In the recent case of Potocki v. Wells Fargo, the California Court of Appeal ruled that Wells Fargo did not breach the terms of a loan forbearance agreement by declining to modify a homeowner’s loan after the homeowner made three trial payments since the agreement clearly disclaimed a promise to modify. While a lender can owe a duty of care in processing load modifications, a lender cannot be found liable for breaching that duty in the absence of any allegations that suggest a failure to comply with the lender’s duty.
However, the California Homeowner Bill of Rights ("HBR") imposes a duty on a lender to provide specific reasons for denying a loan modification; a lender’s assertion that it did not have contractual authority to modify a loan because of limitations in its servicing agreement does not suffice as an explanation.
Plaintiff borrowers sued Wells Fargo Bank arising out of plaintiffs’ attempts to get a loan modification. The trial court ruled against Plaintiffs on Wells Fargo’s objections (i.e, demurrer) to the third amended complaint which alleged five causes of action: (1) breach of contract, (2) violation of Business & Professions Code §17200, (3) negligence, (4) violation of HBR ("Civil Code § 2923.6), and (5) intentional infliction of emotional distress.
On appeal, plaintiffs contended their third amended complaint sufficiently alleged causes of action and argued: (1) the forbearance agreement obligated Wells Fargo to modify their loan; (2) the trial court erred in finding Wells Fargo owed no duty of care; (3) Wells Fargo’s denial of a loan modification was not sufficiently detailed to satisfy the HBR; and(4) a claim of intentional infliction of emotional distress was sufficiently pled.
The Appellate Court found that only Plaintiffs’ third contention had merit for a potential violation of the HBR, and remanded the case back to the trial court for further proceedings.
Plaintiffs purchased their home in 2004. In 2009, they fell several months behind on mortgage payments. They contacted their mortgage servicer, Wells Fargo, and were offered a loan modification in exchange for agreeing to make three trial payments of $1,633.53.
Plaintiffs made the three payments but were never provided mortgage modification paperwork. Three months later, a notice of default was recorded. Shortly after, plaintiffs filed a lawsuit against Wells Fargo alleging wrongful foreclosure related claims, but it was dismissed by plaintiffs, and the complaint in the Potockicase was filed in early 2014.
In late 2014, plaintiffs submitted a completed loan modification application with supporting documents requested by Wells Fargo. Wells Fargo reviewed plaintiffs for two separate modifications: a Home Affordable Modification Program or “HAMP” modification, and a non-HAMP “Trial Payment Plan” modification.
The “forbearance agreement” attached to the third amended complaint showed there was no promise of a loan modification, allowing Wells Fargo discretion in whether to grant a loan modification after the borrower complied and made the three payments.
Two months later, plaintiffs received a denial for the HAMP modification. The denial explained Wells Fargo could not modify the mortgage because: “[We] do not have the contractual authority to modify your loan because of limitations in our servicing agreement.”
Plaintiffs also received a letter regarding the non-HAMP “Trial Payment Plan”review. It stated: “We have good news about the above referenced loan. . . . We want to ensure that you have every opportunity to retain your home.” The letter went on to say that the plaintiffs were required to make three trial payments, the first being $171,745.78, which was “essentially an initial payment of the past due total arrearages . . . .” The plaintiffs alleged the letter was a constructive denial as it was unreasonable to expect they would have the large initial payment.
Plaintiffs appealed the decisions with Wells Fargo, and “both denials” were affirmed. Plaintiffs also alleged that had Wells Fargo “fairly and carefully reviewed them for the modification, they would have been approved and would not have suffered the damages alleged herein.”
The Appellate Court affirmed the trial court's decision that the forbearance agreement did not obligate Wells Fargo to modify the loan because the letter from Wells Fargo stated: “Upon successful completion of the three regular payments as outlined in this plan, your loan will be reviewed for a Loan Modification, based on investor approval, which will satisfy the remaining past due amount on your loan. [¶] The lender is under no obligation to enter into any further agreement, and this forbearance shall not constitute a waiver of the lender’s right to insist upon strict performance in the future.” (Emphasis added.)
Plaintiffs argued the temporary payment plan coupled with Plaintiffs being led to believe a permanent modification was “at the end of the tunnel” was tantamount to a binding contract. In support, they cited West v. JPMorgan Chase Bank, a 2013 decisionwhich held a “Trial Plan Agreement” required the lender to offer a permanent loan modification. But in West, the trial plans were offered under HAMP, and its holding was limited to HAMP plans.
Thus, West established the precedent that for the Trial Plan Agreement to be lawful and comply with HAMP, the bank’s reevaluation following the trial period would be limited to determine if West had complied with the terms of the trial plan and whether her original representations were correct. West’s compliance obligated the bank to offer her a permanent loan modification.
However, in Potocki, the “Special Forbearance Plan” was not offered under HAMP. Where a trial plan was not alleged to be under HAMP, no contract existed requiring the lender to modify the loan. The decision in West was grounded in a U.S. Treasury directive, HAMP guidelines, and the agreement between the borrower and lender in that case was a TPP under HAMP.
