Friday, April 25, 2014

FYI: 9th Cir Follows Wigod in HAMP/TPP Case, Rules Mortgage Servicer's Alleged Loan Mod Activities Subject to California's Rosenthal Act

Tuesday, August 13, 2013

Reversing the lower court's order dismissing the borrowers' allegations, the U.S. Court of Appeals for the Ninth Circuit recently ruled that a bank was contractually obligated to offer borrowers a permanent mortgage modification after the borrowers complied with the requirements of a trial period plan ("TPP") under the Home Affordable Modification Program ("HAMP").

In so ruling, the Ninth Circuit also held that the defendant bank's alleged activities were subject to California's Rosenthal Fair Debt Collection Practices Act, Cal Civ. Code §§ 1788, et seq. ("Rosenthal Act"), because they amounted to more than a mere "informational circulation."

Two separate borrowers filed suit against a bank ("Bank") in federal court under diversity jurisdiction grounds, alleging that the borrowers fully satisfied their requirements under the TPP, and that Bank failed to provide a permanent loan modification, or failed to provide notice that the borrowers did not qualify for a HAMP modification, as contractually required.  The two lawsuits were consolidated.

One of the borrowers alleged he sent his financial information via a financial worksheet to the Bank for a loan modification under HAMP.  The Bank then allegedly sent Borrower a TPP, which provided that if the borrower's representations are accurate and if the borrower complied with the terms of the trial plan, he would receive a modification offer.  The TPP further provided that, as required by the applicable Treasury Directive, the Bank would inform the borrower one way or another on his eligibility for a modification.

In addition, Paragraph 2F of the TPP provided that in addition to the borrower making payments and maintaining the accuracy of his representations, the Bank must provide an executed copy of the TPP and Modification Agreement to the borrower.  According to Paragraph 2G of the TPP, no modification would take effect until the borrower received the Modification Agreement.

The borrower alleged he signed and returned the TPP, and that Bank never told him whether he qualified for a modification.  The borrower also alleged he complied with the TPP's terms and made all three payments on time.  The borrower sought a permanent modification and damages for payments made to Bank.

The second set of borrowers ("Foreclosed Borrowers") made similar allegations, albeit through alleged oral communications with the Bank.  They alleged that Bank offered a trial plan, with the promise of a permanent modification upon full compliance.  Foreclosed Borrowers alleged they met the required payments and submitted all requested documents.  However, despite supposed full performance of their TPP obligations, Bank allegedly neither offered a loan modification nor did the Bank alert Foreclosed Borrowers that there were not eligible for a modification.  The Bank foreclosed on the property.  Foreclosed Borrowers sought rescission of the foreclosure, a permanent modification, and damages.

Borrower and Foreclosed Borrowers (collectively, "Borrowers") alleged that because they fully complied with their requirements of their respective TPPs through submitting accurate documentation and making trial payments, there was an enforceable contract that bound the Bank to offer permanent modifications.

As you may recall, the Treasury Department initiated the HAMP program to incentivize banks to refinance mortgages of distressed homeowners.  Under Treasury Supplement Directive 09-01, the process of applying for and receiving a permanent modification begins with a borrower providing its financial information and inability to pay to the servicer.  The servicer must then evaluate whether a borrower qualifies for a loan modification.

For a borrower that appears eligible under HAMP, the servicer then prepares a TPP.  The TPP requires a borrower to submit documentation to confirm the accuracy of their initial financial representations, and to make trial payments of the modified amount to the servicer.  Next, the servicer must use the provided documentation to confirm that borrower meets the criteria for a permanent modification.

The servicer must then report the results of the eligibility determinations.  If a borrower does not qualify for the HAMP program, the servicer must alert the borrower and also consider alternative options.  For a borrower that makes all requisite trial payments and whose representations remain accurate, the servicer must offer a permanent home loan modification.

The district court dismissed the Borrowers' claims, holding that even accepting their allegations as true, the language of the TPP could not support a contract for a permanent loan modification.  According to the district court, Paragraph 2G of the TPP stated that the loan would not be modified "unless and until" Borrowers received a "fully executed copy of a Modification Agreement."  The district court concluded that under this provision, the Bank's promise of a permanent modification offer was conditioned on the Bank sending the executed Modification Agreement.  Because the Bank did not send the Modification Agreement, the Bank was not required to offer a permanent modification, and the lower court dismissed the breach of contract claims.

Moreover, the district court dismissed claims for promissory estoppel, breach of the covenant of good faith and fair dealing, and violations of California's Unfair Competition Law and Foreclosed Borrowers' claim under the Rosenthal Fair Debt Collection Practices Act because these claims depended upon the non-existent promise by the Bank to offer a permanent modification if Borrowers met the conditions of the TPP.

Borrowers appealed.  In reversing the district court's ruling, the Ninth Circuit held that Bank was contractually obligated under the terms of the TPP to offer a permanent modification to borrowers who complied with the TPP by submitting accurate documentation and making trial payments.

