Keeping the Home: Special Issues for Mortgage Modifications, Refinancing and Reverse Mortgages

2013 National Aging and Law Institute: November 7-9 Washington, DC Keeping the Home: Special Issues for Mortgage Modifications, Refinancing and Reverse Mortgages Presented by: November 9, 2013

What We ll Cover Overview of options Tax consequences, including new IRS guidance for HAMP modifications Special issues for widows, orphans, and heirs

Home Saving Options HAMP modification HARP refinancing Reverse mortgage refinancing Other options: Proprietary modification Regular refinancing???

HAMP Modification Equity in home will usually prevent a HAMP mod Function of NPV test The 31% affordability standard may limit HAMP availability for seniors High medical bills, second liens may mean that 31% is not affordable Sometimes HAMP Tier 2 may be an option, but run the numbers Always use CheckMyNPV.com to determine eligibility

HARP Refinancing Only GSE loans Have to be current, with good payment history for 12 months LTV has to be greater than 80% equity Borrowers with substantial equity who have fallen behind won t qualify for either HARP or HAMP Homeowners in default won t qualify for HARP Getting the refinance done may not be easy

Reverse Mortgage Refinancing Expensive Has to be substantial equity in the house Going forward, financial assessments will be done.

Home Losing Options Sale Short sale Deed in lieu Foreclosure

Sale Best option if there is equity in the home may allow homeowner to retain equity

Short Sale If there is no equity, worth pursuing. Impacts credit score. Getting them done and approved is always tricky Think about: Cash for keys Waiver of deficiency

Deed in Lieu/ Foreclosure Both will have equivalent impact on credit score Deed in lieu should offer cash for keys and waiver of deficiency Deed in lieu worth considering as option for judgment proof clients who cannot retain home for whatever reason, particularly where negative equity in the home Foreclosure may give the homeowner more time

Tax Issues Happen in foreclosure, short sale, loan mod, etc. Two basic kinds: Capital Gains When the house is sold or foreclosed on and the value of the house is more than $250,000 over its acquisition value Form 1099 A Form 1099 C Discharge of Indebtedness Whenever any debt is forgiven If additional cash paid or if the lender pays the consumer s attorney any fees may also create taxable income

Wait, I Lost My House. How Can I Have Capital Gains? Debt forgiven in exchange for the house is treated as a return on capital Capital gains are the difference between the sales price and the basis in the house Basis is purchase price plus improvements The sales price is the lower of: the debt forgiven plus any cash the fair market value of the home Can have both discharge of indebtedness & capital gains in a foreclosure

Exclusion From Capital Gains If home was primary residence for 2 of last 5 years, $250,000 per individual $500,000 per married couple

Capital Gains Example Tom & Jane bought their house for $50,000 in 1970. At the time of the foreclosure, the mortgage debt is $325,000. Tom & Jane also get $5,000 in cash for keys. Value of their house $300,000 at time of foreclosure.

What Are Tom & Jane s Capital Gains? Capital gains are the lesser of the two: $340,000 Debt Forgiven + Cash $305,000 FMV + Cash $50,000 Basis $50,000 Basis $280,000 Capital Gains $255,000 Capital Gains

What Is Taxable? If Tom and Jane are still alive, and together in the home, the combined exclusion is $500,000 $500,000 > either $280,000 or $255,000, no capital gains If Jane is in the house by herself, she can only exclude $250,000 of capital gains $255,000 $250,000= $5,000 of capital gains

CAPITAL LOSSES ARE IRRELEVANT E.g., Nancy bought her home in 1999 for $125,000 and has mortgage debt at the time of foreclosure of $132,000. Her home is worth $100,000. Nancy has a capital loss of $25,000 (fair market value is less than the mortgage debt). Nancy has no capital gains tax implications from this Tax code does not permit recognition of a capital loss on a residence. But she does have potential taxable income from discharge of indebtedness if the lender waives the deficiency

Discharge of Indebtedness (DOI) Cancellation of Debt Whenever debt is forgiven, normally treated as income. Why? Money received when loan taken out But not taxed because of obligation to repay Interest & fees need not be treated as discharge of indebtedness, only principal

Examples of DOI Foreclosure sale, if for less than amount of debt & lender does not seek deficiency judgment E.g., Nancy probably has $32,000 of DOI income Short sale Loan modification with reduction of principal Theoretically, loan modification with significant interest reduction or principal forbearance

Why Does DOI Matter? Lenders usually file 1099 C s. If borrower does not report the DOI income on her tax return, the IRS s automated audit system will pick it up. Borrowers can get dunned by IRS for interest and penalties on underreported tax

What to Do?? Determine how much will be reported. Provide your client with information about why the debt was discharged and how much. Refer your client to a tax lawyer or CPA These issues are out of scope for the free tax assistance sites (VITA and Tax Counseling for the Elderly), with a few limited exceptions Tax clinics associated with law schools may be more helpful

Dealing with DOI and the IRS Homeowners must: File long form 1040 Attach Form 982 Homeowners will usually need to attach to Form 982 an explanation of why the DOI is not income If a homeowner gets a dunning notice from the IRS, they can contest it If a homeowner hasn t reported it, they can amend their return

Common Exclusions from DOI Can t pay Bankruptcy Insolvency Indebtedness related to acquisition of qualified principal residence Illegal debt Disputed indebtedness Fraud in purchase

Bankruptcy 26 U.S.C. 108(a)(1)(A) If debt discharged in bankruptcy, the discharged debt excluded from taxable income Debt discharged in bankruptcy need not be reported Timing is everything: debt must be discharged during the pendency of the bankruptcy, not before and not after

Insolvency 26 U.S.C. 108(a)(1)(B) Measured as assets less liabilities immediately before the discharge Can be partial Not clear if you subtract exemptions IRS says no Contrary to long standing rule

Insolvency Example Assets, including the house, worth $120,000 Liabilities, including mortgage, of $140,000 Taxpayer is insolvent in the amount of $20,00 before the discharged mortgage debt If the mortgage principal reduced by $15,000, no DOI income If the mortgage principal reduced by $25,000, $5,000 of DOI income

Acquisition/ Qualified Principal Residence Indebtedness (QPRI) Applies to debt forgiven in 2007 through 2013 Debt must be forgiven because of the homeowner s financial condition or a decline in value of the collateral Qualified principal residence indebtedness Principal amount of acquisition debt, even if refinanced Improvements that increase the basis. Practically, only purchase money mortgages

When You Have Acquisition & Home Equity Debt If debt is mixed QPRI and home equity You have to discharge all home equity debt before you can count a discharge as QPRI Home equity debt can be excluded using the insolvency exception and then any remaining acquisition debt forgiven may be excluded as QPRI 26 U.S.C. 108(a)(1)(E)

QPRI Example Home purchased for $100,000 $10,000 of principal paid $90,000 of acquisition price refinanced, refinancing rolls in some other, non mortgage, loans New loan $130,000 $90,000 acquisition indebtedness $40,000 home equity debt

QPRI Example Scenario 1: $35,000 of mortgage debt forgiven QPRI not available Insolvency exception could be used Scenario 2: $45,000 of mortgage debt forgiven QPRI available for $5,000 of the debt Insolvency exception could be used for $40,000

Disputed Indebtedness If the debt was never a valid debt, then its discharge does not result in income This will arise mostly in the context of the settlement of litigation Distinct from debts that become unenforceable due to passage of time

Purchase Price Infirmity Only applies to purchase money mortgages. General doctrine: if seller reduces price, that is not income. If a lender reduces a purchase money mortgage not income if Reduction due to fraudulently inflated purchase price Borrower has clean hands. Rev. Rul. 92 99

THE SPECIAL CASE OF HAMP PRINCIPAL REDUCTION MODIFICATIONS Annual borrower incentive payments under HAMP (pay forperformance) don t count as income IRS Rev. Rul. 2009 19 Payments to the investors to encourage principal reductions, subsidize loan modifications, don t count as income. IRS Rev. Proc. 2013 16, at 14 Payments made to or on behalf of borrowers under the Hardest Hit programs don t count as income. IRS Notice 2011 14, 2011 11 I.R.B. 544

Timing of Income recognition under HAMP HAMP mods spread out the reduction over 3 years Can either recognize the income over three years or all at once, when the permanent modification goes into effect Most homeowners will minimize their tax consequences if they recognize the full amount of forgiven debt as income at the time the permanent modification is executed. Maximizes use of insolvency and QPRI Simplifies accounting and record keeping Homeowners can amend prior returns Rev. Proc. 2013 16

Discharged Interest Previously deducted interest: Prior tax benefit must be offset with tax liability when interest forgiven/ repaid Reduction of future interest rate If below applicable federal rate, difference in yield may be taxable Applicable federal rate published monthly in IRS Bulletin 26 C.F.R. 1.1274 1 et seq. Often, lenders do not report the reduced future interest rate on a 1099 but this is why it is important to be clear on the dollar amount that will be reported

Special issue: home transfers After Death or Divorce Family member inherits house, or gets it in divorce Not named on note May need a modification Servicer won t talk to them

WHAT We ll talk about Assumptions Should the client assume the mortgage? Can the client assume the mortgage? Special rules HAMP Freddie & Fannie FHA Practice tips for divorce and death Litigation theories

What s An Assumption? Often client is on the mortgage, but not the note, and wants to keep the house. Assumption subjects client to personal liability on the note Gives clients all rights of mortgagor Does not relieve original mortgagor of personal liability unless creditor agrees

Starting point:what Does The Client Want? Question: To assume or not assume? Assuming makes client personally liable on note Not assuming the mortgage usually means losing the home (because the mortgage can t be modified, generally, unless the client is personally liable on the note) This is a financial, legal, and emotional assessment that has to happen FIRST. Client s decision, not the servicer s or mortgagee s The assent of the obligor is not ordinarily necessary to make an assignment valid. Restatement 2 nd of Contracts 323 Comment a

What To Do? TO ASSUME OR NOT ASSUME Always start with what your client wants long term Can they keep the house? Do they want to be personally liable on the note? Is client judgment proof? Can they pay note even with a modification? Is their ownership interest subject to the mortgage? After acquired Waiver of homestead Signed the mortgage If ownership interest is not subject to mortgage, what happens?

When Would You Advise the Client not to Assume? PRACTICALLY If client can t pay the note, even after modification (particularly if the client isn t judgment proof) If the client can t pay the note, and you don t think they can get a modification If the client doesn t want to keep the home

WHEN WOULD YOU Advise the Client Not to Assume? LEGALLY If the property is held in tenancy by the entireties, and your client didn t sign the mortgage Mortgages generally aren t effective unless signed by both tenants in a TBE Maybe if it s in TBE, and the client signed the mortgage, but not the note Maybe if the property was held in joint tenancy, the other joint tenant is dead, and your client didn t sign the mortgage Maybe if your client had a homestead interest and there was no waiver of homestead

How Do You Get An Assumption? No necessary formal words Restatement 3 rd of Property, Mortgages, 5.1 Caselaw is mostly about protecting new owner from presumption of assumption Making payments, seeking modification can show assumption Chicago Assets Co. v. Watrous, 262 Ill.App. 254 (1 st Dist. 1931)

Assumptions Help Mortgagees Absent a release, the mortgagee can still sue the original mortgagor; assumption adds another party to go after on the debt Restatement 3 rd of Property: Mortgages 5.1 Bay v. Williams, 1 N.E. 340 (Ill. 1884) (granting mortgagee right to sue to collect mortgage debt from grantor even though mortgagee was not a party to the assumption)

Due On Sale Clauses Permit the mortgagee to call the mortgage due and payable if the property is transferred Don t usually forbid assumptions, per se, but assumptions of residential mortgages seldom happen outside a transfer of ownership See Restatement 3 rd of Property, 5.1, 5.2 No due on sale clause, no right to foreclose when property transferred Coffing v. Taylor, 16 Ill. 457 (1855)

ExaMPLE OF Due on Sale Clause If all or any part of the Property or any interest in the Property is sold or transferred (or if Borrower is not a natural person and a beneficial interest in Borrower is sold or transferred) without Lender s prior written consent, Lender may require immediate payment in full of all sums secured by the Security Instrument. Note: In theory, this should make clear that it is subject to applicable law, but not all do

Courts Strike Down Due on sale Clauses In 1970s, homebuyers took over the seller s existing mortgage rather than taking out a new mortgage at double digit interest rates Banks tried to enforce due on sale clauses against these home buyers / loan assumers Courts across the country often held that due on sale clauses were unenforceable as a matter of state property law, including state law banning due on sale clauses. E.g., Wellenkamp v. Bank of Am., 582 P.2d 970, 976 77 (Cal. 1978) Key: unreasonable restraint upon alienation of property

Garn St Germain Depository Institutions Act Garn St. Germain Depository Institutions Act at 12 U.S.C. 1701j 3 et seq (1982) Pre empts state laws that formerly protected homeowners against bank s oppressive use of due on sale clauses: Notwithstanding any provision of the constitution or laws (including the judicial decisions) of any State to the contrary, a lender may enter into or enforce a contract containing a due on sale clause with respect to a real property loan.

