Beyond the Constitutionality of the CFPB: D.C. Circuit Decision Limits Scope of Fines and Enforcement Actions

By Joe Patry

Most media reports and commentary discussing the recent D.C. Circuit opinion on the CFPB focused on the Constitutional issues involving how the Director of the CFPB is appointed and may be removed, but overlooked the decision’s potentially significant benefit to the financial services industry. The key impact on the financial services industry is the D.C. Circuit’s restriction on the extent of the CFPB’s ability to levy penalties and bring enforcement actions.

D.C. Circuit Decision

On October 11, 2016, a three-judge panel of the United States Court of Appeals for the District of Columbia Circuit overturned an administrative decision by the CFPB, which previously imposed a $109 million fine against PHH Mortgage Corporation (“PHH”). The D.C. Circuit rejected the CFPB’s attempt to apply its changed interpretation of the Real Estate Settlement Procedures Act (“RESPA”), 12 U.S.C. § 2601(b)(2), retroactively, and ruled that the CFPB erroneously ignored the expiration of the applicable statute of limitations to inappropriately inflate the amount of the imposed fine.

HUD’s Prior Interpretation of RESPA

Before the CFPB was created, the Department of Housing and Urban Development (“HUD”) was responsible for regulations interpreting Section 8(a) of RESPA. See PHH v. CFPB et al., No. 15-1177 at 14.[1] This section of RESPA prohibits mortgage companies from giving kickbacks or other incentives to vendors. Id.

HUD issued guidance regarding mortgage reinsurance, which is used by mortgage insurance companies to reduce risk. Id. at 83. Under certain circumstances, mortgage companies were allowed to refer consumers to mortgage reinsurance companies that the mortgage lenders themselves owned. Id.

CFPB Switches Course

Contrary to HUD’s long-standing interpretation, the CFPB decided that RESPA prohibits these reinsurance practices. Id. Based on this changed interpretation of RESPA, the CFPB brought an administrative enforcement proceeding against PHH. Id. During the proceeding, the CFPB imposed a $109 million fine on PHH for reinsurance charges that were eventually passed on to borrowers. Id. PHH challenged the CFPB’s authority to enforce the fine in the court system. Id.

CFPB’s Arguments before the D.C. Circuit

Before the D.C. Circuit, the CFPB argued that the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) authorizes the CFPB to bring enforcement actions but that Dodd-Frank contains no explicit statute of limitations to govern actions brought under this power. Id. As a result, the CFPB asserted that it is not bound by RESPA’s three-year statute of limitations. Id. at 12. This is significant because PHH argued that the vast majority of the allegedly prohibited charges were barred by the expiration of the statute of limitations. Id. Additionally, the CFPB argued that it was authorized to apply its changed interpretation of RESPA retroactively. Id. at 83.

D.C. Circuit Rejects the CFPB’s Position

The D.C. Circuit soundly rejected both of the CFPB’s arguments. First, the D.C. Circuit found that Dodd-Frank and RESPA together restricted the CFPB to bring cases only within the statute of limitations. Id. at 93. Nothing in Dodd-Frank explicitly states that the CFPB is not bound by any applicable statutes of limitation; if Congress had intended this to be the law, it would have said so. Id. at 98 (stating that Congress does not “hide elephants in mouseholes”) (internal citations omitted). The D.C. Circuit further noted that the CFPB’s limitless interpretation of its authority was “absurd.” Id. at 99.

Second, the D.C. Circuit found that the CFPB’s attempt to retroactively apply its changed interpretation of RESPA is unconstitutional. The D.C. Circuit ruled: “When a government agency officially and expressly tells you that you are legally allowed to do something, but later tells you ‘just kidding’ and enforces the law retroactively against you and sanctions you for actions you took in reliance on the government’s assurances, that amounts to a serious due process violation. The rule of law constrains the governors as well as the governed.” Id. at 87. (emphasis in original).

The D.C. Circuit remanded the administrative enforcement proceeding back to the CFPB. Id. at 100. Because of this decision, the agency will not be able to rely on its retroactive interpretation of RESPA and must consider the applicable statute of limitations when assessing potential fines. Id.

