Alert August 20, 2013

Ninth Circuit Holds HAMP Obligated Bank to Offer Permanent Loan Modification

The United States Court of Appeals for the Ninth Circuit reversed a lower court’s dismissal of two lawsuits by borrowers who alleged that their loan servicer breached an agreement to offer a permanent loan modification after the borrowers made all required payments under their trial payment plan. The borrowers alleged that defendant, a bank, never offered them a permanent loan modification despite an agreement for permanent modification if the borrowers complied with the requirements of their trial payment plan. The lower court dismissed the borrowers’ actions holding that the language of the trial payment plan could not support a contract for a permanent loan modification. The lower court also ruled that defendant’s promise to offer a permanent modification was conditioned on sending the borrowers a signed modification agreement, which defendant did not do. The borrowers appealed.

Citing Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547 (7th Cir. 2012), the Ninth Circuit, rejected defendant’s argument that, pursuant to the  terms of the trial payment plan, no permanent modification exists until the servicer, at its sole discretion, sends the borrower a permanent modification agreement. To the contrary, the Ninth Circuit opined that “[t]he more natural and fair interpretation of the [trial payment plan] is that the servicer must send a signed Modification Agreement offering to modify the loan once borrowers meet their end of the bargain.” The Ninth Circuit noted the importance of determining the borrower’s qualifications for the Home Affordable Modification Program at the time it agreed to extend the trial payment plan. If the borrower does not qualify for HAMP, the Ninth Circuit reasoned, “it could have and should have denied [the borrower] a modification on that basis” instead of offering the trial payment plan. Ultimately, the Ninth Circuit ruled that an oral agreement to make the trial payment plan permanent could support a breach of contract claim (i.e., no written agreement was required). Notably, the Ninth Circuit recognized that if a borrower fails to provide all documents required under the trial payment plan, the servicer may assert this failure as a basis for not making a modification permanent. 

Of import was the particularly stinging concurring opinion by Judge John Noonan. Asserting that the “self-contradictory” trial payment plan served no purpose “except the fraudulent purpose of inducing [the borrower] to make the payments while the bank retained the option of modifying the loan or stiffing him,” Judge Noonan argued that defendant drafted the trial payment plan agreement, and therefore, should be held to it.