Silver Lining: exceptions to Garn A due on sale clause cannot be enforced when an interest in real property is transferred: To a relative resulting from the borrower s death To a spouse or child To a spouse pursuant to a divorce decree or separation agreement And others. See 12 USC 1701j 3(d)

What Garn Should mean You can t use a due on sale clause to refuse to honor an assumption that is in one of the protected classes Fannie Mae Servicing Guide 408 recognizes this legal reality, calling for non qualified assumptions for widows, heirs, divorcees BUT Garn has no private right of action

But The Mortgage Has Been Accelerated! So??? Loan mods are always offered to people after the mortgage has been accelerated Ask for basis of denial No law forbidding assumptions after acceleration Never seen investor guidelines that forbid assumptions after acceleration Remember an assumption helps the ultimate owner of the loan by giving them more recourse in the event of non payment

HAMP Rules & Assumption HAMP Limits when the servicer can insist on unobtainable signatures Encourages servicers to work with homeowners who aren t on the note to process assumptions and delay foreclosures (Unfortunately) suggests that servicers may be able to deny assumptions, based on investor guidelines or state or federal law

HAMP Rules On Signature Personal rep of estate can sign (8.9.1) Deceased borrowers don t have to sign (5.7) Servicer can waive signature requirement for mental incapacity, military deployment or contested divorce. (5.7)

HAMP RULES For Borrowers Borrower vs. non borrower Probably means person on note versus person not on note Borrower may continue existing TPP or apply for new one (8.9.1)

HAMP RULES For Assumptions Requires servicer to stay foreclosure for non borrower while assumption process chugs forward (8.9.2) Surviving homeowner remains eligible for new TPP, even if gets booted out of existing TPP (8.9.3) 4(H) of Mod Agreement provides that transfers and assumptions as allowed by Garn are okay BUT suggests that applicable law or investor guidelines may forbid modification

Freddie Mac Guidance Provides for simultaneous modifications and assumptions, after borrower s death, by someone, like a surviving spouse, with an ownership interest in the property B65.12, B65.28 in the Single Family Seller Servicer Guide Points of concern: Can you get a HAMP mod or only a standard mod? What happens in divorce? Language not entirely clear that assumption can t involve new credit screening

Fannie Mae Guidance References exempt transactions basically the Garn St Germain exceptions Requires communication with new owners in exempt transactions Loan mod requests for new owners in exempt transactions have to be evaluated as if they came from borrowers See Fannie Mae Lender Letter LL 2013 04, also Fannie Mae, Transfers of Ownership, Questions and Answers

Fha rules HUD has a general policy of free assumability With a credit review Unless the new owner is via devise or descent HUD Handbook 4330.1 Rev 5 Chapter 6 Not quite clear where that leaves divorcees

CFPB Guidance CFPB Bulletin 2013 12 (Oct. 15, 2013) Servicers should let successors in interest know what documents they need to provide for communication & assumption Servicers should let successors in interest know what their options are Servicers should develop policies for suspending foreclosure and processing assumption and loan modifications simultaneously

DEALING WITH THIS IN DIVORCE Work with the family law attorneys Get disposition of debts and title in family law court: Who is responsible for mortgage? Order assigning rights and responsibilities/ acknowledging assumption of mortgage by remaining spouse? Quit claim deed to remaining spouse Consider consolidating the foreclosure into the divorce proceeding In Re the Marriage of Schweihs, 222 Ill App 3d 887, 584 NE2d 472 (1st D 1991) In Re Marriage of Elliott, 265 Ill App 3d 912, 638 NE2d 1172 (1st D 1994)

DEALING WITH THIS IN DEATH Property passes automatically upon death to heirs True whether intestate succession or via a will Trick is getting the servicer to recognize Estate? Title company opinion?

DO YOU NEED TO OPEN AN ESTATE? How is the property held? Property held in joint tenancy, tenancy by the entireties, land trust, passes outside probate Is there a will? If so, it has to be filed, but still may not need to open an estate Title insurance is the key Talk to the title insurer what will they require to issue a policy? Bond in lieu of probate? Affidavit of heirship? Coupled with quit claim deeds from other heirs? Affidavit of joint tenancy?

How to Raise RIGHT To Assume in Litigation Bankruptcy UDAP Court s equitable powers Breach of duty of good faith and fair dealing ECOA/ FHA Breach of contract FDCPA

Bankruptcy cases Servicer required to engage with GSG protected debtor in state mandated loss mitigation procedures, even though debtor was not on the note and mortgage. In Re Smith, 469 B.R. 198 (Bankr. S.D. N.Y. 2012). Non borrowers that are protected under GSG must be allowed to deaccelerate the note. See In Re Jordan, 199 B.R. 68 (Bankr. S.D. Fla. 1996); In Re Curington, 300 B.R. 78 (M.D. Fla 2003); Citicorp Mortg. v. Lumpkin, 144 B.R. 240 (Bankr. D. Conn. 1992); In Re Alexander, 20 Fla. L. Weekly Fed. B 463 (Bankr. N.D. Fla. 2007); see also Johnson v. Home State Bank, 501 U.S. 78 (1991). Mortgage that permits assumption only with lender s approval is equivalent to a due on sale clause prohibited by Garn. In Re Jordan, 199 B.R. 68 (Bankr. S.D. Fla. 1996). Basic principle in bankruptcy that anyone who has an interest in the property should be allowed to cure the arrearages.

Udap challenges State UDAP claims: Garn prohibits enforcement of due on sale clause for heirs, divorcees, etc; Lender s refusal to accept payments, give information, or consider assumption constructively accelerates note & mortgage, in violation of Garn; Depending on state law, may be able to raise these refusals as violation of state laws barring unfair or deceptive practices.

UDAP misleading and unfair conduct Note and mortgage terms violate federal law if they are due and payable after the death of owner/mortgagor; Not authorized to communicate or won t communicate with heirs/divorcees about the terms, payments or status of the mortgages on their homes, even though they own the home; Refusal to accept payments from heir/divorcee; Refusal to consider new owner for assumption of note/ mortgage; Refusal consider new owner for modification of the existing mortgage on home; Offering new owner loan modification but won t grant one. See McGarvey v. Chase, E.D. CA, 10/11/13 (denying motion to dismiss unfair business practices claim on behalf of class of widows & orphans who own homes but aren t borrowers, and were not processed for assumption simultaneously with modification).

Discrimination claims FHA and ECOA Protected class? Women? Age? Disparate impact vs. disparate treatment Getting data Risk: protection only for a subset of the folks with this problem

Breach of contract Terms of note & mortgage permit calling due and payable upon transfer only if allowed by applicable law. Servicer s refusal to accept payments, talk to new owners, consider assumption, etc. = actual or constructive acceleration in violation of Garn. Garn prohibits acceleration upon transfer by inheritance, divorce, etc. Acceleration in violation of Garn ( applicable law ) is a breach of contract.

What about reverse mortgages? By their terms, are due and payable upon death of borrower. 12 U.S.C. 1701j 3(e)(2) exempts reverse mortgages from the Garn protections

HECM regs conflict with statute HECM statute: HUD reverse mortgages must protect spouse from displacement, even if not on the mortgage. 12 U.S.C. 1715z 20(j). But HUD regulations & HECM documents terminate mortgage upon death of mortgagor 24 C.F.R. 206.27(c); Trigger foreclosures on borrowing spouses

Bennett V. donovan HUD s regulation terminating mortgage upon death of borrower violated plain statutory protection for homeowners, including non borrowing spouses. HUD erred in insuring mortgages in reliance on this illegal regulation. Remanded to HUD to determine relief consistent with decision.

Remaining issues Mortgages give 3 rd party lenders right to foreclose upon death of borrower. HUD must act to protect spouses & lenders. While HUD is deciding what relief means, what happens to the surviving spouses who are being foreclosed on, regardless of illegal rule?

file:///r /NCLC-CL/eReports/update/html/20130403.htm New IRS Guidance Limits Adverse Tax Consequences of HAMP Loan Modifications Involving Principal Forgiveness by Diane Thompson NCLC ereports, April 2013, No. 3 Foreclosures and Servicing, Mortgage Loans IRS Revenue Procedure 2013-16 (Jan. 24, 2013) offers homeowners new options for limiting the tax consequences of principal forgiveness in connection with HAMP loan modifications.[1] This guidance applies to future returns, returns for the 2012 tax year, and returns from previous years. Homeowners may amend previously-filed returns, from this year or any previous years in which they recognized debt forgiveness income from a HAMP loan modification, to take advantage of the Revenue Procedure. Revenue Procedure 2013-16 also discusses the tax implications for investment properties, which are eligible for HAMP Tier II modifications; this article only addresses the implications for resident homeowners. This guidance has the potential to save low-income families millions or even billions of dollars in tax consequences, as well as the stress and strain of facing IRS collection actions. In a HAMP Principal Reduction Alternative (PRA), a portion of the mortgage principal is forgiven over time. For many families, the potential tax consequences of a HAMP PRA amounts to tens of thousands of dollars and several months of income more than any family is likely to be able to spare, much less a low-income family recently facing foreclosure. Practitioners advising clients with HAMP PRA loan modifications can maximize the benefit of those loan modifications and minimize the adverse tax consequences by providing homeowners with information about IRS Revenue Procedure 2013-16. How the IRS Treats Forgiven Debt The Internal Revenue Code generally treats forgiven debt as taxable income in the year in which it is forgiven.[2] The statute provides for some exceptions to this general rule: debt forgiven in bankruptcy forgiven debt to the extent that the taxpayer is insolvent or Qualified Principal Residence Indebtedness (QPRI).[3] file:///r /NCLC-CL/eReports/update/html/20130403.htm (1 of 5)9/6/2013 2:28:01 PM

file:///r /NCLC-CL/eReports/update/html/20130403.htm Whether the exclusions apply is measured at the time the debt is forgiven. There is also an exception for debt that is forgiven as the result of government payments, under what is called the "general welfare doctrine." Generally, in order to take advantage of these exceptions, homeowners must file a long form 1040 and attach Form 982. Homeowners who fail to do this run a substantial risk of facing a dunning notice from the IRS: forgiven debt is reported by loan servicers to the IRS on 1099-C's, and the IRS automatically cross-checks 1099-C's against 1040's it receives.[4] The HAMP Principal Reduction Alternative Under HAMP's Principal Reduction Alternative (PRA), the amount of principal forgiven is calculated at the outset of the modification, but is recognized in three equal installments, on the first three anniversaries of the permanent modification.[5] As a result, a principal modification entered into this year could result in taxable income for 2014, 2015, and 2016. Investors are paid by the U.S. Treasury for forgiving principal under PRA. The investor incentive payments are calculated based on a matrix of how delinquent the mortgage is at the time of the modification (incentive payments are larger for loans that are less than six months delinquent) and what the post-forgiveness loan-to-value ratio is (more money is given for principal reductions that bring the loan-to-value below 115% down to a 105%).[6] These investor incentives range from a low of 18 cents on the dollar to 63 cents on the dollar of principal forgiven. Revenue Procedure 2013-16 Investor Incentives Excluded from Taxable Income The Revenue Procedure reaffirms prior guidance: the amount of the forgiven principal is excluded from income to the extent of the investor incentives.[7] Servicers are not to include this amount of the forgiven debt in the 1099-C's they issue to borrowers.[8] Unfortunately, many homeowners are more than six months delinquent when their trial modification is started,[9] and thus will only see a small reduction in their potential tax bill under this exclusion. Servicer Reporting Under Revenue Procedure 2013-16, servicers are required to report the principal forgiven in a lump sum at the time the permanent modification is finalized, excluding the amount attributable to investor incentive payments.[10] file:///r /NCLC-CL/eReports/update/html/20130403.htm (2 of 5)9/6/2013 2:28:01 PM

file:///r /NCLC-CL/eReports/update/html/20130403.htm Homeowner's Election Homeowners may elect whether to treat any remaining principal reduction (after the exclusion of the investor incentives) as income in the year they enter into the permanent modification or as the principal is reduced on the anniversary date of the permanent modification.[11] Most homeowners will minimize tax consequences if they recognize the full amount in the year when the permanent modification is entered into, and not as the debt is forgiven over time. Most homeowners receiving a permanent modification with principal reduction will be able to exclude a significant portion of the debt forgiven under either the QPRI exception or the insolvency exception in the year when the permanent modification is entered into, but may not be able to take advantage of either of those exceptions in future years. Additionally, recognizing the entire amount forgiven in year 1 simplifies the homeowner's accounting and tax preparation costs. The homeowner will only need to file the long form 1040 and Form 982 once, not three times, and only once need obtain sophisticated tax advice on the treatment of the forgiven debt. Additionally, for homeowners seeking to use the insolvency exception, recognizing the forgiven debt as income in the year when the permanent modification becomes effective means that only one valuation of their assets (including the house) need be done, not three. In many cases, homeowners may be able to use the servicer's valuation of the home, done as part of the evaluation for the HAMP modification, when recognizing the forgiven debt in year 1, but will not be able to do so when spreading the recognition out over three years. Both QPRI and the insolvency exception may not be available to homeowners beyond year 1. QPRI is currently set to sunset at the end of this year; without congressional action, it will not be available for homeowners in tax years after 2013.[12] Insolvency does not have the same hard cutoff as QPRI, but, for most homeowners, recognizing the full amount of the debt forgiven as income when the principal modification is finalized will maximize the availability of the insolvency exception. If the homeowner spreads out recognizing the debt as income over three years, each year the homeowner will have to redo the insolvency calculation, valuing anew all of her assets and liabilities. Over the three years that the principal reduction is applied to the balance of the mortgage, the homeowner's balance sheet is likely to improve either because housing prices rebound or because the homeowner is paying down her debt or, most likely, both. The result is that in each subsequent year, the homeowner is less and less likely to be able to exclude the forgiven debt under the insolvency exception. If the homeowner is fortunate enough to pay down other debt, come into a small inheritance, or build up savings, those small gains could well be wiped out by the tax consequences. Only homeowners who are not insolvent and are not eligible for the QPRI exception and expect to pay taxes on the forgiven principal of their loan should elect to recognize the income over three years. What Happens If the Homeowner Loses Good Standing file:///r /NCLC-CL/eReports/update/html/20130403.htm (3 of 5)9/6/2013 2:28:01 PM

file:///r /NCLC-CL/eReports/update/html/20130403.htm If a homeowner loses good standing under the HAMP PRA program, some or all of the principal reduction may not be recognized. If the homeowner has already recognized the principal reduction as income in prior years, the IRS advises filing an amended return for the years in which the income was recognized.[13] What About Prior Years? The IRS allows taxpayers to amend their returns, to change from reporting the forgiven principal as income over three years on the anniversary date of the permanent modification to reporting it all at once, in the year when the permanent modification was finalized. There are only two caveats: the homeowner can only make this switch once (no switching back and forth), and the change in the return can't change the homeowner's tax liability for that year.[14] For most homeowners now, there should be no change in tax liability. Including the entire amount of forgiven debt in year 1 should be offset by use of the insolvency or QPRI exception, so there will be no change to the tax liability in year 1. Even for homeowners who have begun to recognize the forgiven debt, most of those homeowners should not yet have faced any tax liability, but would be well advised to switch accounting now in order to maximize access to the QPRI and insolvency exceptions. Tax Assistance In most cases, attorneys helping clients get loan modifications will need to help those clients locate competent and affordable tax assistance. Practitioners should remember that free tax preparation sites, such as VITA or Tax Counsel for the Elderly, generally do not assist with tax issues arising from the treatment of discharge of indebtedness. In the cases where they do, their assistance for homeowners is limited to instances when the entire discharged debt is QPRI[15] a relatively rare occurrence for homeowners.low-income tax clinics may be more helpful.[16] In addition to advising homeowners about the tax treatment of principal reduction at the time the modification is negotiated, practitioners may also see homeowners who have received notices from the IRS advising of delinquent taxes from previous years. Homeowners in that circumstance may be advised to return the notice explaining the situation and claiming the appropriate exceptions. In some cases, homeowners will be well advised to file an amended return, as permitted by Revenue Procedure 2013-16. Copyright 2013 National Consumer Law Center, Inc. All rights reserved. [1] A copy of Revenue Procedure 2013-16 is available at www.irs.gov/pub/irs-drop/rp-13-16.pdf. [2] 26 U.S.C. 61(a)(12). file:///r /NCLC-CL/eReports/update/html/20130403.htm (4 of 5)9/6/2013 2:28:01 PM