Although this decision from a three-judge panel of the D.C. Circuit could be reversed by the entire D.C. Circuit or the United States Supreme Court, this decision is potentially a significant win for financial institutions. First, mortgage companies that referred consumers to mortgage reinsurance companies that the mortgage lenders themselves owned, or relied on other HUD interpretations of RESPA, can take comfort in knowing that the CFPB cannot retroactively apply its changed interpretation of RESPA. Second, the CFPB’s ability to bring enforcement actions is governed by the applicable statutes of limitation, so the ability to enforce is not timeless or limitless.

[1] All references to pagination is to how the pages are numbered in the opinion released on the United States Court of Appeals for the District of Columbia’s website on October 11, 2016.

Spokeo: Not the Result Many Hoped (or Feared)

By Joe Patry

The United States Supreme Court’s decision in Spokeo v. Robbins re-emphasized the Constitutional requirement that a plaintiff must show a particularized and concrete injury to show standing to sue in federal court. In remanding a Fair Credit Reporting Act (“FCRA”), 15 U.S.C. § 1681 et seq. complaint to the Ninth Circuit, the Supreme Court found that the lower court failed to sufficiently analyze both requirements. This decision was widely anticipated to potentially cause a sea change in complaints based on violations of federal consumer statutes. Some had feared that this decision would potentially eliminate lawsuits based on statutory violations where the consumer suffers no actual damages. However, the decision merely requires the lower court to more fully analyze whether the consumer sufficiently alleged a concrete and actual injury.

In Spokeo, a six justice majority of the Supreme Court[1] examined whether a consumer had standing to bring a claim under the FCRA. Spokeo operates a “people search engine,” which allows visitors to the site to input a person’s name, phone number or email address, and then provides information about the subject of the search. See Spokeo at 1.[2] Mr. Thomas Robins learned that some of the information which Spokeo had on file for him was incorrect. Specifically, Spokeo states that he is married, has children, is in his 50s, has a job, is relatively affluent, and holds a graduate degree. Id. at 4. According to Mr. Robins, all of that information is incorrect. Id.

Mr. Robins filed sued in the United States District Court for the Central District of California and alleged that Spokeo had violated a provision of the FCRA which requires companies that provide consumer information to follow reasonable procedures to ensure that the information is accurate. Id. at 3. This particular provision of the FCRA allows actual damages or statutory damages of $1,000 per violation. Id. The trial court found that Mr. Robins did not have standing to bring his claim because he had not pled an injury in fact, which is required, as federal courts may decide only actual cases or controversies under Article III of the United States Constitution. Id. at 6. The Ninth Circuit reversed the dismissal, and found that the statutory violation was in and of itself sufficient to confer standing. Id. at 5. Spokeo appealed to the Supreme Court.

The Supreme Court began by briefly discussing the concept of standing, noting that the doctrine of standing developed to ensure that federal courts do not exceed their authority. Id. at 6. Further, the Supreme Court recited the three elements for plaintiff to have standing in federal court: (1) an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be addressed by a favorable judicial decision. Id. To survive a motion to dismiss, a complaint must allege facts to support each element. Id.

Focusing on the injury in fact requirement, the Supreme Court highlighted that plaintiff must have suffered “an invasion of a legally protected interest,” which is “concrete and particularized, and “actual or imminent, not conjectural or hypothetical.” Id. at 7 (internal citations omitted). To be particularized, an injury must affect the plaintiff in a personal way. Id. However, an injury must also be concrete. Id. at 8.

In remanding, the Supreme Court found that the Ninth Circuit had not sufficiently analyzed whether Mr. Robins’ injury caused by the alleged FCRA violation was concrete and actually existed. Id. Although Congress can create statutory violations for intangible harms, Article III still requires a concrete injury in the context of a statutory violation. Id. It is not enough for a plaintiff to allege solely that a statute has been violated. Id. at 10. For example, a provision of the FCRA requires the credit reporting agencies to inform consumers when it has provided information to third parties such as Spokeo. Id. at 10-11. There may be no statutory violation if the credit reporting agency fails to provide the notice to the consumer but the information provided to Spokeo or other third parties was accurate. Id. Or, there may be no harm from even incorrect information – i.e., if an incorrect zip code was provided, the Court found that a consumer could not possibly suffer any harm from this harmless incorrect information. Id.

