Bank’s Advice Does Not Amount to Oral Loan Modification
Those of us who have represented clients in default of their residential mortgages have often heard stories of how a bank representative told the client to “stop making payments” because they would have a better chance of getting a loan modification if the loan were actually in default. It wasn’t until the client followed that “advice” that the loan went into default, the foreclosure was filed and the outstanding debt became so high that not only was it impossible for the client to pay the debt, but it had become so high that the bank’s modification proposal, if one ever came, resulted in a payment plan higher then what the client started with.
Often in these stories, at some point a bank representative (loss mitigation “specialist”) might suggest that the borrower make some modified payment while the modification request is being approved. These suggested payment plans aren’t offered in writing and no one from the bank ever signs anything. The client might make these payments thinking that the loan has been modified and even with the thought that the foreclosure has stopped.
This is exactly what happened in a recent Florida foreclosure, Ocwen Loan Servicing v. Delva, 2015 WL8347360 (Fla. 4th DCA) 2015. The facts in this case are very familiar. The loss mitigation representative told the borrower not to make payments while they worked on the modification. After the foreclosure was filed, the bank told the borrower that the foreclosure would stop if he paid $6,200 and $2,000 per month thereafter. These payments were made even though no documents were signed nor even presented to borrower.
At trial, the court ruled that a modification had been entered into between bank and borrower and the court reformed the note and mortgage. The court agreed with bank that the Statute of Frauds applied, requiring a written agreement, but held that special circumstances applied and default was cured by the modification.
The bank appealed and the court reversed finding that F.S. 725.01, the Statute of Frauds controlled. There was no oral modification. No action can be brought on an agreement that is not to be performed within 1 year unless the agreement is in writing and signed by the person to be charged. In this case, the note and mortgage were to be performed in as long as 30 years.
The borrower argued that promissory estoppel applied to modify the mortgage. Promissory estoppel applies when there is: 1) a promise which the promisor should reasonably expect to induce an action or forbearance; 2) an action or forbearance on the promise; and (3) injustice resulting if the promise is not enforced. The court was succinct. Promissory estoppel can not ever circumvent the Statute of Frauds.
Therefore, when negotiating mortgage modifications with banks, you must get everything in writing. Borrowers seeking modifications prior to default should not stop making payments if advised to by bank representatives. I have been giving this advice to borrowers since the crisis began (fortunately, it is not advice I have to give very often any more). Most borrowers disregarded this advice over the years. But clearly, it is important. Do not take action to change behavior unless the bank is prepared to sign a binding document. There will be no relief to borrowers, regardless of the bank’s behavior.