REQUIRED READING: An increasing number of borrowers assert a servicer's failure to offer a loan modification under the Home Affordable Modification Program (HAMP) as a defense to foreclosure actions, as well as an affirmative claim for relief in lawsuits against lenders.
Not all mortgage loans are eligible for HAMP, and a participating servicer is not required to modify every HAMP-eligible loan. If borrower eligibility is established, the servicer is obligated to consider the borrower for a HAMP modification, assuming modification is not prevented by other contractual arrangements or investor requirements. The servicer retains considerable discretion when determining eligibility for a permanent modification.
Across the country, borrowers are attempting to assert private causes of action directly against loan servicers under HAMP. Borrowers are further attempting to persuade courts that they are the intended beneficiaries of the servicer participation agreement (SPA) between the servicer and Fannie Mae.
It is important to note that the Emergency Economic Stabilization Act (EESA), which paved the way for HAMP, does not expressly provide for any private right of action against servicers. EESA focuses on the parties regulated and the agencies overseeing the regulations, rather than on the borrowers. The economic stimulus effort promotes the welfare of persons facing foreclosure generally, as well as the economy as a whole, but it does not contemplate a direct cause of action under HAMP. Contained within EESA is a savings clause that expressly preserves pre-existing mortgage rights, notwithstanding the Treasury secretary's actions.
The HAMP SPA specifically states that it is governed by federal law. Under federal law, third parties must demonstrate that a contract was made for their direct benefit. Third parties must convince the court that they are the intended beneficiaries of the SPA or other government contract, which is a difficult burden to overcome.
Generally, third parties that benefit from a government contract are treated as incidental beneficiaries, rather than intended beneficiaries, and thus cannot enforce the contract absent a clear intent to the contrary. A plaintiff does not show clear intent, despite the fact that the plaintiff may be able to show that the contract operates to his or her benefit and was entered into with the third party in mind.
So far, borrowers have been unsuccessful in identifying anything in the HAMP SPA that clearly expresses that borrowers are the intended, rather than the incidental, beneficiaries of the contract. Instead, the HAMP SPA expressly states that the agreement shall inure to the benefit of, and be binding upon, the parties to the agreement and their permitted successors-in-interest.
The SPA contains no language providing a cause of action for the borrower, nor does it express an intent to confer third-party beneficiary status on borrowers. Even Fannie Mae, a party to the SPA, cannot require servicers to offer loan modifications. Fannie Mae can take other steps against servicers, including terminating the HAMP SPA, but it cannot unilaterally impose a modification.
Therefore, borrowers also cannot force servicers to offer loan modifications under HAMP. Although HAMP undoubtedly has an overall goal of assisting homeowners, the HAMP SPA is absent any intent to grant borrowers a cause of action to enforce any rights under HAMP.
Numerous courts across the country have held that a borrower is not a third-party beneficiary under the SPA, nor do individuals have a private cause of action under HAMP. California and Arizona – two of the hardest-hit states in terms of foreclosure rates – have rejected borrowers' attempts to invoke a private right of action under HAMP.
The recent decision in Robinson v. Wells Fargo contains a thorough analysis regarding why borrowers cannot enforce compliance with federal loan modification programs through civil actions. The plaintiff in the case claimed that his servicer failed to consider his eligibility for a HAMP modification and instead proceeded to foreclosure.
The court applied the four-factor test set forth by the U.S. Supreme Court concerning whether an implied right of action exists in a statute that does not expressly provide for one. In determining whether a private right of action is implied, the court considers whether the plaintiff is "one of the class for whose especial benefit the statute was enacted – that is, [whether] the statute create[s] a federal right in favor of the plaintiff"; whether "there [is] any indication of legislative intent, explicit or implicit, either to create such a remedy or to deny one"; whether the cause of action is "consistent with the underlying purposes of the legislative scheme"; and whether "the cause of action [is] one traditionally relegated to state law, in an area basically the concern of the states, so that it would be inappropriate to infer a cause of action based solely on federal law."
Applying those factors, the federal district court reasoned that there was no private cause of action contemplated by HAMP. The court further held that Congress had previously demonstrated, through its other economic stimulus legislation, the ability to create a private right of action when it intends to do so.
The court reasoned "it is highly unlikely that Congress absentmindedly forgot to mention an intended private action" against Troubled Asset Relief Program (TARP) fund recipients. The court noted, "By providing a cause of action against the [Treasury] secretary but not mentioning a cause of action against non-governmental entities, Congress demonstrated its intent to limit private action under TARP solely to actions against the secretary and not to extend any obligations or liabilities to those receiving TARP funds."
Most recently, borrowers are changing their strategy concerning HAMP litigation. Recent class-action litigation now primarily focuses on arguments that the servicer breached its contract with homeowners. Borrowers allege that servicers breached the trial period plan (TPP). Under HAMP, the TPP is a temporary payment plan intended to provide the borrower with immediate mortgage relief while the servicer conducts its formal HAMP eligibility review.
Though the TPP contains numerous disclaimers, including language expressly stating that the TPP itself is not a loan modification, many lawsuits allege that the TPP is an enforceable contract directly between the borrowers and the servicer, and that the servicers have breached this contract through delays, repeated requests for information, and the lack of a formal and prompt eligibility determination.
In a closely watched case, filed by the National Consumer Law Center (NCLC) as a class-action lawsuit against JPMorgan Chase, NCLC's strategy withstood an initial challenge in November 2010, when the court denied Chase's request to dismiss the case, holding that issues concerning whether the TPP created a privately enforceable contract were best left to summary judgment.
In December 2010, Chase scored a victory when the court denied the plaintiffs' pre-discovery request for class certification. The plaintiffs sought certification of a class of all Massachusetts borrowers who entered into written TPP agreements with Chase and who made the three required monthly payments but received neither an executed modification agreement nor a prompt formal denial of eligibility. The plaintiffs estimated their proposed class to include 1,875 members.
Chase successfully opposed certification by arguing that the named plaintiffs could not satisfy the requirements under the Federal Rules of Civil Procedure. The court held that the class would be overly broad because it would include borrowers who met the initial eligibility requirements but were ultimately rejected, either because they made "verbal misrepresentations" when applying for the modification agreements or because the value of the property or the source and amount of their income changed after the initial TPP evaluation.
In addition, the court accepted Chase's argument that the named plaintiffs were "vulnerable to unique defenses," as Chase had determined that each plaintiff had made significant misstatements regarding income or property value.
The battle over class certification in Durmic v. Chase will continue, since the plaintiffs sought certification prior to conducting any class discovery. The decision, however, provides a blueprint for future HAMP claimants, particularly in crafting class definitions and selecting representative plaintiffs.
In the March 2011 Making Home Affordable report, it was reported that 586,916 permanent home loan modifications were currently in place with 137,363 active trial modifications. HAMP was created and intended to help between 3 million and 4 million homeowners. As of the end of March, about 1.56 million homeowners had entered into trial modifications since HAMP's inception. It is expected that HAMP litigation will continue, especially in light of the current fiscal environment and sentiment that the efforts of the servicers and the federal government have been insufficient to prevent foreclosures.
Alison Berry is an attorney at Denver-headquartered Castle Stawiarski LLC. The multi-jurisdictional law firm provides legal representation in finance, foreclosure, bankruptcy and mortgage litigation in both state and federal courts. Berry can be reached at (303) 865-1400 or aberry@cmsatty.com.
