The new frontier: mortgage-related claims brought under consumer protection laws. A divided court of appeals reversed the dismissal of Lueras’ negligence, breach of contract, fraud, and unfair practice claims against Bank of America and ReconTrust. The key fact alleged was that,
a mere 13 days before Bank of America foreclosed on Lueras’s home, Bank of America falsely represented in writing to Lueras that no foreclosure sale would occur while Lueras was being considered for “other foreclosure avoidance programs.” In so doing, Bank of America expressly and in writing informed Lueras he “will not lose [his] home during this review period.” A Bank of America representative also informed Lueras the pending foreclosure sale would be postponed. Nevertheless, days later, Bank of America foreclosed on Lueras’s home.
The story is familiar and frustrating: Lueras refinanced a $385,000 loan in 2007, then suffered financial hardship and requested a HAMP modification in 2009, but Bank of America offered him instead Fannie Mae’s HomeSaver Forbearance program. Bank of America’s letter said: “Under the HomeSaver Forbearance program, we are working with Fannie Mae, a government-sponsored enterprise, to reduce your mortgage payment by up to 50% for up to 6 months while we work with you to find a long-term solution.” Thus, Lueras entered into a forbearance agreement and made the monthly payment for 10 months, but—contrary to the promises it made—Bank of America didn’t work with him to identify feasible foreclosure prevention alternatives.
Meanwhile, Lueras submitted all required information to determine whether he qualified for a HAMP modification. While he was waiting, the trustee ReconTrust served him with a notice of default. Only once this notice was recorded did Bank of America begin to explore alternatives to foreclosure. Lueras enlisted the California AG, which agreed to monitor and assist with the modification process. He was served with a notice of trustee’s sale with a scheduled sale date of Feb. 22, 2011; it was rescheduled four times, to May 18, 2011.
Bank of America allegedly eventually determined Lueras was HAMP-eligible and made an oral modification offer, which Lueras accepted. But a May 5 letter told Lueras he wasn’t eligible. The letter said that Bank of America was reviewing Lueras’s financial information “to determine if there are other options available to you” and that Bank of America “will contact you within 10 days to let you know what other options are available to you and the next steps you need to take.” The May 5 letter also stated: “If a foreclosure sale of your home is currently pending and on hold, that hold will continue and remain in effect while you are considered for other foreclosure avoidance programs.” While advising Lueras not to ignore any foreclosure notices, the letter stated, “you will not lose your home during this review period.”
Lueras immediately contacted Bank of America, which told him that the letter was sent by a third party in error, and that he’d been approved for a reduced interest rate subject to Fannie Mae’s approval. A May 6 letter said that Bank of America was reviewing his financial documents, with one of three possible responses: (1) notification he had been approved for a trial period plan under HAMP, (2) notification he was not eligible for a HAMP loan modification, or (3) more information was needed to make a decision. Again, he immediately contacted Bank of America, but was told that the letter was erroneous because his application had already “been approved” by Bank of America. Bank of America told Lueras that the trustee’s sale rescheduled for May 18, 2011 would be reset, pending approval by Fannie Mae.
Lueras made many attempts to contact Fannie Mae, Bank of America, and the AG during May 2011, but never received any further response. HAMP’s guidelines require servicers to wait 30 days after denying a HAMP modification before foreclosing, allowing an appeal. On May 18, the AG’s office told Lueras that the foreclosure sale would happen on that day; minutes later, his home was sold. The sale was ultimately rescinded.
The court first held that Bank of America and ReconTrust didn’t have a duty of care to offer a loan modification or offer alternatives to foreclosure. However, “a lender does owe a duty to a borrower to not make material misrepresentations about the status of an application for a loan modification or about the date, time, or status of a foreclosure sale.” Thus, Lueras could potentially amend his complaint to state a claim for negligent misrepresentation of fact.
The court reached similar results on breach of contract. Though Bank of America never signed the forbearance agreement, it was still bound because it accepted payments during the deferral period and was entitled to receive a $200 incentive fee “upon successful reporting to Fannie Mae of the initiation of a HomeSaver Forbearance plan and the collection of one payment under the forbearance plan.” (Though an agreement modifying a note and deed of trust is subject to the statute of frauds, the agreement here stated: “No Modification. I understand that the Agreement is not a forgiveness of payments on my Loan or a modification of the Loan Documents.”) The agreement did require Bank of America to work with Lueras in good faith to identify foreclosure prevention alternatives within six months. Thus, Lueras could also amend his complaint to allege that Bank of America’s failure to act breached its duty.
Bank of America argued that Lueras failed to allege damages. Payments he made during the deferral period weren’t contractual damages because they would have been owed under the mortgage in the absence of the forbearance agreement. But he might be able to allege some other damages from the failure to work with him in good faith.
California’s mortgage-specific law was no help because it only provided the remedy of a one-time postponement of foreclosure where the lender didn’t look for foreclosure alternatives in time.
Fraud: As with the contract damages, Lueras’ continued payments on the loan didn’t constitute detrimental reliance. Nor did the money, time and effort he wasted on compiling over a hundred pages of documents while attempting to modify the loan, which was de minimis. But he might be able to amend the complaint to allege detrimental reliance, even if the trustee’s sale was ultimately rescinded.
UCL violations: Bank of America argued that Lueras hadn’t lost money or property as a result of its actions, because he’d been in default for years before suing and his monthly payment under the forbearance agreement was less than his monthly payment under the mortgage. But the allegation that his home was sold at foreclosure was sufficient economic injury: “Sale of a home through a foreclosure sale is certainly a deprivation of property to which a plaintiff has a cognizable claim.” He might also be able to amend the complaint to allege that his injury was “caused by” BoA’s allegedly unlawful, unfair, or fraudulent conduct. After all, BoA told him that any pending foreclosure sale would be “on hold,” that the May letters were sent in error, and that he’d been approved for a modification. Also, Lueras might be able to allege that BoA didn’t work with him in good faith to evaluate and try to identify and implement a permanent solution, as a consequence of which he lost his home through foreclosure. Although it was his default that triggered the foreclosure proceedings, BoA’s subsequent misrepresentations/failure to work with him in good faith might also have caused the foreclosure sale.
Unfair/unlawful/fraudulent practices: The court held that some of the alleged conduct could not violate the UCL, to the extent that Lueras alleged that BoA promised him a solution: “Nothing in the Forbearance Agreement would mislead a borrower into believing Bank of America would always determine or identify a permanent solution to ‘save’ the borrower’s home.” However, “[i]t is fraudulent or unfair for a lender to proceed with foreclosure after informing a borrower he or she has been approved for a loan modification, or telling the borrower he or she will be contacted about other options and the borrower’s home will not be foreclosed on in the meantime, as represented in the May 5 letter. It is fraudulent or unfair for a lender to misrepresent the status or date of a foreclosure sale.” Lueras could also allege that BoA violated its duty to act in good faith.
The dissent would have found, among other things, that Lueras lacked standing for a UCL claim, since he couldn’t have lost money or property when he was in default. “Rather, he has experienced an incredible windfall. Lueras has avoided foreclosure on the Property even though he has not made any payment on the Loan since July 2010.” Also, the dissent would have held, Lueras couldn’t show reliance on any of the May statements since all his actions/inactions took place before then.