Within the past few months, borrowers across the country have asserted claims against lenders based on the lenders' alleged failure to honor loan modifications pursuant to the federal Home Affordable Modification Program (HAMP). Recently a federal district court in New Jersey issued a decision that may provide a sound basis for opposing such claims.

In Papoutsakis v. Bank of America, Judge Susan D. Wigenton held that a failure to honor a modification cannot, without more, form the basis for a consumer fraud claim against the lender.

In Papoutsakis, the plaintiff-borrower alleged he entered into a loan modification with Bank of America, which BofA acknowledged by accepting modified payments for several months. BofA then sent a notice of intention to foreclose.

The plaintiff alleged that, even after BofA issued the notice, he continued to make the payments required by the modification, and BofA accepted the payments.

After BofA refused to cash one of the plaintiff's payments and sent him a letter advising that his loan had been referred to a foreclosure management committee, he initiated suit in state court. He alleged BofA violated New Jersey's Consumer Fraud Act and sought, among other relief, to enforce the modification and prohibit foreclosure; removal of derogatory notations on his credit history; attorneys' fees; and treble damages. After the case was removed to federal court, BofA filed a motion to dismiss.

The court, in considering the motion, noted plaintiff's "sole basis for alleging a CFA violation is a breach of contract claim."

The court found that a breach of contract is not "per se unfair or unconscionable" and thus could not be actionable under the CFA absent "substantial aggravating circumstances."

According to the court, "substantial aggravating circumstances" involve the "existence of bad faith or lack of fair dealing, sufficient to constitute an unconscionable business practice." The court concluded that plaintiff's complaint did not show evidence of such actions by BofA.

In rendering its decision, the court noted that it did not "make light of the present economic climate in this country and the grave implications that may arise from a breach of Plaintiff's Modification."

The court found those circumstances alone, however, were insufficient to state a CFA claim. Accordingly, the court dismissed the complaint without prejudice.

This decision represents an important victory for lenders. Borrowers across the country have been filing actions claiming that lenders have failed to honor modifications from the Home Affordable program and that such failure constitutes an unfair trade practice.

The Papoutsakis decision and the cases it relies upon provide a basis for limiting lenders' liability in these suits.

This article was first published in American Banker.

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