Preventing Claims Arising from Unsuccessful Loss Mitigation

The "Making Home Affordable Plan", or HAMP as it is commonly known, was signed into law in 2009 to provide eligible homeowners the opportunity to modify their mortgages to make them more affordable. At the time, HAMP was instituted it was welcomed as a law that would help to keep borrowers in their homes by inducing lenders to modify mortgages that were at risk of foreclosure.  Additionally, the law did not create a private right of action, and therefore it was understood that lenders could implement the modification programs outlined by HAMP without the threat of potential litigation if the loss mitigation efforts failed to result in a permanent loan modification.

In a 2012 landmark decision known as Wigod v. Wells Fargo, (673 F.3d 547), the 7th Circuit determined that State law claims arising from alleged HAMP violations are not pre-empted or otherwise barred by Federal law.   Effectively, borrowers could now sue under state law, and it no longer mattered that HAMP did not create a private right of action. Essentially, borrowers and lenders who have entered into trial agreements under HAMP have created a sufficient contractual relationship, and therefore borrowers could sue their lender for failed loss mitigation under existing State law theories such as breach of contract or fraud if they were not offered a permanent loan modification following the completion of the trial period.

The Court held in Wigod that lenders were required to offer permanent modifications to borrowers who completed their obligations under the trial agreements, unless the lender timely notified those borrowers that they did not qualify for a HAMP modification. 

Since Wigod, a rash of HAMP related lawsuits have been filed nationwide.  Lenders have sought to limit their liability by arguing that the terms of the written trial agreements should determine the obligations of the parties.   Some courts have agreed with this position, but in one recent decision, the Fourth District Court of Appeals in California concluded that the lenders obligations under Federal and State laws may be implied in the trial agreement.  Breach of contract claims may arise if the lender violates those laws regardless of the language contained in the trial agreement.  Specifically, the trial plan agreement authorized the lender, before offering a modification to evaluate only whether borrowers had complied with the agreement's terms and whether their representations (made in the application) remained true.  Once the bank determined that a borrower had complied and the representations were still true, then the lender was required to offer a permanent modification regardless of the terms of the written trial agreement.  West v. JPMorgan Chase Bank, N.A. (2013) 214 Cal. App. 4th 780.

Following the West decision courts may now be inclined to hold lenders to an even higher standard in this sort of HAMP related litigation.   In fact, an August 2013 Ninth Circuit Court of Appeals decision rejected the terms of a trial agreement, and reinstated a HAMP related class action lawsuit, which was dismissed by the trial court.  In the case of Corvello v. Wells Fargo Bank, the court analyzed the trial agreement between Wells Fargo and Corvello and determined that the terms limiting the lender's liability amounted to a heads-I-win-tails-you-lose scenario against the interests of the borrower, and looked at the trial agreement prepared by the lender, as fraudulently inducing the borrower to make trial payments while the lender still had the option of rejecting the modification after the payments.   Regardless of the terms of the trial agreement, the lender must determine whether the borrower qualifies for a permanent modification at the moment that the lender receives the trial agreement from the borrower.  

While lenders have grappled with the slew of new lawsuits filed arising from failed HAMP loss mitigation, it appears that the pendulum is now swinging in favor of the borrowers, and lenders should take some precautionary measures to prevent these types of claims from occurring. 

First and foremost, a careful review of all loss mitigation and related documentation from the borrower should occur prior to approving a trial modification. It should be known to the lender at that time, whether the borrower will qualify for a permanent modification, provided they complete all of the trial period payments, and if their financial information remains the same.  

Thorough documentation of all communications with the borrower during the negotiating period is also essential.  Lenders should create policies and procedures to eliminate any conflicting statements made to the borrower during that time. Poor communication and conflicting communication can be the basis of a lawsuit.  Once an application is received from the borrower, a good policy is to establish a single point of contact on the account to avert the possibility that a different representative will provide conflicting information.  Also essential are timely follow ups on all communications with the borrower, in order to avoid confusion, including written communication detailing any missing documents, or additional documents that are needed to complete the borrower's application.

Loss mitigation related lawsuits generally arise out of confusion when a borrower feels that they have met their obligations under HAMP, but the lender has unfairly denied them a permanent modification.  Sound policies to minimize or eliminate confusion can help to drastically reduce the potential for these claims.