Bad Faith in Mediation and Modification; Judges Decry Bank Misdeeds
Bad Faith During Mediation/Modification Discussions
A string of recent New Jersey cases have held that a Servicer or Lender must conduct itself in good faith during mediation sessions and that a Servicer or Lender cannot abuse the modification process by giving the Borrower the "run-around" and engaging in dilatory and suspect "dual track" practices.
All of these decisions are unpublished (thus not precedential or binding), but these cases still shed light on how the judiciary views and analyzes abuses of the mediation/modification process and judicial attitudes toward a general unwillingness of Servicers and Lenders to deal fairly with homeowners.
In BAC Home Loans Servicing, LP v. Joseph Durelli, 2012 N.J. Super. Unpub. LEXIS 1732 (July 18, 2012), Judge Mary C. Jacobson in Mercer County awarded Defendants counsel fees of $500 for their attorney's appearance at a mediation session in which the attorney for the Lender lacked settlement authority (attorney could not settle because Freddie Mac has a policy that it does not approve loan modifications during active litigation). Judge Jacobson found the bona fides of Plaintiff’s standing to be in order based on an indorsement of the note in blank, combined with a certification the loan was in the possession of the Lender when the Complaint was filed. On the “bad faith during mediation” motion, Judge Jacobson opined that while the motion was procedurally deficient and not properly before the Court, a dismissal of the Complaint on this basis, under the circumstances, would surely be far too extreme. It would appear, however, that in an appropriate case, dismissal, or some greater sanction, including attorney’s fees for continued and unecessary motion practice or trial would be considered. Ultimately, the judiciary would probably be reluctant to impose a “harsh” sanction on a lender unless fraud was alleged and proved, such that “bad faith” in the mediation process and/or a failure to produce documents was a “continuation” of already proven fraudulent conduct by the lender.
In Wells Fargo Bank, N.A. v. Vicki Schultz, 2013 N.J. Super. Unpub. LEXIS 406 (February 22, 2013), Judge Doyne in Bergen County refused to strike Defendants’ Answer and Counterclaims, finding that colorable claims for “modification abuses” were available, even though res judicata precluded a number of claims relating to the origination of the subject loans. Specifically, Judge Doyne stated:
“Incredibly, after almost a year of submitting documents and generally “getting the run-around” from plaintiff, Vicki finally was informed she had submitted all the necessary documents, only to be informed that the loan modifications she applied for was “not available at this time.” Again, while Vicki may not have a legal right to the HAMP modification, she does have the quitable right to be treated with fairness. Plaintiff has apparently failed in this regard, and accrodingly is not entitled at this time to strike Vicki’s answer as to non-loan origination claims. Additionally, it should be noted that even though it is not evident at this point whether plaintiff is guilty of unclean hands, its behavior toward Vicki is at the least highly suspect.”
At *31. The facts of the modification efforts involved (*10-*20) are far too pervasive and widespread and unfortunately are the norm in the industry, with the homeowner submitting package after package without any meaningful review, only to be asked to re-submit and include additional documents, being placed into plans for forbearance or modified payments, such plans ultimately discontinued, and with the homeowner suffering from overall systemic abuse. Aside from being suggestive of outright fraud and illegality, these practices are simply unprofessional and do not cast the banks in a positive light; although, on balance, the banks should be commended for the fact that their processes have been improving.
In Hudson City Savings Bank v. Donna Colyer, 2013 N.J. Super. Unpub. LEXIS 263 (February 4, 2013), Judge Doyne in Bergen County addressed claims that Hudson City Savings Bank (“Hudson City”) failed to mediate in good faith and failed to respond to defendants’ discovery requests. The Judge ultimately held that the facts of the case were insufficient to make a finding of “bad faith” in the mediation process, but opined that “[s]trict reliance to financial guidelines may not meet or satisfy requirements of ‘good faith’,” specifically pointing out that a hasty denial based on formulaic facts is troubling, although not per se impermissible. At one point, Judge Doyne fleshed out his admonishion against rigid adherence to guidelines, without categorically condemning them:
“For plaintiff to attend a judicially-mandated mediation session and sit with its arms crossed without intending to entertain any proposal would qualify as a lack of “good faith.” However, if a mortgagee relies on in-house guidelines, touted as reasonable, and applies those guidelines consistently in every modification application the specter of lack fo good faith may be diminished.”
