Unfair Practices in Mortgage Modification Program

A handful of lawsuits have been filed in courts across the country against loan providers participating in President Obama’s Home Affordable Mortgage Program(HAMP). The lawsuits were filed by trial participants in the program who’ve kept current on reduced payments and provided required documentation, yet the lenders failed to grant permanent modifications. Permanent modifications have only been granted to about a third of the 1.3 million borrowers who’ve enrolled on a trial basis. This is devastating to homeowners, who, after the trial period, often find themselves behind on payments by up to a year when the trial ends and no permanent modification is awarded.

The lawsuits claim that the 3 or 4 month trial payment plans are contracts, and lenders are breaking the contracts when they fail to offer permanent modification status to borrowers that keep current and provide necessary documentation. Loan servicers named in the lawsuits have asked courts to dismiss the cases, saying that the trial plans are not contracts. Previous HAMP related legal cases have been dismissed because they alleged that lenders had broken contracts made with the Treasury Department and courts said that homeowners couldn’t sue on those grounds because they were not a party in the contract involved. The new tactic taken by lawyers of homeowners is to say that lenders have broken a contract between them and the borrower.

Since the HAMP program was started in April 2009, nearly 620,000 trail modifications have been canceled without a permanent modification being offered. Lenders are accused of denying the modifications in order to profit from late fees and other charges, and many denied homeowners are in jeopardy of being foreclosed on. Court documents provide detailed accounts of borrowers who allege that over periods of months, they repeatedly sent banks requested documents which the banks claim they didn’t receive, made inquiries that went unanswered, and received promises of help that were later contradicted or denied by other representatives.

The process leaves homeowners in worse shape than before they started the trial modification plan, because at the end of the trial, if a permanent modification is not granted, the loan reverts back to original terms, meaning that the months borrowers spent making reduced payments means they are behind on regular payments, often by more than the term of the trial. Borrowers credit scores are immediately taking hits upon denial of permanent modifications. The longer a trail plan last, the further behind a borrower is when it ends. One lawsuit reads: “By failing to live up to its obligations, according to the court filing, “Bank of America has left thousands of borrowers in a state of limbo – often worse off than they were before they sought a modification from Bank of America.”

Consumer advocacy groups have gotten involved as well. Many lenders have been accused of asking for upfront fees, which is in direct violation of Treasury’s directive, and others are accused of beginning foreclosure proceedings on borrowers currently enrolled in a trial payment plan, also a violation. The problem for most homeowners is that there is simply no way to appeal a lender’s decision on a permanent modification, because Treasury does not have the authority to overturn a decision.