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Some lawmakers, industry insiders and consumer advocates say a legislative role is needed to ensure rules are binding and combine various state and federal policies.
February 4
A California appeals court has dealt mortgage servicers another setback by letting a borrower pursue a fraud claim because she was promised a loan modification, but got pushed into foreclosure.
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The court ruled, in Aceves v. U.S. Bank, that a borrower who relied on such a promise and decided not to file for Chapter 13 bankruptcy protection based on that assurance, could pursue fraud charges. (When the promise was made, the borrower had filed for liquidation under Chapter 7 of the U.S. Bankruptcy Code, which would have required her to give up the home; converting the case to Chapter 13 would have let her keep the home provided she pay the overdue amounts over time.)
"The promise was sufficiently concrete to be enforceable," the three-judge appellate panel wrote, adding that U.S. Bank "breached its promise by foreclosing."
Ari Brown, a lawyer at Hagens Berman Sobol Shapiro LLP in Seattle who represents borrowers but was not involved in the Aceves case, said the ruling could have broader implications.
"The court recognized that there are some limits to what servicers can do to borrowers," he said. "In thousands of cases, servicers are uniformly denying loan modifications to borrowers in much the same way, making promises, accepting payments and then reneging on their promise."
U.S. Bancorp declined to comment except to say that as a trustee, it had a limited role in the case. A spokeswoman for American Home Mortgage Servicing Inc. of Coppell, Texas, which serviced the loan, said by email that "because of the procedural stage of the case, there was not a full factual record before the court. Therefore, the statements and actions described in the opinion represent only the plaintiff's allegations."
The ruling has received much attention in industry circles, but not for its main thrust. Rather, the discussion has focused on a single paragraph from the 15-page ruling. That passage has been interpreted as a victory for the industry. Claudia Aceves had taken issue with the notice of default she had received because it mistakenly identified Option One, the originator of the loan, as its holder. But the court said this clerical error was "of no legal consequence" and did not harm the borrower. In so doing, the court "handed servicers a win," Paul Miller, managing director of FBR Capital Markets, wrote to clients in a research note Friday.
"This is a significant ruling for California as many of the cases contesting foreclosure question the validity of the notice of default," Miller wrote, citing an analysis of the case by the website HousingWire. But several plaintiff's attorneys maintained the ruling will have no impact on other lawsuits that allege problems with notices of default.
The panel ruled the borrower "did not suffer any prejudice" because the notice of default instructed the borrower to contact the correct party and included the address and telephone number.
Walter Hackett, a lawyer with Inland Counties Legal Services in San Bernardino, Calif., said the panel "did not say notices of default do not have to identify the proper beneficiary."
"It won't have an impact on other [notice of default] cases."
