A California appeals court has ruled that when a lender promises to work with a borrower on a loan modification, but then proceeds to foreclose in the meantime, the lender is bound by its promise and can be held liable.
In the case of Claudia Aceves v. US Bank, the bank did exactly what many other large lenders do. One department obtains all the borrower’s financial information for a loan modification. A completely different department, with its own time schedule and employee incentive structure, goes full steam ahead with foreclosure plans. The first one to reach the “finish line” wins: Foreclosure or Modification.
Claudia Aceves could not make her mortgage payments, and so filed for Chapter 7 bankruptcy. That’s a liquidation, and she would have lost her home in the process. BUT, she decided to switch it to Chapter 13, which would have saved her home. The bank said they would work with her on a loan modification, but only if she agreed to let the bank “lift the stay” and obtain bankruptcy court permission for foreclosure, “just in case things didn’t work out.”
Ms. Aceves agreed.The bank received bankruptcy court permission to foreclose, and then immediately started foreclosure proceedings.
Meanwhile, back at the farm….[as the saying goes]:
The borrower sent in all her financial information. U.S. Bank said a negotiator would be in touch with her by a particular date in the next month. As it turned out, that date was four days AFTER the scheduled foreclosure auction!
On the day before the scheduled foreclosure, the bank negotiator called Ms. Aceves’ attorney with their demands. The requirements included wire transfer of a substantial sum of money immediately! The negotiator refused to put her demands in writing. The borrower did not meet the demands, so U. S. Bank foreclosed the next day!
When Ms. Aceves complained, the bank said, “Too bad, oral promises to stop or postpone foreclosure are not enforceable.”
Well, it’s a good thing Ms. Aceves had a good lawyer, and there were good judges on the appeals panel that heard her case. The judges said that if a borrower changes their position in reliance on the bank’s promises, then the bank is stuck with those promises. In Ms. Aceves’ case, she decided NOT to switch to Chapter 13, and she decided NOT to oppose the bank’s motion to lift the automatic stay, because she relied on the bank’s promises. Under those circumstances, the oral promises to work with Ms. Aceves on a loan modification were enforceable.
This case is going to have a major impact on the banking industry and how loan modifications are handled. I’ll keep you updated regarding any new developments around the country, following California’s lead. If you want to read the entire appeals court decision, click HERE.