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Mortgage Servicers Must Do What They Say
By Shawnielle D. Predeoux

Mortgage borrowers have filed multiple suits against mortgage servicers who held a foreclosure sale after orally promising to delay the foreclosure sale while a loan modification application was being processed. Most of these suits have been dismissed. Since most of these lawsuits are unsuccessful, is it possible that a mortgage servicer could be liable to a borrower for promising to send a loan modification application to the borrower? The Fifth Circuit Court of Appeals recently decided a case based on such a promise. Here is what happened.

James and Allene Miller obtained a purchase-money mortgage from Nexstar Financial Corp. Nexstar later assigned the note to BAC Home Loans Servicing, L.P. as the loan servicer. After the Millers defaulted, BAC Home Loans started to foreclose. The Millers contacted BAC Home Loans three times to request a loan modification application, but BAC Home Loans failed to send the application even though it promised to do so. BAC Home Loans also told the Millers that they did not have to make any payments on the loan because delinquent payments would be included in the modified loan after a modification was completed. After the Millers received a notice of foreclosure sale, a BAC Home Loans employee sent a loan modification application and agreed to postpone the foreclosure sale while the Millers attempted to modify the loan. The Millers returned a completed loan modification application before the sale date and were told by a BAC Home Loans employee that approval to postpone the sale was obtained the day before the foreclosure sale so the loan modification application could be processed. However, the foreclosure sale was held on the original scheduled date by an employee from National Default Exchange, L.P. BAC Home Loans never responded to the loan modification application.

The Millers sued BAC Home Loans and National Default as a result of the foreclosure sale. The Millers alleged violations of the Texas Debt Collection Act (TDCA) and the Texas Deceptive Trade Practices Act (DTPA) and asserted promissory estoppel because BAC Home Loans repeatedly promised to send a loan modification application and to delay foreclosure. These claims also were based on the fact that BAC Home Loans failed to respond to their loan modification application. The Millers also claimed wrongful foreclosure against BAC Home Loans and National Default. Finally, the Millers asked for an accounting and distribution from National Default.

BAC Home Loans moved to dismiss the complaint for failure to state a claim. The trial court dismissed all of the claims against BAC Home Loans and National Default. The promissory estoppel claim was dismissed because of the statute of frauds. The court dismissed the DTPA claim, explaining that the Millers were not "consumers" under the DTPA because their claims related to a loan transaction. The Millers appealed. On appeal, the Millers renewed their TDCA and DTPA claims. The Millers argued that the trial court erred in dismissing the promissory estoppel claim because BAC Home Loans raised the statute of frauds as an affirmative defense in its motion and not in its answer to the complaint. The Millers also argued that they were not required to establish the inadequate selling price element in their wrongful foreclosure claim because they were only seeking damages. Finally, the Millers argued that the trial court erred in refusing their request for an accounting and distribution.

The Fifth Circuit Court of Appeals reversed the dismissal of one of the TDCA claims and the request for an accounting and affirmed the dismissal of the remaining claim. The appellate court found that Millers' allegations that BAC Home Loans repeatedly promised to send a loan modification application and to delay foreclosure, that BAC Home Loans told the Millers not to make payments, and that an employee told them that the foreclosure sale would be postponed while the application was being considered was enough to establish a claim under TDCA § 392.304(a)(14). TDCA § 392.304(a)(14) prohibits a person from falsely representing the status or nature of the services rendered by the debt collector. Because the Millers stated a claim, they were entitled to an accounting. The appellate court also found that the Millers did not qualify as "consumers" under the DTPA even though the claims related to a purchase-money mortgage because the claims were based on a loan modification. A loan modification is a loan transaction that is neither a good or service by purchase or lease. The appellate court also found the statute of frauds defense could be raised in a Rule 12(b)(6) motion because the Millers claims were entirely based on oral promises. Finally, the court found that the Millers had to establish the grossly inadequate selling price element of the wrongful foreclosure claim because they did not allege that BAC Home Loans and National Default interfered with the bidding process.

In this case, the Fifth Circuit Court of Appeals found that a mortgage servicer was liable for promises surrounding a loan modification application and for misrepresenting its services under a state debt collection act. The federal Fair Debt Collection Practices Act contains a similar provision in Section 1692e. In a July 10, 2013 CFPB bulletin on unfair, deceptive, or abusive acts and practices, the CFPB stated that creditors and other entities they supervise who do not meet the FDCPA definition of debt collector must also comply with the FDCPA. In light of this CFPB bulletin, this case is applicable to all mortgage servicers. Mortgage servicers should ensure that their employees are adequately trained and perform compliance procedures to ensure that their employees are not misrepresenting services, which could subject the mortgage servicer to liability.

Miller v. BAC Home Loans Servicing, L.P., 2013 U.S. App. LEXIS 16773 (5th Cir. (E.D. Tex.) August 13, 2013)

Shawnielle D. Predeoux is an associate of Hudson Cook, LLP, in the firm's Hanover, Maryland office. Shawnielle can be reached at 410-865-5425 or by email at spredeoux@hudco.com.

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