file:///r /NCLC-CL/eReports/update/html/20130403.htm [3] 26 U.S.C. 108. See generally Nat'l Consumer L. Ctr, Foreclosures 16.6.3 (4th ed. 2012). [4] 2008 National Taxpayer Advocate Annual Report 391 n.5, 395. See, e.g., Cavoto v. Hayes, 634 F.3d 921 (7th Cir. 2011) (former son-in-law dunned by IRS for $11,000 after mother-in-law issued 1099-C for $30,000). [5] Making Home Affordable Handbook, Chapter II, 6.4.5 [6] Making Home Affordable, Chapter II, 13.3.4.1. [7] Rev. Proc. 2013-16, at 12. This is only true for resident homeowners, not for investment properties. [8] Rev. Proc. 2013-16, at 14. [9] U.S. Dep't. of the Treasury, Making Home Affordable: Program Performance Report Through November 2012 at 12 (2013), available at www.treasury.gov/initiatives/financial-stability/reports/ Documents/November%202012%20MHA%20Report%20Final.pdf. [10] Rev. Proc. 2013-16, at 14. The IRS guidance refers to investors as having the duty to issue the 1099- C's, but practically servicers issue this guidance on behalf of investors. [11] Rev. Proc. 2013-16, at 16. [12] 26 U.S.C. 108(a)(1)(E). See generally 16.6.4.7 (discussing other limitations of the QPRI exception). [13] Rev. Proc. 2013-16, at 19. [14] Rev. Proc. 2013-16, at 15-18. [15] I.R.S. Pub. No. 4555, at 10-22 (2009). [16] The IRS provides a locator for the nearest low-income tax clinic at the following web address: www.irs.gov/uac/contact-a-low-income-taxpayer-clinic. file:///r /NCLC-CL/eReports/update/html/20130403.htm (5 of 5)9/6/2013 2:28:01 PM

Case Study for Keeping the Home Jose and Maria Lopez were married and had owned their home as tenants by the entireties.. They purchased the home for $68,000 in 1990. In 2007, they refinanced their mortgage with Citibank. Jose signed the Note and Mortgage; Maria signed only the Mortgage. In early 2012, Jose suffered a stroke and was forced to retire; the couple suffered a substantial cut in their income. They submitted a HAMP Application to Citibank that listed Maria as a co-borrower and included her income information.. Unbeknownst to them, Citibank processed the HAMP application using only Jose s income. In Sept., 2012, the couple started making Trial Period Plan payments that reduced their mortgage payment by $300 per month. The TPP payments were timely made. In December 2012, Jose was diagnosed with advanced cancer. Prior to undergoing surgery, Jose asked Maria to call Citibank to find out the status of the HAMP modification. When Maria called, the Citi representative told her that he could not speak with her because her name was not on the HAMP application. Jose then executed a document that authorized the Bank to talk with Maria about the HAMP application. Jose died on December 18, 2012. Upon his death, Maria became the sole owner of the property by operation of law. Her monthly income was reduced to $1500 In January, 2013, Citibank sent a permanent HAMP Agreement to the Lopez home and requested Jose s signature. Maria signed her name in place of Jose s and sent the Agreement and a copy of Jose s death certificate to Citibank. Citibank told Maria that the Agreement was not valid without Jose s signature, even though he was deceased. Maria faithfully made monthly payments of $550 over the telephone according to the terms of the HAMP Agreement for more than a year and a half. At that point, Citibank began refusing to accept Maria s payments and informed her that she was in default in the amount of $15,250. A few months later, Maria received a Notice of Trustee s Sale. Their home is now valued at $120,000. The balance on the mortgage is $169,765. Maria thinks she was told that the mortgage balance on her home would be reduced she s not sure by how much, but she thinks about $30,000. NALI Conference November 2013 Jean Constantine Davis, AARP Diane E. Thompson, NCLC Page 1 of 2

Case Study for Keeping the Home Questions: What are Maria s options? What should Maria do next? Can she afford this modification? If you can get Citi to honor the existing HAMP modification, what are the potential tax consequences to Maria of the modification? What advice should you give her? What additional information do you need to know? If the refinancing with Citi was a reverse mortgage, with only Jose on the note, would Maria be able to keep the house? NALI Conference November 2013 Jean Constantine Davis, AARP Diane E. Thompson, NCLC Page 2 of 2

Case 1:11-cv-00498-ESH Document 42 Filed 09/30/13 Page 1 of 15 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA ) ROBERT BENNETT, et al., ) ) Plaintiffs, ) ) v. ) Civil Action No. 11-0498 (ESH) ) SHAUN DONOVAN ) Secretary, Housing and Urban ) Development ) ) Defendant. ) ) MEMORANDUM OPINION On March 8, 2011, plaintiffs sued the Secretary of the Department of Housing and Urban Development ( HUD ) in his official capacity, alleging that certain regulations implementing the Home Equity Conversion Mortgage ( HECM ) program violate the Administrative Procedure Act ( APA ), 5 U.S.C. 551 et seq. Although plaintiffs originally brought four claims against HUD, the parties agree that three of the claims are now moot. Plaintiffs sole surviving claim alleges that the Secretary acted contrary to law by failing to protect the spouses of HECM mortgagors from foreclosure. This Court previously dismissed plaintiffs case for lack of standing. See Bennett v. Donovan, 797 F. Supp. 2d 69 (D.D.C. 2011). The Court of Appeals reversed. See Bennett v. Donovan, 703 F.3d 582 (D.C. Cir. 2013). The parties have now filed cross motions for summary judgment. (Pls. Mot. for Summ. J. ( Pls. Mot. ); Def. s Combined Mem. in Support of his Mot. for Summ. J. and in Opp. To Pls. Mot. for Summ. J. ( Def. s Mot. ).) For the reasons stated below, plaintiffs motion will be granted, and defendant s motion will be denied. 1

Case 1:11-cv-00498-ESH Document 42 Filed 09/30/13 Page 2 of 15 BACKGROUND The material facts and statutory framework relevant to this case were described in detail in the Court s prior opinion and by the Circuit Court. See Bennett, 703 F.3d at 584-86; Bennett, 797 F. Supp. 2d. at 72-73. Therefore an abbreviated version will suffice. HECMs, often referred to as reverse mortgages, provide a mechanism for elderly homeowners to convert a portion of accumulated home equity into liquid assets. 12 U.S.C. 1715z-20(a). When an elderly homeowner enters into a reverse mortgage, he receives some combination of a lump sum payment, monthly payments, or a line of credit. This non-recourse loan is secured by a mortgage on the borrower s house. Because a collateral loss may result if the value of the home is less than the outstanding balance when the loan comes due, Congress created an insurance program administered by HUD. Plaintiffs are widowed spouses of now deceased holders of reverse mortgages insured by HUD. 1 Plaintiffs are not listed on the deeds of their homes, nor are they obligors on the reverse mortgages. See Bennett, 797 F. Supp. 2d. at 72-73. The reverse mortgages at issue contain language from the HECM form contract permitting the lender to demand immediate payment on the loan if the [b]orrower dies and the [p]roperty is not the principal residence of a least one surviving borrower. Id. This language is consistent with 24 C.F.R. 206.27, a regulation promulgated by HUD, which states that [t]he mortgage shall state that the mortgage balance will be due and payable in full if a mortgagor dies and the property is not the principle residence of at least one surviving mortgagor.... 1 Originally, this case included three plaintiffs. Plaintiff Delores Jeanne Moore is no longer a plaintiff in this case because she purchased the property from the estate of her deceased husband. (See Pls. Mot. at 5 n.5.) 2

Case 1:11-cv-00498-ESH Document 42 Filed 09/30/13 Page 3 of 15 Facing foreclosure, plaintiffs allege that this HUD regulation violates federal law because it does not protect them as non-mortgagor spouses. (See Pls. Mot. at 10-14.) In support of their position, plaintiffs rely on 12 U.S.C. 1715z-20(j) ( subsection (j) ) which states that [t]he Secretary may not insure a home equity conversion mortgage under this section unless such mortgage provides that the homeowner s obligation to satisfy the loan obligation is deferred until the homeowner s death, the sale of the home, or the occurrence of other events specified in regulations of the Secretary. For purposes of this subsection, the term homeowner includes the spouse of the homeowner. (emphasis added). Plaintiffs seek a declaratory judgment that HUD s regulation violates this subsection and demand that HUD be required to take steps immediately to provide Plaintiffs the protection of Subsection (j). (Pls. Mot. at 15.) I. LEGAL STANDARDS A. Motion for Summary Judgment ANALYSIS Under Federal Rule of Civil Procedure 56, summary judgment is appropriate when the pleadings and the evidence demonstrate that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law. However, in a case such as this one involving review of agency action under the APA, the standard set forth in Rule 56 does not apply. See Sierra Club v. Mainella, 459 F. Supp. 2d 76, 89 (D.D.C. 2006). Summary judgment thus serves as the mechanism for deciding, as a matter of law, whether the agency action is supported by the administrative record and is otherwise consistent with the APA standard of review. See Bloch v. Powell, 227 F. Supp. 2d 25, 31 (D.D.C. 2002), aff d, 348 F.3d 1060 (D.C. Cir. 2003). 3

Case 1:11-cv-00498-ESH Document 42 Filed 09/30/13 Page 4 of 15 B. Chevron Deference The Supreme Court s opinion in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), outlines a two-step process courts must follow in determining whether to defer to an agency s interpretation of a statute. Under Chevron [s]tep [o]ne, the court applies the traditional tools of statutory construction in order to discern whether Congress has spoken directly to the question at issue. Eagle Broad. Group, Ltd. v. FCC, 563 F.3d 543, 552 (D.C. Cir. 2009) (citing Chevron, 467 U.S. at 842-43). If this search for the plain meaning of the statute... yields a clear result, then Congress has expressed its intention as to the question, and deference is not appropriate. Id. at 552 (quoting Bell Atlantic Tel. Cos. v. FCC, 131 F.3d 1044, 1047 (D.C. Cir. 1997)). Under that circumstance, the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. See Chevron, 467 U.S. at 842-43. In order to decide a case on that basis of Chevron step one, a court must find that the intent of Congress evidenced in the statute is not just plausible, but rather that it is the only possible interpretation. See Regions Hosp. v. Shalala, 522 U.S. 450, 460 (1998); PDK Laboratories, Inc. v. U.S. D.E.A., 362 F.3d 786, 796 (D.C. Cir. 2004) ( That a statute is susceptible of one construction does not render its meaning plain if it is also susceptible of another, plausible construction.... ). If the court finds that the statute is silent or ambiguous with respect to the specific issue, the court will proceed to step two of the Chevron analysis and consider whether the agency s interpretation of the statute is arbitrary and capricious. See Chevron, 467 U.S. at 843. At this second step, the agency s interpretation is given controlling weight unless it is manifestly contrary to the statute. Id. at 844. The question at this step is not whether the [plaintiff's] proposed alternative is an acceptable policy option but whether the 4

Case 1:11-cv-00498-ESH Document 42 Filed 09/30/13 Page 5 of 15 [agency action] reflects a reasonable interpretation of [the statute]. Coal. for Common Sense in Gov't Procurement v. United States, 707 F.3d 311, 317 (D.C. Cir. 2013). II. CHEVRON STEP ONE REVIEW A. Plain Meaning When analyzing a statute under Chevron step one, a court must first determine whether the plain meaning of the statutory text is clear on its face or whether the statutory text is ambiguous. See PSEG Energy Resources & Trade LLC v. F.E.R.C., 665 F.3d 203, 208 (D.C. Cir. 2011). For purposes of Chevron analysis, ambiguity is a creature not of definitional possibility but of statutory context. Brown v. Gardner, 513 U.S. 115, 118 (1994). Therefore, the issue is not so much whether the [statutory language]... is, in some abstract sense, ambiguous, but rather whether, read in context and using the traditional tools of statutory construction, the term... encompasses [the government s interpretation]. Cal. Indep. Sys. Operator Corp. v. F.E.R.C., 372 F.3d 395, 400 (D.C. Cir. 2004). In this analysis, courts must presume that a legislature says in a statute what it means and means in a statute what it says there. See Conn. Nat l Bank v. Germain, 503 U.S. 249, 253-54 (1992) (citation omitted). Moreover, at this step, [courts] alone are tasked with determining Congress s unambiguous intent, and therefore the statutory interpretation proceeds without showing the agency any special deference. Village of Barrington v. Surface Transp. Bd., 636 F.3d 650, 660 (D.C. Cir. 2011). Both parties agree that this case turns on whether subsection (j) is ambiguous or whether the plain meaning of the text is readily ascertainable. Plaintiffs contend that subsection (j) is capable of a single meaning; namely, that HUD may only insure reverse mortgages that come due after the death of both the homeowner (the mortgagor) and the spouse of that homeowner 5

