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CA: Appellate Court Interprets HAMP re Borrower’s Right to a Permanent Loan Modification

Posted By USFN, Thursday, April 4, 2013
Updated: Monday, November 30, 2015

April 4, 2013


by Kathy Shakibi
Northwest Trustee Services, Inc – USFN Member (California, Oregon)

The California Court of Appeal has ruled that if a borrower complies with the terms of a trial period plan, and the borrower’s representations remain true, a servicer has to offer a permanent loan modification. Going forward, servicers need to be mindful of California’s interpretation of the HAMP directive when offering trial period plans. [West v. JP Morgan Chase, 2013 Cal. App. LEXIS 207 (Mar. 18, 2013)].

Facts of the Case

The servicer sent the borrower a trial period plan (TPP), stating “If 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.” This language is usual for a TPP, as no guarantee is provided that the borrower will be offered a permanent loan modification. The borrower completed the TPP and the servicer denied a permanent loan modification, citing the net present value calculation. The borrower asked for a re-evaluation based on updated figures, and for the net present value data calculations; the servicer did not follow through. The property went to sale and the borrower sued. The trial court dismissed the amended complaint and the borrower appealed.

Appellate Review

The appellate court acknowledged that the TPP did not include a provision that the servicer would offer a permanent loan modification upon the borrower complying with the terms. Nevertheless, the court imposed such a provision into a TPP, offering this portion of HAMP Supplemental Directive 09-01 in support: “If the borrower complies with the terms and conditions of the Trial Period Plan, the loan modification will become effective on the first day of the month following the trial period as specified in the Trial Period Plan.” (Directive, p. 18).

Based on the above-referenced language, the West court concluded that: “After the trial period, if the borrower complied with all terms of the TPP Agreement — including making all required payments and providing all required documentation — and if the borrower’s representations remained true and correct, the servicer had to offer a permanent modification.” The appellate court remanded the case, permitting the borrower to pursue claims of breach of contract, fraud, negligent misrepresentation, promissory estoppel, and unfair business practice.

HAMP Interpretation

The HAMP Supplemental Directive 09-01 (Directive) issued on April 6, 2009, covers the topics of eligibility, underwriting, and modification process to help servicers implement HAMP. Pursuant to the Directive, servicers must use a two-step process for HAMP modifications: (1) provide a TPP outlining the terms of the trial period; and (2) provide an agreement that outlines the terms of the final modification (Directive, p. 14). In step one, the servicer should instruct the borrower to return the signed TPP, with a signed hardship affidavit and income verification documents (if not previously obtained), and the first trial period payment (when not using automated drafting arrangements), to the servicer within 30 days. Upon receipt of the TPP from the borrower, the servicer must confirm that the borrower meets the underwriting and eligibility criteria (Directive, p. 15). Once the servicer makes this determination and has received good funds for the first month’s trial payment, the servicer should sign and return an executed copy of the TPP to the borrower. If the servicer determines that the borrower does not meet the underwriting and eligibility standards of HAMP after the borrower has submitted a signed TPP, the servicer should promptly communicate that determination to the borrower in writing (Directive, p. 15).

The language on page 15 of the Directive seems to provide servicers with discretion to determine a borrower’s qualification for a permanent loan modification under the eligibility and underwriting criteria after receiving a signed TPP along with required documents and good funds. The court in West, however, does not examine the language on pages 15 and 17 regarding TTP, and appears to interpret the Directive to require determining a borrower’s eligibility and qualification prior to offering a TPP. Once a borrower completes a TPP, the West court mandates that a servicer offer a permanent loan modification, if the borrower’s representations remain true and correct. This interpretation diminishes or eliminates a servicer’s discretion to determine a borrower’s qualification for a permanent modification during a TPP or after its completion.

When offering a TPP, servicers need to be mindful of the West case’s interpretation of the HAMP Directive.

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