Alert October 01, 2013

California Appellate Court Holds Lender Failed to Follow HAMP Procedures

The California Court of Appeal reversed a lower’s court’s dismissal of a lawsuit by a borrower alleging that her lender breached an agreement to offer a permanent loan modification after she made all required payments under a 3-month trial payment plan. The borrower claimed that although she fully complied with all the requirements of a loan modification agreement with the lender and continued making on-time payments, the lender never offered her a permanent loan modification. She claimed that despite the terms of the loan modification agreement, the lender neither sent her a signed copy of the permanent agreement nor permanently modified her loan. The borrower further alleged that instead of notifying her that she did not qualify for the modification, the lender foreclosed on the property. The lower court dismissed the borrower’s lawsuit and she appealed.

Citing the Ninth Circuit’s recent ruling in Corvello v. Wells Fargo, Nos. 11-16234, 11-16242, 2013 WL 4017279 (9th Cir. 2013) (see August 20, 2013 Alert for discussion of case), the California Court of Appeal reversed. Recognizing that the borrower could not show literal compliance with the statute of frauds, which requires a writing signed by the party against whom the contract is sought to be enforced, the Court held that the borrower may be able to show that equitable estoppel bars the lender from asserting the statute of frauds defense. The Court found that the loan modification agreement was “ambiguous at best and illusory at wors[t]” and, as such refused to enforce the trial payment plan’s provision that it would not take effect unless signed by both parties noting that to do so would “essentially nullif[y] other express provisions of the trial [payment] plan” that showed the lender’s intent to be bound even if it did not execute a signed copy of the permanent modification agreement. The Court also rejected the lender’s argument that equitable estoppel did not apply because the borrower was only making payments that the trial payment plan required her to make in the first place, ruling that the borrower increased her obligations in the permanent modification agreement by agreeing to pay “unpaid and deferred interest, fees, escrow advances and other costs.” The Court also suggested that the borrower may have a claim—which borrower never pled—for unjust enrichment, based on a 2011 law review article, Foreclosing Modifications: How Servicer Incentives Discourage Loan Modifications (2011) 86 Wash.L.Rev. 755 claiming that loan servicers have a financial incentive not to modify loans or foreclose, but to maximize the duration of the delinquent servicing period.

The ruling serves as a cautionary reminder of courts’ increasing willingness to require lenders who participate in HAMP to offer borrowers a permanent loan modification. Many states have enacted legislation requiring lenders to make a good faith effort to either avoid foreclosure or modify loan terms prior to initiating a foreclosure (see e.g., January 22, 2013 Alert).