The New Jersey Appellate Division answered the question: “If a loan agreement states the lender may choose to apply the funds to the outstanding debt if either repairs are economically infeasible or if such expenditures would impair the lender’s security interest, does the lender have an obligation to the borrower to make that decision promptly and in good faith”? The Court held that the mortgage lender in such situations owes the borrower an implied covenant of good faith and fair dealing in determining the disposition of the property or insurance funds. Once the lender is provided with adequate information to determine how the insurance funds should be used—such as the estimated costs of repairs and market values—the lender is obligated to advise the borrower within a reasonable time as to whether the requested use of insurance monies for repairs is economically infeasible or will impair its security in the property.
