Written By: Sonia A. Plesset
Servicers Beware: The Common-Law Claim for “Negligent Processing of a Loan Modification Application” and other torts…
Since 2008, lenders and servicers alike have been subject to a litany of regulations and statutory requirements that have made the industry a veritable minefield. Since 2013, the combination of the Dodd-Frank Act regulations and of the Homeowner’s Bill of Rights (“HBOR”) have made servicing a risky-business. As if the legislature had not done enough to impose a constantly- evolving set of servicing rules, California courts have seemingly jumped on the bandwagon by adding new common-law duties to the mix.
A perfect illustration of this phenomenon is the creation of the new tort of “negligent loan modification processing or review.” In a nutshell, there is a new line of cases which hold that if a servicer voluntarily undertakes the review process for a loan modification, it has a duty to the borrower to exercise reasonable care in the review process.
While it is often true that bad facts make bad laws, it is also true that bad cases that go on appeal make bad precedent. Such is the case of Alvarez v. BAC Home Loans Servicing, L.P., 228 Cal. App. 4th 941, 176 Cal. Rptr. 3d 304 (2014) and the cases which began to pave the way for tort-based causes of action arising from the essentially contractual relationship between a lender and a borrower. It is no secret that tort claims, when sustainable, often have more “bite” than contractual claims in terms of both financial and reputational exposure.
In Alvarez, Plaintiffs applied for a loan modification under the HAMP program, were declined, and ultimately lost their home. Plaintiffs filed an action, alleging, among other things, a claim for negligence against the bank based on its purportedly inaccurate calculation of the borrowers’ gross income and reliance on equally inaccurate information about a junior lienholder. In addition, borrowers alleged that the bank also failed to review their loan modification application in a timely manner and foreclosed on their property while the application was under consideration, a practice known as dual-tracking.
The Court of Appeal held that these allegations were sufficient to give rise to a claim for negligent processing of a loan modification, holding that the general rule, cited in the landmark decision of Nymark v. Heart Fed. Savings & Loan Assn’ (1991) 231 Cal. App. 3d 1089 (1991), that a lender owes no duty of care to a borrower when the institution’s involvement does not exceed the conventional role as a mere lender of money, did not apply to the review of loan modification applications. In reaching its conclusion, the court relied in part on the balancing test known as the “Biakanja Factors” utilized by the court in Nymark in deciding whether such an exception exists. Relying on the more recent decision of Jolley v. Chase Home Finance, LLC (2013), 213 Cal. App. 4th 872, 153 Cal. Rptr. 3d 546, which underscores the fact that Nymark’s general rule is not absolute and subject to exceptions, the court in Alvarez thus found that while a lender has no duty to grant a loan modification, a lender that agrees to consider a loan modification has a duty to process the application with due care. The court opined that by undertaking the review of the loan modification, the lender entered into a special relationship with the borrowers that gave rise to a duty of care. Akin to the rules governing the Good Samaritan who provides assistance on the side of the road, the court’s message is clear: a lender that offers to provide assistance, and induces a borrower to rely on that assistance, is obligated to perform its task with due care.
It is also noteworthy that although the transaction occurred prior to the effective date of HBOR, the Alvarez court considered its prohibition against dual-tracking as a guideline for imposing such a duty, noting that HBOR “demonstrates a rising trend to require lenders to deal reasonably with borrowers in default to try to effectuate a workable loan modification.“ In other words, the court imposed the requirements of HBOR before the statute came into effect under common law principles.
Equally troublesome is the fact that the court in Alvarez held that even a borrower who cannot prove that the negligent processing was the proximate cause of a denial, still has a claim for damages (albeit a lesser one), because, the court reasoned, when a servicer undertakes a review, he deprives the borrower of the opportunity to seek other options or otherwise deters him from doing so. As stated by the court, “should plaintiffs fail to prove that they would have obtained a loan modification absent defendants’ negligence, damages will be affected accordingly, but not necessarily eliminated.” Id. At 949. In other words, the court held that the “lost opportunity” to be properly considered, constituted damages. Relying on a District Court’s opinion in Garcia v. OCWEN Loan Servicing, LLC, (2010) U.S. District Lexis 45875 * 7-11, the court held that the borrowers were damaged by the loss of the “possibility of obtaining the requested relief.” Id. In other words, the court in Alvarez found an exception to the general rule concerning the absence of duty, applied a statute before its effective date, and allowed for damages as speculative as “lost possibility.”
Is Alvarez the final word on the issue of duty relating to the loan modification review process? That is doubtful. The Supreme Court has not weighed in and recent decisions, especially at the District Court level, suggest a split in authority. While the proposition that a lender owes no duty to provide loan modifications seems to be well-grounded, there is a broad grey area with respect to other components. For instance, In Lueras v. BAC Home Loans Servicing, LP (2013), 221 Cal. App. 4th 49, the Court of Appeal held that while a lender does not owe a duty to “offer, consider or approve” a loan modification, it has a duty to provide accurate information regarding the status of a loan modification application and the date, time, or status of a foreclosure sale. Id. at 68.
While it is self-evident that negligent conduct is wrong from a business and a moral standpoint, this split of authority provides yet another incentive for diligent conduct and solid policies and procedures.