Good Faith

Good faith is a legal and ethical standard that requires parties to act honestly, fairly, and without intent to defraud or take unfair advantage. In mortgage note investing, good faith governs both sides of every transaction — how investors acquire loans, how they interact with borrowers, and how they structure resolutions. A note investor who operates in good faith deals transparently, honors commitments, and does not exploit informational advantages or borrower vulnerabilities to extract unconscionable terms.

Good Faith in Loan Acquisition

Good Faith Purchaser

A good faith purchaser (also called a bona fide purchaser) is someone who acquires an asset for value, without notice of any defects, competing claims, or fraud affecting the transaction. In note investing, establishing good faith purchaser status can protect the buyer from certain legal defenses the borrower might raise:

• Holder in due course — Under the Uniform Commercial Code (UCC), a party who acquires a negotiable instrument (such as a promissory note) in good faith, for value, and without notice of defenses or claims becomes a holder in due course. This status shields the holder from most personal defenses the borrower could assert against the original lender — such as claims of misrepresentation during origination.
• Clean acquisition — Thorough due diligence before purchase is itself an act of good faith. By reviewing the collateral file, ordering a title search, and verifying loan terms, the investor demonstrates that they did not knowingly acquire a defective asset.

The practical implication: an investor who conducts proper due diligence and pays fair value for a note is in a far stronger legal position than one who cuts corners or acquires loans under suspicious circumstances.

Good Faith in Borrower Negotiations

Good faith is most visible — and most consequential — in how note investors interact with borrowers during the resolution process. Federal regulations, state laws, and industry best practices all require that servicers and note holders engage with borrowers honestly and make reasonable efforts to explore alternatives before pursuing foreclosure.

Loan Modifications and Payment Plans

When structuring a loan modification, good faith means offering terms the borrower can realistically sustain. Setting a payment amount the borrower clearly cannot afford — solely to create a paper trail justifying foreclosure — is the opposite of good faith and exposes the investor to legal and regulatory risk.

Good faith modification practices include:

Discounted Payoffs

In discounted payoff (DPO) negotiations, good faith shapes the negotiation process. Waiving arrears and late fees while keeping the principal balance intact signals good faith to the borrower and often leads to faster resolution. Explicitly waiving the right to pursue a deficiency judgment after the DPO builds trust and gives the borrower a compelling reason to cooperate.

Good Faith in Foreclosure

When foreclosure becomes necessary, good faith requires that the investor:

• Has made genuine efforts to contact the borrower and explore alternatives (loss mitigation)
• Has complied with all required notices, waiting periods, and state-specific pre-foreclosure procedures
• Is not pursuing foreclosure solely to strip equity from a borrower who could sustain modified payments
• Has maintained accurate records of all borrower communications and workout attempts

Courts scrutinize the foreclosing party's good faith, particularly in judicial foreclosure states where the lender must prove its case before a judge. A documented history of good faith outreach and loss mitigation efforts strengthens the investor's position if the borrower contests the foreclosure.

Good Faith in Regulatory Compliance

Federal and state regulations embed good faith requirements throughout mortgage servicing:

• CFPB servicing rules — Require servicers to make good faith efforts to establish live contact with delinquent borrowers within 36 days of a missed payment and to evaluate borrowers for all available loss mitigation options before proceeding to foreclosure.
• State loss mitigation requirements — Many states require mandatory mediation or good faith negotiation before foreclosure can proceed.
• Fair debt collection practices — The Mini Miranda warning and related disclosures reflect the regulatory expectation that debt collectors (including note investors) communicate honestly with borrowers.

Documenting corrective actions promptly — such as updating communication templates when a compliance gap is identified — demonstrates good faith and provides a defense if a borrower or regulator later raises questions about past practices.

Why Good Faith Matters for Note Investors

Beyond legal protection, operating in good faith is sound business strategy. Borrowers who trust the investor are more likely to engage in resolution discussions, make payments on modified terms, and complete deed-in-lieu or DPO transactions cooperatively. Sellers and brokers prefer to work with investors who have a reputation for fair dealing. And regulators are far more forgiving of honest mistakes made by investors who can demonstrate a pattern of good faith conduct than they are of investors with a track record of sharp practices.