Class Action Alleging Servicers Engaged In Loan Modification Fraud Dismissed With Prejudice


On February 20, the U.S. District Court for Central District of California dismissed with prejudice a putative class action against several large mortgage servicers because the named borrowers failed to properly plead their allegations that the servicers stonewalled loan modification applications in order to continue earning servicing fees. Casault v. Federal National Mortgage Association, No. 11-10520, 2014 WL 689884 (C.D. Cal. Feb. 20, 2014). In their third amended complaint, the borrowers alleged three causes of action against the servicers: (i) fraud; (ii) violation of California’s Unfair Competition Law (UCL); and (iii) violation of the Rosenthal Act, California’s version of the FDCPA. The court granted the servicers’ motion to dismiss the fraud allegation because they failed to allege any causal connection between the scheme and the borrowers’ foreclosure. The borrowers alleged only that the foreclosures were the result of their inability to make their mortgage payments, even after receiving loan modifications. The court dismissed the UCL claim because the borrowers could not demonstrate a right to a loan modification—through contract, promissory estoppel, or some other theory—and, as a result, could not prove injury in fact. Finally, the court dismissed the borrowers’ claims under the Rosenthal Act because they failed to allege facts demonstrating that their loans defaulted prior to the debt being assigned to the servicers.


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