Ultimately, depending on what happens on remand, this issue may be back before the Supreme Court. Depending on the Ninth Circuit’s decision on remand, the Supreme Court may again have the opportunity to issue an opinion that significantly impacts consumers’ ability to sue for statutory violations for which they have no actual damages. However, Spokeo was not the potential sea change that some had predicted.

[1] Justice Alito wrote the opinion, joined by Chief Justice Roberts, and Justices Kennedy, Thomas and Breyer. Justice Thomas concurred and Justices Ginsburg and Sotomayor dissented.

[2] All references to pages are to as the opinion is paginated in the version available on the Supreme Court’s website.

California Supreme Court issues narrow holding that, post-foreclosure, borrowers have standing to assert wrongful foreclosure based on allegations that an underlying assignment is void

By: Shawnda M. Grady

On February 18, 2016, the California Supreme Court resolved a split in the Courts of Appeal and unanimously held that a mortgage loan borrower has standing to sue for wrongful foreclosure based on an allegedly void assignment.  Tsvetana Yvanova v. New Century Mortgage Corp. et al., Case No. S218973 (Cal. Feb. 18, 2016).   The Court followed the reasoning in Glaski v. Bank of America, 218 Cal.App.4th 1079 (2013), which held that foreclosure itself is sufficient prejudice for standing purposes.  The Yvanova opinion did not extend to pre-foreclosure claims, did not address whether a borrower must allege tender to state a cause of action for wrongful foreclosure, did not address what facts render an assignment void, and explicitly limited its ruling to void – not voidable – mortgage assignments.  Three additional cases currently pending before the California Supreme Court, which have not yet been briefed, also address a homeowner’s standing to assert a claim for wrongful foreclosure and have the potential to expand the Yvanova ruling.

Background
Plaintiff-borrower Tsvetana Yvanova sued her mortgage lender, New Century Mortgage Corporation (“New Century”), and others for various foreclosure-related causes of action, with a single cause of action for quiet title remaining in her second amended complaint.  Yvanova alleged that in 2006, she obtained a $483,000 loan from New Century, for which she provided a deed of trust as security.  In 2007, New Century filed for bankruptcy and was liquidated in August 2008.  In December 2011, the servicer, on behalf of New Century, executed an assignment transferring the Deed of Trust to Deutsche Bank National Trust Company (“Deutsche Bank”) as trustee for a securitized trust.  The closing date for the securitized trust was in January 2007.  In August 2012, Western Progressive LLC recorded (1) a substitution of trustee, substituting itself for Deutsche Bank, and (2) a notice of trustee’s sale.  On September 14, 2012, the property was sold at public auction by Western Progressive LLC to a third party.

Yvanova alleged the December 2011 Assignment of the Deed of Trust from New Century to Deutsche Bank was void because:  (1) New Century lacked authority to transfer the Deed of Trust in 2011, because its assets were transferred to the bankruptcy trustee in 2008, and (2) the investment trust was closed in 2007, four years before the assignment.  The superior court sustained defendants’ demurrer without leave to amend.

The Court of Appeal affirmed the judgment, concluding that Yvanova could not state a claim for quiet title, because Yvanova had not alleged tender of the amount due.  The Court of Appeal also determined that Yvanova could not, on the facts alleged, amend her complaint to state a claim for wrongful foreclosure.  The Court of Appeal reasoned that, as a third party unrelated to the assignment at issue, Yvanova was not affected by any alleged deficiencies in the assignment and, therefore, lacked standing to enforce the terms of the agreements allegedly violated.  In so ruling, the Court of Appeal declined to follow the holding of Glaski.  Yvanova petitioned for review before the California Supreme Court, which granted review on August 27, 2014.  Yvanova v. New Century Mortg. Corp., 331 P.3d 1275 (Cal. 2014).

