Federal Court Partially Dismisses Class Action Over Bank’s Alleged Loan Modification Calculation Errors

A California federal court partially dismissed a class action against a large national bank over alleged errors by its automated mortgage loss mitigation servicing system, rejecting claims under state consumer protection laws while allowing breach of contract claims to proceed.

Residential mortgage servicers are typically required to evaluate defaulting borrowers for various loss mitigation options—such as loan modifications—as a way to avoid foreclosure.  A group of borrowers alleged that the bank’s highly-automated loss mitigation servicing system was defective and regularly caused certain erroneous or improper fees and cost to be added to the borrowers’ outstanding loans balances.  In turn, potential loan modification options were evaluated based on the inflated loan balances, such that some modifications required borrowers to repay higher amounts than should otherwise have been warranted.  The borrowers brought class action claims against the bank for breach of contract and for violations of state consumer protection laws.

The court denied the request to dismiss the breach of contract claims.  In key part, the plaintiffs asserted that the operative complaint adequately pleaded: a) breaches of provisions in their mortgage security instruments which delineated when and under what circumstances the servicer could charge certain fees; b) breaches of provisions which prohibited the servicer from charging fees which were prohibited by law (which included certain escrow-related fees and certain fees prohibited by FHA and VA regulations); and breaches of the implied covenant of good faith and fair dealing due to the bank incorporating fees and charges into the loan modification payments which were not in fact due or owed.

The court dismissed the Plaintiffs’ claims based on alleged violations of state consumer protection laws which prohibit various types of unfair, deceptive, and/or fraudulent trade practices.  The allegations in the complaint were insufficiently pleaded where they at most showed that the errors were unintentional mistakes and did not allege that the bank knew of the fee and cost errors at the time it considered the Plaintiffs’ loan modifications.