A bank is legally bound by its promise to try to work out a loan modification with a homeowner to avoid foreclosure, a state appeals court has ruled.
Thursday’s decision by the Second District Court of Appeal in Los Angeles involved a homeowner who said she refrained from protecting her home in a Bankruptcy Court filing after the bank promised to negotiate new loan terms – then foreclosed and evicted her.
The court refused to undo the foreclosure but said the owner, Claudia Aceves, could sue the bank for fraud. Her lawyer, Nick Alden, said the ruling should also help financially distressed homeowners who make several months of reduced payments in reliance on a bank’s promise to modify their mortgages.
“The homeowner has no choice but to work with the bank,” Alden said. Typically in such cases, he said, the lender will reject the final payment as insufficient, declare the borrower unqualified for a loan, and foreclose.
A lawyer for U.S. Bank, the lender in the case, was unavailable for comment.
Aceves took out a 30-year, $845,000 adjustable-rate loan on her Los Angeles home in April 2006 and could no longer afford the monthly payments two years later, the court said.
The lender filed a notice of foreclosure that was halted when Aceves filed for bankruptcy. She intended to convert her case to a Chapter 13 bankruptcy filing, which would have let her keep the home by paying what she owed over an extended period, but said U.S. Bank told her it would work with her to reinstate and modify the loan if she withdrew from bankruptcy.
Five days after she dropped her bankruptcy case in December 2008, Aceves said, U.S. Bank, without contacting her, scheduled her home for public auction a month later. She said the bank’s loan servicer called her lawyer the day before the sale and orally proposed a new loan with higher payments.
The bank bought the home at the foreclosure sale and filed an eviction notice two months later.
A judge dismissed Aceves’ suit against the bank but it was revived by the appeals court, which said a lender who falsely promises to help a homeowner prevent foreclosure can be sued for fraud.
Aceves “could have reasonably relied on the bank’s promise to work out a loan reinstatement and modification if she did not seek relief” under the bankruptcy law, the court said in a 3-0 ruling.
The bank argued that Aceves acted in bad faith by seeking refuge from foreclosure in bankruptcy proceedings. But the court said a Chapter 13 bankruptcy filing is a legitimate way for a borrower to reinstate a home loan and does not violate the lender’s rights.
Because a bankruptcy judge can’t modify a long-term mortgage by reducing the payments or extending the life of the loan, the court said, Aceves had a reason to rely on the bank’s offer to negotiate more favorable terms.