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A mortgage modification is when a homeowner requests that the mortgage lender restructure the loan, usually due to financial difficulties.

When a homeowner requests a mortgage modification, they go into the application process assuming it will be a simple and quick process, only to be met with delays, unreturned telephone calls, and multiple claims by the mortgage company that the homeowner failed to send in documents. Homeowners may even have proof the documents were sent such as a fax confirmation sheet or a certified mail receipt – but the mortgage company denies receiving the document.

To highlight some of the ongoing issues of mortgage lenders abusing homeowners, below are two cases involving two of the nation’s larger mortgage lenders.

Sundquist v. Bank of America, No. 10-35624, Adv. Proc. No. 14-2278 (Bankr. E.D. Cal. March 23, 2017). A copy of the opinion can be found here.

Facts of Case 1

The Sundquists were current on their mortgage when they reached out to Bank of America (‘BOA’) to request a mortgage modification due to financial difficulties. They were told by BOA that they could not apply for a mortgage modification until they were behind on their payments. The Sundquists, on the instructions provided by BOA, began missing mortgage payments and eventually applied for several modifications. They dealt with BOA claiming they did not receive documents, denied the modification application without giving a reason, and promised to offer a future modification, all while putting the home in foreclosure. It was even claimed that one BOA employee told the Sundquists that mortgage modifications were not real and were just a scam so BOA could make more money before foreclosing on a home.

The Sundquists subsequently filed Chapter 13 bankruptcy to keep BOA from foreclosing on their home. The effect on the homeowners was devastating, including a heart attack and an attempted suicide. The Court found BOA acted willfully and intentionally and found the behavior so egregious that the Court awarded the homeowners $1,000,000 in damages and another $45,000,000 in punitive damages.

The punitive damages were intended to send a message to BOA – that this type of behavior was not acceptable and needs to stop. $40,000,000 of the punitive damages were directed by the court to be paid to the National Consumer Rights Bankruptcy Center, the National Consumer Law Center and five University of California law schools.

In my opinion, the initial fines and sanctions that mortgage lenders faced in the past were a drop in the bucket. As more and more mortgage lenders get fined for questionable practices related to mortgage modifications, these hefty sanctions may continue to be imposed. It is expected that this legal decision will be appealed.

Cotton v. Wells Fargo Bank, N.A., Adversary Proceeding No. 17-03056, pending in the United States Bankruptcy Court for the Western District of North Carolina

Facts of Case 2

This class action lawsuit is ongoing (it was filed in June of 2017) and alleges that Wells Fargo intentionally and improperly used forms to put homeowners currently in active Chapter 13 bankruptcy into an unsolicited mortgage modification. As a result of the forms filed with the Court, the Chapter 13 bankruptcy Trustee would start paying an amount lower than the homeowner’s current mortgage putting the homeowner further behind on their monthly obligation each month.

This modification, being called a ‘stealth modification’ by the lawyers handling the case not only put the homeowner further into default on their loan, but it also put them in default of their Chapter 13 bankruptcy plan. The terms of the ‘stealth modification’ frequently extended the term of the homeowner’s loan by as much 26 years and would have cost many homeowners upwards of $100,000 in additional interest.

It is speculation at this point as to why Wells Fargo would have put homeowners into these stealth modifications. Some legal experts believe the reason may have been to receive government payments given to mortgage lenders for each loan modified. Other lawyers believe the reason may have been to receive the increased income that would be paid over the life of the loan. The reason for the stealth modifications may have been a combination of these and other reasons.

It is important to note that this lawsuit comes on the heels of a 2015 settlement in the amount of $81.6 million between Wells Fargo and the Justice department. Wells Fargo was accused of failing to properly file the same forms in Chapter 13 bankruptcies. It is now accused of using them to put homeowners into stealth modifications. The Justice Department’s release regarding the settlement can be read here.

The information contained in this blog is for general information and educational purposes and is not legal advice. Reading these posts does not create an attorney/client relationship.

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