Servicer's Confusion During Mortgage Loan Modification Process Not Result of Fraud

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By Stephanie M. Acree

A debtor was not defrauded by his mortgage servicer when he failed to receive a loan modification after rejecting a proposed modification during his bankruptcy proceeding, the U.S. District Court for the Southern District of New York held May 29 (McFarland v. Loan Care, S.D.N.Y., No. 1:12-cv-02847-JPO, 5/29/13).

Judge J. Paul Oetken found that the mortgage servicer had not made any material misrepresentations to the debtor regarding his loan modification and that the debtor's suit was grounded in the belief that he should have been offered a modification with more favorable terms.


Loss Mitigation
Keith McFarland bought an apartment in Bronx, N.Y., in April 2009. He obtained a mortgage from Freedom Mortgage Company in the amount of $235,063, with Loan Care serving as the mortgage servicer. His monthly payment on the mortgage including taxes and insurance was originally $1,518.

McFarland's income dropped significantly between 2009 and 2010, and he filed for Chapter 13 protection on June 12, 2010. Loan Care moved to lift the stay on Jan. 18, 2011, in order to enforce its rights to the property. On the advice of his attorney Daniel M. Katzner, McFarland filed a motion with the bankruptcy court requesting loss mitigation. Loan Care approved McFarland for a loan modification and sent him a letter offering to reduce the monthly payments to $1,454, reduce the monthly interest rate, and extend the term of the loan.


Modification Offer Rejected
McFarland rejected the offer because he claimed the reduction was too small and he would still not be able to afford the payments. In the letter rejecting the offer, McFarland's attorney added that McFarland had decided to “surrender the property back to [Loan Care] in satisfaction of the secured debt unless a greater reduction can be offered.”

On Aug. 11, 2011, the bankruptcy court issued an order granting Loan Care's motion to lift the automatic stay. On Aug. 22, 2011, Loan Care denied a new request from McFarland for loss mitigation. The following day, McFarland, through his attorney, moved the bankruptcy court to modify his Chapter 13 plan so that he could surrender his property to Loan Care in satisfaction of the debt. However, McFarland would later claim that he did not recall discussing surrendering the property with his attorney and that it was his understanding that he was at all times discussing a loan modification with Loan Care.


'Very Confused.'
On Sept. 9, 2011, a Loan Care loss mitigation specialist named Cathy Jarboe contacted McFarland's attorney and requested certain information regarding surrendering the property. A few days later, McFarland sent a loss mitigation package to Loan Care that included the documents Jarboe requested and Loan Care processed the documents with the understanding that McFarland wanted to surrender the property. Loan Care requested more documents, which McFarland submitted, and also conducted a physical appraisal of the property.

On Feb. 15, 2012, Jarboe contacted McFarland about surrendering the property, and McFarland replied that he was under the impression that he was being considered for a loan modification and that he was “very confused.” Jarboe replied that Katzner, McFarland's attorney, had told her McFarland wished to surrender the property but said that she would reassign the loan for modification. McFarland's loan was reassigned to Marcus Scott, who requested McFarland's last four paystubs. Based on McFarland's income and expenses, Scott offered him a trial loan modification with payments of $1,580 (a payment higher than his original monthly payment).

In a phone call with Scott, McFarland rejected the offer as not affordable, and claimed that Scott would not consider the fact that his income was “inconsistent” and that Scott ended their phone call mid-conversation. McFarland filed suit in the district court on Feb. 21, 2012, alleging that Loan Care defrauded him with regard to the loan modification. Loan Care moved for summary judgment.


'Genuine Mistake.'
The court said that in order to state a claim for fraud, a plaintiff must show: “(1) a misrepresentation or omission of material fact; (2) which the defendant knew to be false; (3) which the defendant made with the intention of inducing reliance; (4) upon which the plaintiff reasonably relied; and (5) which caused injury to the plaintiff.” The court also said that McFarland's claim for fraud appeared to be based on three grounds, which were that Loan Care claimed to be processing him for a loan modification when it was actually processing him to surrender the property, that Loan Care allegedly misled him about the terms of the loan modification he could receive, and that Loan Care did not properly evaluate his application for a modification.

The court found that McFarland could not succeed on any of these grounds. The court said that following McFarland's first rejection of the modification offer, Loan Care proceeded with the surrender based on McFarland's motion and Katzner's statements. Furthermore, Jarboe corrected the misunderstanding immediately when McFarland told her that he still wanted to pursue a modification. The court said there was no evidence that Loan Care made any knowing misrepresentations regarding the modification. The court said this appeared to be a “genuine mistake” especially considering that loss mitigation would handle both modifications and surrenders and require similar documents for both.


No Misrepresentations
The court said the second ground must fail for similar reasons because there was no evidence that Loan Care made any promises regarding terms of loan modifications other than the formal offers that were rejected. Jarboe provided McFarland with an estimate at one point but “used heavily qualified language.”

With regard to the final ground, the court said that Loan Care “represented to McFarland that it would evaluate his application and explained how it would do so, and all of those statements were accurate.”

“Ultimately, McFarland's case is grounded in his belief that Loan Care should have offered him a better loan modification package,” the court said. Having found that no reasonable juror could conclude that Loan Care had knowingly made any misrepresentations to McFarland, the court granted the motion for summary judgment.

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