HOLA Does Not Preempt Fraud Claims against Mortgage Loan Servicer, California District Court Rules

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The Southern District of California recently held that claims against a mortgage loan servicer are not preempted by the Home Owners Loan Act (HOLA) when they rely on "general allegations of misrepresentation" and are only "incidental" to the servicer's lending practices.

The case arose when a borrower brought claims against a lender and a servicer for fraud, negligent misrepresentation, promissory estoppel, and an accounting based on alleged representations made by a loan servicer regarding a potential modification. Specifically, the plaintiff claimed he was told he would have to default on the loan at issue to obtain a modification, that doing so would not affect his credit score, and that he would be eligible for a modification even though he received unemployment benefits. The plaintiff further alleged that he stopped paying his mortgage loan based on these representations but was eventually denied a modification because he was on unemployment.

The servicer moved to dismiss on the basis that all claims were preempted by HOLA because they involved loan servicing, and each claim also failed as a matter of law. In an opinion issued on August 23, 2013, the court disagreed that the claims were preempted by HOLA. It held that though the claims involved representations by a loan servicer, they invoked only the general duty not to commit fraud rather than imposing additional lending or servicing requirements on the defendants. Accordingly, the allegations were "only incidental to Defendants' lending practices" and not preempted by HOLA.

Further, though the court dismissed the plaintiff's negligent misrepresentation, promissory estoppel, and accounting causes of action for failure to state a claim, it disagreed that the plaintiff's fraud claim was not stated with sufficient specificity. Viewing the plaintiff's allegations in the most favorable light, the court held that the servicer's representations, including that the plaintiff was eligible for a modification and that he could qualify while on unemployment benefits constituted actionable misrepresentations sufficient to state a claim for fraud.

The lending industry has faced lawsuits with similar allegations that lender representatives suggested borrowers default to be considered for modification programs. Given the survival of the plaintiff's fraud claim, lenders and consumer advocates alike will likely be watching this case closely.

Topics:  Fraud, HOLA, Mortgage Loan Servicing Standards, Mortgage Servicers, Mortgages, Preemption

Published In: Business Torts Updates, Civil Procedure Updates, Conflict of Laws Updates, Finance & Banking Updates, Residential Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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