California Supreme Court Decision
In Yvanova,  California Supreme Court limited its review to the following:  “In an action for wrongful foreclosure on a deed of trust securing a home loan, does the borrower have standing to challenge an assignment of the note and deed of trust on the basis of defects allegedly rendering the assignment void?”  Yvanova, 331 P.3d at 1275.  The Court found in the affirmative, following the reasoning in Glaski, supra,  and rejecting the holding in Jenkins v. JPMorgan Chase Bank, N.A., 216 Cal.App.4th 497 (2013), to the extent that those cases addressed a borrower’s standing to assert a post-foreclosure claim of wrongful foreclosure based on a void assignment.  Specifically, the Court found that an entity foreclosing following a void assignment of the deed of trust, as opposed to a merely voidable assignment, acts without legal authority to do so.  Under such circumstances, a borrower has standing to state a claim for wrongful foreclosure, because he or she has suffered the loss of ownership of the property.

The Court explicitly noted that its holding was limited to the issue of standing in post-foreclosure cases.  The Court did not determine whether the defects alleged by Yvanova would render an assignment void, and declined to address what facts must be alleged to demonstrate a void assignment.  The Court further declined to extend its analysis of prejudice beyond the standing context.

Additional Cases Pending Review
Three additional cases remain pending before the California Supreme Court that also address a borrower’s standing to challenge foreclosure based on allegations of a void assignment:  Boyce v. TD. Service Company, 352 P.3d 390 (Cal. 2015) (post-foreclosure action); Keshtgar v. U.S. Bank, 334 P.3d 686 (Cal. 2014) (pre-foreclosure action); Mendoza v. JP Morgan Chase Bank, 337 P.3d 493 (Cal. 2014) (post-foreclosure action).  In each of these cases, the plaintiff asserted a wrongful foreclosure claim, alleging the assignment of the subject deed of trust was void because it was reportedly transferred into a securitized trust after the trust’s closing date; in Keshtgar and Medoza, the plaintiffs also challenged the authority of the individual who executed the assignment to do so.  In each of the three cases, the Court of Appeal declined to follow Glaski v. Bank of America, 218 Cal.App.4th 1079 (2013) and instead followed the reasoning in Jenkins, supra, holding that the borrowers had no standing.  The Supreme Court deferred briefing in each of these three cases pending the Court’s disposition of Yvanova, and no further orders have been issued.

Although borrowers may attempt to rely on Yvanova to assert wrongful foreclosure claims based on allegedly void assignments, the limitations of the Court’s holding in Yvanova still permit defendants to challenge the borrower’s failure to tender, whether the underlying facts regarding the assignment render it void and whether the borrower has sufficiently alleged prejudice as an element of wrongful foreclosure.  It is not yet clear whether the Court’s anticipated disposition of Boyce, Keshtgar, and Mendoza will extend to these issues or clarify the Yvanova holding.

 

CFPB Takes Action Against Auto Seller Financing, Construes Failure to Negotiate as Hidden Finance Charge

By: Todd C. Smith

On January 21, 2016, The CFPB (the “Bureau”) issued Consent Order Y King S Corp., d/b/a Herbies Auto Sales, finding various violations of the Truth in Lending Act, 15 U.S.C. §§ 1601 et seq., and Regulation Z, 12 C.F.R. Part 1026; and the Consumer Financial Protection Act of 2010 (CFPA), 12 U.S.C. §§ 5531, 5536. (2016-CFPB-0001 (Jan. 16, 2016).) Among other violations, the Bureau found that Herbies Auto Sales (“Herbies) failed to accurately disclose the finance charge and annual percentage rate for financing agreements, as well as certain costs and discounts that should have been construed as finance charges. Cash purchasers were notably exempt from many of these costs. The Bureau also found that Herbies took unreasonable advantage of consumers, who were unable to protect their interests in selecting and obtaining financing for used car purchases.

Herbies’ sales practices also drew condemnation by the Bureau, which found purchasers’ ability to meaningfully comparison shop frustrated by Herbies’ policy of not disclosing the sale price of a vehicle until after credit purchasers had agreed to buy the car chosen for them, based on Herbies’ calculation of the monthly payment each credit purchaser could bear.

