Lawsuit Alleges Workout Scheme Tricked Homeowners to Foreclose

A lawsuit is bringing the spotlight on how lack of loan servicing transparency that ensures open in-house exchange of data and communication between departments can cause losses.

Filed by a group of homeowners it claims  Aurora Loan Services LLC reaped $100 million from delinquent homeowners promising to modify their loans but instead had their properties foreclosed with little or no notice.

Filed in the U.S. District Court for the Northern District of California in San Jose, the suit states the Littleton, Colo.-based mortgage bank collected tens of thousands of dollars in “illicit profits” from each of these homeowners but did not cure their mortgages.

In exchange for three to six large monthly payments, Aurora had promised it would halt the foreclosure process and work with homeowners to restructure, modify or resell the loan, allowing homeowners a chance to keep their homes, the suit states.

“We intend to prove that Aurora’s workout plan was nothing more than a cynical ploy to take advantage of homeowners desperate to hold on to their homes,” said Steve Berman, managing partner of Seattle-based Hagens Berman Sobol Shapiro LLP and the attorney representing the proposed class.
If there is a disconnect between the collections and the loss mitigation department distinctions between a workout effort that aims to cure a distressed or incurable mortgage loan and a workout scheme type scenario can easily blur.

The suit contends that, after a few months, Aurora foreclosed on the homes without giving the borrowers any notice that their requests for loan modification were denied and without allowing borrowers access to any method for ending their loan deficiency, despite the provisions of the workout agreements.

The suit states that the workout agreements provided for four methods for ending loan deficiency: bringing the loan current, refinancing with another lender, modification of the terms of the loan at the discretion of Aurora and another workout option at the company’s discretion.

“The past three years have been tough enough on homeowners without them having to worry about being preyed upon by unscrupulous loan services,” Berman said.
The complaint outlines the stories of two married couples who engaged Aurora in an attempt to forestall foreclosure.

The first couple, from San Jose, refinanced their home with a mortgage company in early 2006. Two years later, the couple suffered economic setbacks in the form of poorly performing investments and a temporary loss of work. In late 2009, the couple contacted Aurora and signed one of the so-called workout agreements.

Over the next several months, the couple paid a total of $33,500 in return for Aurora’s promise to work on modifying the terms of the loan, among other possible outcomes. In May 2010, the family was served with a notice to vacate, indicating their home had been sold in foreclosure. The family had received no prior notice that the foreclosure process had been completed. In addition, Aurora did not notify the family that it had been denied a loan modification, according to the complaint.

In another instance, a second San Jose couple refinanced their home in mid-2007. Two years later, the couple suffered financial hardship as a result of an illness and the death of a parent, which led to increased expenses and loss of income. In early 2009, the couple contacted Aurora and signed one of the company’s workout agreements, the complaint alleges.

Over the next several months, the family paid a total of $23,700 in return for Aurora’s promise to modify the loan. Like the first couple, the family was served with a notice to vacate in late June 2010, signaling their home had been sold in foreclosure. The family was not told prior to receiving the notice that the foreclosure process on their home had begun, according to the complaint.

“We’ve heard of cases like this a lot over the last few years,” Berman said. “We’d like to bring struggling homeowners some sense of relief.”

The complaint alleges Aurora conducted negligent misrepresentation, unjust enrichment, breached the implied covenant of good faith and fair dealing, violation of the California Unfair Business Practices Act and other violations of California law.

Hagens Berman believes the workout agreements were fraudulent in nature and seeks to have the agreements declared void.

The firm also seeks an injunction against Aurora forbidding the company from continued offering of its deceptive workout agreements, restitution to be determined at trial, damages to be determined at trial, and trial and attorneys’ fees.

The lawsuit alleges Aurora offered distressed homeowners fraudulent workout options that pushed into foreclosure. In addition the law firm called on other borrowers with a workout agreement with Aurora to join this case.

The bank is one of many under scrutiny in times when fraud prevention is a hot topic for both borrowers and lenders.

Data show that the federal government executed Operation Stolen Dreams to minimize fraud related to modifications, foreclosures and nonfraud criminal cases has had a positive effect on the marketplace. Fluctuations were affected by quarter changes, such as a big decline in mortgage insurance litigation resulting primarily from a burst in FHA-related activity during the first quarter that did not continue into the second quarter.

So between April 1 and June 30 active cases totaled 75, according to data reported by mortgage banking litigation firm Patton Boggs LLP of Washington, down 52% compared to the first quarter and 40% lower than a year ago.

Earlier this year “to strengthen the fight against loan modification scammers,” the Lawyers’ Committee for Civil Rights Under Law launched PreventLoanScams.org, a website designed to assist federal, state and local governmental agencies, and other law enforcement entities to stop this type of fraud.

The website is part of the Loan Modification Scam Prevention Network, a broad coalition of government agencies and nonprofit organizations led by Fannie Mae, Freddie Mac, the Lawyers’ Committee for Civil Rights Under Law and NeighborWorks America.

Its goal, according to executive director of the Lawyers’ Committee for Civil Rights Under Law, Barbara Arnwine, is to build a national clearinghouse and database for fraud complaints that is accessible to all and ultimately step up and coordinate efforts “to put these scammers out of business for good.”