The Illinois Appellate Court for the Second District recently held that a borrower's discharge in Chapter 7 Bankruptcy is a sufficient change in circumstance to trigger eligibility for a subsequent HAMP application, absent a written internal policy to the contrary on the part of the lender.
A copy of the opinion is available at http://www.illinoiscourts.gov/Opinions/AppellateCourt/2013/2ndDistrict/2120719.pdf.
A lender filed a foreclosure action against two borrowers, who had previously been denied a loan modification on the basis of a negative Net Present Value ("NPV") calculation. The borrowers filed for bankruptcy, and then pursued an additional loan modification application. The lender declined to postpone a scheduled sheriff's sale.
The borrowers moved to deny confirmation of the sale, alleging that the lender had violated Illinois statutory requirements pertaining to loan modifications by failing to postpone a scheduled sheriff's sale after receiving a loan modification. The lender argued that the borrowers failed to demonstrate a sufficient change in circumstance that would require it to consider a subsequent loan modification. The lower court found in favor of the lender, and the borrower appealed.
As you may recall, 735 ILCS 5/15-1508.5 ("1508.5") provides that sales are to be set aside where the mortgagor proves that he applied for assistance under the Making Home Affordable Program ("HAMP"), and that the mortgaged real estate was sold in material violation of HAMP's requirements for proceeding to judicial sale.
Two HAMP guidelines are relevant here: Guideline 1.2 provides that a previously rejected loan modification application may be reconsidered if the borrower experiences a change in circumstance; and Guideline 3.3 provides that where a borrower submits a timely loan modification application after a foreclosure sale date has been scheduled, the servicer must suspend the sale as necessary to evaluate the borrower for HAMP.
On appeal, the lender argued among other things that the borrowers' bankruptcy filing did not constitute a significant change in circumstance such that the lender was required to reconsider the borrowers' subsequent HAMP application. Further, the lender argued that borrowers' argument led to an absurd result, in that sales might be postponed indefinitely by filing successive HAMP applications without any changes in circumstance.
The Appellate Court disagreed. In so ruling, it placed emphasis on the requirement of HAMP Guideline 1.2, which provides that servicers are to have an internal written policy which defines what the servicer considers to constitute a change in circumstance such that re-evaluating a HAMP application would be appropriate. After reciting this requirement, the Court noted that a reference to said written policy was "conspicuously absent" from the lender's brief.
Because the lender "has not ruled out a bankruptcy discharge as a change in circumstance," the Court found that it "stands to reason that a bankruptcy discharge could...affect the outcome of the very analysis that was the basis for [the borrowers'] first application: a negative NPV."
Accordingly, the Court held that "absent an internal policy to the contrary, a borrower's discharge from Chapter 7 bankruptcy is a change in circumstance that can trigger continued eligibility for a successive HAMP application under HAMP guideline 1.2."
With that standard in place, the Court ruled that the lender's failure to postpone the sale to consider the borrowers' HAMP application constituted a "material" violation for the purposes of Sec. 1508.5.
The Court also rejected the lender's contention that its decision would lead to borrowers gaining the power to postpone sales indefinitely. The Court observed that "unless a defendant can declare and receive a discharge from bankruptcy multiple times - and all before a scheduled sale date - then a defendant cannot use our holding to perpetually suspend a sale."
Accordingly, the Court reversed the lower court's holding, and remanded the matter to allow the lender to consider the borrowers' HAMP application.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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Chicago, Illinois 60602
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