The law is well settled that borrowers do not have a direct right of action under the Home Affordable Modification Program (HAMP) against a lender that fails to offer a loan modification. A split of authority continues, however, on whether a lender owes a borrower either a contractual obligation or a tort-based duty of care in its negotiation and consideration of a borrower's loan modification application. Last month, the U.S. Court of Appeals for the First Circuit joined the fray by issuing a decision that should be helpful to lenders facing common law HAMP-related claims.
Specifically, in MacKenzie v. Flagstar Bank, FSB, the First Circuit affirmed the district court's dismissal of the borrowers' breach of the implied covenant and negligence claims. The borrowers had alleged, among other things, that the lender violated the implied covenant of good faith and fair dealing by proceeding with the foreclosure sale after they submitted a completed HAMP application.
The complaint alleged the borrowers were intended third-party beneficiaries of the Servicer Participation Agreement (SPA) between the lender and Fannie Mae (acting as agent for the U.S. Department of the Treasury). The borrowers also alleged that the lender owed them a duty as third-party beneficiaries of the SPA and breached its obligations under the HAMP and other government programs the SPA incorporates.
The First Circuit held the implied duty of good faith that arises from the mortgage "is tied directly to the mortgagee's contractual right to exercise a power of sale" and simply requires the lender to sell the property for the "highest value possible." In addition, because the borrowers were not third-party beneficiaries of the SPA, the court held they could not base a claim for negligence on that agreement. Finally, the court held that because "[t]he relationship between a borrower and lender does not give rise to a duty of care under Massachusetts law," the borrowers could not premise a negligence claim solely on an alleged HAMP violation.
Other state and federal courts have dismissed common law claims premised on a breach of HAMP on the same or similar grounds as did the First Circuit in MacKenzie. For example, some courts have held that HAMP extends no legal rights to borrowers—including the benefit of the covenant of good faith—because borrowers are not parties to HAMP and have no independent authority to enforce it. By contrast, other courts have determined that the lender could owe a borrower a duty of care in negotiating or processing a loan modification application, the breach of which could result in a negligence-based claim.
Still, the law in this area remains unsettled. Both lenders and servicers would be well advised to seek legal counsel in setting servicing protocols and defending against allegations of a breach of HAMP or other claims derivative of such a breach.