Lenders Have a Duty to Not Misstate the Status of a Foreclosure or Loan Modification


Henry Chuang

by Henry Chuang on March 10, 2014

in Banking Issues, Foreclosure, Mortgage Issues, Real Estate Law

There have been a string of recent cases that have been decided in favor of borrowers against their lenders who have failed to offer loan modifications.  The most recent case is Lueras v. BAC Home Loans Servicing, LP.  In Lueras, the Court found that a lender could be held liable for misstating the status of a foreclosure or loan modification.  Further, a lender who is participating in Fannie Mae’s HomeSaver Forbearance Program is required to explore in good faith permanent alternatives to foreclosure.

Richard Lueras was a borrower who became delinquent on his home loan.  When he and his wife fell on hard times, he sought a loan modification.  Bank of America, who was the successor to BAC Home Loans, offered Lueras six months’ of reduced payments under Fannie Mae’s Homesaver Forbearance Program.  Although the program was supposed to be for six months, Lueras actually made payments at the reduced rate for ten months, while exploring a loan modification.  During this time Lueras received conflicting information from BofA about whether he was approved for a loan modification.  Further, he received notices that he was in foreclosure and written notices from BofA that no foreclosure would occur.  Eventually, BofA foreclosed on his home and this lawsuit was filed.

At the trial level, the court found that Lueras could not state a claim.  On appeal, the court reversed the trial court’s ruling.  First, regarding a claim for negligence, the appellate court affirmed that a lender has no duty to a borrower if the lender acted within the conventional lender role.  However, the appellate court ruled that a lender is required to not misrepresent facts, such as the status of a loan modification.  Given BofA’s misrepresentation of the status of the foreclosure and loan modification, the Court found that Lueras could make a sufficient claim for BofA’s neligence.  This reasoning also held true for Lueras’s claim for fraud.  There, the Court held that a misrepresentation of the status of a foreclosure was actionable not only for negligence, but potentially for fraud.

Additionally, the Court held that when a lender enters a trial forbearance under the HomeSaver Forbearance plan, it must evaluate and identify a permanent solution within the first three months and implement the solution within six months.  The Court reasoned that because Fannie Mae issued guidance stating that a lender should do these things under HomeSaver Forbearance Program, Fannie Mae’s suggestions were binding for any forbearance agreements initiated under the program.  Further, while the court noted that “should” meant that the lender had discretion on what to do, the court also found that a lender was required to work in good faith with the borrower because the failure to do so was a breach of the covenant of good faith and fair dealing.  However, even with this duty, a lender is not required to offer a loan modification, but instead is merely required to identify what, if any, alternatives are available.

Takeaway – It is clear that the courts are becoming increasingly frustrated with lenders and are willing to create new duties and responsibilities in order to hold lenders accountable.  Previous cases have found that a lender does not have a duty to a borrower.  While some recent cases have held that a lender is required to grant a loan modification if a borrower qualifies for one, this case has gone even further in finding a lender liable for misstating the status of the application or of the foreclosure.  Lenders must now be extremely careful that any information they provide is as accurate as possible or face liability for their failings.  If you need assistance navigating these new standards, please do not hesitate to contact us at (650) 327-2900.

Related Posts Plugin for WordPress, Blogger...

{ 2 comments… read them below or add one }

avatar dennis kavanagh March 28, 2014 at 10:56 am

Do you get the newsletter by Harold Justman entitled Calif. Real Estate Law published by San Mateo County Community College District? I assume you know Justman since he is in Palo Alto also. In the Feb. 2014 newsletter Justman’s take on the Lueras case in my opinion is rather extreme. He zeros in on the dissent and calls the majority opinion a star trek decision. Justman calls the decision a rush to judgement that should have never been published and questions the motivation of the court. Check out the newsletter online or I can send you a copy. Your website gives a fair summary of thee Lueras case without a bitter comments. Dennis Kavanagh-retired & inactive in Sausalito

avatar Henry Chuang March 31, 2014 at 11:37 am

Dennis,
Thank you for your comments. Yes, I know Mr. Justman and the newsletter. Actually, he recently asked me to join as one of the contributors to the newsletter so you should be seeing some of my analysis in the newsletter in the near future. Also, we recently co-authored an article about the recent series of decisions in the Lueras chain. I invite you to read that article when it is published.

Leave a Comment

{ 1 trackback }

Previous post:

Next post: