In a decision that all lenders should read carefully, the Appellate Division recently reiterated that a borrower may have a private cause of action against a lender if the lender breaches the terms of a mortgage modification agreement under the Home Affordable Modification Program ("HAMP").
Earlier this year, I wrote about the Appellate Division's decision in Arias v. Elite Mortgage. (In case you forgot, click here to review the post.) In that case, the Appellate Division faced an issue of first impression involving mortgage modifications under HAMP. Specifically, the Appellate Division was faced with the question of whether a borrower could sue a lender if the lender breached the terms of a Trial Period Plan (“TPP”) agreement. As I noted in that post, a TPP is essentially the first step in obtaining a mortgage modification under HAMP. In a TPP agreement, the borrower agrees, among other things, to make reduced monthly payments in a timely manner during a relatively short period. As the name suggests, this is a trial period during which the lender can determine whether the borrower is able to make payments similar to those the borrower would be required to make under a modified mortgage. If the borrower satisfies the conditions of the TPP, including making the monthly payments, then the lender agrees to modify the mortgage. In Arias, the Appellate Division held that a lender could face a lawsuit from a borrower if it failed to hold up its end of this bargain. In that case, however, the borrower had not made the required payments in a timely manner during the trial period — i.e., the borrower failed to hold up its end of the bargain — so the lender did not have to offer the borrower a modified mortgage.
Now, the Appellate Division has returned to the same issue in Aiello v. OceanFirst Bank. In Aiello, plaintiffs entered into a TPP agreement with defendant that required them to provide certain financial documentation, submit to credit counseling if necessary, and make monthly payments of $1,386.75 during the trial period.The TPP agreement stated that it was not a loan modification and that if plaintiffs failed to comply with its terms, no modification would be offered. It also stated that the monthly payment during the trial period was an estimate of the payment that would be required under a modified mortgage, and the actual amount under a modified mortgage might be greater.
Unlike Arias, plaintiffs in Aiello complied with the terms of the TPP agreement. Nonetheless, Fannie Mae initially rejected plaintiffs' application for a modified mortgage because their loan was originated prior to January 1, 2009, a fact, the Appellate Division observed, that defendant was aware of when it first entered into the TTP agreement with plaintiffs. Defendant eventually did offer plaintiffs a modification, but it included monthly payments almost $400 higher than the payments made under the TPP agreement. Plaintiffs rejected the offer and sued defendant for breaching the TPP agreement. Both sides moved for summary judgment. The trial court denied plaintiffs' motion and granted defendant's motion.
Plaintiffs appealed. The Appellate Division affirmed the trial court's decision denying plaintiffs' motion but reversed its decision granting defendant's motion.The reason it reversed the trial court in connection with defendant's motion was entirely procedural. Defendant failed to file a statement of undisputed material facts with its summary judgment motion, and relied on a certification of counsel for facts that were not within counsel's personal knowledge.
The Appellate Division's analysis of the trial court's decision on plaintiff's summary judgment motion was more interesting. The Appellate Division first reiterated the holding of Arias — a borrower can maintain a common-law breach of contract claim against a lender if the borrower satisfies the terms of a TPP agreement, including making the required monthly payments, but the lender refuses to modify the mortgage. The Appellate Division noted, however, that even though a borrower might be entitled to a modified mortgage once it satisfies the terms of a TPP agreement, and might be able to sue if it does not get one, the borrower is not entitled to a modified mortgage with the same monthly payments as those made under the TPP agreement. As the TPP agreements in both Aiello and Arias made clear, the monthly payments under a TPP agreement are only estimates. They are subject to change at the end of the trial period when the lender determines the actual amount due under the mortgage.
In Aiello, although plaintiffs initial request was rejected, they were eventually offered a modified mortgage, albeit with monthly payments almost $400 more than the monthly payments under the TPP agreement. As a result, the Appellate Division held that plaintiffs were not entitled to summary judgment. To be clear, the Appellate Division did not rule that plaintiffs could never prove a breach of the TPP agreement. It simply held that there were sufficient factual issues that prevented the trial court from granting summary judgment. Specifically, the Appellate Division held that it was not clear from the record whether, as the TPP agreement required, the proposed monthly payments under the modified mortgage were based on "the final amounts of unpaid interest and any other delinquent amounts (except late charges) to be added to the loan balance." If they were, then plaintiffs may not be able to prevail on their claim. If they were not, however, then the lender might be in trouble. Either way, however, this is an issue that will have to be resolved by the trial court.