The U.S. Court of Appeals for the Ninth Circuit recently reversed the dismissal of a borrower’s claim of deceptive loan modification efforts under Hawaii’s UDAP statute that was premised only on the grounds that the servicer exceed its role as a mere lender/servicer and owed an independent duty of care to the borrower.
A copy of the opinion is available at:http://cdn.ca9.uscourts.gov/datastore/opinions/2014/08/04/11-17158.pdf
In August 2008, while still making timely payments, the borrower contacted the lender to inquire about loan modification, and was supposedly told that she would not qualify unless she was at least thirty (30) days behind on payments. The borrower stopped making loan payments on her mortgage in May 2009, and subsequently applied for a loan modification.
The borrower’s first two modification applications were eventually rejected after the servicer allegedly demanded further documentation, yet failed to respond to the borrower’s requests for updates. After her third loan modification application was approved in August 2009, the servicer allegedly informed her that the agreement was incomplete due to a problem with the notary’s signature block. The borrower allegedly submitted re-notarized documents, but the servicer supposedly again rejected the documents and supposedly required the borrower to submit a fourth modification application.
After the borrower submitted her fourth application, the servicer allegedly assured her that they would not commence foreclosure proceedings while the modification process was underway. Nonetheless, in August 2010, the servicer supposedly initiated foreclosure proceedings, thus rendering the borrower ineligible to apply for modification.
Hawaii’s unfair competition and practices statute (“Hawaii UDAP Statute”), Rev. Stat. Section 480-2(a) provides, in full, that: “Unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce are unlawful.” For a consumer to obtain relief under for injury by unfair or deceptive act or practice under section 480-13(b)(1), a consumer must establish three elements: “(1) a violation of [section] 480-2; (2) injury to the consumer caused by such a violation; and (3) proof of the amount of damages.” Davis v. Wholesale Motors, Inc.,86 Haw. 405, 417 (Ct. App. 1997) (citing Ai, 61 Haw. at 617, and Cieri v. Leticia Query Realty, Inc., 80 Haw. 54, 61–62(1995)).
The borrower alleged that that the servicer supposedly violated the Hawaii UDAP Statute by: 1.) misinforming her that only borrowers at least 30 days behind on payment were eligible for modification; 2.) purposefully delaying efforts to negotiate modification and terminated her requests; 3.) misrepresenting the length of time to process the modification so that the borrower would end up in foreclosure, and; 4.) misrepresenting that foreclosure proceedings would not be brought while her modification remained pending, and backdating paperwork so it would falsely appear that foreclosure was commenced after denying the modification application.
The district court dismissed the complaint for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6), concluding that : 1.) “lenders generally owe no duty ‘not to place borrowers in a loan even where there was a foreseeable risk borrowers would be unable to repay,’” or determine whether a borrower is qualified for a loan, and; 2.) financial institutions owe no duty of care to a borrower when their involvement in the loan does not exceed the scope of its role as a lender. The borrower subsequently appealed the district court’s dismissal of her claim.
The Ninth Circuit found the district court’s rationale in dismissing the borrower's claim to be based solely upon on the ground that the borrower failed to allege that defendant-bank exceeded its role as a lender and owed an independent duty of care to plaintiff-borrower.
However, the Appellate Court held that a district court’s evaluation of a borrower’s claim under Haw. Rev. Stat. 480-2 and 480-13 need only address whether the complaint adequately alleged that the lender used unfair or deceptive acts in its relationship with the borrower, without looking to negligence law to determine whether the lender breached a common law duty of care.
Here, the Ninth Circuit held that the borrower’s complaint adequately alleged unfair and that unfair and deceptive acts by the servicer that resulted in damage to the borrower, and was sufficient to withstand a motion to dismiss.
Moreover, according to the Ninth Circuit, the district court’s conclusion that the lender owes no duty to determine whether a borrower is qualified for a loan was not applicable to the borrower’s claim. The Appellate Court reasoned that the claim was based upon allegations that the lender made material misrepresentations and purposefully delayed modification efforts, not on the theory that the lender placed her in a loan for which she was not qualified.
Thus, the Ninth Circuit reversed the district court’s dismissal of the borrower’s claim under the Hawaii UDAP Statute, and remanded to the lower court.
Eric Tsai
McGinnis Wutscher Beiramee LLP
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