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Financial Services Law Insights and Observations

5th Circuit says loan contract containing grace period should be enforced

Courts Appellate Fifth Circuit Foreclosure Consumer Finance Mortgages

Courts

On June 16, the U.S. Court of Appeals for the Fifth Circuit reversed a district court’s summary judgment ruling in favor of a defendant lender, holding that a deadline accompanied by a grace period in a loan modification trial plan should be enforced. The plaintiff defaulted on his loan and sought a loan modification. The defendant provided the plaintiff an opportunity to participate in a trial period plan, which required three monthly payments due by January 1, February 1, and March 1, 2019. The trial period plan (TPP) also specified that a payment would be considered timely provided it was made within the month in which it was due. According to the opinion, even though the plaintiff “effectively accepted the terms of the TPP when he made the first trial period payment” within the grace period, the defendant informed him “he was ‘ineligible’ for the loan modification because he failed to comply with the terms of the TPP” and posted his property for foreclosure. The plaintiff sued the defendant for breach of contract, but the district court granted summary judgment to the defendant, declining to “give force to the grace period provisions” and concluding that the plaintiff did not comply with the payment deadlines.

On appeal, the 5th Circuit held that it will enforce a grace period included in a valid, binding contract. “If a lender sets a deadline for payment, but allows the borrower to make that payment anytime ‘in the month in which it is due,’ then the borrower may make that payment anytime in the month in which it is due,” the appellate court wrote. “That’s exactly what [the defendant] offered the borrower here—a deadline accompanied by a grace period. Yet [the defendant] nevertheless contends that we should ignore the grace period.” The 5th Circuit also rejected the defendant’s argument that the trial period plan was not a valid binding contract, pointing out that the text of the TPP made it clear that the defendant intended to be bound by its terms upon the plaintiff’s performance. Deadlines and grace periods co-exist by design, the appellate court explained, noting that “[g]race periods facilitate contractual relationships by making clear which deadlines are aspirational and which are mission-critical.”

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