While the majority of the remedial portion of the Consent Order appears narrowly applicable to Herbies—including the requirement that Herbies obtain a signed acknowledgment of receipt of specific disclosures relating to the sale price and finance terms of future sales— the Bureau’s most significant determination may be its decision to construe the gap in average purchase price between cash and credit purchasers as a hidden finance charge in the form of a discount offered to cash purchasers. This decision to hold Herbies responsible for the disparity in bargaining power between cash and credit buyers may prove more significant to other targets of the Bureau’s enforcement activity going forward. It remains to be seen whether the Bureau will extrapolate its findings to other contexts outside of used car sales, in which cash and credit are used for consumer purchases.

Florida Statutory Requirement for a Notice of Assignment Is Not a Condition Precedent to Foreclosure

By: Alen H. Hsu

Florida’s Second District Court of Appeal (“Second District Court”) recently held that a lender’s failure to provide written notice of assignment of a debt to a borrower as required by Section 559.715, Florida Statutes (2012) (“Section 559.715”), does not bar a foreclosure suit. Brindise v. U.S. Bank Nat. Ass’n, 2D14-3316, 2016 WL 229572, (Fla. 2d DCA 2016). In Brindise, the borrower took out a loan from Countrywide Home Loans, Inc., and the loan was subsequently acquired by U.S. Bank National Association (“U.S. Bank”) via an assignment of the promissory note. Borrower stopped making mortgage payments in 2010, and U.S. Bank instituted a foreclosure action and sought a money judgment for the accelerated principal amounts due on the promissory note, together with any deficiency after sale, interest, and attorney’s fees.

After conclusion of a non-jury trial, U.S. Bank obtained final judgment of foreclosure. Borrower appealed and argued that all foreclosure actions are attempts to collect debt under Florida’s Consumer Collection Practices Act (“FCCPA”), and because of this, Section 559.715, which is part of the FCCPA, is a condition precedent to foreclosure. Borrower further argued that U.S. Bank failed to plead or prove this issue at trial which barred foreclosure.

Section 559.715 states in pertinent part that, “the assignee must give the debtor written notice of such assignment as soon as practical after the assignment is made, but at least 30 days before any action to collect the debt.”

The Second District Court, in interpreting Section 559.715, rejected borrower’s argument for several reasons. First, Section 559.715 does not contain any language that makes a written notice of assignment a condition precedent to a lawsuit. The Second District noted that the legislature knows how to condition the filing of a lawsuit on a prior occurrence; it has done so, for example, in statutes related to libel and slander actions and condominium associations. Second, Section 559.715 was enacted for the purpose of allowing the consolidation of all claims by various creditors against a particular debtor. Section 559.715 does not apply to the mortgage foreclosure context, in which a single note holder seeks to foreclose on a single mortgage and note. Lastly, the FCCPA prohibits egregious debt collection practices and the borrower, in this matter, did not demonstrate how the filing of a foreclosure suit implicates such concerns.

Thus, the Second District Court held that the failure to provide written notice of assignment of a debt under Section 559.715 does not bar a foreclosure. In other words, Section 559.715 does not create a condition precedent to the institution of a foreclosure, regardless of whether a foreclosure action is an attempt to collect a consumer debt under the FCCPA. In light of the number of foreclosure cases pending in Florida, the Second District, however, certified this issue to the Florida Supreme Court as a question of great public importance. Accordingly, lenders and servicers should monitor this decision, which if reversed, could alter the landscape of foreclosure law in Florida.

HOUSE PASSES BILLS TO REPEAL CFPB AUTO LENDING GUIDANCE AND EXPAND SAFE HARBOR FOR MORTGAGE LENDERS

By: Louise Bowes

On November 18, 2015, the House of Representatives passed H.R. 1737, known as the Reforming CFPB Indirect Auto Financing Guide Act (the “Auto Financing Act”), which rejected the position taken by the CFPB in its March 2013 bulletin on indirect auto lending. Although intended to provide guidance to auto lenders regarding compliance with the Equal Credit Opportunity Act, the proponents of the Auto Financing Act have concluded that the effect of the CFPB’s bulletin has been to regulate auto lenders, which the CFPB is not permitted to do pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank”). The bulletin has resulted in uncertainty in the auto lending market, as it impacts the interest rates lenders may offer to consumers. Although the bulletin is nonbinding, it has functioned as a rule because lawmakers have had no opportunity to comment on it.   Accordingly, the Auto Financing Act provides that any replacement to the CFPB’s bulletin must go through the rulemaking process to allow for comments.

