By Andrew R. Dennington, Conn Kavanaugh Rosenthal Peisch & Ford, LLP
The Home Affordable Modification Program (“HAMP”) is the federal government’s primary foreclosure prevention program. The Obama Administration established HAMP in March 2009 with a goal of assisting 3,000,000 to 4,000,000 borrowers modify their loans.[i] By all accounts, HAMP has fallen far short of that goal.[ii] As of January 2011, only 539,000 borrowers had secured active, permanent loan modifications under HAMP.[iii]
Each loan servicer participating in HAMP is required to execute a Servicer Participation Agreement (SPA) with the federal government.[iv] Under HAMP and the SPAs, loan servicers have specific obligations to solicit HAMP-eligible borrowers, to take timely action on their requests for loan modification, provide relief if they qualify and stay foreclosure in the meantime.[v] According to studies by the General Accounting Officer (“GAO”), the U.S. Treasury’s long delay in issuing guidelines with respect to loan servicer solicitation of HAMP-eligible borrowers, gaps in the issued guidelines, and, perhaps most importantly, Treasury’s failure to establish specific consequences or penalties for noncompliance with HAMP guidelines, including those related to the treatment of borrowers, have resulted in inconsistent performance by loan servicers under HAMP.[vi] As a result, borrowers do not have an administrative mechanism to enforce loan servicers’ compliance with their obligations under HAMP and the SPAs.[vii]
Nor is there a judicial mechanism to enforce compliance, as courts across the country consistently have declined to hold loan servicers directly liable for violations of SPAs.[viii] That may begin to change due to Parker v. Bank of America, N.A., a decision issued in December, 2011 by Associate Justice Thomas P. Billings of the Massachusetts Superior Court. Departing from the position taken by most courts across the country, Judge Billings held that a borrower may sue a loan servicer for breach of contract as an intended third party beneficiary of the loan servicer’s SPAs with the federal government under HAMP.[ix]
Valerie Parker’s story was disturbingly similar to those of millions of other Americans.[x] In 2007, Ms. Parker granted Bank of America first and second mortgages on her home in Lowell, Massachusetts. For the first two years, Ms. Parker paid these loans on time. As the financial crisis accelerated, Ms. Parker anticipated difficulty making these payments, and asked her loan servicer, BAC Home Loans Servicing, Inc., for advice. The loan servicer told Ms. Parker that she could not be helped because she was not in default. Ironically, she would need to stop paying her mortgage in order to get help paying her mortgage.[xi]
In 2009, Bank of America – together with nearly all the country’s other top lending institutions – began participating in HAMP. Ms. Parker applied for a modification through this program. When she applied, Bank of America repeatedly lost Ms. Parker’s paperwork, required her to resubmit documents, and put her on hold for hours. Eventually, Bank of America sent Ms. Parker a letter in July 2010, indicating that she was approved for a modification, and that further paperwork was on the way to complete the process. This never happened. In May 2011, the bank initiated foreclosure proceedings against Ms. Parker.[xii]
Ms. Parker filed suit in the Superior Court, including in her ten-count complaint a claim for breach of contract against Bank of America and BAC Home Loans Servicing, Inc. (Shortly after the complaint was filed, BAC Home Loans Servicing, Inc. merged into Bank of America.)[xiii] Ms. Parker had no contract with BAC Home Loans Servicing, Inc. While she had a contract with Bank of America (her promissory note and related mortgage documentation), this contract said nothing about HAMP.[xiv] Notwithstanding that Ms. Parker was not a party to any contract concerning HAMP, Ms. Parker argued that she could sue to enforce Bank of America’s HAMP contract with the federal government (i.e. the SPA) under a third-party beneficiary theory. Bank of America moved to dismiss the complaint in its entirety.
