A California appeals court has dealt mortgage servicers another setback by letting a borrower pursue a fraud claim because she was promised a loan modification, but got pushed into foreclosure.
In a ruling late last month, the California Court of Appeals rejected an argument made by U.S. Bancorp (the trustee for the securitization that held the mortgage), that an oral promise to a borrower to modify a loan was unenforceable.
The court ruled in Aceves v. U.S. Bank that a borrower who relied on such a promise, and decided not to file for Chapter 13 bankruptcy protection based on that assurance, could pursue fraud charges. (When the promise was made, the borrower had filed for liquidation under Chapter 7 of the U.S. Bankruptcy Code, which would have required her to give up the home; converting the case to Chapter 13 would have let her keep the home provided she pay the overdue amounts over time.)
“The promise was sufficiently concrete to be enforceable,” the three-judge appellate panel wrote, adding that U.S. Bank “breached its promise by foreclosing.”
Ari Brown, a lawyer at Hagens Berman Sobol Shapiro LLP in Seattle who represents borrowers but was not involved in the Aceves case, said the ruling could have broader implications.
“The court recognized that there are some limits to what servicers can do to borrowers,” he said. “In thousands of cases, servicers are uniformly denying loan modifications to borrowers in much the same way, making promises, accepting payments and then reneging on their promise.”
U.S. Bancorp declined to comment except to say that as a trustee, it had a limited role in the case. A spokeswoman for American Home Mortgage Servicing Inc. of Coppell, Texas, which serviced the loan, said by e-mail that, “because of the procedural stage of the case, there was not a full factual record before the court. Therefore, the statements and actions described in the opinion represent only the plaintiff's allegations.”