The third amended complaint also alleged negligence based on the argument that Wells Fargo owed Plaintiffs a general duty of care when Plaintiffs and Wells Fargo entered into a contract that was not honored. Plaintiffs cited Alvarez v. BAC Home Loans Servicing, L.P., which ruled that when a bank agrees to consider a loan modification, it owes a duty to timely and carefully process the modification application. Based thereon, Plaintiffs in Potocki argued Wells Fargo owed a duty of care to diligently handle their modification application and provide a detailed denial. They also argued that a per se duty of care was owed based on Wells Fargo’s violation of the HBR.
Even though the Court of Appeal assumed that Wells Fargo owed a duty of care in processing the loan application, plaintiffs failed to allege any breach of that duty. The parties never entered into a contract to modify the loan. Plaintiffs failed to allege facts that might suggest a failure to comply with any duty articulated in Alvarez (alleging defendant failed to timely review applications, foreclosed while considering a HAMP modification, and mishandled applications by relying on incorrect information).
Also, Rossetta v. CitiMortgage, Inc., the Appellate Court allowed a negligence cause of action thatalleged the borrower was dragged through a “seemingly endless application process, requiring her to submit the same documents over and over again,” documents were lost or mishandled, the status of various applications were mishandled, and borrower was ultimately denied for “bogus reasons”.) However, simply alleging that the modification was “denied in bad faith” is insufficient, and more facts similar to those in Alvarezand Rossettawere required.
Nor did the argument of a per se duty rehabilitate the contention because the doctrine of negligence per se is not a separate cause of action, but creates an evidentiary presumption that affects the standard of care in a cause of action for negligence. With negligence per se, statutes may be borrowed in the negligence context for one of two purposes: (1) to establish a duty of care, or (2) to establish a standard of care. Even assuming a duty of care is owed in the processing of the modification in Potocki,plaintiffs failed to allege any breach.
However, the Appellate Court found that as to Plaintiffs' claim under section 2923.6 of the HBR, the denials as alleged were not sufficiently detailed to comply with subdivision (f).
Section 2923.6 subdivision (f) of the HBR requires a servicer, following the denial of a loan modification, to send written notice “identifying the reasons for the denial.” Subdivision (f)(2) further requires that “[i]f the denial was based on investor disallowance, the specific reasons for the investor disallowance” must be given. (Italics added.)
Wells Fargo's explanation that “[we] do not have the contractual authority to modify your loan because of limitations in our servicing agreement,” does not suffice as an explanation — at least for purposes of a demurrer. The statement is ambiguous and appears to imply the investor has not allowed the modification. If that is the case, subdivision (f)(2) requires the “specific reasons for the investor disallowance.” As is, the explanation appears to communicate little more than the modification was denied because the investor did not want to approve it.
Wells Fargo argued that where a trustee’s deed upon sale has not been recorded (the case in Potocki), a borrower may only bring a claim for injunctive relief to enjoin a material violation of section 2923.6, under section 2924.12, subd. (a)(1).) Wells Fargo maintained that any violation of section 2923.6 was not material in that plaintiffs would not have been better able to protect their rights or achieve a more favorable outcome absent the violation.
The Appellate Court disagreed, reasoning that without knowing the investor’s actual reason for denying the HAMP modification, the Appellate Court could not say for certain that the failure to provide “specific reasons for the investor disallowance” was not material.
Finally, Plaintiffs claimed intentional infliction of emotional distress based on allegations that Wells Fargo’s irrational refusal to offer plaintiffs help “is extreme and outrageous” conduct, together with sending Plaintiffs a letter congratulating them on being approved for a loan modification, only to tell them they have to pay over $100,000 in order to accept.
Wells Fargo responded that plaintiffs had not made a mortgage payment in six years, and it was standard practice for a bank to agree to “piggy bank” 12 months of late payments, but no more. The amount plaintiffs were asked to pay would bring the arrearages to within 12 months of being current. The trial court explained that creditors enjoy a qualified privilege to protect their economic interest by asserting their legal rights even though doing so may cause emotional distress. Requiring plaintiffs to first pay $171,745.78 to cover past due arrearages was not extreme and outrageous.
The Appellate Court ruled that no such extreme and outrageous conduct occurred where Plaintiffs were given an offer of a loan modification, albeit one they could not afford. The fact that the offer was prefaced with “We have good news" is not conduct exceeding all bounds usually tolerated by decent society, of a nature which is especially calculated to cause, and does cause, mental distress of a very serious kind.
Therefore, plaintiffs were allowed to proceed with the fourth cause of action for violation of section 2923.6 of the Homeowners Bill of Rights, and the other causes of action were dismissed.
LESSONS:
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1. A HAMP modification agreement is superior to a non-HAMP “Trial Payment Plan” modification, and borrowers need to understand the differences because they control review by California courts.
2. Borrowers should obtain a legal explanation of the loan modification agreements they contemplate entering into from an experienced attorney, as they may make the required payments and still be denied a permanent loan modification (i.e., "throwing good money after bad").
3. Beware of a lender's offer of a non-HAMP “Trial Payment Plan” modification, and determine whether the agreement contains language that no permanent modification is promised or required.
4. A negligence cause of action against a lender considering a loan modification (i.e., unreasonable conduct) may be possible if enough facts similar to those in Alvarez and Rossetta are alleged.
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