Every week, one of my partners tells me about a court decision in which a bank lender blew the statute of limitations and lost the right to foreclose. Almost all of these cases involve securitized loans with incompetent “foreclosure factory” lawyers and inattentive bankers. However, there is one important lesson that even the most diligent lender should learn. The statute of limitations has a beginning, as well as an end. If a lender accelerates and demands payment in full, the statute of limitations clock starts ticking. If the lender then agrees to accept installment payments and reinstate the loan, the reinstatement should not be a simple informal nod of the head. Some courts have allowed a claim that the statute of limitations has been running since the first acceleration when the borrower defaults years later. I think that’s legally incorrect, but why take a chance. It’s an easy trap to avoid, and an ounce of prevention is definitely worth a lot more than a pound of cure.

Today’s Takeaway? How do you avoid this trap? It’s easy. When you reinstate a loan that has been accelerated, do it in writing with a letter withdrawing the prior acceleration and reinstating the loan. Issue the letter promptly after you resume accepting payments. Although I don’t believe that a signature from the borrower is necessary on the reinstatement letter, it is a good idea to get it. Borrowers shouldn’t have a problem signing a reinstatement letter in exchange you're waiving the acceleration.