Loan Servicer Lack of Good Faith in Loss Mitigation Program

Failure to tell the debtor that a down payment toward mortgage arrears was essential to loan modification rendered the loan servicer’s loss mitigation negotiations in bad faith. Rushmore Loan Management Services v. Hosking, No. 15-3999 (S.D. N.Y. Jan. 11, 2016).

Ms. Hosking had mortgage arrears in the amount of over $18,000.00 and a principal balance of over $125,000.00. She filed a chapter 13 petition to save her home from foreclosure and to seek loan modification through the bankruptcy court’s loss mitigation program. After the petition was filed, Ms. Hosking’s counsel sent a modification proposal to Rushmore, the servicer for U.S. Bank. Initial correspondence between Ms. Hosking’s counsel and a representative from Rushmore included discussion about Rushmore’s requirement that Ms. Hosking provide “proof of funds for the down payment” necessary to support the request for modification. Ms. Hosking’s counsel sought clarification of the requirement and was informed that Ms. Hosking needed to either provide a down payment or a letter of explanation as to why she was unable to. At the same time, Rushmore informed the court that“[a]t this time, no documents are being requested.” A few days later, Rushmore’s counsel sent an email to Ms. Hosking’s counsel stating, “as we have not received any information in regards to a down payment, your client’s request [for a loan modification] is being processed with no down payment.” After a couple months, Rushmore informed Ms. Hosking that her loan modification was denied because “[t]he amount of good faith down payment is insufficient to offer a loan modification.”

The court held three hearings as part of the loss mitigation process. The first two hearings ended with the court ordering Rushmore to bring a person of higher authority and more responsibility for the denial of the loan modification to the next hearing. Rushmore provided testimony that loan modifications were indeed, at least informally, contingent upon provision of a 25% down payment, though the person reviewing the modification application had discretion to override that requirement.

At the close of the hearings the bankruptcy court found that Rushmore had failed to participate in good faith in the loss mitigation program because it “(i) denied Ms. Hosking’s application for a loan modification for failing to provide a down payment without notifying her of a down payment requirement, and (ii) failed to designate someone with full settlement authority.” The court awarded Ms. Hosking attorney fees and costs in the amount of $3,525.94.

On appeal, the district court noted that the “loss mitigation program does not compel parties to modify the loan, but does compel the parties to participate in good faith.” The court found that open communication and sharing of basic information including the parameters the debtor must meet to be considered for a modification, were fundamental aspects of the good faith inquiry. The court found that while Rushmore provided notice of the down payment requirement in some correspondence with the debtor, it contradicted its own notice in other contacts with the debtor and the court and, in fact, indicated that it was considering her request despite having no down payment. Ms. Hosking participated in loan modification discussions for four months without being told that her failure to make the down payment rendered her ineligible.

With respect to the issue of failure to provide an appropriate representative with authority to settle, the district court disagreed with the bankruptcy court’s finding because the bankruptcy court failed to give Rushmore an opportunity to demonstrate that it provided adequate contacts for Ms. Hosking. Nonetheless, Rushmore’s failure to make its down payment requirement clear was sufficient to justify the award of sanctions.

Hosking SD NY opinion