Legal Lessons From Current Mortgage Loan Modification Litigation
Numerous court cases consider if proposed contracts or modifications of existing contracts are legally binding. This comment briefly and incompletely provides an educational overview of some legal lessons from recent mortgage loan modification litigation. Always consult an experienced attorney in specific situations.
Both loan originators and loan service companies are being sued, often in the context of a mortgage foreclosure. The complaint is frequently made that an oral promise to modify was made, or fraud or unfairness was committed. These lawsuits tend to be dismissed by the courts for the following reasons, listed in no particular order:
1. State law usually requires the modification agreement to be written and signed to be legally enforceable (the statute of frauds). Without a signed writing, many courts dismiss the case in a brief opinion. A related but seldom raised question is if the individual signing has authority to sign and if some form of electronic signature is legally binding.
2. Assertions that loan payments made after a modification application request was submitted create a “part performance” exception to the statute of frauds are often rejected by courts since the performance asserted must relate to the requirements of the modification agreement and not to the requirement to make payments imposed by the original agreement. In other words, a borrower can’t argue that she or he would not have made the payments knowing that the modification application would be rejected. The original duty to pay still exists.
3. Additionally, courts may require that a modification be supported by new and additional consideration. In other words, is the borrower doing something more or differently than the original lending agreement required?
4. Noncommittal conversation or emails concerning requirements or possibilities, perhaps containing “evaluating your request” language, have limited legal significance as, at best, preliminary negotiations. However, a few courts suggest that the best practice is for the lender or service provider to clearly state in writing that no modification is legally binding until it is written and signed by all parties.
5. Instructions concerning how to submit a modification request or information concerning the modification process do not guarantee acceptance. However, all parties should have legal counsel review the application language to determine its implications and potential ambiguities. Borrowers may argue that the application creates a unilateral contract (a promise to accept if the borrower undertakes the action to submit). Most courts are unwilling to consider this argument. However, in general, ambiguities in contractual language are interpreted against the party that prepared this language and in favor of a reasonable alternative interpretation proposed by the other party.
6. The debtor’s failure to submit a written application for a loan modification is interpreted as additional evidence that conversations were preliminary and nonbinding.
7. Oral promises of a loan modification coupled with justifiable reliance by the borrower (promissory estoppel) typically will not overcome the signed writing requirement. Fairness arguments based on an assertion that the debtor changed her or his position in reliance on a promise are countered with the argument that the original lending agreement required the demanded payments, hence there is no change from the status quo.
8. Lack of specific evidence of misconduct and vague general unfairness claims based a “good faith and fair dealing” standard usually fail, especially when they contradict the written requirements contained in the original loan agreement. Contractual requirements dominate the current legal environment. In this context, there tends to be only a very limited acknowledgment by courts of overarching ethical or moral standards of conduct when compared to legal requirements.
9. Unless there is clear connect-the-dots evidence, courts are reluctant to entertain evidence based upon conclusions and speculation concerning motives. The classic “objective theory of contracts” looks only to words and actions and usually does not attempt to determine subjective motivations.
10. Real Estate Settlement Procedures Act (RESPA) violations, and in particular a loan service provider’s failure to respond to a Qualified Written Request (QWR) by a borrower (basically disputing errors or requesting information), may provide damages if a “pattern or practice of non-compliance” can be established. However, the QWR must be timely made in a specific manner that is beyond the scope of this brief comment. All parties should consult legal counsel.
11. Asserted violations of state licensing or state financial regulatory requirements typically do not apply to federally chartered institutions. Preemption (overriding) of state law by federal regulations often occurs. In like manner, assertions that state consumer protection laws were violated usually fail due to preemption.
12. Claims of negligence in handling the loan modification request usually fail as there typically is no legal duty on lenders and servicers that extends beyond the terms of the original agreement. However, clear and specific evidence demonstrating the intentional misrepresentation of the status of the submitted modification request, producing foreseeable costs to the borrower, may shade into an allowable fraud claim as discussed in the following point.
13. Allegations of fraud or misrepresentation by the lender or service provider are difficult to prove. One must provide specific facts of how, when, and where this occurred. Additionally, the borrower must demonstrate precisely how she or he justifiably relied upon the alleged misrepresentation and suffered injury. Some allegations of fraud as discussed in judicial opinions seem to be assertions of unfairness in general. “Unfairness” as such is not recognized by courts. Fraud is more difficult to prove than one might suppose in the contemporary “arm’s-length transaction” environment.
14. Occasionally a borrower may assert unlawful discrimination in the denial of a loan modification. Rarely is there specific supporting evidence to back this claim.
15. Assertions that the borrower’s credit has been “defamed” or impaired by the rejection of a modification request also typically fail. Furthermore, if the lender has followed the requirements of the Fair Credit Reporting Act (FCRA) in reporting nonpayment to consumer credit reporting agencies and there is no evidence of a specific willful intent to wrongfully injure the borrower, this claim fails as well.
This comment provides a brief and incomplete educational overview of a complex topic and is not intended to provide legal advice. Always consult an experienced attorney in specific situations.