9th Circuit: Incomplete loan modification application bars plaintiff's CA Homeowner Bill of Rights claims

Courts Appellate Mortgages Consumer Finance Ninth Circuit State Issues California

On May 11, the U.S. Court of Appeals for the Ninth Circuit affirmed dismissal of a plaintiff’s allegations that a lender violated RESPA and the California Homeowner Bill of Rights (HBOR), breached its contract, and breached the implied covenant of good faith and fair dealing. The court also dismissed the plaintiff’s request for promissory estoppel. In affirming the district court, the appellate court determined that the plaintiff’s HBOR claims failed, specifically because the plaintiff insufficiently showed that she incurred actual damages because of a RESPA violation. The appellate court also agreed that the plaintiff’s HBOR claims failed because she did not submit a complete application. Under HBOR, mortgage servicers are prohibited from reporting a notice of default if a lender’s “complete application for a first lien loan modification” is pending. The appellate court concluded that the plaintiff failed to sufficiently show that she had submitted a complete loan modification application, and did not demonstrate that she took follow-up action in response to a letter stating her loan modification application was incomplete, meaning her claim failed.

With respect to the plaintiff’s remaining claims, the 9th Circuit held, among other things, that the lender’s “alleged promise to consider plaintiff’s loan modification application upon dismissal of her lawsuit was neither sufficiently definite to create a contract nor sufficiently ‘clear and unambiguous to support a promissory estoppel.’” Moreover, the plaintiff’s claim for breach of the covenant of good faith and fair dealing also failed because she could not prove breach of contract. Specifically, she did not state a claim for breach of the deed of trust because, as the plaintiff herself noted, “she failed to perform under the deed of trust when she did not make loan payments, and performance under the contract is a necessary element of a breach of contract claim.”

The dissenting judge disagreed with the majority in two key respects. First, the judge argued the majority wrongfully rejected the plaintiff’s HBOR claim because the complaint contended that the lender “would send out such boilerplate letters so that it did not have to comply with the requirement that it cease foreclosure activities once an application is complete,” and that “a lender’s bad faith conduct does not render a borrower’s application incomplete.” Regarding the plaintiff’s good faith and fair dealing claim, the judge argued that the plaintiff plausibly alleged that she submitted a complete application to the lender. According to the complaint, the plaintiff submitted the necessary documents and was allegedly informed by the lender’s lawyer that “her application was ‘in review, which meant that plaintiff’s application was complete.’”