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Ninth Circuit Denies Class Action For Allegedly Fraudulent Mortgage Modification Delays and Subsequent Foreclosures

The United States Court of Appeals for the Ninth Circuit has refused to reinstate a putative class-action suit accusing numerous banks and other mortgage servicers of fraudulently enticing mortgagors into applying for mortgage loan modifications to continue collecting servicing fees prior to foreclosure.  The Ninth Circuit panel agreed with the United States District Court for the Central District of California and the defendants that the servicers were not at fault for the foreclosures where the borrowers failed to pay their mortgages.  Casault v. OneWest Bank, et al., 2016 WL 4137656 (9th Cir. Aug. 4, 2016).

The homeowners alleged that banks encouraged borrowers to apply for mortgage modification programs to avoid foreclosure, knowing that the borrowers were unlikely to be eligible for the programs.  The enticements were allegedly made so that the banks could continue collecting servicing fees while keeping the modification requests in a perpetual holding pattern.  While denying the alleged fraud, the banks moved to dismiss on the ground that, even if such delays occurred, the ultimate cause of the foreclosures was the borrowers' failure to pay their mortgages.

The Ninth Circuit agreed with the banks and the lower court.  Any alleged reliance by the borrowers on invitations to apply for mortgage modifications, necessary to allege fraud, was not reasonable.  The offers to apply contained no promise or guarantee of a loan modification.  Ultimately, the court found that the properties in question were not foreclosed on due to any actions by the banks, but rather because of the borrowers' failure to make their mortgage payments on time and cure any defaults.

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