The House of Representatives also passed another bill on the same day, the Portfolio Lending and Mortgage Access Act, H.R. 1210 (the “Mortgage Access Act”). The Mortgage Access Act provides that depository institutions can receive safe harbor protection for “qualified mortgages,” or “QMs,” even if the loans do not comply with Dodd Frank’s “ability to repay” requirement. This requirement, implemented as part of the CFPB’s amendments to Regulation Z, provides that a lender must make a reasonable, good-faith determination that a potential borrower has the ability to repay a loan prior to consummation. 12 C.F.R. 1026.43(c). To receive protection under the Mortgage Access Act without satisfying the ability to repay requirement, the lender must keep the loan in question on its own books. Lenders have been hesitant to issue new loans that do not qualify as QMs because such loans do not receive safe harbor protection, which would insulate the lender from claims made under the Truth in Lending Act and Regulation Z related to the qualified mortgage requirements. Proponents of the Mortgage Access Act believe that the unavailability of safe harbor protection for non-QM loans has resulted in potential borrowers being refused non-QM loans they could afford to repay.   Although removal of the ability to repay requirement may afford less protection to consumers, supporters of the Mortgage Access Act believe that requiring lenders to keep these loans on their own books will deter them from issuing loans to borrowers who cannot afford them.

If enacted, the Auto Financing Act and Mortgage Access Act may allow both auto lenders and mortgage lenders more flexibility in their lending practices; however, the White House has indicated that it opposes both Acts, and has specifically stated that President Barack Obama will veto the Auto Financing Act if given the opportunity.

NJ Appellate Division Decisions Hold that, While Borrowers Do Not Have a Private Right of Action Under HAMP, Borrowers Are Not Precluded from Pursuing Valid State Law Claims

By: Donna M. Bates

It is well-established that the federal Home Affordable Modification Program (“HAMP”) does not offer borrowers a private right of action to allege a lender or servicer violated HAMP. However, the New Jersey Appellate Division recently held that borrowers may pursue state law claims that a lender or servicer engaged in the modification process in bad faith or otherwise breached the terms of a HAMP Trial Period Plan (“TPP”).

In Arias v. Elite Mortgage Group, Inc., et al.,[1] the first reported New Jersey case on this issue, the Appellate Division held that a written TPP, which allowed the borrowers to make three reduced monthly mortgage payments as a condition of the TPP, constitutes a unilateral offer by the lender to modify a mortgage loan if the borrowers completely and timely comply with their obligations under the TPP.

In Arias, the plaintiff borrowers appealed from an order granting summary judgment to the defendant servicer. On appeal, Plaintiffs claimed that they had a contractual right to a permanent loan modification under the terms of a HAMP TPP, and defendant breached the TPP when it did not give them a loan modification. They also argued that defendant breached the covenant of good faith and fair dealing when it denied them the loan modification.

The Appellate Division upheld the grant of summary judgment to defendant, but it did so for different reasons than the trial court. After acknowledging that there were no reported New Jersey cases on this issue, the Arias Court opined that current case law suggests that an agreement that binds a debtor to make payments while leaving the mortgage company free to give nothing in return may violate the New Jersey Consumer Fraud Act (“CFA”). In its analysis, the Court relied heavily on Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547 (7th Cir. 2012), which held that, even though there was no private right of action for a borrower under HAMP, a borrower may still assert a common law contract claim for a lender’s failure to honor the terms of a HAMP TPP.

The Arias Court rejected defendant’s arguments that there was no enforceable promise to modify Plaintiffs’ loan because there was no consideration given and that the lender had sole and unbridled discretion whether to give a modification, where the borrower complied with the payment terms and other requirements of the TPP. The Court reviewed the language of the TPP and noted that, even though the TPP notified borrowers that it was not a loan modification, it also contained language stating that ‘if” borrowers complied with the TPP and their representations continued to be true in all material respects, “then” the servicer will provide them with a modification agreement.

