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Connecticut: Lender Liable Relating to Loan Modification Processing?

Posted By USFN, Tuesday, September 13, 2016
Updated: Monday, August 29, 2016

September 13, 2016

by William R. Dziedzic
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)

In a recent superior court case, a mortgagor filed a two-count complaint against his lender alleging a violation of the Connecticut Unfair Trade Practices Act (CUTPA) and a claim for common-law negligence. [Blanco v. Bank of America, 2016 WL 2729319, 62 Conn. L. Rptr. 190 (Conn. Super. Ct. Apr. 19, 2016)].

The basis for the CUTPA count of the complaint is alleged conduct arising out of the lender’s review and processing of the plaintiff’s application to modify his mortgage. In support of the negligence count of the complaint the plaintiff relied, in part, on provisions in the National Mortgage Settlement (NMS) and the 2011 Office of the Comptroller of Currency Consent Order with Bank of America (Consent Order) to assert that the Bank owed the borrower a duty of care.

Background: In an attempt to cure the delinquency on his loan, the plaintiff-borrower submitted a number of loan modification applications to the Bank. The application process began in April 2012 and concluded in May 2014, resulting in a permanent modification of the plaintiff-borrower’s loan. The plaintiff-borrower alleged that during this process the Bank was negligent and unscrupulous in reviewing the loan modification applications — citing examples of being told to resubmit documents as well as the misapplication of trial payments. The borrower’s lawsuit against the Bank followed. The Bank challenged the complaint as legally insufficient, and the court granted the Bank’s motion to strike both counts. [The Bank subsequently moved for judgment against the plaintiff-borrower for failing to file a substituted complaint pursuant to the Connecticut Rules of Practice. That motion, too, was granted; and the plaintiff-borrower took an appeal. The appeal is currently pending with the Connecticut Appellate Court.]

Superior Court’s Review of the CUTPA Count — This first count alleged that the Bank violated CUTPA by initiating a foreclosure action while the loan modification applications were under consideration by the Bank. In granting the Bank’s motion to strike, the trial court referred to a long history of decisions where Connecticut courts have held that refusing to negotiate a loan modification prior to proceeding to foreclosure does not rise to a violation of CUTPA.

Superior Court’s Review of the Common-Law Negligence Count — The second count related to the handling of the loan modification applications. The plaintiff-borrower cited to the NMS and the Consent Order, which detail certain actions and guidelines that a mortgage servicer must take when reviewing a loss mitigation request. The borrower contended that these guidelines imposed a duty on the Bank, and that the Bank breached its alleged duty by not reviewing the plaintiff-borrower’s loss mitigation request in accordance with them. The Bank countered that no duty of care exists between a lender and a borrower, specifically that lenders have no obligation to negotiate a loan modification with a borrower. Moreover, the Bank maintained that the borrower lacked standing to bring claims based on the NMS or the Consent Order. (The court did not address the standing argument. See Blanco, footnote 2.)

In striking the common-law negligence count, the court reasoned that to impose a duty on a lender or loan servicer in this context would ultimately frustrate the loan modification process and would likely lead to increased litigation. Entities in the defendant’s position would be less inclined to even entertain loan modification applications, which principally benefit mortgagors, if there is a chance that such entities would be exposed to civil liability.

As it stands, this Blanco decision is favorable to the loan servicing industry because the court refused to recognize a new cause of action for borrowers against their lender or mortgage servicer. However, as referenced above, the decision is currently under appellate review.

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