The Ninth Circuit first examined the U.S. Court of Appeals for the Seventh Circuit's decision on the contractual obligations of banks under TPP agreements in Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547 (7th Cir. 2012).

The Seventh Circuit in Wigod held that banks "were required to offer permanent modifications to borrowers who completed their obligations under the TPPs, unless the banks timely notified those borrowers that they did not qualify for a HAMP modification."  Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547 (7th Cir. 2012).

The Ninth Circuit noted that the Seventh Circuit's decision rejected the very same arguments advanced by the Bank.  The Bank contended that under the language of Paragraph 2G of the TPP "the Loan Documents will not be modified unless and until… (ii) [the borrower] receive[s] a fully executed copy of a Modification Agreement."  Because no Modification Agreement was sent, the Bank argued, there was no requirement to offer a permanent modification.  The Seventh Circuit rejected this argument, because it made the existence of any obligation conditional solely on the action of the Bank, and conflicted with another provision of the TPP – the Bank's promise to send borrower a Modification Agreement if borrower fully complied with the obligations of the TPP and borrower's representations were true.

The Ninth Circuit further noted that the Bank's argument would allow banks to avoid their obligations to borrowers merely by choosing not to send a copy of the executed Modification Agreement even if borrowers fully complied with their requirements under the TPP. 

Based upon the Seventh Circuit's ruling, the Ninth Circuit concluded that the TPP does not contemplate such an unfair result – Paragraph 2G cannot convert a purported agreement setting forth clear obligations into a decision left to the unfettered discretion of the Bank.  The Ninth Circuit held a fair interpretation of the TPP is that the servicer must send a signed Modification Agreement once the borrowers meet their obligations under the TPP. 

Moreover, although the Seventh Circuit decision interpreted Illinois law, the Ninth Circuit found that there was no material difference between Illinois and California law, citing to the California Court of Appeal's decision in West v. JPMorgan Chase Bank, N.A., 154 Cal. Rptr. 3d 285, 299 (Ct. App. 2013), where the state appellate court expressly adopted the Seventh Circuit ruling.  Specifically, the California appellate court found that once the servicer determined that a borrower had complied and the representations were still true, then the servicer was required by the agreement to offer a permanent modification.

Bank argued the West decision was not controlling because it is not a California Supreme Court decision, citing Nungaray v. Litton Loan Servicing, LP, 135 Cal. Rptr. 3d 442 (Ct. App. 2011) evidencing a conflict among the California Courts of Appeal.  However, the Ninth Circuit found Nungaray distinguishable, because in that case, borrowers had failed to submit documents required by the TPP, whereas in the case at hand the Borrowers alleged they fully complied with their requirements.

The Bank further argued that the Seventh Circuit's ruling was distinguishable because there, the bank actually sent the borrowers a signed copy of the TPP.  The Ninth Circuit was not persuaded, finding that the Seventh Circuit's ruling did not turn on this fact.  Rather, according to the Ninth Circuit, it was the bank's failure to tell borrowers that they did not qualify for a permanent modification that was determinative.  The Ninth Circuit noted that the TPP gives the servicer a chance, after borrowers submit the completed TPP, to notify the borrowers if they do not qualify.  The Ninth Circuit noted tis notification requirement is also set out in the applicable Treasury Directive.

As such, the Bank's own failure to fulfill the notification obligation does not deprive Borrowers of the benefits of the TPP agreement.

Next, the Bank argued that the Foreclosed Borrowers' breach of contract claim cannot survive the statute of frauds because it is an oral agreement to modify a mortgage.  The Ninth Circuit rejected this argument because the Foreclosed Borrowers alleged full performance of their obligations and therefore that they may enforce the Bank's promises.

The Bank also argued that the Foreclosed Borrowers' claim for violation of the Rosenthal Act, California's version of the federal Fair Debt Collection Practices Act, must be dismissed because the Bank was not engaged in debt collection activities when it offered the TPP.  The Ninth Circuit rejected this argument, finding that the TPP was more than a mere "informational circulation," citing In re Bank  of Am. Home Affordable Modification Program (HAMP)  Contract Litig., No. 10-MD-02193-RWZ,2011WL 2637222,at *6 (D. Mass.July6,2011), and Reyes v. Wells Fargo Bank, N.A., No. C-10-01667JCS, 2011 WL30759, at
*20 (N.D. Cal. Jan. 3, 2011) (activities by a debt collector that are "beyond the scope of the ordinary foreclosure process" are "debt collection" activities subject to the Rosenthal Act).

Accordingly, the Ninth Circuit reversed the district court's ruling because the Borrowers alleged that they complied with all requirements under the TPP, the Bank was contractually obligated to offer Borrowers a permanent modification or inform Borrowers that they did not qualify for a permanent modification.

Eric Tsai
McGinnis Wutscher Beiramee LLP
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