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Appellate case establishes that lenders can be found liable

A recent appellate case has established that lenders can be found liable for negligence if they mishandle the loan modification process and cause injury to a homeowner through their negligence conduct.  Some of the factors that could amount to negligence include (1) asking for the same documents over and over or loses documents previously provided, (2) providing conflicting or inaccurate information, (3) failing to maintain a single point of contact, (4) instructing homeowners to go into default, (5) making a homeowner pay trial modification payments and never providing the homeowner with a permanent modification, and (6) generally unnecessary prolonging the loan modification review process.

In Jolley v. Chase Home Finance LLC, the California Court of Appeal (First District), reversed the trial court’s summary judgment motion in favor of Chase finding there were triable issues of fact as to whether Chase’s representatives were negligent during the loan modification process.  In Jolley, the homeowner plaintiff took out a construction loan with WaMu.  Soon after origination, Chase acquired the loan from the FDIC through its takeover of WaMu.  Due to WaMu’s delay in funding the loan, Jolley defaulted on the loan and began the process of applying for a loan modification.   One bank representative, who claimed to be with the “executive office of One bank representative, who claimed to be with the “executive office of Chase,” told Jolley on multiple occasions that it was “likely” and “highly probable” that Chase “would be able to modify the loan so as to avoid the foreclosure.” The Chase representative further stated that the “likelihood was good” that when construction was complete, he could roll the construction loan into a fully amortized conventional loan. As a result of those representations by Chase, Jolley was induced to borrow additional funds from friends and family, which he used to complete construction.

Ultimately, instead of agreeing to a loan modification, Chase demanded payment of the loan in full. Chase initiated foreclosure proceedings shortly thereafter.  Jolley filed suit and immediately enjoined the scheduled foreclosure sale. Jolley’s suit named WaMu and Chase (as WaMu’s successor) and alleged eight causes of action, including misrepresentation, violation of the UCL, breach of contract, and negligence. Chase moved for summary judgment. The trial court granted summary judgment, finding that Chase did not assume liability for borrowers’ claims related to any loan commitments, pursuant to

The court also found that, while Chase did not owe Jolley a fiduciary duty, it did owe him an ordinary duty of reasonable care, despite the long‐standing notion that “lenders and borrowers operate at arm’s length.” The Jolley court’s opinion thus carved out a powerful exception to the “general rule” articulated In Nymark v. Heart Fed. Savings & Loan Assn. that financial institutions do not owe a duty of care to a borrower “when the institution’s involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money.” The court reasoned, “[w]hen considered in full context, the cases show the question is not subject to black‐and‐white analysis —and not easily decided on the ‘general rule.’ We conclude here, where there was an ongoing dispute about WaMu’s performance of the construction loan contract, where that dispute appears to have bridged the FDIC’s receivership and Chase’s acquisition of the construction loan, and where specific representations were made by a Chase representative as to the likelihood of a loan modification, a cause of action for negligence has been stated that cannot be properly resolved based on lack of duty alone.”

Observing that ours is “a world dramatically rocked in the past few years by lending practices perhaps too much colored by short‐sighted self‐interest” and citing the recent slew of bank failures and the “avalanche of foreclosures,” the court also indicated that policy considerations favored imposing a duty of care on a lender in Chase’s position. “When a bank acquires from the FDIC a loan from a failed bank part of what it acquires is the history of the loan. Even if acquiring banks are not liable for breaches, fraud, or negligence of the failed bank under their purchase and assumption agreements—an issue we do not decide—simple good business practices dictate that they take into account the position in which the borrower has been placed prior to their acquisition of the loan. Where there is a long‐running dispute whether the failed bank properly disbursed monies due under the loan, the acquiring bank owes a duty of care to investigate the history of the loan and take that into account in negotiating with the borrower for a loan modification.”

This case has broad implications in the foreclosure and lender-liability context as homeowners can now hold banks accountable for failing to treat them with a reasonably duty of care and seek recompense for damages such as loss of trial modification payments, unnecessary fees and penalties, emotional distress, and loss of their home.

