Business Solutions Alert: Lender’s Misrepresentations During Loan Modification Trial Period Are Actionable

A lender that fails to offer a borrower a good faith permanent loan modification where the borrower complies with all terms of the trial period is subject to a borrower’s suit for breach of contract of a trial modification plan. In Bushell v. JPMorgan Chase Bank, N.A. (No. C070643, filed 10/22/13), a California Court of Appeal held that borrowers sufficiently pleaded that they complied with all terms of a trial modification plan, they were qualified for a permanent modification, and the lender breached the trial plan by failing to offer a good faith permanent loan modification.

After the borrowers defaulted on a loan, the lender sent a trial modification plan stating that if the borrowers qualified and complied with all terms, the lender would modify the loan to avoid foreclosure. The borrowers made the first four trial-period payments, and complied with the lender’s advice to continue, by making twenty-six payments over two years. The borrowers were eventually told that the modification had been denied. But they contacted the lender for written explanation, and were later cleared to resume modification payments, which the borrowers paid. Shortly thereafter, however, the borrowers received a notice of trustee’s sale.

The trial court’s ruling to sustain the lender’s demurrer without leave to amend was made prior to two recent appellate decisions determinative on the issue. Those cases hold that when a borrower alleges compliance with all terms of a trial modification plan (e.g., makes all required payments and provides all documentation), and if the borrower’s representations remain true and correct, the lender must offer a permanent modification. Otherwise, the borrower may sue for breach of contract of the trial modification plan.

On appeal, the court in Bushell relied on those two decisions to hold that the borrowers stated a breach of contract claim. The court rejected the lender’s argument that the trial plan was a mere agreement to agree, noting that while the language was conditional, the borrowers met all conditions. The court also noted that the borrowers sufficiently pleaded damages in the form of time spent contacting the lender, discontinuing efforts to pursue refinance elsewhere, damaged credit reports, and losing their home. As to the fraud claim, the court found that the borrowers sufficiently pleaded that the trial plan contained false statements regarding foreclosure proceedings. The court upheld the borrowers’ other claims on similar grounds.

Despite that the parties in Bushell settled the case and requested that the appeal be dismissed, the Court of Appeal exercised its discretion to decide the merits because the appeal posed an issue of broad public interest likely to recur. From this, it can be surmised that the court sought to educate lenders that they must offer borrowers a good faith permanent loan modification where the borrower has complied with all terms of the trial plan and made representations that remain true and correct. To do otherwise renders the lender vulnerable to a borrower’s suit for breach of contract and fraud.

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October 28, 2013