Promise to Borrower to modify loan when servicer knows that Borrower is not eligible unfair under California’s Unfair Competition Law § 17200

The Ninth Circuit held that a servicer’s promise to a borrower to modify her loan when it knew knows that the borrower was not eligible for a loan modification was an unfair practice under California’s Unfair Competition Law § 17200.

The Borrower in Oskoui v. J.P. Morgan Chase Bank, N.A., No. 15-55457 (9th Cir. Mar. 13, 2017) asked her servicer to modify her loan after she missed a loan payment. The servicer offered her a “Trial Plan Agreement” explaining that “[i]f you comply with all the terms of this Agreement, we’ll consider a permanent workout solution for your loan once the Trial Plan has been completed.” The only specified term was that the borrower had to make three payments of $3,280.05.

Borrower made the payments only to be informed that she did not qualify for a modification “at this time” under either the Making Home Affordable Program (“HAMP”) or the servicer’s internal plan, because her income was insufficient. The servicer gave her no additional reasons for its denial even though its internal paperwork revealed two others reasons: the unpaid principal balance was higher than the amount allowed under the HAMP guidelines and the loan failed to satisfy the servicer’s net present value test (“NPV”).

But not only did the servicer fail to advise Borrower that she was not eligible for a modification, it told her that “we may be able to offer other alternatives” to foreclosure. Based on this invitation, Borrower applied for another loan modification with no knowledge that the servicer had already determined she was not eligible. The servicer wrote back stating it “wants to help you stay in your home” and included three payment coupons. The letter stated that “After successful completion of the Trial Period Plan, [servicer] will send you a Modification Agreement for your signature which will modify the Loan as necessary to reflect this new payment amount.” It also read that “[i]f all payments are made as scheduled, we will consider a permanent workout solution for your Loan.”

The servicer sent Borrower another letter the next day advising that she was not eligible for a loan modification because the unpaid balance exceeded the program limits, but again it did not mention that loan also failed the NPV test. The letter repeated that Borrower might be eligible for other modification programs with no explanation of what those were. Because the servicer “left the door open to relief and even urged her to do so,” Borrower made seven more monthly payments before the servicer served a foreclosure notice.

Borrower sued under California’s Unfair Competition Law (“UCL”) § 17200, breach of contract and TILA. The district court found for the servicer because Borrower did not comply with her obligations under the Agreement because she did not provide the “requested documentation to support her loan modification request.” That decision was reversed on appeal.

The Circuit Court found a plausible UCL claim existed because the servicer deceptively enticed the borrower to continue making payments by falsely leading her to believe that her mortgage would be modified if she did. The argument that the servicer proceeded in good faith because the Borrower’s situation could have changed making her eligible for a modification were, “patently unreasonable”. The Court also held that Borrower had a viable breach of contract claim. After successfully completing the Trial Period Plan, the servicer wrote that it would modify Borrower’s loan. Borrower made the payments only to be notified that she did not qualify for a modification. Once the Borrower made the payments the servicer was obligated by the explicit language of the letter to send an Agreement for Borrower to sign.

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