In the last five years, we have seen an unprecedented spike in lawsuits filed by individual borrowers against their lenders and loan servicers. These lawsuits were brought primarily to delay the foreclosure process, mostly lacking in merit. But because civil litigation is a slow process, simply filing suit was often enough to buy the delinquent borrower an extra three to nine months in the property. Careless reporting by media sources helped stir up this frenzy.

As a result, today there are significantly more plaintiffs’ attorneys versed in the mortgage field. With the upswing in the economy (and corresponding decline in foreclosures), many of these attorneys are facing a drop off in their business. This is making them more aggressive in seeking out targets.

The good news is that the attorneys still focusing on origination theories should not survive long. The “MERS lacks standing to foreclose,” “securitizing a loan destroys the lien,” and “my lender lied to me about the value of my property” theories have almost uniformly been rejected. See Rajamin v. Deutsche Bank National Trust Co., 757 F.3d 79 (2d Cir. 2014); Graham v. Bank of America, N.A., 226 Cal. App. 4th 594 (2014). Thus, lenders facing these types of claims should still be able to dispose of them efficiently at the pleadings stage.

The savvier plaintiffs’ attorneys, however, are pursuing a different avenue of attack: challenging how lenders and servicers handled loss mitigation communications and applications. Both the California Homeowner Bill of Rights (“HOBR”), and the Consumer Financial Protection Bureau’s (“CFPB”) revisions (and additions) to Regulations Z and X, provide potent weapons to support these claims. Recent developments in California case law have increased the risk to lenders and servicers even further.

In Bingham v. Ocwen Loan Servicing, LLC, 2014 WL 1494005 (N.D. Cal. Apr. 16, 2014), a trial court held that the borrower alleged the possible violation of the dual tracking prohibition in the HOBR by claiming that he emailed a loan modification application to the servicer seven days before the foreclosure sale. The court came to this conclusion, in part, because it found that language the servicer used on its website meant that it was generally offering loan modification to everyone. Thus, this borrower’s email should have been considered a modification application sufficient to trigger the dual tracking prohibition.

More troubling, in Alvarez v. BAC Home Loans Servicing, L.P., 228 Cal. App. 4th 941 (Aug. 7, 2014), the California Court of Appeal disagreed with Lueras v. BAC HomeLoans Servicing, L.P., 221 Cal. App. 4th 49 (2013), and concluded that if a lender agrees to review a loan modification application, it then owes the borrower a duty of care in processing that modification application. Specifically, the court felt that servicers should (1) review a borrower’s application in a timely manner; (2) not foreclose on the property while the borrower is under consideration for a modification; and (3) not provide the borrower with incorrect information as to the status of the review, what documents are required, or when foreclosure would take place. While superficially agreeing that a borrower is not legally entitled to a loan modification, the Alaverz court openly admitted that it felt servicers owed “a moral imperative” to essentially help borrowers find a way to break their promise to repay the money they indisputably borrowed.

Given these developments, what should a lender/servicer do to reduce their litigation costs in this area? Here are three things to consider.

Control How Modification Applications Can Be Submitted. Giving the borrower control over how and when to submit an application for loan modification creates the potential for them to make allegations that prevent a case from being disposed of early: e.g., “I printed out the form from your website and emailed it to your customer service email address.” Such an allegation is hard to negate at the pleadings stage. If you have good documentation and time, you could probably defeat it at the preliminary injunction stage. But a simpler alternative may be to just have the customers respond to the pre-notice of default correspondence required under the HOBR and CFPB regulations.

Document Your Application Review Process. Be prepared to prove to a judge that a borrower’s loss mitigation application was reviewed correctly–e.g., with the right figures and the most current documents. While the law is still that you are not obligated to give the borrower a modification, the review process itself is now more vulnerable to attack. Thus, having a clear written record of what was done–and why–will save time and expense in setting the case up for early resolution or summary judgment.

Do Not Reopen A Completed Review. When an application is denied, it helps to have a clear system in place to treat further attempts to submit documentation, or questions about the result, as an effort by the borrower to show “changed circumstances.” Treating such communications as a brand new application arguably resets the clock and triggers the deadlines all over. Treating them as an effort to demonstrate “changed circumstances” not only limits the amount of additional wait time, but it also raises the bar on what the applicant needs to prove–thus making a negligence claim harder to establish.

The wave of foreclosure litigation may have crested, but that only changes the threat profile. Plaintiffs’ attorneys remain and will continue to look for openings. Thus, avoiding “business as usual,” and staying on top of the new requirements, will go a long way toward lowering overall litigation costs.

For more information about California’s HOBR and reducing the cost of foreclosure litigation, contact Sunny S. Huo at