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North Carolina Supreme Court orders appeals court to review HAMP fraud claims
On November 4, the Supreme Court of North Carolina determined that an appeals court erred by remanding a case concerning a defendant bank’s Home Affordable Modification Program to a trial court with instructions to make factual findings and conclusions of law on the defendant’s motion to dismiss. Plaintiffs sued the defendant alleging fraud and other related claims arising out of the bank’s mortgage modification program. The trial court dismissed the claims for failure to state a claim pursuant to North Carolina’s Rule of Civil Procedure 12(b)(6), after concluding that plaintiffs’ claims were time barred and “that ‘the claims of all [p]laintiffs who were parties to foreclosure proceedings [were] barred by the doctrines of res judicata and collateral estoppel.’” Plaintiffs appealed. A divided panel of the Court of Appeals remanded the case to the trial court claiming that “it could not ‘determine the reason behind the grant’ and could not ‘conduct a meaningful review of the trial court’s conclusions of law.’” The North Carolina Supreme Court countered, however, that there exists “no legal basis or practical reason for the Court of Appeals to remand the case to the trial court to make factual findings and conclusions of law” as “a trial court is not required to make factual findings and conclusions of law to support its order unless requested by a party”—a request neither party made. According to the North Carolina Supreme Court, the appeals court erred by not conducting a de novo review of the sufficiency of the plaintiffs’ allegations. The North Carolina Supreme Court ordered the appeals court to address whether the plaintiffs’ allegations, if treated as true, are sufficient to state a claim upon which relief can be granted.
District Court denies defendants summary judgment over FCA violations
On March 16, the U.S. District Court for the Eastern District of Texas denied a motion for summary judgment by a mortgage servicer relating to False Claims Act (FCA) claims alleging false certifications of compliance to obtain payment under three different government programs: Treasury’s Home Affordable Modification Program (HAMP), FHA HAMP, and VA HAMP. According to the memorandum opinion and order, the relator, a former loss-mitigation specialist at the mortgage servicer, alleged that the mortgage servicer engaged in widespread dual tracking, continuously moving homeowners’ mortgages through the foreclosure process even as the defendants were supposed to be evaluating the mortgages for loss mitigation options and HAMP. The plaintiff further alleged that “the dual tracking led many homeowners to lose their homes in foreclosure when foreclosure should have been suspended during the resolution of modification and other workout processes,” and that the defendants “knowingly lacked adequate HAMP systems, processes, staffing, and training.”
The defendants argued that, “notwithstanding industrywide difficulties, publicly available service assessments and third-party reviews show that [the mortgage servicer was] one of the highest-rated servicers participating in HAMP []. Further, though Treasury had the power to withhold incentives for HAMP non-compliance, Treasury never did so and consistently paid HAMP incentive payments to [the mortgage servicer] until the program expired.” The mortgage servicer also argued that summary judgment was appropriate for several reasons; (i) the court lacks jurisdiction to consider any of the relator’s claims under the FCA’s first-to-file bar; (ii) the relator’s claims fail because he cannot establish one or more of the required elements as to each claim; and (iii) the relator’s VA claim fails because the he cannot cite to any evidence of a certification by the mortgage servicer to the VA, and thus cannot demonstrate a false statement or fraudulent conduct. The court held that, pursuant to Fifth Circuit precedent, the first-to-file rule is inapplicable here because this case was filed by the same relator in a New York district court. With respect to the remaining claims, the court held that summary judgment is inappropriate where, as here, there exist genuine issues of material fact.
Fannie Mae updates Lender Letter 2020-02 to address impact of Covid-19 on disbursing insurance loss proceeds and HAMP incentives.
On July 15, Fannie Mae updated Lender Letter 2020-02 to include information on servicer requirements related to disbursing insurance loss proceeds for borrowers impacted by Covid-19 as well as Home Affordable Modification Program (HAMP) “Pay for Performance” incentives. For purposes of disbursing insurance loss proceeds, the servicer must consider a loan to be current or less than 31 days delinquent if the borrower has experienced a Covid-19 related hardship and certain criteria are met. Separately, the guidance clarifies the impact of Covid-19 on HAMP “Pay for Performance” incentives. Specifically, the mortgage loan does not lose good standing and the borrower will not lose any “pay for performance” incentives if the borrower (i) immediately reinstates the mortgage loan upon expiration of the Covid-19 related forbearance plan or (ii) transitions directly from a Covid-19 related forbearance plan to a repayment plan.
