Who remembers 2008? People thought we were all gonna die because they switched on the Large Hadron Collider, Breaking Bad premiered, Barack Obama was elected, the financial system collapsed and led to a worldwide recession that ruined people’s lives and that we’re just barely getting out of. Good times.
Wait. That last thing? That wasn’t good times? Oh. You’re right. But at least it’s something we can talk about on today’s blog, because debt-related loan modifications are back in style, baby.
To refresh your memory: a loan modification is, as the name indicates, a change made to the terms of a loan by the lender(s). This is usually negotiated with help from a legal professional, a dedicated settlement company, or even government aid if the borrowers meet certain criteria. Note the difference with forbearance, which provides short-term relief, whereas a modification is a long-haul solution.
A lot of people might need to resort to a modification in times of financial duress, and that number skyrocketed during the housing crisis. Desperate to avoid foreclosure, borrowers flocked to extend their repayment time or alter their interest rate – only to be denied without justification. In response, California passed the Home Owners Bill of Rights (HOBR) in 2013, which, among other things, supposedly facilitated communication between borrowers and lenders, forcing said lenders to explicitly state why the modification was being denied. Great! What could go wrong?
Well, lenders simply answered that they didn’t “have contractual authority to modify the loan because of servicing agreement limitation.” Which is an answer, inasmuch as it is a collection of words that vaguely address the salient point, but which also isn’t an answer by virtue of clarifying nothing.
Most people took this answer lying down, and had to leave their homes behind. When you’re totally focused on scraping by, moving, keeping your family together, it can be tough to think about legal matters. I’d wager most of the public don’t know their rights, or their options. But some do, and more and more people began litigating lenders and services over non-compliance with the mandates of the law. Though many cases petered out, one was recently resolved in a very interesting way: Potocki v. Wells Fargo Bank.
Thaddeus Potocki, destined for great things by nominative determinism, and Kelly Davenport, two plaintiff-borrowers, sued Wells Fargo and other providers after encountering just the problem described above. As with so many others, Potocki’s case was dismissed at first, but an appeal by the prosecution argued that a forbearance agreement forced Wells Fargo to modify their loans, the first ruling was erroneous, the denial of modification was too vague to satisfy Civil Code section 2923.61, and the whole situation had led to emotional distress. The Appellate Court agreed that the denial was too vague, and reversed the dismissal, stating that a servicer must provide “specific reasons for the investor disallowance.” The case was remanded and is ongoing, but it sure looks like the tried and tested line of “no contractual authority” won’t cut it anymore.
What does that mean for the rest of us? There’s a good chance Potocki v. Wells Fargo will mark a change in the way servicers handle loan modifications. Greater transparency can only ultimately be positive for everyone involved, but we’ve seen with the establishment of HOBR itself that people will find loopholes to keep doing what they want… at least, for a while. Keep your eyes peeled for further developments on the case, and in the meantime, it might be worth consulting a lawyer if you’re looking for a loan modification of your own.