The First Circuit has affirmed a holding finding that no private right of action exists for homeowner-borrowers under the Home Affordable Modification Program (“HAMP”), bringing clarity on this issue to courts within the Circuit. In the underlying mater, Mackenzie v. Flagstar Bank, FSB, 2013 WL 139738 (D. Mass. Jan. 9, 2013) aff’d, 2013 WL 6840611 (1st Cir. Dec. 30, 2013), Magistrate Judge Bowler of the United States District Court had held a borrower is not an intended third-party beneficiary of the Servicer Participation Agreement (“SPA”) among the banks and the federal government relating to HAMP. The District Court further held that absent an independent duty to modify the mortgage, neither the existence of a mortgagor-mortgagee relationship nor HAMP itself created any duty enforceable by the borrower.
The borrowers alleged that they were third-party beneficiaries under the bank’s SPA with the federal government relating to HAMP. Based on that alleged status, they argued that they could sue for breach of contract or the implied covenant of good faith and fair dealing for failure to property evaluate them for a HAMP modification or for an allegedly wrongful denial of a modification.
The First Circuit noted that the Restatement (Second) of Contracts § 313 and cases interpreting the Restatement demonstrate that parties who benefit from a government contract are assumed to be incidental beneficiaries, with no right to enforce the contract. The borrowers cited to Parker v. Bank of America, N.A., No. 11-cv-1838, 2011 WL 6413615 (Mass. Super. Ct. Dec. 16, 2011) for the proposition that they had a private right of action under HAMP, but the First Circuit stated that even the Parker case itself recognized that it was an outlier and that all other Massachusetts courts had rejected such a status. Rejecting the Parker rationale, the Court found that “…the broadly accepted principle set forth in the Restatement, from which we see no reason to deviate, applies squarely to the circumstances of this case and forecloses the MacKenzies’ argument that they are third-party beneficiaries of the SPA.”
The Court similarly rejected the argument that any alleged failure to modify the borrowers’ mortgage could serve as a breach of the implied covenant of good faith and fair dealing where, as here, the mortgage itself imposed no duty on the bank to consider loan modification prior to foreclosure. “It would…be an error to extend the implied covenant to encompass a duty to modify (or consider modifying) the loan prior to foreclosure, where no such obligation exists in the mortgage.”
Finally, the Court affirmed the rejection of the borrowers’ negligence claims, noting that the borrower-lender relationship does not itself create a duty of care. Further, the borrowers’ contention that a violation of HAMP guidelines or regulations can itself give rise to a negligence claim was incorrect as a matter of law. Where an independent duty of care exists, a violation of statutory or regulatory law could be evidence of breach of that duty. “But in the absence of an independent duty, a plaintiff cannot proceed with a negligence claim based solely on a statutory or regulatory violation.”
For more information about our banking law practice, please visit our banking law page.