Litigating Consumer Protection Acts in the Hamp Context
| Publication year | 2014 |
I. INTRODUCTION
At the height of the economic recession in 2010, over 2.9 million foreclosure actions were initiated nationally.(fn1) While the economy has improved, the foreclosure crisis lingers. Millions of Americans will face foreclosure in 2014.(fn2) The U.S. government responded by implementing the Home Affordable Mortgage Program (HAMP), a Treasury-sponsored initiative that aims to prevent foreclosure by encouraging mortgage loan servicers to modify the mortgages of qualified homeowners.(fn3) The Treasury Department has extended HAMP multiple times-from its original ending date in 2013 to its present ending date in 2016.(fn4)
While HAMP has indeed helped homeowners avoid foreclosure, the program has spawned an array of litigation as servicer misconduct runs rampant.(fn5) As the Ninth Circuit recently noted, "the [HAMP] program seems to have created more litigation than it has happy homeowners."(fn6) Litigation has had varying success for homeowners. Courts were initially reluctant to enforce Treasury directives regarding HAMP.(fn7) However, evolving case law has required a shift in strategy for homeowners to litigate under common law devices and state statutory law, such as consumer protection acts.(fn8) When servicers violate HAMP Guidelines, courts should afford homeowners legal recourse after the homeowner brings a consumer protection act claim against the servicer.
Part II of this Comment provides a brief overview of HAMP, including an explanation of the loan modification process. In Part III, the history of HAMP litigation is explored, from its weak beginnings to the mixed success of current claims. Finally, this Comment analyzes how homeowners can successfully litigate HAMP claims using consumer protection acts and how courts should respond to servicers' challenges to these claims.
II. THE HOME AFFORDABLE MODIFICATION PROGRAM
As part of the 2008 bailout of the financial industry, the Bush Administration passed the Emergency Economic Stabilization Act (EESA) of 2008,(fn9) which authorized the creation of the Making Home Affordable Program (MHA)-an initiative intended to stabilize the housing market and provide relief for homeowners.(fn10) As part of the MHA, the Treasury Department introduced HAMP.(fn11) The purpose of HAMP is to reduce the number of foreclosures by encouraging beneficiaries and servicers to modify mortgages for homeowners at risk of default or already in default on their mortgage loan.(fn12) Guidelines issued by the Treasury Department (HAMP Guidelines) set procedures and rules for participating servicers.(fn13) While the Obama Administration originally estimated that this program could benefit up to four million homeowners, there were only 939,008 active permanent HAMP loan modifications as of February 2014.(fn14) This Part explores the roles of HAMP participants, the benefits of HAMP for homeowners, and the process of HAMP loan modification.
HAMP creates a relationship between the U.S. Department of the Treasury, participating servicers, and homeowners whose residence is secured by a mortgage.(fn15) The Treasury Department oversees all MHA programs and publishes the HAMP Guidelines that regulate the loan modification process.(fn16)
Both government-sponsored entities (GSEs), including Freddie Mac and Fannie Mae, and non-government-sponsored entities (non-GSEs) participate in HAMP.(fn17) Non-GSEs participate in HAMP voluntarily,(fn18) and typically do so because they received Troubled Asset Relief Program (TARP) funds during the 2008 financial industry bailout.(fn19) Non-GSEs, including Bank of America, Wells Fargo, and JP Morgan Chase, commit to following HAMP Guidelines through signing a Servicer Participation Agreement (SPA) that imposes contractual obligations on the servicer to consider all eligible loans for MHA programs unless otherwise prohibited.(fn20) HAMP participants service approximately 89% of all first-lien mortgages.(fn21)
Homeowners must fit a narrow set of criteria to qualify for a HAMP loan modification.(fn22) This Comment only examines HAMP Tier 1 modifications as these are the oldest, most common, and as such, the most widely litigated type of HAMP modifications. Basic criteria for a HAMP Tier 1 modification include: (1) the mortgage is a first-lien loan originating on or before January 1, 2009; (2) the homeowner has a documented financial hardship; (3) the mortgage loan is secured by a single family property; (4) the mortgage loan was not previously modified under HAMP; (5) the mortgage loan is in default or "default is reasonably foreseeable"; (6) the residence is owner-occupied; and (7) the homeowner's current monthly mortgage payment is greater than 31% of his gross monthly income.(fn23) These criteria exclude a number of homeowners, including those who have less conventional sources of income or are unemployed.(fn24) However, these homeowners may qualify under other MHA programs, including the Home Affordable Unemployment Program, the Home Affordable Foreclosure Alternatives Program, or other foreclosure alternatives, including in-house modifications, short sales, or deed-in-lieu.(fn25) Even homeowners who meet the HAMP criteria are not guaranteed a loan modification, as the process requires a substantial amount of further effort by both the homeowner and the servicer.
