HAMP Trial Period Plan Is Not A Contract Or Promise For Permanent Modification

In Morales v. Chase Home Finance LLC, (C 10-02068, N.D. Cal. April 11, 2011), two borrowers filed a putative class action on behalf of California homeowners who complied with HAMP Trial Period Plan (TPP) contract, but who had not received a permanent HAMP modification. The borrowers’ alleged that they executed a HAMP TPP contract, submitted updated income documentation, paid the required three trial period payments and continued making payments under the TPP after the initial trial period ended. Despite their meeting the conditions under the TPP and despite the servicer’s acceptance of payments, the servicer did not give the borrowers a final modification agreement because they lacked sufficient income and documentation for their income. The borrowers sued seeking relief for breach of contract, breach of the covenant of good faith and fair dealing, and promissory estoppel, as well as, for breach of the Servicer Participation Agreement (SPA). The servicer moved to dismiss the complaint which was granted. In dismissing the breach of contract claim, the district court observed that the TPP contracts contained the condition that the loan will not be modified until a fully executed copy of a Modification Agreement is received by each borrower. The court found that the borrowers failed to allege that they received a fully executed copy of a Modification Agreement and therefore failed to allege the existence of a binding contract regarding the loan modification. The court found that breach of the covenant of good faith claim also failed because the borrowers must establish the existence of a contractual duty along with conduct that frustrates the borrowers’ right to benefit from the contract. Because they failed to sufficiently allege the existence of a contractual obligation by the servicer to give them a final loan modification, the borrowers failed to allege a claim for breach of the covenant of good faith and fair dealing. The court also dismissed the promissory estoppel claim. The court observed that prior to a HAMP amendment in January 2010 directing servicers to offer a TPP only on verified income documentations; HAMP did not require servicers to verify eligibility prior to accepting borrowers into the TPP. The amendment actually allowed servicers to accept borrowers to TPP based on verbal financial information presented by the borrowers and subject to later verification during the trial period. The court concluded that when the borrowers were offered a trial modification there was no promise that they could rely on that they would also be deemed eligible for permanent loan modification. Because a showing of reliance on a promise is essential for promissory estoppel, the court found that the claim failed as a matter of law. Lastly, the court dismissed borrower’s breach of contract claim under the SPA finding that they are incidental and not the intended beneficiaries to the HAMP servicer’s participation agreement.

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