Action Item: To avoid possible state law claims related to denial of loan modifications, trial modification offers should clearly define the requirements a borrower must fulfill to receive a loan modification, and lenders and servicers should provide timely written notification to borrowers when they fail to comply with the terms of a loss mitigation agreement.
It is well-established that the federal Home Affordable Modification Program ("HAMP") does not offer borrowers a private right of action to allege a lender or servicer violated HAMP. However, the New Jersey Appellate Division recently held that borrowers may pursue state law claims that a lender or servicer engaged in the modification process in bad faith or otherwise breached the terms of a HAMP Trial Period Plan ("TPP").
In Arias v. Elite Mortgage Group, Inc., et al.,1 the first reported New Jersey case on this issue, the Appellate Division held that a written TPP, which allowed the borrowers to make three reduced monthly mortgage payments as a condition of the TPP, constitutes a unilateral offer by the lender to modify a mortgage loan if the borrowers completely and timely comply with their obligations under the TPP.
In Arias, the plaintiff borrowers appealed from an order granting summary judgment to the defendant servicer. On appeal, Plaintiffs claimed that they had a contractual right to a permanent loan modification under the terms of a HAMP TPP, and defendant breached the TPP when it did not give them a loan modification. They also argued that defendant breached the covenant of good faith and fair dealing when it denied them the loan modification.
The Appellate Division upheld the grant of summary judgment to defendant, but it did so for different reasons than the trial court. After acknowledging that there were no reported New Jersey cases on this issue, the Arias Court opined that current case law suggests that an agreement that binds a debtor to make payments while leaving the mortgage company free to give nothing in return may violate the New Jersey Consumer Fraud Act ("CFA"). In its analysis, the Court relied heavily on Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547 (7th Cir. 2012), which held that, even though there was no private right of action for a borrower under HAMP, a borrower may still assert a common law contract claim for a lender's failure to honor the terms of a HAMP TPP.
The Arias Court rejected defendant's arguments that there was no enforceable promise to modify Plaintiffs' loan because there was no consideration given and that the lender had sole and unbridled discretion whether to give a modification, where the borrower complied with the payment terms and other requirements of the TPP. The Court reviewed the language of the TPP and noted that, even though the TPP notified borrowers that it was not a loan modification, it also contained language stating that 'if" borrowers complied with the TPP and their representations continued to be true in all material respects, "then" the servicer will provide them with a modification agreement.
Ultimately, the Arias Court affirmed the grant of summary judgment in favor of the defendant because the terms of the TPP in this case constituted "a unilateral offer" to give plaintiffs a loan modification if and only if plaintiffs fully complied with their obligations under the TPP. In this case, the borrowers did not comply with the TPP requirements. The Court held that the summary judgment record clearly established that the plaintiffs failed to comply with the payment schedule set forth in the TPP and, therefore, defendant was justified in refusing to give plaintiffs a loan modification. Therefore, there was no breach of contract or breach of the duty of good faith and fair dealing on these facts.
In Miller v. Bank of America Home Loan Servicing, L.P.,2 decided just over one month after Arias, the Appellate Division was again faced with deciding whether borrowers could sustain claims against a mortgagee related to a HAMP TPP. In Miller, after defendant declined to modify their mortgage under HAMP, the borrowers filed an action alleging breach of contract, violation of the CFA, promissory estoppel, and breach of the covenant of good faith and fair dealing. Defendant was granted summary judgment after the judge concluded there was no private right of action under HAMP. Plaintiffs moved for reconsideration, and their motion was denied. They then appealed both orders.
After briefly recapping the history of the HAMP program, the Miller Court specifically agreed with the Appellate Division's holding in Arias that "HAMP's preclusion of a private right of action does not preempt pursuit of valid state law claims arising between the parties to a TPP." The Court then reviewed the specific facts in the record regarding plaintiffs' loan modification efforts. The TPP at issue in Miller contained language similar to the TPP in Arias, requiring plaintiffs to make three payments of $3,508.17, due on May 1, June 1, and July 1, 2009. Defendant's records showed that the three TPP payments were instead received on May 14, June 18, and August 18, 2009, and plaintiffs were ultimately denied a modification "because [they] did not make all of the required [TPP] payments by the end of the trial period." Plaintiffs argued on appeal that summary judgment was inappropriate because there were disputed issues of material facts regarding their payments under the TPP, and they challenged the reliability of defendant's payment records.
The Miller Court affirmed summary judgment in favor of the defendant. It held that plaintiffs' self-serving assertions regarding challenges to the payment history, unsupported by any documentary proof, were insufficient to raise a genuine issue of material fact. The Court also held that plaintiffs' CFA claim, which suggested that the defendant engaged in elusive tactics and failed to fulfill its promise of a loan modification, was properly dismissed. Plaintiffs failed to identify the alleged unlawful conduct, they failed to detail material misrepresentations they reasonably relied upon that resulted in damages, or to proffer facts that demonstrated a business practice to materially conceal information that ultimately induced them to act. Plaintiffs' unsupported assertions were insufficient to create a material dispute, and therefore summary judgment was appropriate.
These decisions qualify the long-standing and frequently cited principle that a borrower does not have a right to a loan modification, and a lender is not required to offer one. While the Arias and Miller decisions do not hold that a borrower is entitled to a loan modification, they do hold that the language of a TPP or forbearance agreement may require the lender to modify the loan if the borrower complies with its terms. Lenders and servicers frequently engage in loss mitigation efforts with borrowers, including loan modification reviews, whether pursuant to the HAMP program, court mediation programs, or in-house modification programs. In light of these decisions, lenders and servicers should take care when drafting the terms of a written TPP or other forbearance agreement, so that it is clear what requirements a borrower must fulfill to receive a loan modification. Lenders and servicers should also make sure to provide written and timely notification to borrowers when they fail to comply with the terms of a loss mitigation agreement. These recent cases also underscore the importance of maintaining accurate records of payments and communications regarding loss mitigation efforts, which records may be necessary to rebut a borrower's claims that they complied with all the TPP terms. Following these steps will help provide the support needed to defend against a borrower's claims that they were improperly denied a loan modification.
Mr. Streibich would like to thank Donna Bates for her assistance in developing this Alert.
Footnotes
1 Arias v. Elite Mortgage Group, Inc., et al., New Jersey Superior Court, Appellate Division, Case Number A-4599-12T1. The Appellate Division approved Arias for publication on January 23, 2015.
2 Miller v. Bank of America Home Loan Servicing, L.P., Superior Court of New Jersey, Appellate Division, Case Number A-0169-13T2. The Appellate Division approved Miller for publication on March 5, 2015.
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