Participation in HAMP provides several advantages to homeowners that are unavailable outside of the HAMP context. Perhaps the most important benefit is that once a homeowner submits a complete loan modification application(fn26) to the servicer, the servicer may not begin or continue foreclosure proceedings.(fn27) Discontinuation of foreclosure proceedings is valuable as it gives the homeowner additional time in his residence and allows him time to explore alternatives to foreclosure. Another advantage of HAMP is increased transparency in the communication process between homeowners and servicers.(fn28) HAMP Guidelines provide that servicers must assign homeowners a "single point of contact"-an employee of the servicer that the homeowner can contact for information regarding their loan modification application.(fn29) HAMP Guidelines also specify that the servicer must provide certain notices to the homeowner, including when an application is considered complete and whether the loan modification has been approved.(fn30) This more open system of communication is imperfect at best, but it provides the homeowner with some important notices, such as when the application has been received. Finally, a servicer cannot charge a homeowner any fees to be considered for a loan modification.(fn31) These benefits are unique to HAMP, and as such, it places homeowners on a more even playing field with servicers.
The HAMP loan modification process typically starts when the homeowner submits a loan modification application.(fn32) The servicer then performs a two-step analysis to consider whether the homeowner is eligible for a loan modification: (1) the waterfall approach, and (2) the Net Present Value (NPV) test.(fn33) Next, servicers offer approved homeowners a trial period plan (TPP) to ensure homeowners are able to make the modified monthly mortgage payments before a permanent loan modification is offered.(fn34) Completion of the entire process may span anywhere from a few months to a few years.(fn35)
1. The Loan Modification Application
Homeowners must submit a complete loan modification application to their mortgage loan servicer for consideration.(fn36) This application includes forms required by HAMP Guidelines, documentation of income, personal expenses worksheets, and tax returns.(fn37) Income may come from several sources, including salary/hourly wages, social security benefits, spousal and domestic support, rental income, income from a business, and support from other members of the household.(fn38) However, unemployment benefits are not considered as acceptable income under HAMP.(fn39) Income is consistently a problem for homeowners, as many homeowners default after experiencing a loss of income.(fn40) It is typical for homeowners to send several loan modification applications to servicers, as servicers can deny applications for being untimely or incomplete.(fn41) Many loan applications result in a paper chase, where the servicer continually asks for additional or updated paperwork, extending the loan modification process and having many homeowners rack up the amount in arrears.(fn42)
Once the servicer does determine that the application is complete, it forwards the application to its underwriting department for review.(fn43) The review consists of the four to five-step waterfall approach, followed by the NPV test.
2. The Waterfall Approach
The overall goal of a loan modification is to bring the homeowner current on their mortgage loan and to lower the homeowner's mortgage payment to a target of 31% of their current monthly income.(fn44) Servicers' underwriters use a waterfall approach to reach the target payment. The analysis generally involves up to five steps: (1) capitalization; (2) interest rate reduction; (3) term extension; (4) principal forbearance; and (5) principal reduction alternative.(fn45)
First, the...
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