Read the case here: Jolley_v_Chase_Home_Finance_LLC


Breach of Contract—West v. JPMorgan Chase Bank

In West v. JPMorgan Chase Bank NA, 214 Cal. App. 4th 780 (2013), the California Appeal Court (Fourth District), overturned the lower court’s order sustaining Chase’s demurrer as to various claims brought by the plaintiff, and found that a homeowner who complied with all of the terms of a HAMP trial plan (“TPP”), and the representations made to Chase by the homeowner during the loan modification process remained true at the conclusion of the trial plan, could sue Chase for breach of contract for failing to provide the homeowner with a permanent HAMP loan modification.  “…[W]hen a borrower complies with all the terms of a TPP, and the borrower’s representations remain true and correct, the loan servicer must offer the borrower a permanent loan modification. As a party to a TPP, a borrower may sue the lender or loan servicer for its breach.  Because West complied with all the terms of the TPP, Chase Bank had to offer her a permanent loan modification.” Id. at 786.

West alleged that in July 2009, Washington Mutual informed her that she had been approved for a TPP.  The approval letter stated: “Since you have told us you’re committed to pursuing a stay-in-home option, you have been approved for a Trial Plan Agreement. If you comply with all the terms of this Agreement, we’ll consider a permanent workout solution for your loan once the Trial Plan has been completed.”  After West made all three payments under the trial modification, and Chase confirmed receipt of the documents she had submitted in support of her application, Chase told West to “continue to make the trial payments on time.”

Shortly thereafter, Chase sent West a letter and advised her that she had been denied a permanent loan modification due to Chase’s determination that their financial analysis showed a negative NPV.  After West wrote to Chase numerous times to alert them that they had calculated the NPV using outdated information, West was able to get on a call with a Chase representative who promised West she could resubmit her updated financial information for re-evaluation of the modification.  Although Chase told West no foreclosure sale had been scheduled, her property was sold at a trustee’s sale only two days later.

West soon hired an attorney and sued Chase for various causes of action, including fraud, breach of contract, negligent misrepresentation, and unfair business practices.  The trial court sustained Chase’s demurrer to the complaint in its entirety, and West appealed the judgment.

What is notable about this case is that the appeal court—for the first time—looked directly to the HAMP guidelines and state contract law and concluded that lenders who participated in the TARP program to receive money and other benefits from the government, are required to give HAMP loan modifications to those who met the guidelines set forth in the HAMP Supplemental Directive.  Concerning the application of the HAMP directives, the court noted that “If the NPV result was negative—that is, the value of the modified mortgage would be lower than the servicer’s expected return after foreclosure—the servicer was not obliged to offer a modification. If the NPV was positive, however, the Treasury directives said that ‘the servicer MUST offer the modification. Supplemental Directive 09–01.”  Id. at 788 (emphasis added).

As to the breach of contract claim, the Court of Appeal found that even though Chase’s trial modification offer did not contain language promising West she would be given a permanent loan modification, Chase was bound by state contract law to offer West a permanent modification.  Noting that state contract law permitted the court to enforce a contract in a way that would make the contract lawful and enforceable and in a way which was consistent with the parties’ intent at the time the contract was created.  The court stated that under the “practical construction doctrine,” the original contract together with Chase’s subsequent representations made to West allowing her to challenge the NPV calculations showed Chase’s intent to permanently modify her or give her the chance to negotiate an alternative to foreclosure before the trustee’s sale.

The court’s ruling is a huge win for homeowners.  Most notable in this holding, however, is that for the first time, a California court, looked to the applicable HAMP guidelines to determine that Chase was obligated to modify a homeowner of the homeowner otherwise qualified under the guidelines.  This is important because other lower courts have consistently held that the HAMP guidelines cannot be used to force the bank to modify since the homeowner was not a party to the TARP agreement.  Using state contract law and the applicable guidelines, the court has now paved the way for homeowners to hold banks accountable for their conduct in avoiding foreclosures and evaluating homeowners for a modification.

Read the case here: West_v_JPMorgan_Chase_Bank_NA

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