Borrower Can Sue Lender To Compel Loan Modification (But Only If It Does What It Promised To Do First)

by:  Peter J. Gallagher (@pjsgallagher)

A recent published decision from the Appellate Division — Arias v. Elite Mortgage — resolved a question of first impression in New Jersey that is important as the State continues to dig its way out of the credit crisis. The issue in Arias involved mortgage modifications under the federal Home Affordable Mortgage Program, and specifically modifications that involve Trial Period Plan (“TPP”) agreements. As the name suggests, TPP agreements require borrowers who cannot make their regular monthly payments to make agreed upon reduced monthly payments in a timely manner for a trial period. Essentially, it allows borrowers to demonstrate to lenders that if their monthly payments are reduced then they can make their monthly mortgage payments. Accordingly, if they are able to make these payments during the trial period, then the lender agrees to modify their mortgage.

In Arias, Plaintiffs defaulted on their mortgage and then pursued a loan modification with their lender, which included a TPP agreement. However, the lender eventually refused to modify plaintiffs’ mortgage. Plaintiffs argued that this amounted to a breach of the promises the lender made in the TPP agreement, or alternatively, violated the implied covenant of good faith and fair dealing contained in the TPP agreement. The trial court rejected their claims and the Appellate Division affirmed.

Prior to Arias, there were no reported decisions in New Jersey addressing whether a borrower could maintain a cause of action against a lender that breached the promises it made in a TPP agreement.  The seminal decision on this issue was handed down by the U.S. Circuit Court of Appeals for the Seventh Circuit in Wigod v. Wells Fargo Bank. N.A. In that case, the Seventh Circuit held that, although there is no private cause of action under HAMP, a borrower can nonetheless assert a common-law contract claim against a lender that breaches a TPP agreement. In that case, the lender had argued that the TPP agreement was unenforceable because there was no consideration for its promise to grant a loan modification — the borrower was not offering anything new, it was just making a partial payment of a debt it already owed. The Seventh Circuit rejected this argument, holding that the consideration from the borrower was its agreement to provide additional financial information to the lender and its agreement to enter into debt counseling. The Seventh Circuit also rejected the lender’s argument that the TPP agreement gave the lender sole and unbridled discretion to decide whether to modify the borrower’s mortgage even if the borrower complied with its obligations under the TPP agreement. Instead, the Seventh Circuit described the TPP agreement as a “unilateral offer” to modify a mortgage that must be honored if, and this is the important part, the borrower complies with its obligations under the TPP agreement.


The Appellate Division endorsed and adopted the Seventh Circuit’s reasoning. Once it did so, the decision in Arias was easy. The TPP agreement in that case made clear, in a number of different provisions, that it was not a loan modification unto itself and that plaintiffs failure to strictly comply with the terms of the agreement would result in a denial of their request for a loan modification. Plaintiffs did not comply with the terms of the TPP agreement. Specifically, they failed to make the three trial period payments that they were supposed to make under the agreement. Accordingly, the court held that the lender was entitled to refuse the loan modification. Nonetheless, the court endorsed the idea that a TPP agreement could be enforced by a borrower if the borrower abided by its obligations under the TPP agreement. This is, therefore, an important opinion for lenders.


The Appellate Division also rejected plaintiffs’ argument that the bank had breached the implied covenant of good faith and fair dealing by refusing to modify their mortgage. In doing so, the Appellate Division relied on the well-settled principle that a lender cannot be deemed to have acted in bad faith when it seeks to enforce the terms of a note or mortgage as written. As we have noted in prior posts — here and here — “a creditor's duty to act in good faith does not extend to foregoing its right to accelerate upon default or otherwise compromising its contractual rights in order to aid its debtor.” Glenfed Financial Corp. v. Penick Corp. In other words, a borrower cannot accuse a lender of bad faith simply because the lender enforced its rights under the plain language of the relevant loan documents.

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