The provider and its attorneys are protected by the New Jersey Litigation Privilege and are not liable for any inaccuracies. In proper cases, you may seek damages under the Fair Debt Collection Practices Act, 15 U.S.C.A. §1601 et seq."

Regulation Z (Truth in Lending) (TILA) 12 C.F.R. 1026.36(c)(3), promulgated pursuant to 15 U.S.C.A. 1693(g), governs mortgage payoff statements even when a foreclosure is pending. It provides in part that a creditor, assignee or servicer, in connection with a consumer credit transaction secured by a consumer's dwelling (including a home equity loan) must provide an accurate statement of the total outstanding balance required to pay the consumer's obligation in full as of a specified date. The statement must be sent within a reasonable time, but not more than seven business days after receiving a consumer's written request or any person acting on behalf of the consumer. When this cannot be done, because a loan is in bankruptcy, foreclosure, is a reverse mortgage or shared appreciation mortgage, or because of natural disasters or similar circumstance the payoff statement must be provided within a reasonable time.

It has been held that, due to TILA's plain language, foreclosure counsel do not come within the definition of creditor, assignee or servicer for purposes of imposing liability on them for payoff statements under 15 U.S.C. §1639g, 12 C.F.R. 1026.36(c)(3) and 15 U.S.C. §1640(a). Larkins v. Fifth Third Mtg. Co., 376 F.Supp.3d 784, 790-1 (S.D.Ohio 2019).

This ignores the reality that law firms, for the most part, are the entities furnishing payoff statements pending foreclosure.

California courts have held that the litigation privilege will not shield violations of a statute if the statute is more specific than the privilege and would be significantly or wholly inoperable if the privilege applied." People v. Persolve, 218 Cal. App. 4th 1267, 1276-77 (2013). New Jersey's LP is derived from California's.

It is submitted that LP application in the context of mortgage payoff and reinstatement statements furnished during the foreclosure process makes no sense.

First, it cannot be doubted that foreclosing parties and their agents have an independent duty to provide accurate mortgage payoff and residential mortgage reinstatement statements to mortgagors on request. LP immunity unquestionably undermines those duties. These statements are required (not privileged) communications, and this alone should outweigh LP application. Payoff and reinstatement statements, after all, are factually objective communications, calculated in accordance with the law and the mortgage documents, and, in most cases, are based on information within the almost exclusive possession of the foreclosing mortgage creditor, assignee or servicer.

Second, there is something fundamentally wrong with a foreclosing law firm furnishing a willfully false payoff or reinstatement statement to a borrower and receiving immunity for its actions, especially when it would have had liability for the same statements if there were no foreclosure.

Third, the LP produces the absurd result that a mortgagor cannot safely rely on a payoff or reinstatement statement from the foreclosing law firm, although the mortgagor is required to go to the firm to obtain the very statement for which the firm in great measure is not accountable. This also undercuts the New Jersey Supreme Court's strong efforts to curb abuses in mortgage foreclosures.

Fourth, a law firm tacking on unlawful fees and costs to a payoff or reinstatement statement (or any unlawful amount) is certainly not "achieving the objects of the litigation"—factor (3) of the LP test—but rather is furthering its own interests by overcharging the borrower and, by inflating the redemption or reinstatement sum, making "settlement" or "resolution" of the litigation more difficult.

And fifth, the LP also bars claims for an incorrect payoff amount based on inflated principal and interest amounts (not just inflated fees and costs) furnished during foreclosure, thereby rendering the entire mortgage payoff process potentially unaccountable pending foreclosure.

The authors of the leading treatise on mortgages in the United States state that even in the absence of statutory law "mortgagees have a duty to respond reasonably and promptly" to inquiries regarding payoff statements. And that "the whole system of mortgage finance would break down if mortgagees refused on any wide scale to provide the needed information." 1 Real Estate Finance Law §2:4 (6th ed.).

The Restatement (Third) of Property: Mortgages §1.6 imposes a duty on a mortgagee, even in the absence of an applicable statute, to provide information regarding the balance due and status of an obligation to the mortgagor and others, on written request, and that a mortgagee who discloses erroneous information is liable for the damages caused by the failure or error.

Under the New Jersey Home Ownership Security Act of 2002 (HOSA), N.J.S.A. 46:10B-25f, a creditor's failure to provide payoff balances within seven days after a request is an unlawful practice under the New Jersey Consumer Fraud Act implicating treble damages, N.J.S.A. 56:8-19. And HOEPA, 15 U.S.C. Sec. 1639(t)(2), requires creditors to provide payoff balances within five business days of a request.

With the crush of mortgage foreclosures today in New Jersey and elsewhere, public policy should override the LP to ensure that borrowers, especially homeowners, are guaranteed accurate payoff and reinstatement figures during the foreclosure process.

The New Jersey Legislature has provided strict penalties for tax sale certificate holders, their agents, servants, employees and representatives who charge redemptioners excessive or unlawful fees and charges, N.J.S.A. 54:5-63.1. There is no exemption here for overcharging during a foreclosure. The legislature should pass similar legislation protecting mortgagors from excessive and illegal mortgage payoff and reinstatement amounts during the mortgage foreclosure process. After all, the rights of persons redeeming tax sale certificates should not be preferred over mortgagors. Stiff penalties, including treble damages, should be assessed against violators.

Simply put: The LP should not be a license to lie.

Myron C. Weinstein is the author of the New Jersey Practice Series on Mortgages. He was the former Chief of the Office of Foreclosure for the New Jersey Judiciary, and former President of Garden State Legal Services Corp., a company that specializes in reviewing foreclosures and issuing certificates of regularity.