Case 1:11-cv-00498-ESH Document 42 Filed 09/30/13 Page 6 of 15 regardless of whether that spouse is also a mortgagor. (See Pls. Mot. at 10-14.) Defendant argues that subsection (j) is ambiguous because the statute can also be read to protect only those spouses who are co-obligors on a reverse mortgage. (Def. s Mot. at 13-20.) This conflict arises because the parties disagree as to the meaning of the second sentence of subsection (j) [f]or purposes of this subsection, the term homeowner includes the spouse of a homeowner. Plaintiffs read this sentence to mean that for the purposes of subsection (j), the term homeowner includes the homeowner and that homeowner s spouse. Defendant reads it to mean that for purposes of subsection (j), the term homeowner includes the homeowner and his or her homeowner spouse. If either of these readings is plausible, the Court must move on to Chevron step two. However, if only one is plausible, the Court must give effect to the unambiguously expressed intent of Congress. See Chevron, 467 U.S. at 842-43. In analyzing which construction of the statute is correct, the Court is aided by the longstanding canon of statutory interpretation that it must give effect, if possible, to every clause and word of a statute, avoiding, if it may [], any construction which implies that the legislature was ignorant of the meaning of the language it employed. Inhabitants of the Twp. of Montclair v. Ramsdell, 107 U.S. 147, 152 (1883); see also Am. Airlines, Inc. v. Transp. Sec. Admin., 665 F.3d 170, 176 (D.C. Cir. 2011). Put differently, a court must not interpret a statute so as to render any words within that statute as mere surplusage. See Potter v. United States, 155 U.S. 438, 446 (1894) (language cannot be regarded as mere surplusage; it means something ). Relying on this hermeneutic principle, plaintiffs argue that in subsection (j) Congress intended to extend displacement protection to the homeowner and his or her spouse regardless of whether the spouse was also an obligor on the loan. (Pls. Mot. at 12.) Any other reading, 6

Case 1:11-cv-00498-ESH Document 42 Filed 09/30/13 Page 7 of 15 plaintiffs explain, would strip[] spouses of their explicit statutory protection against displacement, and render[] the core statutory protection at issue here mere surplusage. (Id. at 14.) In response, defendant contends that for purposes of subsection (j), a person must be a homeowner in order to be within the definition of a homeowner under the statute. (Def. s Mot. at 16 n.12.) If the spouse is not a borrower on the mortgage note, defendant argues, then the spouse has no obligation to satisfy the loan obligation and there is nothing to defer until her death. (Id. at 14.) Defendant s construction of the statute would render the second sentence of subsection (j) mere surplusage, so it is not a plausible reading of the statutory text. If a spouse is a co-obligor on the reverse mortgage, then he or she would automatically be considered a homeowner under the terms of the statute. 2 By virtue of the spouse s legal status as a homeowner, he or she would be protected by the first sentence of subsection (j), which defers the reverse mortgage from becoming due and payable until the homeowner s death. 12 U.S.C. 1715z-20(j). Under defendant s interpretation, therefore, the same protections would extend to the same parties the homeowner(s) with or without the second sentence. Because defendant s position effectively reads the second sentence of subsection (j) out of the statute, the Court finds this construction to be implausible. 3 In order for the second sentence to have any meaning at all, it must be read to include in the definition of homeowner any spouse, regardless of whether he or she is a joint mortgagor. 2 According to the explicit terms of the statute, a prospective obligor must be a homeowner to be eligible for a reverse mortgage. See 12 U.S.C. 1715z-20(d)(2)(A). 3 On appeal, the Court of Appeals appears to have endorsed this conclusion in dicta. In his opinion for the Court, Judge Silberman wrote: [W]e admit to being somewhat puzzled as to how HUD can justify a regulation that seems contrary to the governing statute. Bennett, 703 F.3d at 586. But, as defendant correctly argues, this observation by the Circuit does not bind this Court. (Def. s Mot. at 12 (citing Cent. Va. Cmty. Coll. v. Katz, 546 U.S. 356, 363 (2006)).) 7

Case 1:11-cv-00498-ESH Document 42 Filed 09/30/13 Page 8 of 15 Defendant tries to avoid this result and give meaning to subsection (j) by arguing that [i]n the absence of the second sentence of Subsection (j), a due-on-sale clause could be triggered by the death of one joint tenant, or one member of a tenancy by the entirety. 4 (Def. s Mot. at 18.) Yet, this interpretation is simply not supported by the statute. Although the word mortgagor does appear at least twenty times in the statute, Congress specifically chose to use the term spouse in subsection (j), and not joint mortgagors or joint tenants. In fact, Congress chose spouse notwithstanding the fact that it has a very specific meaning, and notwithstanding the fact that in other sections of the statute, Congress demonstrated its ability to extend protections to joint mortgagors with ease. In subsection (f), for example, Congress requires HUD to extend counseling services not to homeowners and their spouses, but to each mortgagor. 12 U.S.C. 1715z-20(f). The Court presumes, therefore, that if Congress wanted to extend displacement protection to joint mortgagors, the second sentence of subsection (j) would have read: For purposes of this subsection, the term homeowner includes each mortgagor. Moreover, as discussed above, it is clear that the first sentence of subsection (j) would be sufficient to protect two co-mortgagor spouses without the inclusion of the second sentence. Defendant s argument regarding due-on-sale clauses does nothing to alter this analysis. The first sentence of subsection (j) is sufficient to protect against the scenario proffered by defendant 4 In support of this argument, defendant relies in part on the regulatory background at the time of subsection (j) s passage. (Def. s Mot. at 17.) Specifically, defendant emphasizes that pursuant to another act of Congress, the Garn St. Germain Act, Congress created a number of exceptions to the enforceability of due-on-sale clauses, but excluded reverse mortgages from that protection. (See id.) Evidence of other statutes, however, is appropriate at step two of Chevron analysis, not at step one. See, e.g., Kennecott Utah Copper Corp. v. U.S. Dept. of Interior, 88 F.3d 1191, 1231 (D.C. Cir. 1996). Moreover, even if the Court were to consider the Garn St. Germain Act, it would not be swayed by defendant s argument that because the Act did not protect reverse mortgages, it follows that subsection (j) was passed only to close that statutory gap. Defendant simply presents no evidence that subsection (j) was passed specifically to address this aspect of HECM lending. (See Def. s Mot. at 18.) 8

Case 1:11-cv-00498-ESH Document 42 Filed 09/30/13 Page 9 of 15 where a lender seeks to invoke a due-on-sale clause after the death of the first obligor spouse, because both borrowers would be homeowners under the statute. The second part of the first sentence would protect the widowed co-mortgagor because a homeowner would still be alive. In addition to offering his own interpretation of the statute, defendant argues that plaintiffs reading of the statute is implausible. Although the term homeowner appears twice in the first sentence of Subsection (j), defendant asserts, Plaintiffs attempt to substitute the term spouse for only one of those. (Def. s Mot. at 15-16.) Under this reasoning, defendant contends that plaintiffs would rewrite the statute to read: The Secretary may not insure a home equity conversion mortgage under this section unless such mortgage provides that the homeowner s obligation to satisfy the loan obligation is deferred until the spouse s death.... (Id. (emphasis in original).) Defendant argues that the only way to judge the validity of plaintiffs proposed construction is to read the sentence in the following way: The Secretary may not insure a home equity conversion mortgage under this section unless such mortgage provides that the spouse s obligation to satisfy the loan obligation is deferred until the spouse s death. (Id. at 16.) The problem with defendant s argument is that if the statute is read in this way, it fundamentally misconstrues the definition of the term includes. Because [a] fundamental canon of statutory construction is that, unless otherwise defined, words will be interpreted as taking their ordinary, contemporary, common meaning, Perrin v. United States, 444 U.S. 37, 42 (1979); Rasul v. Myers, 563 F.3d 527, 533 (D.C. Cir. 2009) (quoting Perrin, 444 U.S. at 42), it is more appropriate to read the second sentence of subsection (j) in light of the common meaning of include : to take in or comprise as a part of a whole. MERRIAM-WEBSTER S COLLEGIATE DICTIONARY 588 (10th ed. 1997). This is very different from the definition of the word 9

Case 1:11-cv-00498-ESH Document 42 Filed 09/30/13 Page 10 of 15 substitute, which means to put or use in the place of another. Id. at 1174. Relying on these dictionary definitions, the Court concludes that Congress intended to give homeowner a moreexpansive meaning in subsection (j) when it used the word includes a meaning where it takes in, or encompasses, the word spouse. To require the Court to substitute the term spouse for all references to homeowner in its analysis would effectively eliminate Congress use of the term include. 5 Ultimately, while the plain text of this statute may lack linguistic precision, there is no reason to manufacture ambiguity when, as in this case, the legislative prose is pellucid. See Performance Coal Co. v. Fed. Mine & Health Review Comm n, 642 F.3d 234, 239 (D.C. Cir. 2011). Neither party asserts that this is a case where Congress failed to consider the precise question at hand or where Congress explicitly left a gap for an administrative agency to fill. Rather, this is a case in which the parties disagree as to the implications of Congress definition of homeowner for the narrow purposes of subsection (j). Despite his linguistic gymnastics, the plain meaning of the statute unambiguously forecloses defendant s interpretation. See Petit v. U.S. Dep't of Educ., 675 F.3d 769, 781 (D.C. Cir. 2012). Subsection (j) means what it says: the loan obligation is deferred until the homeowner s and the spouse s death. Therefore, the judicial inquiry stops there. B. Context and Legislative History In this Circuit, a court must exhaust the traditional tools of statutory construction... [including] the statute s text, legislative history, and structure, as well as its purpose at step one 5 This reasoning also illustrates why defendant s focus on defining the term obligation is misguided. (See Def. s Mot. at 14-16.) Both parties agree that the term obligation extends just to the homeowner. The question in this case is whether the phrase homeowner s obligation implies an obligation of any member of the category homeowner (which includes a non-obligor spouse) or whether both the homeowner and the spouse must independently be obligors in order to be protected under subsection (j). 10

Case 1:11-cv-00498-ESH Document 42 Filed 09/30/13 Page 11 of 15 of its Chevron analysis. See id. (quoting Bell Atl. Tel. Cos., 131 F.3d at 1047). That said, in order to defeat application of a statute s plain meaning, [defendant] must show either that, as a matter of historical fact, Congress did not mean what it appears to have said, or that, as a matter of logic and statutory structure, it almost surely could not have meant it. Performance Coal Co., 642 F.3d. at 238 (quoting Engine Mfrs. Ass n v. EPA, 88 F.3d 1075, 1089 (D.C. Cir. 1996) (internal quotation marks omitted)). While the Court is satisfied that the statutory text of subsection (j) is unambiguous for the reasons discussed above, there are several contextual arguments which offer further support for the Court s conclusion. First among these is that the second sentence of subsection (j) begins with the introductory clause, For purposes of this subsection.... This preamble is indicative of Congress intent that the sentence serve a special function. Indeed, subsection (j) is the only subsection in the entire HECM statute that includes such qualifying language, and [w]here Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion. Russello v. United States, 464 U.S. 16, 23 (1983) (citations and internal quotation marks omitted). In addition, the Court also presumes that Congress use of the word spouse was intentional; after all, the only other time it appears in the statute is when Congress defined elderly homeowner to mean any homeowner who is, or whose spouse is, at least 62 years of age or such higher age as the Secretary may prescribe. 12 U.S.C. 1715z- 20(b). Read in tandem, subjections (b) and (j) confirm that Congress drafted the statute with an understanding that spouses could be distinct from homeowners, and that scenarios might arise where reverse mortgages would be entered into by only one of two spouses but still affect the non-mortgagor spouse. 11

Case 1:11-cv-00498-ESH Document 42 Filed 09/30/13 Page 12 of 15 The Court also finds instructive the Senate Report of the Committee on Banking, Housing and Urban Affairs where subsection (j) is discussed. 6 See S. Rep. No. 100-21, at 28 (1987). This report explicitly states that subsection (j) intended to defer[] any repayment obligation until death of the homeowner and the homeowner s spouse... Id. Defendants do not dispute the existence of this legislative history, nor could they. Instead, they argue that the committee report is an unreliable guide, particularly [when compared] with the language of the conference report. (Def. s Mot. at 27.) Yet, defendant fails to point to any language in the Conference Report that specifically addresses the question presented in this case. (See id. (quoting H.R. Rep. No. 100-426, reprinted in 1987 U.S.C.C.A.N. 3458, 3512).) To the contrary, defendant states that [m]ore than anything, th[e] legislative history indicates Congress intent to confer upon the Secretary the broad discretion necessary to operate the HECM insurance program in a financially responsible manner. (Def. s Mot. at 27.) It is indisputable that Congress, as it so often does, sought to provide the agency with broad discretion in effectuating a statutory scheme. However, under Chevron it is the duty of the court to determine whether the regulations that the agency adopted pursuant to that scheme violate the plain text of the statute. On this question, the Conference Report s reference to broad discretion is simply not helpful. Therefore, while defendant is correct that as a general matter a conference report is a better indicator of congressional intent than an unpublished committee report, where as in this case the conference report fails to shed light on the statutory text, the Court finds it useful to look at legislative history that is directly on point. 6 Legislative history is of limited value at step one of the Chevron inquiry, especially when a court concludes that the statute s plain meaning is clear. See Halverson v. Slater, 129 F.3d 180, 189 n.10 (D.C. Cir. 1997) ( [O]rdinarily we have no need to refer to legislative history at Chevron step one.... We consider legislative history [] only because the Secretary argues it evinces a congressional intent at odds with what the language of [the statute] otherwise manifests. ). 12

Case 1:11-cv-00498-ESH Document 42 Filed 09/30/13 Page 13 of 15 Defendant s pleadings make several additional arguments, including the need to create an actuarially sound reverse mortgage insurance plan, the Equal Credit Opportunity Act, the Garn St. Germain Act, congressional acquiescence, and state intestacy issues. However, as defendant recognizes, none of these arguments speaks to whether the statutory text is unambiguous. Instead, they only speak to the question of whether the regulation at issue is an arbitrary and capricious exercise of HUD s statutorily granted authority. Because the Court is satisfied based on the plain meaning of the text, as well as the context and legislative history, that there is only one plausible construction of subsection (j), it is not permitted to continue to Chevron step two and consider these extra-textual sources. C. Other Events Clause In a final attempt to justify the validity of HUD s regulation, defendant argues that HUD s ability under subsection (j) to specify other events when a reverse mortgage can become due allows it to make the death of all borrowers a triggering event. (Def. s Mot. at 20 (emphasis in original).) However, this argument is without merit. Simply because subsection (j) permits HUD to create other events when a lender may make a reverse mortgage due, it does not give HUD the statutory authority to alter the specific triggering events identified in the statute. See Nat l Treasury Emples. Union v. Chertoff, 452 F.3d 839, 858-59 (an agency may not nullify the [statute s] specific guarantee... ); Railway Labor Executives Ass n v. Nat l Mediation Bd., 29 F.3d 655, 670 (D.C. Cir. 1994) (an agency does not have plenary authority to act, just because Congress provides some authority). Defendant s reading of subsection (j) would do just that. It would permit the agency to unilaterally create a triggering event that would render another statutorily-specified triggering event ( the homeowner s death ) meaningless. Therefore, it is not a plausible reading of the statute. 13