Factually, Ms. Parker was able to adequately allege that Bank of America’s handling of her modification application violated the terms of its SPA.[xv] Ms. Parker had submitted necessary paperwork and underwent a lengthy financial audit over the telephone, but Bank of America refused to take timely action on a trial modification plan, or to halt foreclosure activities. This ran contrary to the terms of Bank of America’s SPA, which required a loan servicer to suspend foreclosure activities while a borrower such a Ms. Parker was in the process of seeking a modification.[xvi]
Legally, Ms. Parker faced a challenge establishing her standing to sue, because there is no private right of action under HAMP.[xvii] To circumvent this rule, Ms. Parker sought standing to sue as a third-party beneficiary of Bank of America’s SPA with the federal government. In analyzing this claim, Judge Billings took judicial notice of facts concerning the subprime mortgage crisis, Bank of America’s acceptance of funds from the U.S. Treasury under the Troubled Asset Relief Program (“TARP”), and the subsequent creation of HAMP. In exchange for government assistance in reducing the impact of modifications, HAMP required loan servicers to execute SPAs prohibiting the type of processing delays that Ms. Parker experienced.[xviii] Judge Billings summarized loan servicers’ obligations under SPAs as follows: “Inertia is not an option.”[xix]
In order to enforce its terms, Ms. Parker must be an “intended beneficiary” of the SPA.[xx] Judge Billings held that she was: “It seems undeniable that the performance required of servicers who entered into SPAs was intended for the direct benefit of borrowers struggling to pay first mortgages on their residences, with the hope of additional but incidental benefits accruing to the economy as a whole.”[xxi] As precedent, the court cited Ayala v. Boston Housing Authority, in which the Supreme Judicial Court held that minor children who were victims of lead poisoning in Section 8 housing could sue the Boston Housing Authority (“BHA”) as third-party beneficiaries to the BHA’s contracts with the United States Department of Housing and Urban Development (“HUD”), because the primary purpose of that contract was to benefit the residents of Section 8 public housing by providing safe housing.[xxii]
The court recognized, however, that “contracts with governmental entities present special considerations.”[xxiii] Judge Billings distinguished Parker from those cases in which regulatory mechanisms already are in place to remedy violations of a government contract that cause harm to private parties. In those cases, allowing parallel suits by private parties under a third-party beneficiary theory runs contrary to a system of consistent adjudication and centralized enforcement. But here, the U.S. Treasury and Freddie Mac (its compliance agent) failed to establish any such enforcement mechanism under HAMP. Therefore, the court found that “there is no risk of a judicial proceeding such as this one duplicating or undermining a parallel administrative enforcement system, because no such system exists.”[xxiv]
In the Parker decision, the court’s frustration with the inaction of both Bank of America and the federal government – and the resulting harm to Ms. Parker – was palpable. Bank of America accepted benefits from TARP, and in exchange agreed to process modification applications promptly and efficiently. In Ms. Parker’s case, it did neither. The fact that Bank of America could violate its SPA without significant penalty undermined HAMP’s goal of preventing foreclosures. Ms. Parker affirmatively sought out a modification, but Bank of America foreclosed anyway. Under these circumstances, the court held: “Denial of third-party beneficiary status to persons aggrieved by violations such as are alleged here would be... to ‘mock the very goals of’ the [HAMP] program that the contract was intended to further, placing its ‘legitimacy ... in grave doubt.’”[xxv]
The Parker decision is potentially groundbreaking. While Parker currently remains an outlier in HAMP jurisprudence, there would be wide-ranging policy implications if additional courts were to recognize third-party beneficiary status for homeowners wrongfully denied HAMP modifications. Facing the exposure of civil liability for violations of HAMP guidelines, loan servicers would be incentivized to improve HAMP compliance, approve more modifications, and prevent more foreclosures. Attorneys who represent mortgage lenders, loan servicers, brokers, and borrowers should take note of the Parker decision, and monitor whether its reasoning proves persuasive to other courts across the country.
[i] Parker v. Bank of America, NA, 29 Mass. L. Rptr. 194, 196 (Mass. Super. Ct. 2009) (citing Jean Braucher, “Humpty Dumpty and the Foreclosure Crisis: Lessons from the Lackluster First Year of the Home Affordable Modification Program (HAMP),” 52 Ariz. L. Rev. 727, 748 (2010)).
[ii] Michael Powell & Andrew Martin, Foreclosure Aid Fell Short, and is Fading, N.Y. Times, Mar. 29, 2011, at A1.
[iii] Parker, 29 Mass. L. Rptr. at 197 (citing GAO–11–476T, Troubled Asset Relief Program, Status of Programs and Implementation of GAO Recommendations (March 17, 2011), p. 13).
[vi] Id. at 197-98 (citing GAO-10-634, “Troubled Asset Relief Program, Further Actions Needed to Fully and Equitably Implement Foreclosure Mitigation Programs,” (June 2010), p. 27).
[viii] Id. (collecting cases).
[x] Olga Pierce & Paul Kiel, By The Numbers: A Revealing Look at the Mortgage Mod Meltdown, ProPublica, March 8, 2011, http://www.propublica.org/article/by-the-numbers-a-revealing-look-at-the-mortgage-mod-meltdown.
[xvii] See, e.g., Speleos v. BAC Home Loans Servicing, L.P., 755 F. Supp. 2d 304, 311 (D. Mass. 2010).
[xviii] Parker, 29 Mass. L. Rptr. at 196-97.
[xx] Id. at 198 (citing Ayala v. Boston Hous. Auth., 404 Mass. 689, 699 n. 13 (1989)).
[xxii] Id. at 198; see also Speleos, 755 F. Supp. 2d at 309 (discussing Ayala in context of HAMP third-party beneficiary claims).
[xxiii] Parker, 29 Mass. L. Rptr. at 197.
[xxv] Id. (quoting Ayala, 404 Mass. at 700-02).