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.
Posts
No comments:
Post a Comment