Case 1:11-cv-00498-ESH Document 42 Filed 09/30/13 Page 14 of 15 III. REMEDY Having found that subsection (j) is not ambiguous and that HUD s regulation as applied to plaintiffs is invalid, 7 the Court is now tasked with identifying the appropriate remedy. In this regard, the Court is bound by the explicit guidance set forth by the Court of Appeals: We do not hold, of course, that HUD is required to take [a] precise series of steps, nor do we suggest that the district court should issue an injunction to that effect. Appellants brought a complaint under the Administrative Procedure Act to set aside an unlawful agency action, and in such circumstances, it is the prerogative of the agency to decide in the first instance how best to provide relief. See N. Air Cargo v. U.S. Postal Serv., 674 F.3d 852, 861 (D.C. Cir. 2012)... Perhaps HUD would provide the precise relief we have outlined, perhaps it would find another alternative, or perhaps it would decide no such relief was appropriate. We recognize that, even if the district court issues a declaratory judgment, appellants still have no guaranty of relief. Though of course, if Bennett and Joseph prevailed on the merits in the district court but were dissatisfied with HUD s remedy, they would always have the option to seek review on the ground that HUD s actions were arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law. 5 U.S.C. 706(2)(A). Bennett, 703 F.3d at 589. Given this guidance, this Court has no choice but to identify the legal error and then remand to the agency. N. Air Cargo v. U.S. Postal Serv., 674 F.3d 852, 861 (D.C. Cir. 2012). That error is that HUD violated 12 U.S.C 1715z-20(j) when it insured the reverse mortgages of plaintiffs spouses pursuant to agency regulation, which permitted their loan obligations to come due upon their death regardless of whether their spouses (plaintiffs) were still alive. The Court will remand the case to HUD so that it can fashion appropriate relief consistent with this Memorandum Opinion. 7 There is some disagreement as to whether this challenge is facial or as applied. However, both parties seem to reach the conclusion that this challenge only applies to the plaintiffs in this case. (See Pls. Mem. of Law in Further Support of Their Mot. for Summ. J. and in Response to Def. s Mot. for Summ. J. at 17 ( the Court should issue a declaratory judgment that the challenged regulations are invalid as applied to Plaintiffs.... ); Def. s Mot. at 34 ( At best, Plaintiffs can argue that [the regulations] are invalid as applied to them.... ).) 14

Case 1:11-cv-00498-ESH Document 42 Filed 09/30/13 Page 15 of 15 CONCLUSION For the foregoing reasons, the Court grants the plaintiffs motion for summary judgment and denies defendant s cross motion for summary judgment. A separate order accompanies this Memorandum Opinion. /s/ ELLEN SEGAL HUVELLE United States District Judge DATE: September 30, 2013 15

NCLC REPORTS Bankruptcy and Foreclosures Edition Volume 30 March/April 2012 Developments and Ideas For the Practice of Consumer Law In This Issue Loan modification or curing a default in bankruptcy for widows, orphans, and divorcees Treasury announces HAMP Tier II Loan Modification Program Loan Mods & Curing Defaults in Bankruptcy for Widows, Orphans, and Divorcees It s an all-too common scenario: a spouse dies and the servicer refuses to discuss a loan modification with the grieving widow, or objects to her chapter 13 bankruptcy cure plan, because her name isn t on the note. 1 What s an advocate to do? Homeowners who acquire title from a parent or spouse, whether by death, divorce, or deed, should be able to step into the shoes of the original borrower and assume the mortgage. Once the mortgage is assumed, then the homeowner has all the rights of the original borrower on the note, including, where applicable, the right to be evaluated for a loan modification. But convincing the servicer of that, and protecting your client from undertaking personal liability on a debt they cannot pay without a modification, is tricky. Usually, resolution of these cases involves orchestration of a simultaneous assumption and modification of the mortgage (handled, of course, by separate departments at the servicer). Can the Servicer Deny an Assumption? Although servicers commonly refuse to recognize assumptions of the mortgage, servicers have no legal say whether or not to allow an assumption of the mortgage. 2 Under common law, contracts are freely assignable, unless the contract is for personal services, the assignment is against public policy, or there is a provision in the contract that forbids assignment. 3 Creditors, for example, routinely assign notes and mortgages to third parties. Thus, unless the mortgage contract forbids homeowners from assigning their obligations and rights under the mortgage to a third party, the servicer is powerless to prevent such assignment. What About Due-on-Sale Clauses? Most mortgage contracts restrict transfers of the homeowner s rights and obligations under the mortgage contract: the mortgage comes due if the homeowner assigns the mortgage or transfers the property. Due-on-sale clauses al- 1 See, e.g., Cara Liu, Widow: Bank Won t Honor Loan Mod After Husband Dies, (Dec. 7, 2011), www.kpho.com/story/16203972/widow-bank-wont-honorloan-mod-after-husband-died. 2 See, e.g., In re Jordan, 199 B.R. 68, 70 (Bankr. S.D. Fla. 1996) ( The Debtor, having received his ownership interest from his mother, did not need the consent of the mortgagee. ). 3 See 6 Am. Jur. 7 (2012). low the servicer to accelerate the mortgage loan upon transfer. The 1982 federal Garn-St. Germain Act, which preempted state laws forbidding the enforcement of due-on-sale clauses, carved out important exceptions. If a transfer falls within a Garn-St. Germain exception, the mortgagee may not enforce the due-on-sale clause. 4 Because the due-on-sale clause is the only mechanism a servicer has to block assumption of the mortgage by the new owner, servicers must allow assumptions that fall within one of these exceptions, even if there is an otherwise valid due-on-sale clause. 5 Courts have interpreted other assumption restrictions in the mortgage as a due-on-sale clause, subject to the federal law limitations. 6 What If There s No Due-on-Sale Clause in the Mortgage? Always review the mortgage to determine whether there is a due-on-sale clause. Absent an enforceable due-on-sale clause, the servicer has no authority to prevent or interfere in any way in the assumption of the mortgage by anyone and no legal recourse upon the event of the assumption. 7 Who Is Entitled to Assume the Note and Mortgage Despite the Existence of a Due-on-Sale Clause? Garn-St. Germain carves out several circumstances where the servicer may not enforce the due-on-sale clause, including: a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety; [or]... a transfer to a relative resulting from the death of a borrower; [or]....a transfer where the spouse or children of the borrower become an owner of the property; [or] a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property.... 8 Unless there is a transfer of ownership from one spouse to another, legal separation by itself will not trigger Garn-St. Germain. 4 12 U.S.C. 1701j-3(d). 5 See, e.g., Fannie Mae, Single Family Servicing Guide 408.02 (Jan. 31, 2003) ( Generally, the servicer must process these exempt transactions without reviewing or approving the terms of the transfer. ). 6 See, e.g., In re Jordan, 199 B.R. 68 (Bankr. S.D. Fla. 1996) (finding a provision in the VA loan that required the VA s approval for an assumption unenforceable). 7 See, e.g., Fannie Mae, Transfers of Ownership, Questions and Answers, www.efanniemae.com/sf/guides/ssg/relatedservicinginfo/pdf/transowner.p df ( If there is no due-on-sale clause, ownership of the property may be transferred without restriction. ). 8 12 U.S.C. 1701j-3(d)(3), (5), (6), (7). See also In re Cady, 440 B.R. 16, 20 n.9 (Bankr. N.D.N.Y. 2010) (transfer from parents to son and his wife); In re Alexander, 2007 WL 2296741 (Bankr. N.D. Fla. 2007) (transfer on death); Citicorp Mortg. v. Lumpkin, 144 B.R. 240, 241 (Bankr. D. Conn. 1992) (transfer from mother to daughter). NCLC REPORTS BANKRUPTCY AND FORECLOSURES EDITION 2012 19 145

My Client s Ex-Husband Is Long Gone; What Do I Need to Show the Servicer? If your client acquired title in a divorce, servicers will sometimes be content with a copy of the divorce decree, awarding title to your client. Other times, they will want a quit claim deed. If you don t have a quit claim deed from the ex-spouse and can t get one, you may be able to re-open the divorce proceedings to get a judicial quit claim deed. You may want to ask for an order that your client assumes the mortgage or that the mortgage is assigned to her. What Happens After a Death? Do I Need to Open an Estate? If the property was held in joint tenancy with your client, the servicer may be content with a death certificate (although you should still prepare and file an affidavit of heirship). Even if the property was not held in joint tenancy, local practice and state law may not require that a formal estate be opened to transfer the real estate. You should check with a local title company to ensure that whatever procedure you do use will protect the merchantability of title. Sometimes a filed affidavit of heirship, where appropriate, demonstrating that title passed to the surviving homeowner, is all that is necessary. Other times, servicers will accept the signature of a personal representative of the estate (appointed by a court for the sole purpose of negotiating the mortgage) or the administrator of the estate as the signature of the borrower s duly authorized representative under section 5.7 of the HAMP Handbook (in these circumstances, the estate would presumably include non-borrower income in the HAMP application). Can the Lender Require New Underwriting? The only requirement the Garn-St. Germain implementing regulations place on a homeowner who assumes a mortgage is that pre-existing mortgage insurance be continued. 9 There is no requirement that the new homeowner obtain the creditor or servicer s permission. The creditworthiness of the homeowner assuming the mortgage is irrelevant; no new underwriting is required. Okay, but How Do I Get the Servicer to Recognize the Assumption? Always start by talking to the assumption department, not loss mitigation. Advocates will often find it necessary to get an injunction barring the foreclosure from proceeding until the servicer processes the homeowner for a loan modification. The basis of the injunctive relief may be breach of contract, state law that creates a private right of action for violations of Garn-St. Germain, 10 or equity. Bankruptcy may provide a favorable forum as the automatic stay should stop the sale without the need to seek injunctive relief. 11 What About When the Mortgage Is in Default? The Servicer Says They Don t Allow Assumptions of Mortgages in Default. Nothing in the Garn-St. Germain Act restricts the right to assume mortgages to those that are current. Fundamentally, it is the servicer s failure to recognize the assumption that prevents the cure of the default: if the homeowner had as- 9 12 C.F.R. 591.5. 10 See, e.g., Mich. Comp. Laws 445.1626 (forbidding lenders from enforcing due-on-sale clauses in violation of the Garn-St. Germain Act), 445.1628 (providing for actual damages and attorney fees). 11 E.g., In re Jordan, 199 B.R. 68 (Bankr. S.D. Fla. 1996). sumed the mortgage, they would permit cure via a modification. Because the homeowner has the right, independent of the servicer, to decide whether or not to assume the mortgage, the servicer cannot block that assumption based on the default status of the mortgage. 12 Once again, a chapter 13 bankruptcy can be used to de-accelerate the debt and force a reluctant servicer to accept a cure of the default. 13 Are There Special Rules for HAMP Modifications? Section 8.9 of the MHA Handbook, v. 3.4, provides detailed rules for how servicers should handle transfer of title upon death or divorce during a trial modification. What If My Client and Her Husband Were Already in a Trial Plan? If your client was on both the note and mortgage, the servicer must offer the homeowner the option of continuing under the existing trial modification or having the trial modification terminated and being evaluated for a new modification based solely on the surviving homeowner s income. Advocates should use CheckMyNPV.com to evaluate whether or not their client will qualify for a HAMP modification before advising a homeowner to terminate the existing trial plan and opt for re-evaluation. My Client s Father Just Died and Left her the House. He Was in a Trial Plan. Can She Assume It? If the surviving homeowner was not on the note and mortgage, the MHA Handbook requires the servicer to notify the homeowner of the procedures for assuming the mortgage and then afford the homeowner the opportunity to be evaluated for a new HAMP modification after the assumption. The servicer may not proceed with a foreclosure during this time period. HAMP guidance concerning where a new homeowner was not on the note erroneously suggests that the homeowner s right to assume may be subject to investor restrictions or state or federal law. Advocates can push back against servicers attempting to deny an assumption based on these grounds. Also, although the HAMP guidance requires new homeowners to re-apply for a trial modification, standard contract law should dictate that the new homeowner can assume the existing trial modification without a new review, and have it converted to a permanent modification upon successful completion of the trial period. 14 Advocates can consider litigation to force servicers to honor existing trial plans for homeowners who cannot qualify for a HAMP trial plan. Can a Widow Get a New HAMP Mod on Her Own Income? What if death or divorce occurs after a permanent modification is finalized, but the client isn t sure she can afford the modified mortgage payment. Can she get a new HAMP mod just on her own income? The homeowner should be able to assume the mortgage as modified, but is unlikely to be able 12 See, e.g., In re Jordan 199 B.R. 68 (Bankr. S.D. Fla. 1996) (allowing a son who received a 50% ownership interest in the home from his mother after the loan had gone into default to cure the arrearages via a chapter 13 bankruptcy). 13 See, e.g., In re Alexander, 2007 WL 2296741 (Bankr. N.D. Fla. 2007); In re Trapp, 260 B.R. 267 (Bankr. D.S.C. 2001). 14 Cf. Wigod v. Wells Fargo Bank, N.A., 2012 WL 727646 (7th Cir. Mar 7, 2012) (finding homeowner-borrower stated claim for breach of contract for failure to convert trial HAMP plan to permanent HAMP modification). 20 NCLC REPORTS BANKRUPTCY AND FORECLOSURES EDITION 2012 146

