Avoiding Breach of Contract Exposure in Loan Modification Review

Fair Lending / Fair Servicing

Loan ApplicationOn January 28, 2014, a federal judge indicated that home loan borrowers in California may bring breach of contract claims against their loan servicer if the servicer offers a permanent loan modification agreement that differs from what was advertised in communications before the borrowers entered into the prerequisite Trial Period Plan (“TPP”).  Reiydelle v. J.P. Morgan Chase Bank, N.A., No. 12-cv-06543-JCS, 2014 WL 312348, at *12-13 (N.D. Cal. Jan. 28, 2014).  The judge suggested that a servicer’s alleged pre-trial plan communications with the borrower about the potential permanent loan modification could constitute an enforceable oral or implied-in-fact contract giving rise to claims against the servicer for breach of contract, breach of the covenant of good faith and fair dealing, and promissory estoppel.

This has serious implications for what servicers should and should not say in communications with borrowers while a TPP offer is pending, especially in court-sponsored mandatory mediation where servicers may be required to communicate estimated terms for the potential permanent modification.  It appears that the servicer in Reiydelle could have reduced the risk of breach of contract litigation by not allegedly making definitive “representations” or “promises” in its communications with the borrower and by making clear that it was only communicating imprecise “estimated[s]” for the potential permanent modification.  Id.; see Young v. Wells Fargo Bank, N.A., 717 F.3d 224, 232 (1st Cir. 2013) (no breach of contract claim where servicer had “unambiguously distinguished[d]” that TPP was only an “estimate of the payment that will be required under the [permanently] modified loan terms” which “may be different”).

So, servicers should be careful about what they say in pre-trial plan communications with borrowers.

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