7th Circuit: Bank avoids breach of contract claims in HAMP loan modification offer
On April 30, in a split opinion, the U.S. Court of Appeals for the Seventh Circuit issued a decision affirming a district court order holding that a consumer’s claims against a bank failed because the bank never counter-signed the Trial Period Plan (TPP) it offered the consumer in connection with the Home Affordable Mortgage Program (HAMP). According to the opinion, the consumer signed his name to the TPP and returned the TPP to the bank along with what the consumer believed to be the other required documents and the first of this three payments. However, the bank never returned a fully executed copy of the TPP to the consumer. Instead, it sent the consumer multiple notices stating that necessary documentation was still missing. Ultimately, the consumer made all three payments required by the TPP, but never received a permanent modification of his loan. On that basis, the consumer filed suit, alleging breach of contract, fraud, and intentional infliction of emotional distress due to the bank’s alleged failure to honor its loan-modification offer. The district court granted judgment on the pleadings for the bank and denied the plaintiff’s request to amend the complaint, concluding, among other things, that the consumer failed to state a plausible claim for relief.
On appeal, the majority agreed with the district court, holding, among other things, that the bank never actually agreed to modify the consumer’s mortgage under HAMP. Specifically, the majority stated that “[i]f an offer contains a conditional precedent, a contract does not form until the condition is satisfied,” referencing language in which the bank reserved the right not to send the consumer a counter-signed copy of the Trial Period Plan (TPP) if the borrower did not qualify for HAMP relief. Because the TPP never went into effect, it imposed no contractual obligations on the bank.
Court certifies breach of contract class against bank
On January 30, the U.S. District Court for the Northern District of California certified a class of mortgage borrowers in a breach of contract suit against a national bank (defendant). In doing so, the court approved a class defined as consumers who (i) had a mortgage loan with the defendant; (ii) qualified for a modification of their loan between 2010 and 2018 “pursuant to the requirements of government-sponsored enterprises (such as Fannie Mae and Freddie Mac), the Federal Housing Administration (FHA), [or] the U.S. Department of Treasury’s Home Affordable Modification Program (HAMP)”; (iii) though they qualified, were not offered a loan modification by the defendant due to defendant’s flawed calculations of eligibility; and (iv) had their homes foreclosed upon and sold by the defendant. According to the order, the plaintiffs claimed that in 2013 the “defendant discovered a calculation error that had caused certain fees to be misstated and had resulted in incorrect mortgage modification denials,” but the problem was not fully resolved until 2018.
The court also granted the plaintiffs’ motion for leave to file a third amended complaint in order to add a plaintiff “whose property was secured by an FHA instrument.” The plaintiffs reasoned that they should have a representative for the FHA contracts as well as a representative for the GSE contracts, in case it is argued that the FHA and GSE contracts are so different that each requires its own representative.
Written request for HAMP assistance resets foreclosures limitations
On December 13, the U.S. Court of Appeals for the Ninth Circuit affirmed a district court’s grant of summary judgement in favor of a bank and mortgage servicer defendants in an action brought by a consumer to prevent foreclosure of his property. According to the unpublished opinion, in 2016, the consumer, who was struggling with his mortgage payments, submitted loan modification requests on three occasions. In each request, the consumer provided written acknowledgment of the original debt and expressed his desire to pay in order to keep his property. The consumer asserted that Washington state law and the FDCPA prohibited the defendants from instituting foreclosure proceedings on his mortgage because the six-year statute of limitations for filing for foreclosure had expired. On appeal, the three judge panel rejected the consumer’s argument, determining that the limitation on filing for foreclosure had not run, explaining that because the consumer had not communicated to defendants “an intent not to pay,” and each of the modification requests acknowledged the debt in writing, the foreclosure statute of limitations period was restarted each of the three times he submitted his loan modification requests.
Connecticut Supreme Court reverses in favor of consumer in unfair trade practices appeal
On November 26, the Connecticut Supreme Court reversed a trial court’s ruling on a mortgage servicer’s motion to dismiss a Connecticut Unfair Trade Practices Act (CUTPA) action brought by a consumer. The trial court had ruled in favor of the servicer, stating, among other things, that ruling in the consumer’s favor might dissuade servicers from engaging in loan modifications for fear of negligence claims and additional liability. According to the Connecticut Supreme Court opinion, the consumer defaulted on his mortgage and his servicer instituted foreclosure proceedings, at which time the consumer requested a loan modification under the HAMP program. The complaint claims that over the next five years, the servicer mishandled the loan modification process, failed to respond to the consumer’s inquiries about the modification status, and repeatedly requested applications and additional documents from the consumer.
Based on the facts stated in the complaint, the consumer claims that when the servicer finally extended a HAMP modification (which capitalized accrued but unpaid interest, default fees, and the servicer’s attorney fees), the consumer filed a complaint against the servicer for violation of CUTPA, alleging that the servicer “committed unfair or deceptive acts in the conduct of trade or commerce by failing to exercise reasonable diligence in reviewing and processing the [consumer’s] loan modification applications.” Additionally, the consumer alleged negligence, claiming that the servicer “owed the [consumer] a duty of care arising out of the servicing standards imposed by RESPA, the 2011 federal consent order, the national mortgage settlement, and the Connecticut foreclosure mediation statutes.”
