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Mortgage Servicing and Loan Modifications: 4.8.3.5 Prepayment Fees and Loan Acceleration

If the exercise of the due-on-sale clause cannot be prevented, at a minimum, a transferee should not be obligated to pay any prepayment fee set forth in the contract. Some mortgages require a borrower to pay a penalty if the loan is repaid before it is legally due.613 When the prepayment is not voluntary, as when the lender enforces a due-on-sale clause, imposing a prepayment penalty is unfair.

Mortgage Servicing and Loan Modifications: 4.8.4.1 Generally

The Garn-St Germain Act makes clear that a transferee who obtains an interest in a home through one of the Act’s categories of exempt transfers may continue making mortgage payments without having the loan accelerated based on the transfer. However, continuing to make the payments does not amount to “assuming” the loan or becoming a borrower on the note. If the successor in interest cannot afford the payments and needs a loan modification, they may have to assume personal liability on the mortgage.

Mortgage Servicing and Loan Modifications: 4.8.4.2 Mortgage Loans are Freely Assumable Based on State Contract Law

As a matter of state contract law, mortgage loans are generally freely assumable and assignable.620 The only exceptions to this background rule of law are where a contract is for personal services (like a contract with a famous painter to create a mural in your home—the contract cannot be performed by just anyone), the assumption would be against public policy, or there is a valid restriction on assumptions in the contract.621 The first two exceptions should not apply in the mortgage loan contex

Mortgage Servicing and Loan Modifications: 4.8.4.3 Loan Modification Program Rules Requiring Simultaneous Modification and Assumption

For most successors, it would be a risky financial decision to assume liability for a debt they cannot afford without knowing whether a loan modification will be approved. Perhaps in recognition of this fact, or perhaps intending to increase the number of beneficial loan modifications and avoid foreclosures, the government agency insurers and the government sponsored enterprises, Fannie Mae and Freddie Mac, require servicers to evaluate successor homeowners for loan modifications before they have assumed liability on the debt.631

Mortgage Servicing and Loan Modifications: 4.8.4.4 Legal Claims Arising Out of Failure to Properly Evaluate Successors in Interest for Loan Modification and Assumption

When a servicer responds improperly to a successor’s request to be evaluated for a loan modification, one option is to escalate the problem both internally with the servicer (by asking to talk with a supervisor, sending a formal appeal, or contacting the office of the CEO, executive resolution department, or general counsel’s office) and externally (by contacting the Fannie or Freddie escalations portals or the FHA National Servicing Center).636

Mortgage Servicing and Loan Modifications: 5.2.1 Scope

State statutes and regulations cover a broad range of activities by lenders, mortgage holders, and servicers. Practitioners should be aware, however, that some or all of the provisions in a state servicing statute or regulation may not apply to a particular entity or type of loan due to the terms of the statute itself. A critical first step in using these laws is to carefully review the scope and exclusion provisions of the statutes to ensure that the law applies to the subject loans and to the entities that are to be named as defendants in the action.

Mortgage Servicing and Loan Modifications: 5.2.5 Private Mortgage Insurance

A limited number of states have enacted laws covering private mortgage insurance. These state statutes mostly piggyback on the requirements imposed under federal law by the Homeowners Protection Act,36 such as the requirement that borrowers receive annual notice of private mortgage insurance cancelation rights.37 However a few states give borrowers different, and in some cases more favorable, cancelation rights than federal law does.38

Mortgage Servicing and Loan Modifications: 5.2.7 Loss Mitigation

In response to the subprime foreclosure crisis that began in 2007, many courts and state legislatures implemented residential foreclosure mediation and conference programs designed to encourage parties to agree to alternatives to foreclosure. While many of these programs were created as temporary measures tied to the foreclosure crisis, some of their features have become permanently incorporated into their respective state’s foreclosure law.

Mortgage Servicing and Loan Modifications: 5.2.8 Payoff Statements

For any loan secured by the consumer’s dwelling, regulations issued by the Consumer Financial Protection Bureau (CFPB) under the Truth in Lending Act (TILA) require that a creditor, assignee, or servicer provide an accurate statement of the total outstanding balance required to pay the loan obligation in full no later than seven business days after they receive a written request for one.44 In issuing its final rule, the CFPB acknowledged that many state laws provide longer or shorter deadlines for complying with payoff requests (allowing from t

Mortgage Servicing and Loan Modifications: 5.2.10 Mortgage Servicer Duty of Good Faith

One state has imposed a statutory requirement on servicers that is similar to the implied contractual obligation of good faith and fair dealing.49 This Maine statute provides that a mortgage servicer shall act in good faith toward an obligor in the servicing of a mortgage obligation and in any foreclosure action relating to the obligation.50 Servicing under the statute expressly includes evaluating obligors for loss mitigation or loan modification options.

Mortgage Servicing and Loan Modifications: 5.4 Claims Under State Debt Collection Statutes

Many states have enacted their own debt collection practices statutes, similar to the federal Fair Debt Collection Practices Act (FDCPA),76 that may apply to servicers.77 These statutes are particularly worth investigating because many of them have a broader scope than the FDCPA. For example, in a number of states the state debt collection practices statute covers creditors who are collecting or servicing their own debts.

Home Foreclosures: 8.4.2.3.1 In general

Whether the mortgage owner can be held liable for servicing abuses will turn on whether the servicer is considered an agent of the mortgage owner. Where an agency relationship exists, the mortgage owner generally is liable.

Mortgage Servicing and Loan Modifications: 5.5.2 Privity As a Prerequisite to Servicer Liability

Because the servicer is typically an agent for the loan owner, the owner of the loan should be added as a defendant in any breach of contract action based on the original mortgage agreements.100 When a servicer acts as agent for the owner of the loan in all of its conduct related to the servicing of the loan, general rules of vicarious liability should apply to any claim arising out of the servicing of the loan.101 Conversely, if the servicer is an independent contractor, rather than an agent, o

Mortgage Servicing and Loan Modifications: 5.6 Breach of the Implied Covenant of Good Faith and Fair Dealing

The duty of good faith and fair dealing between parties to a contract115 is based in both common law and the Uniform Commercial Code (UCC).116 This implied contractual obligation is recognized in every state and is imposed on parties to an existing contract “to prohibit improper behavior in the performance and enforcement” of that contract.117 In some states, a breach of good faith and fair dealing is not an independent claim, but rather a theory u

Mortgage Servicing and Loan Modifications: 5.7 Breach of Fiduciary Duty

To state a claim for breach of fiduciary duty, a plaintiff must show (1) the existence of a fiduciary relationship; (2) the breach of that relationship; and (3) damage proximately caused by the breach. Absent special circumstances, most courts have held that the mere existence of a debtor-creditor relationship does not give rise to a fiduciary duty. However, special circumstances may exist when a disparity of bargaining power is coupled with the weaker party placing trust and confidence in the stronger party.135

Mortgage Servicing and Loan Modifications: 5.8.1 Introduction

While contract law theories and statutory remedies often predominate in cases of abusive servicing practices, it is also possible that such conduct may give rise to liability based on common law torts. Intentional torts, such as fraud and conversion, may give rise to emotional distress and punitive damages.144