Ultimately, the Arias Court affirmed the grant of summary judgment in favor of the defendant because the terms of the TPP in this case constituted “a unilateral offer” to give plaintiffs a loan modification if and only if plaintiffs fully complied with their obligations under the TPP. In this case, the borrowers did not comply with the TPP requirements. The Court held that the summary judgment record clearly established that the plaintiffs failed to comply with the payment schedule set forth in the TPP and, therefore, defendant was justified in refusing to give plaintiffs a loan modification. Therefore, there was no breach of contract or breach of the duty of good faith and fair dealing on these facts.

In Miller v. Bank of America Home Loan Servicing, L.P.,[2] decided just over one month after Arias, the Appellate Division was again faced with deciding whether borrowers could sustain claims against a mortgagee related to a HAMP TPP. In Miller, after defendant declined to modify their mortgage under HAMP, the borrowers filed an action alleging breach of contract, violation of the CFA, promissory estoppel, and breach of the covenant of good faith and fair dealing. Defendant was granted summary judgment after the judge concluded there was no private right of action under HAMP. Plaintiffs moved for reconsideration, and their motion was denied. They then appealed both orders.

After briefly recapping the history of the HAMP program, the Miller Court specifically agreed with the Appellate Division’s holding in Arias that “HAMP’s preclusion of a private right of action does not preempt pursuit of valid state law claims arising between the parties to a TPP.” The Court then reviewed the specific facts in the record regarding plaintiffs’ loan modification efforts. The TPP at issue in Miller contained language similar to the TPP in Arias, requiring  plaintiffs to make three payments of $3,508.17, due on May 1, June 1, and July 1, 2009. Defendant’s records showed that the three TPP payments were instead received on May 14, June 18, and August 18, 2009, and plaintiffs were ultimately denied a modification “because [they] did not make all of the required [TPP] payments by the end of the trial period.” Plaintiffs argued on appeal that summary judgment was inappropriate because there were disputed issues of material facts regarding their payments under the TPP, and they challenged the reliability of defendant’s payment records.

The Miller Court affirmed summary judgment in favor of the defendant. It held that plaintiffs’ self-serving assertions regarding challenges to the payment history, unsupported by any documentary proof, were insufficient to raise a genuine issue of material fact. The Court also held that plaintiffs’ CFA claim, which suggested that the defendant engaged in elusive tactics and failed to fulfill its promise of a loan modification, was properly dismissed. Plaintiffs failed to identify the alleged unlawful conduct, they failed to detail material misrepresentations they reasonably relied upon that resulted in damages, or to proffer facts that demonstrated a business practice to materially conceal information that ultimately induced them to act. Plaintiffs’ unsupported assertions were insufficient to create a material dispute, and therefore summary judgment was appropriate.

These decisions qualify the long-standing and frequently cited principle that a borrower does not have a right to a loan modification, and a lender is not required to offer one. While the Arias and Miller decisions do not hold that a borrower is entitled to a loan modification, they do hold that the language of a TPP or forbearance agreement may require the lender to modify the loan if the borrower complies with its terms. Lenders and servicers frequently engage in loss mitigation efforts with borrowers, including loan modification reviews, whether pursuant to the HAMP program, court mediation programs, or in-house modification programs. In light of these decisions, lenders and servicers should take care when drafting the terms of a written TPP or other forbearance agreement, so that it is clear what requirements a borrower must fulfill to receive a loan modification. Lenders and servicers should also make sure to provide written and timely notification to borrowers when they fail to comply with the terms of a loss mitigation agreement. These recent cases also underscore the importance of maintaining accurate records of payments and communications regarding loss mitigation efforts, which records may be necessary to rebut a borrower’s claims that they complied with all the TPP terms. Following these steps will help provide the support needed to defend against a borrower’s claims that they were improperly denied a loan modification.

[1] Arias v. Elite Mortgage Group, Inc., et al., New Jersey Superior Court, Appellate Division, Case Number A-4599-12T1. The Appellate Division approved Arias for publication on January 23, 2015.

[2] Miller v. Bank of America Home Loan Servicing, L.P., Superior Court of New Jersey, Appellate Division, Case Number A-0169-13T2. The Appellate Division approved Miller for publication on March 5, 2015.