The Connecticut Supreme Court reversed the lower court’s ruling striking the consumer’s CUTPA claim on a motion to strike (similar to a federal motion to dismiss), stating that, “viewed in the light most favorable to sustaining the complaint’s legal sufficiency, we agree with the [consumer] and conclude that these allegations describe conduct that was not merely a technical violation of these provisions or negligent or incompetent, but involved a conscious, systematic departure from known, standard business norms” and that the allegations, if true, could show that the servicer “deliberately engage[d] in a pattern of conduct intended to prevent” the consumer from getting a loan modification. However, the court agreed with the lower court regarding the negligence claim, rejecting the consumer’s claim that the servicer had a common-law duty “to use reasonable care in the review and processing of” his loan modification application.
Class action over mortgage modification denial error moves forward
On October 18, the U.S. District Court for the Eastern District of Washington granted in part a national bank’s motion to dismiss, but allowed the plaintiffs’ claim under the Washington Consumer Protection Act (WCPA) to move forward. According to the opinion, in 2011, a national bank denied the plaintiffs’ mortgage modification, and in 2012, the plaintiffs’ home was foreclosed upon. In August 2018, the national bank disclosed that approximately 625 mortgage modification applications were improperly denied due to a calculation error in the bank’s software. The bank informed the plaintiffs of the error, provided a check for $15,000, and after mediation, paid the plaintiffs another $25,000. The plaintiffs filed a class action against the bank, asserting claims for violation of the WCPA and unjust enrichment. The bank moved to dismiss the action, arguing, among other things, that the WCPA claim was an “impermissible attempt to enforce the federal Home Affordable Modification Program (HAMP), which creates no private right of action.” The court disagreed with the bank, determining that while the mortgage modification application was filed pursuant to HAMP, the plaintiffs “do not seek to enforce HAMP.” Instead, the plaintiffs argue that the wrongful denial of their application and failure to disclose the calculation error for three years “constitutes unfair or deceptive conduct in violation of the [WCPA].” The court concluded that the WCPA claim “is not an improper attempt to enforce” HAMP, as HAMP is merely “a ‘component’ of the [WCPA] claim.” The court went on to grant the bank’s motion to dismiss as to the unjust enrichment claim, while granting the plaintiffs’ request to amend their complaint.
6th Circuit holds that failing to report a trial modification plan can constitute incomplete reporting under FCRA
On August 23, the U.S. Court of Appeals for the 6th Circuit held that a borrower met the requirements necessary for a Fair Credit Reporting Act (FCRA) claim to proceed when two mortgage servicers failed to report the existence of a trial modification plan when reporting the borrower was delinquent to reporting agencies. In 2014, a borrower brought an action against three credit reporting agencies and two mortgage servicers alleging, among other claims, violations of the FCRA due to payments being reported as past due while successfully making payments under a trial modification plan (also referred to as a Trial Period Plan, or “TPP”) and working towards a permanent modification. Regarding the FCRA claim, the 6th Circuit reversed the lower court’s decision granting the servicers’ motion for summary judgment, finding that the borrower met the statutory requirements for an FCRA claim because failing to report the existence of a TPP can constitute “incomplete reporting” in violation of the statute. The 6th Circuit rejected the servicers’ argument that the Home Affordable Modification Program guidelines “encouraged, but did not require” that they report a TPP. The court acknowledged this distinction but noted that “[r]eporting that [a borrower] was delinquent on his loan payments without reporting the TPP implies a much greater degree of financial irresponsibility than was present here.” The court remanded the case to the district court to determine whether the servicers conducted a reasonable investigation after the borrower disputed the reporting.
CFPB Issues Principles for the Future of Loss Mitigation
On August 2, the CFPB released consumer protection principles for mortgage servicers to use as they develop new foreclosure relief solutions in anticipation of Treasury’s Home Affordable Modification Program’s (HAMP) upcoming expiration date (CFPB Principles). The CFPB Principles echo those summarized in FHFA’s, HUD’s, and Treasury’s recently published white paper, “Guiding Principles for the Future of Loss Mitigation: How the Lessons Learned from the Financial Crisis Can Influence the Path Forward.” As previously covered in InfoBytes, the white paper recommends that future loss mitigation programs promote accessibility, affordability, sustainability, transparency, and accountability. The CFPB Principles address accessibility, affordability, sustainability, and transparency, and cite to separate CFPB mortgage servicing rules for standards concerning accountability. In its press release, the CFPB notes that the four principles “do not establish binding legal requirements but instead are intended to complement ongoing discussions among industry, consumer, groups, and policymakers.”