The Lawletter Vol 41 No 11
It is not unusual for a borrower (mortgagor) who is facing foreclosure to attempt to obtain a loan modification from the lender (or the servicer acting for the lender). However, even if the borrower requests a loan modification, this does not automatically put the foreclosure process on hold. Nor does the lender (mortgagee) automatically violate some sort of duty owed to the borrower by proceeding with the foreclosure even though a loan modification has been requested.
For example, in Afridi v. Residential Credit Solutions, Inc., No. CV 15-13632-NMG, 2016 WL 3017382 (D. Mass. May 24, 2016), the U.S. District Court for Massachusetts recently held that the lender (or the servicer acting for the lender) did not breach its implied duty of good faith by proceeding with a foreclosure sale while the borrower was attempting to obtain a loan modification. In that case, the servicer sought to foreclose, and in order to avoid that outcome, the borrower applied for a mortgage modification under the Home Affordable Modification Program ("HAMP"). The servicer initially denied the application as incomplete. The servicer ultimately provided a list of the missing documents and the borrower updated his application. However, the servicer scheduled a foreclosure sale without first rendering a decision on the borrower’s modification application. The servicer ultimately denied the application.
The borrower filed suit against the servicer claiming, among other things, that the servicer breached its implied duty of good faith by refusing to postpone the foreclosure sale while the loan modification application was pending and by refusing to make a decision on the application prior to the scheduled foreclosure sale. The court pointed out that "a foreclosing mortgagee has a duty to act in good faith and to use reasonable diligence to protect the interests of a mortgagor prior to exercising a power of sale." Id. at * 3. However, the court agreed with the servicer’s position that "the duty of good faith and reasonable diligence does not require a mortgagee [lender] to refrain from foreclosure while a mortgagor's application for a loan modification is pending." Id. The court reasoned that "the implied covenant of good faith cannot create rights and duties not otherwise provided for in the existing contractual relationship. . . . The plaintiff has not alleged any contractual term requiring defendant to consider a loan modification prior to foreclosure." Id. However, the court tempered its holding by pointing out the following:
That is not to say that a mortgagee is free to abuse the loan modification process in order to foreclose in bad faith. To the contrary, even in the absence of a contractual term, a mortgagee may not abuse the modification process so as to trick or gain an unscrupulous advantage over the mortgagor.
Id. (internal quotations omitted). But there was no allegation by the borrower that the servicer sought to trick or otherwise deceive the borrower in order to foreclose. Rather, it simply failed to put the foreclosure process and sale on hold while a loan modification application was pending.