The U.S. Court of Appeals for the Fourth Circuit recently ruled that a bank owed no duty of care to mortgage borrowers in processing an application for a loan modification under the federal Home Affordable Modification Program, and that the bank's request for additional income documentation from the borrowers was not a "false" representation that the bank required more information to process their application.
In so ruling, the Court concluded that the borrowers failed to state claims for breach of implied contract, negligence, fraud, and violation of Maryland's consumer protection law based on the bank's denial of their loan modification application.
A copy of the opinion is available at: http://www.ca4.uscourts.gov/Opinions/Published/121973.P.pdf.
Plaintiffs borrowers ("Borrowers") refinanced their home mortgage loan and later defaulted. Borrowers sent a "hardship letter" to defendant mortgage servicer ("Servicer"), explaining the various reasons for their financial circumstances. Borrowers also included an application for a loan modification under the federal government's Home Affordable Modification Program ("HAMP"), along with a statement of monthly rental income and two weekly pay stubs showing a half month's pay.
Servicer responded a week later, stating that it had received Borrowers' "inquiry" regarding their mortgage loan and that in order to process their request for a loan modification, Servicer needed two additional pay stubs reflecting income for specific dates. Servicer's letter further stated that if the information, or a request for an extension, was not received within ten days, the modification request would be considered cancelled. Borrowers submitted the additional proof of income eleven days past the deadline.
Servicer subsequently sent Borrowers delinquency notices, a notice of intent to foreclose, as well as a letter denying their HAMP application, citing their failure to provide the requested documents within the specified time period. Borrowers repeatedly applied for HAMP loan modifications, but were denied each time. After several more missed mortgage payments, Servicer sent Borrowers a second foreclosure notice.
Borrowers filed suit against Servicer in state court, alleging breach of contract, negligence, violation of Maryland's Consumer Protection Act, negligent misrepresentation, and common law fraud. Servicer removed the case to federal court, which dismissed Borrowers' complaint. The lower court concluded in part that absent a "Trial Period Plan" agreement, Borrowers lacked a basis for challenging a HAMP application, as there was no express or implied contract and no private right of action under HAMP for alleged failure to follow HAMP guidelines. The lower court further determined that Servicer owed no duty to Borrowers to support their negligence claim, and that Borrowers' MCPA and fraud claims failed because Servicer never made any false representations in its correspondence to Borrowers.
Borrowers appealed. The Fourth Circuit affirmed.
As you may recall, the Maryland Consumer Protection Act ("MCPA") prohibits unfair or deceptive trade practices in connection with consumer debt. Md. Code Ann. Com. Law § 13-103. The MCPA defines unfair or deceptive trade practices as a "[f]alse disparaging, or misleading oral or written statement, visual description, or other representation of any kind which has the capacity, tendency, or effect of deceiving or misleading consumers." Id. § 13-301(1).
After providing an overview of the origin and operational aspects of the HAMP program, the Fourth Circuit pointed out among other things that a contract requires a meeting of the minds, thus rejecting Borrowers' assertion that they created an implied-in-fact contract because Bank and Borrowers "shared a tacit understanding that the application was to be processed [and approved] under HAMP." In so doing, the Court also rejected Borrowers' assertions that they provided consideration for the agreement in the form of taking time to complete and submit their application, and that Servicer bound itself to comply with some allegedly applicable "standard of care" by, among other things, entering into an agreement with the federal government to participate in HAMP and by stating in its foreclosure notice that "[i]f you are eligible [for HAMP], we will look at your monthly income and housing costs . . . and then determine an affordable mortgage payment."
Noting that none of this conduct amounted to a "meeting of the minds," the Fourth Circuit further observed that: (1) Borrowers were not a party to the "Servicer Participation Agreement" between Servicer and the federal government and thus had no authority to enforce it; (2) the foreclosure notice and HAMP application contained clear language stating that further action was required on the part of Servicer before an offer would be extended; and (3) Servicer "processed" the loan application under HAMP partly by reviewing it and determining that additional income information was required in order to evaluate borrowers' eligibility.
Repeatedly pointing out Borrowers' "counterfactual mantra" constituting mere legal conclusions that they had provided Servicer with all the documentation "required" under HAMP guidelines, the Fourth Circuit agreed with the lower court that Borrowers failed to state a plausible breach of contract claim.
Turning to Borrowers' negligence, fraud, consumer protection, and misrepresentation claims, the Fourth Circuit similarly concluded that Borrowers failed to state claims. First, the Court pointed out that Bank owed Borrowers no duty of care on which to base a negligence claim, and, contrary to Borrowers' assertion that Bank deviated from the applicable "standard of care" to process their loan modification, there was no contractual privity here to establish the requisite "intimate nexus between the parties as a condition to the imposition of tort liability." See Jacques v First Nat'l Bank of Maryland, 515 A.2d 756, 758-59 (Md. 1986)(relationship between bank and borrower is contractual in nature, not fiduciary, but special circumstances may give rise to a duty of care in processing a loan application).
The Fourth Circuit also rejected Borrowers' assertions that Bank violated the MCPA and committed fraud by supposedly "falsely" stating in a letter that it needed additional income information because, according to Borrowers, Bank already had all the information "required" under HAMP. Concluding that Bank made no false representation in its letter, that Borrowers failed to submit the requested information in a timely manner, and moreover, that Borrowers failed to meet the heightened pleading standards for claims sounding in fraud, the Court held that the MCPA and common-law fraud claims were properly dismissed.
Finally, the Court also determined that Borrowers failed to establish all the elements necessary to state a claim for negligent misrepresentation, finding that: (1) Bank's statements that it needed more documentation to process the HAMP application and that Borrowers failed to provide Bank with the requested documents were not false; and (2) Bank owed them no duty of care; and (3) Borrowers failed to allege that they justifiably took action in reliance on Bank's allegedly false statements or suffered damages caused by those statements.
Accordingly, the Fourth Circuit affirmed the judgment of the lower court in all respects.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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