Making Late Payments on Mortgage Loans

Georgia case illustrates potential effects of missing loan payments.

Church Finance Today

Making Late Payments on Mortgage Loans

Georgia case illustrates potential effects of missing loan payments.

Background. The Georgia Supreme Court ruled that a bank’s failure to reject and return late payments made by a church on its mortgage loan did not prevent the bank from foreclosing on the church’s property. A church purchased property on which it operated worship services and church activities. The purchase was financed by a local bank which retained a mortgage to secure debt for the amount of $184,000. The church signed a promissory note agreeing to pay the principal in 34 installment payments of $2,003 followed by a balloon payment of $166,000.

A few years later, the bank informed the church that the balance of the note would be accelerated unless the church paid $10,000 to cover past due amounts. Specifically, this amount was needed to cover the nonpayment of two monthly payments plus a check the church had issued that had been returned for insufficient funds. The bank gave the church 30 days to pay the past due sums and to make good the insufficient funds check, but required that any such payment be by cashier check, money order, certified funds, or cash.

Two checks for $2,352.79 each (each check represented one month’s payment plus late fees) were delivered by the church to and accepted by a bank teller. The bank had no practice, once a loan was accelerated, to notify tellers to accept no further payments on the defaulted loan. The computers for the tellers would not indicate the status of a loan when a payment was accepted. These payments were credited to the church’s loan and were not refunded by the bank.

A few days later the bank informed the church that the debt was accelerated for failure to make payment as demanded. This letter directed that any payments be made directly to the attorneys for the bank. After receiving the two payments from the church, the bank directed its attorney to continue with the foreclosure as scheduled. As of the foreclosure date, the church was in arrears for two additional monthly payments plus the check that had been returned due to insufficient funds.

The church asked a court to block the foreclosure on its property. It argued that the bank’s failure to reject and return the late payments amounted to a “mutual departure” from the terms of the original note, which prevented the bank from proceeding with foreclosure. The court disagreed. It concluded that for the bank’s acceptance of late payments to change the terms of the original note there had to be “a pattern or course of conduct evidencing an agreement or waiver of the provisions in the original contract relating to non-receipt of monthly payments.” Since the bank was authorized to foreclose due to the nonpayment of obligations under the note, the church’s argument had to be rejected.

Relevance to church treasurers. Most churches have at least one outstanding loan that is secured by a mortgage on their property. Church treasurers should understand that a failure to stay current on monthly loan payments may result in the lender attempting to sell the church property through foreclosure. While this is usually a remedy of last resort that banks pursue reluctantly, it is a legal remedy that is available and therefore should not be ignored. Further, as this case illustrates, a lending bank’s acceptance of one or two late payments does not necessarily avoid the risk of foreclosure. Holy Fellowship Church of God in Christ v. First Community Bank, S.E.2d (Ga. 2001).

This article first appeared in Church Treasurer Alert, January 2002.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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