Modification Side Issue

Posted by kevin on May 4, 2013 under Foreclosure Blog | Comments are off for this article

Right now, with the new HAMP guidelines, modifications are more available, and fairer, than before. Although my website states that we fight foreclosures (and we do), we are also for the first time encouraging clients to actively engage in the modification process.

That being said, I have been interviewing many prospective clients who are in foreclosure because they defaulted on a modification granted in 2009 or earlier. Here is the scenario. The borrower got an option arm or similar ARM type loan with an initial interest rate of 10% or greater. The loan was either a “no doc” or stated income loan. The borrower was not represented by a lawyer. On its face, there may be TILA violations, consumer fraud violations and predatory lending issues. The borrower defaulted and then the servicer, usually unsolicited, offers a modification which takes all the arrearages and charges (late and attorneys fees and escrow advances) and adds them to the loan. Then, the interest rate is dropped to about 6-8%. They don’t ask for an application, tax returns, paystubs or anything. And it is not negotiable-it is “take it or leave it”- known as a contract of adhesion. Finally, the modification agreement has buried in it a clause that says that if you accept the mod, you waive all defenses on the original note.

You can’t afford the mod but you take it because the alternative is that you are out on the streets. Inevitably, you default. The bank recites the original loan and modification. You take the position that the loan was unconsicionable so you have defenses. The lender says, “not so fast”, the original predatory, unconscionable deal cannot be considered by the court based on waiver of defenses claue in the modification agreement. In other words, the lender gets a free pass after they sucked you in on a bad loan to begin with.

So far, I have been able to argue around this point on motions to set aside default or default judgment. And, I have fashioned some arguments that attack the lender’s position that the underlying loan is off the table. However, I am convinced that if the borrower just argues that the waiver of defenses in the modification agreement is void because it is a contract of adhesion, many New Jersey judges will hold against you..

In New York, however, NYCRR Section 419.11 states that servicer shall not require a homeowner to waive legal claims and defenses as a condition of a loan modification. Now, this is just a regulation and not a statute, but it does give the borrower’s attorney in New York a stronger footing to argue against waiver clauses in modifications. (Remember, Regulation Z dealing with Truth in Lending is a regulation and not a statute but courts routinely accept it.

So, contact your State senator or assemblyman and tell him or her that New Jersey should adopt a statute that outlaws waiver of defense claims in modification agreements. In the meanwhile, I am scouring cases from around the country that hold that such contracts of adhesion are void because they violate public policy.

Lenders routinely lobby State and federal representatives. It is about time that consumers do the same.