to obtain a second HAMP Tier I modification on that mortgage. A HAMP Tier II modification may be available. What About Reverse Mortgages? Similar issues arise when a spouse on a reverse mortgage dies first. Servicers usually declare the mortgage due based on the borrower s death and initiate a foreclosure. At least for federally insured reverse mortgages (HECMs), contract reformation may be available to defer default until the nonborrower spouse dies. 15 A few bankruptcy courts allow children to use a chapter 13 plan to pay off the reverse mortgage s balance. 16 Surviving spouses and children may also purchase the property from the estate by tendering the lesser of the mortgage balance or 95% of the current appraised value. 17 What About Habitat for Humanity Loans and Other Small Lenders? Are They Covered? Garn-St. Germain defines lender broadly to include any person or government agency making a real property loan or any assignee or transferee, in whole or in part, of such a person or agency. 18 Real property loans are not limited to loans made by large lenders, but include any loan, including a credit sale, secured by real property, or by a manufactured home, even if personal property, and the homeowner s stock in a cooperative housing corporation. 19 But What If My Client Doesn t Want to Assume the Note? Sometimes homeowners are better served by not assuming the note. If the note is not assumed, the homeowner has no personal liability on it and no risk of a deficiency judgment in any ultimate foreclosure. Additionally, assuming the note may not be necessary to curing the default, at least in chapter 13 bankruptcy cases. Bankruptcy courts have let homeowners cure a default on a mortgage for which they are not personally liable. 20 Treasury Announces HAMP Tier II Loan Modification Program On March 9, 2012, Treasury announced the creation of a second class of HAMP modifications, the HAMP Tier II modifications. 21 The HAMP Tier I modifications are the same modifications advocates have grown to know and hate: eligibility screening, followed by qualification, with the terms of the modification driven by an arbitrarily affordable DTI of 31%. The HAMP Tier II modifications abandon any pre- 15 See Kerrigan v. Bank of Am., 2011 WL 3565121 (C.D. Cal. Aug. 12, 2011) (citing 12 U.S.C. 1715z-20(j), defining homeowner to include the spouse of a homeowner and noting that this follows in part because California is a community property state). But cf. Bennett v. Donovan, 797 F. Supp. 2d 69 (D.D.C. 2011) (surviving spouses lacked standing to bring claims against HUD for issuing regulations that allow mortgagees to accelerate the mortgage upon the mortgagor s death, even if there is a surviving homeowner). 16 E.g., In re Wilcox, 209 B.R. 181 (Bankr. E.D.N.Y. 1996). 17 See 24 C.F.R. 206.125(c). 18 12 U.S.C. 1701j-3(2). 19 12 U.S.C. 1701j-3(3). 20 Johnson v. Home State Bank, 501 U.S. 78 (1991); In re McNeal, 2011 WL 4381725 (Bankr. M.D. Fla. Sept. 1, 2011); In re Alexander, 2007 WL 2296741 (Bankr. N.D. Fla. Apr. 25, 2007); In re Curington, 300 B.R. 78 (Bankr. M.D. Fla. 2003); Citicorp Mortg. v. Lumpkin, 144 B.R. 240, 241 (Bankr. D. Conn. 1992); In re Wilcox, 209 B.R. 181 (Bankr. E.D.N.Y. 1996); In re Hutcherson, 186 B.R. 546 (Bankr. N.D. Ga. 1995). But see Ulster Savings Bank v. Kizelnik, 190 B.R. 171, 179 (Bankr. S.D.N.Y. 1995). See generally NCLC, Consumer Bankruptcy Law and Practice 11.6.2.4 (9th ed. 2009 and Supp.). 21 Making Home Affordable, Sup. Directive 12-02 (Mar. 9, 2012). tense of actual affordability, allowing for a final DTI between 25% and 45%, with the terms of the modification driven by the uniform application of a standard waterfall for capitalization, interest rate reduction, reamortization, and principal forbearance. Nonetheless, the HAMP Tier II modifications may provide some relief for homeowners who do not qualify for HAMP modifications, and, in some cases, may even result in lower payments for homeowners (because the DTI can be lower than 31%). The HAMP Tier II modifications will be available to homeowners as of June 1, 2012, although servicers may choose to offer them sooner. Who Is Eligible for HAMP Tier II? HAMP Tier II modification eligibility includes borrowers not eligible for a regular HAMP modification, who failed a HAMP modification, or who applied for and were rejected for a HAMP modification. If a homeowner failed a HAMP permanent modification, twelve months must elapse from the effective date of the original permanent modification or the homeowner must have had a change in circumstance. Servicers are under no obligation to solicit homeowners for HAMP Tier II modifications; the burden is on the borrower to request review for a HAMP Tier II modification. What About Rental Property? Owners of rental property can apply for a HAMP Tier II modification for mortgages on their rental property, provided all of the following apply: They own fewer than six single-family rental units; They are in actual (not imminent) default on the rental property s mortgage; The net rental income on the property is less than the PITIA payment on the rental property or the owners can document actual hardship (default alone is not enough, unlike the standard under HAMP Tier I); They intend to rent the property out (or have a family member occupy it rent free) for the next five years. What Happens If a Homeowner Defaults on a HAMP Tier II? If a homeowner defaults on a HAMP Tier II modification, she is not eligible for any HAMP modification. Impact of Refusing a HAMP Tier II Mod and Impact of Accepting Mod on Eligibility for a Regular HAMP Mod If a homeowner refuses any HAMP modification, a regular HAMP modification or a HAMP Tier II modification, she is not eligible for any HAMP modification, Tier I or Tier II, unless her circumstances change. Even if a homeowner was wrongly denied a HAMP Tier I modification, once the homeowner accepts the Tier II modification, she is no longer eligible for a HAMP Tier I modification. As a result of these provisions, advocates should be extremely careful to make sure their clients are evaluated first for HAMP Tier I modifications, which generally afford borrowers superior affordability protections. What Is the HAMP Tier II Waterfall? For all HAMP Tier II modifications, the modification terms are created by application of a standard waterfall: Capitalization of arrears; Reduction of the interest rate to a permanent, fixed rate, set at the Freddie Mac Prime Mortgage Market Survey NCLC REPORTS BANKRUPTCY AND FORECLOSURES EDITION 2012 21 147

NCLC REPORTS Developments and Ideas for the Practice of Consumer Law The National Consumer Law Center, Inc. (NCLC), a non-profit legal organization which represents the interests of low-income consumers, publishes NCLC REPORTS 24 times a year. NCLC REPORTS consists of four separate editions: Bankruptcy & Foreclosures (ISSN 1054-3775); Consumer Credit & Usury (ISSN 0890-2615), Debt Collection & Repossessions (ISSN 0890-2607); and Deceptive Practices & Warranties (ISSN 0890-0973). Each edition is published six times a year. NCLC REPORTS is sent free to every neighborhood legal services office funded by the Legal Services Corp. Other individuals and institutions may purchase subscriptions for the entire NCLC REPORTS at a price of $175 (which includes a three ring binder to file NCLC REPORTS) or for each edition at a price of $60 per edition/year, plus $10 for the three ring binder. For subscription orders or more information, write or call: National Consumer Law Center, Inc. NCLC REPORTS 7 Winthrop Sq., 4 th Floor, Boston, MA 02110-1245 Phone: 617-542-9595, Fax: 617-542-8028 E-Mail: publications@nclc.org Visit our website: www.consumerlaw.org Copyright 2012 by the National Consumer Law Center, Inc. NCLC REPORTS National Consumer Law Center, Inc. 7 Winthrop Sq., 4 th Floor Boston, MA 02110-1245 NONPROFIT ORG. U.S. POSTAGE PAID BOSTON, MA PERMIT NO. 57091 rate, rounded up 0.125 percentage points, plus 50 basis points; 22 Extension of the term to 480 months; and Principal forbearance for loans with a pre-modification mark-to-market LTV greater than 115%. Principal reduction is not part of the HAMP Tier II modifications; borrowers will not receive the $5,000 pay-forperformance principal reduction borrower incentives available under HAMP Tier I. How Does the Principal Forbearance Work? Unlike HAMP Tier I modifications, HAMP Tier II modifications forbear principal on all loans with a current LTV greater than 115%, whether such forbearance is necessary for affordability or not. However, also unlike the HAMP Tier I modifications, principal is only forborne to the lesser of 115% LTV or a 30% reduction in the unpaid principal balance, after arrears are capitalized. Let s take an example: A house worth $100,000. An unpaid principal balance after the arrears are capitalized of $150,000. A 115% loan-to-value ratio equals an interest-bearing principal amount of $115,000. The amount needed to reduce the LTV to 115% would be $35,000 ($150,000 minus $115,000). Thirty percent of the post-capitalization unpaid principal balance would be $45,000. Because $35,000 is less than $45,000, the HAMP Tier II loan modification would include $35,000 of principal forbearance. What About Investor Restrictions? If there are investor restrictions on capitalization, the servicer may either forgive the arrears or put them in a noninterest bearing balloon. If there are investor restrictions on the interest rate, the servicer must lower the rate to the greater of the rate allowed by the PSA or the rate dictated by HAMP. If the PSA forbids conversion to a fixed interest rate loan, the loan is not eligible for HAMP. Sup. Dir. 12-02 appears to restrict re-amortization in the absence of term extension, by only providing for term extension, and not reamortization. In general, the servicer may only extend the term as long as permitted by the PSA, unless that term is longer than the 480 months provided for under HAMP. Qualifying Tests for Loan Mod There are three qualifying tests: The final front-end DTI must be between 25% and 45%; The payment must be reduced by at least 10%; and Loan modifications must pass the Net Present Value test. How Is the DTI Calculated on Rental Property? The debt calculation includes the landlord s mortgage payment on the landlord s home. The mortgage payment on the rental property is not included in the debt, unless there is no rental income or the there is a net loss on the rental property. If there is a net loss on the rental property (measured by multiplying the gross rental income by 75% and subtracting the PITIA on the rental property), the loss is added to the landlord s debt. If there is no rental income, the full PITIA on the rental property is added to the landlord s debt for purposes of measuring the DTI. Changes to the Unemployment Program Forbearances The UP forbearance program, offering forbearance for 12 months, is now available for investment and vacant properties, regardless of the borrowers DTI, and to borrowers who previously defaulted on a HAMP modification. When Do Applications Have to Be Submitted? The new guidelines are effective June 1, 2012. Applications must be submitted no later than December 31, 2013, with the permanent modification started no later than September 30, 2014. 22 The rate is published weekly on Freddie Mac s home page, www.freddiemac.com. 22 NCLC REPORTS BANKRUPTCY AND FORECLOSURES EDITION 2012 148

Case 2:13-cv-01099-KJM-EFB Document 21 Filed 10/11/13 Page 1 of 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT COURT OF CALIFORNIA BARBARA MCGARVEY, Plaintiff, No. 2:13-cv-01099-KJM-EFB vs. JP MORGAN CHASE BANK, N.A., Defendant. ORDER / This matter is before the court on defendant s motion to dismiss (ECF 11), which the court has decided without a hearing. Plaintiff brings a putative class action alleging violations of law in the mortgage loan modification process. For the reasons below, defendant s motion is GRANTED in part and DENIED in part. I. ALLEGED FACTS AND PROCEDURAL HISTORY In August 2004, plaintiff inherited her parent s home as the successor trustee of her parent s trust. (Def. s Notice of Removal, Ex. A, Compl. 33 36, ECF 1.) Plaintiff s mother, Berdine Sylvia, had purchased the home, located at 1209 Zinfandel Drive in Roseville, California, in April 2004 so that plaintiff could live with her as her caretaker. (Id. 34.) Plaintiff contributed $80,000 towards the down payment, but Berdine was the sole borrower on the Home Equity Line of Credit loan (the Loan ) that financed the purchase of the home. (Id.) 1

Case 2:13-cv-01099-KJM-EFB Document 21 Filed 10/11/13 Page 2 of 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 When in July 2004 Berdine quitclaimed the home and transferred ownership to herself and plaintiff as trustees of the Sylvia Trust, plaintiff and her mother provided Washington Mutual, the Loan servicer at that time, with all of the information about the transfer of title. (Id. 35.) Washington Mutual sent plaintiff a letter recognizing and approving the transfer of the property. (Id.) In August 2004, when Berdine passed away, plaintiff informed Washington Mutual of her death and again sent them the trust papers and other documentation. (Id. 36.) Plaintiff made timely payments on the Loan from 2004 until 2009. (Id. 37.) On October 22, 2009, plaintiff received a notice, addressed to Berdine Sylvia/Trustee C/O Barbara McGarvey, notifying her that defendant JPMorgan Chase had purchased Washington Mutual s assets and was now the loan servicer. (Id. 38.) In late 2009, plaintiff began to fall behind on her mortgage payments. (Id. 40.) She applied for loan modifications and attempted to apply for loan assumption several times throughout 2010 and 2011; at every turn she was stymied by defendant, who told her she must take additional steps to qualify for modification and assumption. (Id. 40, 41.) When plaintiff complied with defendant s directions and completed these additional steps, defendant continued to deny her applications, eventually telling her she could not modify because she was not the borrower on the Loan. (Id. 42.) Defendant treated plaintiff as the borrower for some purposes but not others. (Id. 43.) In July 2011, for example, defendant sent plaintiff multiple letters soliciting a modification application; these letters were addressed to Berdine Sylvia c/o Barbara McGarvey, Trustee. (Id.) Then, in September 2011, defendant recorded a notice of default on the loan; in its declaration accompanying that notice, defendant listed Sylvia Berdine as the borrower and represented that it had contacted the borrower to discuss the borrower s financial situation and to explore options for the borrower to avoid foreclosure in compliance with Cal. Civ. Code Section 2923.5, even though Berdine had died seven years prior. (Id.) While treating plaintiff as the borrower for purposes of foreclosure, defendant intermittently refused to communicate with plaintiff for any other purpose because she was not the borrower. (Id.) 2