However, Judge Doyne did set the case down for Trial, and ostensibly allowed these issues to be raised during the trial of the cause.
The case involved a 2008 mortgage to Hudson City which went into default in March of 2011. A Complaint was filed and an Answer with Affirmative Defenses and Counterclaims followed. Discovery ensued and numerous documents were requested including a request by the borrowers for documents related to plaitniff’s internal modification approval process. No meaningful response was ever provided. Defendants proceeded through court-sponsored foreclosure mediation. Ms. Felicia Farber, Esq. was the appointed mediator and multiple telephonic conferences were held, spanning May and June of 2012. In the first two conferences, representatives from Hudson City had nothing to report except that the modification application was under review. Before the third conference, defendants received a letter of May 31, 2012 that their loan modification application was denied. Luis Figueroa authored the letter and explained that the denial was based on a “loan-to-value ration that exceeds our established limits.” The letter suggested that loan modification were only appropriate for “loans with a loan-to-value ratio of 95% or less after capitalizing of arrears, a debt-to-income ration of 50% or less, and a Housing debt-to-income ration of 38% of less.” As Judge Doyne noted through mathematical example at *6-*7, with this criteria any loan that was “underwater” and appraised below the original loan value could not qualify even if the borrowers were otherwise in good financial health and ready and willing to rehabilitate the loan. In the third telephonic conference, Vice President and Manager of Foreclosure, Lorenzo Aperocho, participated and explained the modification was rejected because “it did not meet [Hudson City’s] guidelines.” Aperocho said that Hudson City would require the full $71,675.00 of arrears to be paid in full, and the modification would need to include the full loan balance originally negotiated, with no reduction of principal (it is worth noting the loan balance was $513,563.37 against an appraised value of $430,000). Aperocho further stated that he did not have the authority to negotiate for anything other than full payment and payment of the full principal balance – in effect, no one was present at the mediation with any ability to negotiate. In order to Move for Mediation Fraud, Defendants had to first file a motion to waive the confidentiality of mediation discussions, which was ultimately granted and oral argument was held on Defendants’ Motion to Dismiss the Complaint for “Bad Faith” in the Mediation Process and Failure to Make Discovery. R. 1:40-4(g) requires the parties to participate in the mediation process in good faith and in accordance with program guidelines. Plaintiff raised only the defense that they were relying on internal guidelines and reliance on internal guidelines is automatically good faith as it falls within the purview of the company’s business judgment. Judge Doyne found this rational weak and misguided. Judge Doyne’s comments suggested that he found it unreasonable that homeowners willing to pay and that met the bank’s other guidelines were formulaically denied due to a loan-to-value ratio being excessive, which is necessarily the case with every underwater loan. Judge Doyne found “strict adherence” to these guidelines to be of an “illogical nature” because the internal procedures at issue would not necessarily satisfy a “reasonableness” inquiry. The internal guidelines may cause homeowners who should objectively be helped to be denied based purely on mathematical formulae that fail to capture the overall situation. The Judge, however, was unprepared to make a determination one way or the other without expert testimony on this issue. Judge Doyne rejected the idea that Hudson City was insulated from judicial scrutiny of its internal guidelines by the “business judgment rule.” But, a decision on reasonableness, necessarily, would need to involve expert witness testimony. Thus, Judge Doyne denied the Motion to Dismiss for “Bad Faith” in the Mediation Process and set the case down for Trial, ostensibly permitting all of these issues to be raised at the trial of the cause.
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