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Servicer Aurora Sued for Making Loan Mods Too Easy to Get

The loan modification offer was hard to turn down, in more ways than one.

It was July 2008. IndyMac Bank was failing and Fannie Mae and Freddie Mac were in a death spiral. Ballooning monthly payments were still a big worry for homeowners who had taken out adjustable-rate mortgages a few years earlier. Lenders and regulators were worried about the risk of ARM defaults, too.

In that environment, Aurora Loan Services Inc., a unit of the not-yet-bankrupt Lehman Brothers, approached some of its ARM borrowers with what must have sounded to many of them like a sweet deal. The servicer offered to lock in their teaser rates for five years from the date they were scheduled to start adjusting. The borrower didn't even have to sign anything. All one had to do was make two consecutive payments at the current rate and the loan would automatically be modified.

But the offer letter did not spell out how one could opt out of the modification offer, apart from failing to make the two mortgage payments (which, of course, would mean defaulting and potentially losing the home). And one borrower now says he didn't receive the letter at the time, and learned his loan had been modified only after the fact.

Why would a borrower want to opt out? Someone who was prescient about economic trends might have guessed rates would drop dramatically. In hindsight, freezing the rate meant the borrower ended up owing thousands of dollars more the last few years.

Rather than preventing defaults, did the mods precipitate them?

That is what Andrew WeissMalik, the borrower who says he didn't get his offer letter and who is now suing Aurora, claims.

"Aurora's target audience was not a high-level savvy borrower but rather a stated-income borrower," he said. "How many of those borrowers have gone into default and would not have if their rate had adjusted down? They would have been able to make that payment."

Despite his use of the word "predatory" to describe Aurora's actions, WeissMalik is not a typical borrower plaintiff. He's a mortgage banker by trade. And he's using his industry knowledge to make a case challenging Aurora's authority to change the terms of his loan — and potentially those of other borrowers' loans.

WeissMalik — who works as a vice president at 360 Mortgage Group LLC, a wholesale lender based in Austin — sued Aurora in U.S. District Court in Utah late last year for breach of contract, fraudulent nondisclosure, and violations of the Real Estate Settlement Protection Act and Truth in Lending Act.

He is seeking to recoup from Aurora the $20,000 he says he was overcharged over a roughly two-year period because Aurora failed to lower his interest rate under the loan's original terms. The suit also seeks class action status.

Attorneys and a spokeswoman for Aurora did not respond to requests for comment.

WeissMalik said he could not estimate how many other borrowers received the July 2008 modification offer. He hopes to learn that in discovery.

According to the rating firm Fitch Inc., as of July 31 last year Aurora serviced nearly 373,000 loans with an unpaid principal balance of more than $87.1 billion. It's unclear how many of the loans were ARMs, let alone how many Aurora might have solicited for mods two and a half years ago.

Melyssa Davidson, a lawyer with Parsons Kinghorn Harris who represents WeissMalik, said Aurora did not give borrowers a chance to reject the new terms. "One of our claims is that he never had the opportunity to stay with the original loan terms," she said.

WeissMalik's rate was scheduled to adjust for the first time in September 2008. When he received his statement that month and saw the amount hadn't changed, he called Aurora to ask why.

He said he was told the rate had been frozen by a federal mandate issued by then-President George W. Bush. (September 2008 was the month that Lehman filed for bankruptcy protection and Fannie and Freddie were placed in conservatorship.)

WeissMalik was skeptical (there was no such federal freeze) but falling rates were also keeping him busy at his job as a mortgage originator. In late 2008 he moved to Texas to take his current job at 360 Mortgage. So he put his problem with the loan on his Utah house "on the back burner," he said, and didn't contact Aurora again until November 2009.

A month after that, Aurora told him he had consented to the terms of the July 2008 modification letter (the one he says he didn't get) by continuing to pay his mortgage.

Indeed, the form letter, which WeissMalik eventually obtained, says that "we will assume that you have accepted this offer if you make two on-time payments following your adjustment date at your current, unadjusted monthly payment amount."

The letter describes only one way to decline the offer: it told borrowers that if they did not make the two required mortgage payments, the servicer "would assume that you declined our offer and we will adjust the interest rate and monthly payment as provided in your mortgae note."