Case 2:13-cv-01099-KJM-EFB Document 21 Filed 10/11/13 Page 3 of 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Plaintiff eventually entered into a trial loan modification with defendant, which defendant terminated, despite plaintiff s compliance with its terms, because she was not eligible as a non-borrower. (Id. 46 55.) Plaintiff avers that, had she known from the beginning that modification or assumption were not feasible options, she would have pursued other possibilities and would not have spent thousands of dollars on loan payments, fees, and legal assistance. (Id. 44, 45, 59.) Defendant sold the home to a third party at a foreclosure sale on January 20, 2013. (Id. 56.) Plaintiff filed suit in state court on April 15, 2013, seeking to represent a class of widows and orphans who, among other things, own legal title to residential real property but are not borrowers on the loans that encumber the property. (Id. 65 67.) Plaintiff pursues three claims: (1) promissory estoppel; (2) negligence; and (3) unfair competition under California Business and Professions Code section 17200. Defendant removed the matter to this court on June 3, 2013 (Def. s Notice of Removal, ECF 1) and filed the instant motion to dismiss on July 8, 2013 (ECF 11). Plaintiff filed an opposition on August 2, 2013 (ECF 13), and defendant replied on August 9, 2013 (ECF 15). Along with the instant motion, defendant has also submitted a request for judicial notice of certain documents, such as portions of the Loan agreement and some of the loan modification letters plaintiff alleges she received from defendant. (ECF 12.) Because the court is able to give full consideration to defendant s arguments in the instant motion without needing to reference these documents, the court denies defendant s request for judicial notice as moot. II. STANDARD Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a party may move to dismiss a complaint for failure to state a claim upon which relief can be granted. A court may dismiss based on the lack of cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory. Balistreri v. Pacifica Police Dep t, 901 F.2d 696, 699 (9th Cir. 1990). Although a complaint need contain only a short and plain statement of the claim showing that the pleader is entitled to relief, FED. R. CIV. P. 8(a)(2), in order to survive a 3

Case 2:13-cv-01099-KJM-EFB Document 21 Filed 10/11/13 Page 4 of 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 motion to dismiss this short and plain statement must contain sufficient factual matter... to state a claim to relief that is plausible on its face. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A complaint must include something more than an unadorned, the-defendant-unlawfully-harmed-me accusation or labels and conclusions or a formulaic recitation of the elements of a cause of action.... Id. (quoting Twombly, 550 U.S. at 555). Determining whether a complaint will survive a motion to dismiss for failure to state a claim is a context-specific task that requires the reviewing court to draw on its judicial experience and common sense. Id. at 679. Ultimately, the inquiry focuses on the interplay between the factual allegations of the complaint and the dispositive issues of law in the action. See Hishon v. King & Spalding, 467 U.S. 69, 73 (1984). In making this context-specific evaluation, this court must presume all factual allegations of the complaint to be true and draw all reasonable inferences in favor of the nonmoving party. Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). This rule does not apply to a legal conclusion couched as a factual allegation, Papasan v. Allain, 478 U.S. 265, 286 (1986), quoted in Twombly, 550 U.S. at 555, nor to allegations that contradict matters properly subject to judicial notice, or to material attached to or incorporated by reference into the complaint. Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). A court s consideration of documents attached to a complaint or incorporated by reference or matter of judicial notice will not convert a motion to dismiss into a motion for summary judgment. United States v. Ritchie, 342 F.3d 903, 907 08 (9th Cir. 2003). III. ANALYSIS Defendant asserts that each of plaintiff s three claims promissory estoppel, negligence, and unfair competition must be dismissed as a matter of law. The court addresses each claim in turn, ultimately concluding that plaintiff states claims for negligence and unfair competition but not for promissory estoppel. ///// ///// 4

Case 2:13-cv-01099-KJM-EFB Document 21 Filed 10/11/13 Page 5 of 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 A. Promissory Estoppel The elements of a promissory estoppel claim are (1) a promise clear and unambiguous in its terms; (2) reliance by the party to whom the promise is made; (3) [the] reliance must be both reasonable and foreseeable; and (4) the party asserting the estoppel must be injured by his reliance. U.S. Ecology, Inc. v. State, 129 Cal. App. 4th 887, 901 (2005) (alteration in original; internal quotations and citation omitted). Here, defendant argues plaintiff s promissory estoppel claim must be dismissed because plaintiff cannot allege facts sufficient to satisfy the first and fourth prongs. (ECF 11 at 7.) Because the court finds below that plaintiff s allegations are insufficient to satisfy the first prong, the court does not reach the fourth prong. Defendant contends that plaintiff has not identified a clear and unambiguous promise that she would be treated as the borrower for purposes of loan modification. (ECF 11 at 7.) Defendant reads plaintiff s complaint to assert three bases upon which she asserts her promissory estoppel claim: (1) modification offer letters sent from defendant to plaintiff s home; (2) the language of the loan modification agreement; and (3) the fact that defendant agreed to a trial loan modification with plaintiff. (Id.) Defendant argues none of these three bases satisfies the first prong of a promissory estoppel claim. First, none of the letters defendant sent to plaintiff s home were addressed to plaintiff; rather, these letters made clear defendant was attempting to communicate with the borrower, as evidenced by the fact they were addressed to plaintiff s mother, the borrower on the loan. (Id.) Second, the loan modification agreement states that plaintiff s mother is the borrower. (Id.) Plaintiff s own actions demonstrate she understood this: she attempted to sign her mother s name to the agreement in her defunct capacity of power of attorney. (Id.) Third, a servicer s entering into a trial modification does not equate to a promise to offer a permanent loan modification. (Id. at 8 (citing Dooms v. Fed. Home Loan Mortg. Corp., No. CV F 11 0352 LJO DLB, 2011 WL 1232989, at *10 (E.D. Cal. Mar. 31, 2011)).) ///// 5

Case 2:13-cv-01099-KJM-EFB Document 21 Filed 10/11/13 Page 6 of 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Plaintiff counters that the complaint alleges defendant made clear and unambiguous promises to plaintiff and others similarly situated to treat them as the borrowers for purposes of loss mitigation. (ECF 13 at 5.) These promises were made, while knowing the original borrower was deceased, by (1) soliciting and processing applications to modify the loan secured by plaintiff s home; (2) offering a trial modification; and (3) collecting trial modification payments. (Id.) The court finds plaintiff s alleged facts do not support a claim that defendant made plaintiff, as the owner of the home that secured the Loan, a clear and unambiguous promise to treat her as the borrower for purposes of modifying the Loan. Instead, plaintiff s alleged facts demonstrate that defendant s conduct sent mixed messages, the opposite of unambiguous. Plaintiff informed her loan servicer of her mother s death at least three times: in 2004, April 2011, and June 2012. (Compl. 36, 41, 49.) After being informed of this fact, defendant sent plaintiff multiple letters soliciting a modification; however, these letters were addressed not to plaintiff but to Berdine Sylvia c/o [plaintiff], Trustee. (Id. 43.) Plaintiff s own actions show she understood defendant did not make a clear and unambiguous promise to treat her as the borrower. In June 2012, plaintiff received a modification offer addressed to Berdine Sylvia c/o plaintiff. (Id. 46, 101.) Plaintiff signed the modification papers Berdine Sylvia, by Barbara McGarvey POA, and returned them along with her first modification payment. (Id. 48.) In response, defendant sent plaintiff a letter in late June 2012 indicating at least one borrower s signature was missing, for which the application may be denied. (Id. 49.) Plaintiff has submitted as supplemental authority a recent decision by another judge of this court, permitting a promissory estoppel claim to proceed based upon a theory of good faith. (ECF 19 (citing Alimena v. Vericrest Fin., Inc., F. Supp. 3d, No. CIV. S-12-0901 LKK, 2013 WL 4049663, at *14 (E.D. Cal. Aug. 9, 2013)).) In Alimena, the court found the plaintiffs adequately pled that the mortgagee made a clear and unambiguous promise to consider in good faith their application for loan modification because the mortgagee was required to comply with HAMP guidelines in considering Plaintiffs application. Id. The 6

Case 2:13-cv-01099-KJM-EFB Document 21 Filed 10/11/13 Page 7 of 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 plaintiffs in that case explicitly pled, among other things, that [p]ursuant to the First TPP, Plaintiffs and their loan were to be evaluated in good faith and in accordance with HAMP guidelines. Id. In contrast, plaintiff s instant allegations are insufficient to show that defendant was obligated to consider in good faith her application for loan modification when plaintiff alleges she was the owner of the house that secured the Loan, not the borrower. Plaintiff alleges only that HAMP 1 and other mortgage measures reflect a trend of requiring lenders and mortgage servicers to deal reasonably, accurately, and honestly with borrowers in default in a good faith effort to arrive at a workable loan modification or other foreclosure alternative. (Id. 18, 23.) Plaintiff s allegations expressly admit she is not the borrower on the Loan. (See id. 1.) That said, in light of Alimena, plaintiff may be able to plead facts to show defendant was obligated to consider her applications in good faith even knowing she was not the borrower. Plaintiff s claim for promissory estoppel is dismissed without prejudice. B. Negligence The elements of negligence are duty, breach of duty, causation, and damages. Marlene F. v. Affiliated Psychiatric Med. Clinic, Inc., 48 Cal. 3d 583, 588 (1989). Liability for negligent conduct may only be imposed where there is a duty of care owed by the defendant to the plaintiff or to a class of which the plaintiff is a member. A duty of care may arise through statute or by contract. Alternatively, a duty may be premised upon the general character of the activity in which the defendant engaged, the relationship between the parties or even 1 HAMP, which stands for Home Affordable Modification Program, is described as follows: The United States Department of the Treasury and other federal agencies created HAMP pursuant to authority granted by the Emergency Economic Stabilization Act, title 12 United States Code section 5201 et seq. Mortgage servicers may voluntarily participate in HAMP. Treasury guidelines set forth threshold criteria to define the class of eligible borrowers. The guidelines also set forth accounting steps using a standardized net present value test to determine whether it is more profitable to modify the loan or allow it to proceed to foreclosure. Calculations under HAMP involve assigning values to certain variables that are largely within the servicers' discretion, thus precluding any entitlement to loan modifications. Alimena, 2013 WL 4049663, at *1 n.2) (quoting Nungaray v. Litton Loan Servicing, LP, 200 Cal.App.4th 1499, 1501 n.1 (2011)). 7

Case 2:13-cv-01099-KJM-EFB Document 21 Filed 10/11/13 Page 8 of 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 the interdependent nature of human society. Whether a duty is owed is simply a shorthand way of phrasing what is the essential question whether the plaintiff's interests are entitled to legal protection against the defendant's conduct. J'Aire Corp. v. Gregory, 24 Cal. 3d 799, 803 (1979) (internal quotations and citations omitted). Criteria for determining whether a defendant owes a plaintiff a duty of care, identified here as the Biakanja factors, include: (1) the extent to which the transaction was intended to affect the plaintiff, (2) the foreseeability of harm to the plaintiff, (3) the degree of certainty that the plaintiff suffered injury, (4) the closeness of the connection between the defendant's conduct and the injury suffered, (5) the moral blame attached to the defendant's conduct and (6) the policy of preventing future harm. Id. at 804 (citing Biakanja v. Irving, 49 Cal. 2d 647, 650 (1958)); see also Marlene F., 48 Cal. 3d at 588 ( Whether a defendant owes a duty of care is a question of law. Its existence depends upon the foreseeability of the risk and upon a weighing of policy consideration for and against imposition of liability. (quoting Slaughter v. Legal Process & Courier Serv., 162 Cal. App. 3d 1236 (1984))). Defendant asserts plaintiff s negligence claim is not viable because defendant cannot, as a matter of law, owe plaintiff a legal duty. (ECF 11 at 11.) Defendant argues that a financial institution, as a general rule, owes no duty of care to a borrower when that institution does not act as more than a mere lender of money. (Id. (citing Nymark v. Heart Fed. Savings & Loan Ass n, 231 Cal. App. 3d 1089, 1096 (1991).) Imposing a duty on servicers in connection with loan modifications would be inconsistent with Nymark, defendant contends, because lending and modification are so intertwined to constitute typical lending activities and [ ] holding loan servicers to a higher standard would defeat modification goals by discouraging loan servicers to entertain modification to avoid foreclosure. (Id. at 12 (quoting Juarez v. Suntrust Mortg., No. CV F 13 0485 LJO SAB, 2013 WL 1983111, at *12 (E.D. Cal. May 13, 8

Case 2:13-cv-01099-KJM-EFB Document 21 Filed 10/11/13 Page 9 of 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 2013)).) Defendant additionally asserts it has no duty to adequately inform and assist survivors in assuming loans following the death of a borrower because plaintiff does not allege these activities are outside of typical lending activities; in fact, the numerous statutes, regulations, and policies plaintiff cites in her complaint, which govern lenders interactions with survivors, show that defendant s interactions with plaintiff fall within the scope of a bank s conventional role as a lender of money. (Id.) Plaintiff argues there is a presumption of the existence of a duty owed by defendant in California, that Nymark does not categorically preclude a duty of care, and that the Biakanja factors do not support departing from the presumption of the existence of a duty. (ECF 13 at 12 14 (citing Garcia v. Ocwen Loan Servicing, LLC, No. C 10 0290 PVT, 2010 WL 1881098 (N.D. Cal. May 10, 2010)).) Plaintiff has pled facts sufficient to demonstrate defendant owed her a duty of care. Plaintiff alleges defendant, the servicer of the Loan secured by the home plaintiff inherited from her mother, continued to send plaintiff loan modification offers even after learning plaintiff s mother, the original borrower, was deceased. (Compl. 38 52.) Plaintiff alleges defendant, after much dallying, eventually rejected her modification application solely because she is not listed as a borrower on the loan. (Id. 55.) In these circumstances, it is entirely foreseeable that plaintiff, the owner of the home, would attempt to take advantage of defendant s loan modification offers in order to stave off foreclosure and that plaintiff would suffer damages as a result of defendant s unnecessary delays. See J'Aire Corp., 24 Cal. 3d at 803; see also Garcia, 2010 WL 1881098, at *4 ( The California legislature has determined that a person who undertakes an activity owes a duty to others to exercise ordinary care or skill. Here, by asking Plaintiff to submit supporting documentation, Defendant undertook the activity of processing Plaintiff's loan modification request. Having undertaken that task, it owed Plaintiff a duty to exercise ordinary care in carrying out the task. (alterations, internal citations, and quotations omitted)). The sum of the Biankaja factors also supports finding a duty here. See Garcia, 2010 WL 1881098, at *3 (addressing each factor in a similar loan modification situation and concluding they weigh in favor of finding a duty of care). 9

Case 2:13-cv-01099-KJM-EFB Document 21 Filed 10/11/13 Page 10 of 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Nymark s rule, that a defendant bank owes no duty of care when that defendant s interactions with a plaintiff fall within the scope of a bank s conventional role as a lender of money, does not apply here. In Nymark, the plaintiff alleged the defendant s appraisal of his residence, undertaken as part of the defendant s loan process, was negligent because the plaintiff relied upon the appraisal s inaccurate conclusion that the residence contained no serious construction defects. 231 Cal. App. 3d at 1093. In holding that the defendant owed the plaintiff no duty of care, the court reasoned that defendant performed the appraisal of plaintiff's property in the usual course and scope of its loan processing procedures to protect defendant's interest by satisfying it that the property provided adequate security for the loan. Id. at 1096. Defendant did not conduct the appraisal to induce plaintiff to enter into the loan transaction; rather, defendant was simply acting in its conventional role as a lender of money to ascertain the sufficiency of the collateral as security for the loan. Id. at 1096 97. Here, defendant repeatedly affirms throughout its briefing on the instant motion that it is not a lender of money vis-à-vis plaintiff. Defendant is not acting in its conventional role by offering to a non-borrower loan modifications that defendant s own policies apparently do not permit it to honor. Such conduct is fundamentally different from conducting an appraisal of a property before agreeing to fund that property s purchase. Defendant owes plaintiff and those in similar circumstances a duty to exercise ordinary care in the loan modification process. Plaintiff s second claim for negligence may proceed. C. Unfair Competition California s Unfair Competition Law ( UCL ) prohibits any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising. CAL. BUS. & PROF. CODE 17200. An act violates the UCL if it is unlawful, unfair or fraudulent. Rubio v. Capitol One Bank, 613 F.3d 1195, 1203 (9th Cir. 2010). Plaintiff s third claim alleges violations under each of these three prongs. Defendant contends plaintiff does not have standing under the UCL, does not state a claim under any of the three UCL prongs, and cannot seek injunctive relief to reverse the 10

Case 2:13-cv-01099-KJM-EFB Document 21 Filed 10/11/13 Page 11 of 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 foreclosure because she does not plead the ability to tender. (ECF 11 at 13.) The court addresses each of these arguments in turn. 1. Standing Defendant argues plaintiff lacks standing because she has not demonstrated a causal connection between her lost money and property and defendant s conduct. (Id. (citing Rubio, 613 F.3d at 1204 05).) Plaintiff cannot demonstrate causation, defendant asserts, because she is not and has never been the borrower on the Loan and therefore is not personally liable for any balances, charges, or other fees. (Id. (citing Cornelison v. Kornbluth, 15 Cal. 3d 590, 596 97 (1975)).) Moreover, plaintiff did not become liable for any fees incurred during the time defendant forestalled exercising its contractual right to foreclose on the Loan, defendant argues. (Id.) Plaintiff counters that she has pled she paid defendant thousands of dollars for which she was not personally liable. (ECF 13 at 16.) She also pled she paid a law firm $5,000 to help her submit a loan modification application in reliance on defendant s promise to review her for modification. (Id. (citing Rubio, 613 F.3d at 1204).) Finally, plaintiff argues that [e]ven putative class members who did not pay money suffered financial injury as the debt secured by their homes rose. (Id. (citing Troyk v. Farmers Grp., Inc., 171 Cal. App. 4th 1305, 1346 (2009)).) To assert a UCL claim, a plaintiff must have suffered injury in fact and... lost money or property as a result of the unfair competition. Rubio, 613 F.3d at 1203 04 (quoting CAL. BUS. & PROF. CODE 17204 (alteration in original)). There must be a causal connection between the defendant s alleged UCL violation and the plaintiff s injury in fact. Id. Plaintiff has alleged sufficient facts to demonstrate causation. For example, plaintiff alleges that defendant s failure to process [her] for assumption simultaneously with its processing of her multiple modification applications, its refusal to treat her as a borrower, even after placing her in a trial modification and its conduct in foreclosing without giving her a genuine opportunity to modify constitute unfair business practices. (Compl. 58.) As a result 11

Case 2:13-cv-01099-KJM-EFB Document 21 Filed 10/11/13 Page 12 of 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 of these allegedly unfair practices, plaintiff claims she paid defendant thousands of dollars for which she was not personally liable. (See, e.g., Compl. 40, 48, 50.) Moreover, defendant s cited cases do not support its arguments. In Rubio, as here, the plaintiff s allegation that she suffered loss of money or property as a result of the defendant s unfair business practices, which were specifically described, was sufficient for her UCL claim to survive a motion to dismiss. 613 F.3d at 1204. Cornelison is inapposite; there the court granted the defendant summary judgment on the plaintiff s breach of contract claim because the plaintiff was not in privity with the defendant and therefore was not liable on the loan. 15 Cal. 3d at 596 97. Plaintiff brings a UCL claim, not a breach of contract claim, and therefore Rubio controls. Plaintiff has standing to pursue her UCL claims. 2. Unlawful Prong Defendant argues plaintiff does not state a claim under the unlawful prong of the UCL because plaintiff has not successfully alleged a predicate violation of law. (ECF 11 at 14 (citing Cel-Tech Commc ns, Inc. v. L.A. Cellular Tel. Co., 20 Cal. 4th 163, 180 (1999) ( By proscribing any unlawful business practice, section 17200 borrows violations of other laws and treats them as unlawful practices that the unfair competition law makes independently actionable. ).) In other words, defendant contends that because plaintiff has not stated claims for promissory estoppel or negligence, plaintiff cannot base her unlawful UCL claim on these violations of law. Having found plaintiff has not stated a promissory estoppel claim, the court addresses only negligence here. Courts in California appear divided on whether common law claims such as negligence can serve as the predicate violation of law under the UCL unlawful prong. Compare Abels v. Bank of Am., No. C 11-0208 PJH, 2011 WL 1362074, at *4 (N.D. Cal. Apr. 11, 2011) (an act is unlawful if it violates an underlying state or federal statute or common law including negligence) and Osei v. Countrywide Home Loans, 692 F. Supp. 2d 1240, 1254 (E.D. Cal. 2010) (same) with Stearns v. Select Comfort Retail Corp., 763 F. Supp. 2d 1128, 1150 (N.D. Cal. 2010) (negligence claims may not constitute predicate acts for a 12

Case 2:13-cv-01099-KJM-EFB Document 21 Filed 10/11/13 Page 13 of 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 UCL claim ) and Joe Hand Promotions, Inc. v. Alvarado, No. 1:10-CV-00907 LJO, 2011 WL 1544501, at *7 (E.D. Cal. Apr. 21, 2011), report and recommendation adopted, 2011 WL 1773296 (E.D. Cal. May 9, 2011) (same). But the court need not resolve this tension here: defendant does not argue in its motion that negligence cannot serve as the predicate violation of law, asserting instead that plaintiff does not state a viable negligence claim. Because the court has found plaintiff states a viable negligence claim, plaintiff s UCL claim based on unlawfulness may proceed. 3. Unfair and Fraudulent Prongs To state a claim under the UCL s unfairness prong, a plaintiff must show either (1) a practice that undermines a legislatively declared policy or threatens competition, or (2) a practice that has an impact on its alleged victim that outweighs the reasons, justifications, and motives of the alleged wrongdoer. Busalacchi v. Ariz. Pub. Serv. Co., No. 12-CV-00298- H-RBB, 2012 WL 3069948, at *5 (S.D. Cal. July 27, 2012) (citing Lozano v. AT&T Wireless Servs., Inc., 504 F.3d 718, 736 (9th Cir. 2007)). Unfair behavior is that which is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers. Id. (quoting Bardin v. Daimlerchrysler Corp., 136 Cal. App. 4th 1255, 1260 (2006)). The fraudulent prong of the UCL is governed by the reasonable consumer test: a plaintiff may demonstrate a violation by show[ing] that [reasonable] members of the public are likely to be deceived. Rubio, 613 F.3d at 1204 (quotations and citations omitted; original alterations). Claims under this prong are subject to Federal Rule of Civil Procedure 9(b) s heightened pleading standard. Kearns v. Ford Motor Co., 567 F.3d 1120, 1125 (9th Cir. 2009). Whether a business practice is deceptive will usually be a question of fact not appropriate for decision on a motion to dismiss. Williams v. Gerber Products Co., 552 F.3d 934, 938 (9th Cir. 2008). Defendant contends plaintiff bases her claim under the unfair prong on two allegations, neither of which is sustainable. (ECF 11 at 15.) First, plaintiff s allegation that defendant refused to communicate with her about assumption or modification options is contradicted by numerous allegations in the complaint. (Id.) Second, plaintiff s allegation that 13

Case 2:13-cv-01099-KJM-EFB Document 21 Filed 10/11/13 Page 14 of 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 defendant treated her as the borrower when accepting her loan payments, but not when considering her for loan modification, misapprehends the law and facts. (Id. at 16.) Under applicable law, lenders may not enforce standard mortgage clauses that require immediate repayment of the loan when property securing the loan is transferred to a family member via an inter vivos trust. (Id. (citing the Garn-St. Germain Act,12 U.S.C. 170lj-3(d)).) Therefore, defendant had no choice but to accept the payments, while plaintiff had several options, including letting defendant foreclose, that she chose not to pursue. (Id.) Defendant also argues plaintiff s allegations under the fraud prong do not meet Rule 9(b) s heightened pleading standard. (Id. at 17.) Plaintiff responds that defendant s refusal to communicate with her was intermittent but nevertheless unfair. (ECF 13 at 17 (citing Compl. 42, 43, 52).) Plaintiff also asserts that her unfairness claim regarding defendant s acceptance of loan payments is predicated on more than mere acceptance of payments; it also is predicated on the allegation that defendant did not consider her for assumption simultaneously with its processing of her multiple modification applications and did not give her a genuine opportunity to modify before foreclosure. (Id. at 18 (citing Compl. 58).) Plaintiff additionally asserts she has pled her fraud claim sufficiently to satisfy Rule 9(b). (Id. at 19.) Plaintiff s allegations are sufficient to state a claim under the unfair prong because they describe conduct that is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers. Busalacchi, 2012 WL 3069948, at *5. Plaintiff informed defendant of her mother s death at least twice: in April 2011 and June 2012. (Compl. 41, 49.) After being informed of this fact, defendant alternately refused to communicate with plaintiff and sent her multiple letters soliciting a modification addressed to Berdine Sylvia c/o [plaintiff], Trustee. (Id. 43.) More troubling still, in September 2011, defendant recorded a notice of default on the loan; in its accompanying declaration, defendant listed Sylvia Berdine as the borrower and represented that it had contacted the borrower to discuss the borrower s financial situation and to explore options for the borrower to avoid 14

Case 2:13-cv-01099-KJM-EFB Document 21 Filed 10/11/13 Page 15 of 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 foreclosure in compliance with Cal. Civ. Code Section 2923.5, even though Sylvia Berdine died in 2004. (Id.) Having been notified that the borrower on the Loan was deceased, defendant continued to send plaintiff loan modification offers and accepted plaintiff s loan modification payments. In June 2012, plaintiff received a modification offer addressed to Berdine Sylvia c/o McGarvey. (Id. 46, 101.) It offered to reduce her principal balance by over $86,000, to forbear from charging interest on over $24,000 of the remaining balance, and to reduce her monthly payment to $675.06 per month for the first five years of the modification. (Id. 46.) Trial modification payments were to be made in July, August and September 2012. (Id. 47.) Plaintiff signed these modification papers Berdine Sylvia, by Barbara McGarvey POA and returned them along with her first modification payment. (Id. 48.) Defendant sent her a letter in late June 2012 indicating at least one borrower s signature was missing, for which the application might be denied. (Id. 49.) Plaintiff again sent defendant her mother s death certificate. (Id.) Plaintiff then timely made, and defendant accepted, the final two trial modification payments for August and September 2012. (Id. 50.) Defendant eventually denied plaintiff s loan modification application because she was not the borrower. (Id. 42.) Defendant s conduct, as alleged, has an impact on its alleged victim that outweighs the reasons, justifications, and motives of the alleged wrongdoer. Busalacchi, 2012 WL 3069948, at *5. Based upon these same facts, plaintiff also states a claim under the fraudulent prong: a reasonable consumer in plaintiff s position would be deceived by defendant s mixedmessages into believing she could qualify for and receive a loan modification or that defendant could afford her some other relief. See Rubio, 613 F.3d at 1204. Plaintiff pleads with sufficient particularity to satisfy Rule 9(b), in alleging that she received the additional modification offer from defendant in June 2012 after informing defendant in April 2011 that her mother, the borrower on the loan, was deceased. (Compl. 41, 46 50.) See Kearns, 567 F.3d at 1125. ///// 15

Case 2:13-cv-01099-KJM-EFB Document 21 Filed 10/11/13 Page 16 of 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 4. Tender Requirement Because plaintiff seeks an Order requiring the Defendants rescind the trustee sale or otherwise restore title to Plaintiff, (Compl. 104), defendant asserts plaintiff must offer to tender the full amount due on the Loan. (ECF 11 at 18 (citing Nugent v. Fed. Home Loan Mortg. Corp., 2013 WL 1326425, at *7 (E.D. Cal. March 29, 2013)).) Plaintiff counters she need not allege tender because she is not arguing there were irregularities in the foreclosure process. (ECF 13 at 20 (citing Ohlendorf v. Am. Home Mortg. Servicing, 279 F.R.D. 575, 580 (E.D. Cal. 2010)).) Based upon the current complaint, plaintiff is not required to allege tender. Tender is required only when foreclosure has already occurred and the plaintiff alleges irregularities in the foreclosure process itself. Ohlendorf, 279 F.R.D. at 580; see also Nugent, 2013 WL 1326425, at *7 (tender is required when plaintiff brings a wrongful foreclosure claim). Here, while the subject home has already been sold at a trustee s sale and plaintiff seeks to regain title (Compl. 56, 104), plaintiff s promissory estoppel, negligence and UCL claims do not rely on any irregularities in the foreclosure process. IV. CONCLUSION For the foregoing reasons, defendant s motion to dismiss is GRANTED in part and DENIED in part. Plaintiff must file an amended complaint within twenty-one days of the date of this order. IT IS SO ORDERED. DATED: October 10, 2013. 16