Mortgage Lenders Receive A Favorable Court Decision in Ohio

In a reported case (Washington Mutual Bank vs. Cowles, 2006-Ohio-0076) decided on September 14, 2007, the Court of Appeals for the 11th District of Ohio (Ashtabula County) issued a welcome decision in favor of the lender on multiple contested issues which frequently arise in foreclosures.  The borrower had filed an answer to the plaintiff's complaint for foreclosure, alleging the following defenses:

• The lender was negligent in handling negotiations for a loan modification agreement
• The lender promised to consider the borrower's application for a loan modification, and because the lender failed to do so, it should be barred by "promissory estoppel"
• The lender did not have standing to foreclose because the assignment of the mortgage had not been filed prior to the commencement of the foreclosure
• The lender had not provided reinstatement figures timely
• The lender failed to send a notice prior to acceleration of the debt, as required by the terms of the mortgage

The Court of Appeals affirmed the decision of the trial court, rejecting all of the alleged defenses.

The Facts of the Case
The borrower alleged that she previously had a special forbearance plan which the lender agreed to due to the borrower's illness.  After the forbearance period was concluded, the borrower inquired regarding a possible loan modification.  Because she was in default, the lender advised her to contact its collection department, and when she did so, the lender "moved" the loan from its loss mitigation department to its collections department. 

The borrower claimed that she reapplied to the loss mitigation department but her file "lay there" for two months.  She then submitted a detailed application for a new loss mitigation plan but did not receive a response for approximately another month, at which time she was assured that no foreclosure would occur until the loss mitigation representative reviewed the application, which would be within about a week. 

However, the lender commenced the foreclosure action six days later.  The lender was named as the Plaintiff, although the title report showed that there had not been an assignment from the original mortgagee, Mortgage Electronic Registration Systems, Inc. (MERS) filed for record.  About five weeks after the foreclosure was filed, the borrower requested a reinstatement figure, but did not receive a letter with the reinstatement figure for approximately three more weeks. 

The trial court granted the lender's motion for summary judgment, with the provision that an assignment from MERS to the lender was required to be recorded before the court would enter a final decree of foreclosure.  The assignment was filed as shown on an updated title exam, and the final decree of foreclosure was then filed.

The Negligence Issue
The borrower claimed that the lender should not be entitled to foreclosure, because of the lender's delays and alleged mishandling of the loss mitigation discussions.  Although negligence is often an issue in tort cases, the court emphasized that a foreclosure is a contract case, and therefore, negligence was not an issue.  Hence, even if the negotiations for a loan modification or payment plan were mishandled by the lender, the lender could not be deemed to be in breach of contract because nothing in the mortgage required the lender to revise its terms.  Moreover, the mere fact that the borrower had previously been granted a special forbearance plan, or that the lender even was willing to discuss the possibility of a new one, did not constitute a waiver of the lender's rights under the mortgage, which was in default.

The Promissory Estoppel Issue
Promissory Estoppel is a legal doctrine that is used to enforce a party's promise.  The borrower argued that the lender should not be permitted to avoid its alleged promise.  Four elements are required to establish a claim of Promissory Estoppel: (1) a clear and unambiguous promise; (2) reliance on the promise; (3) the reliance is reasonable and foreseeable; and (4) the party relying on the promise was injured by his or her reliance.  The court found that the borrower had produced no evidence that she was injured by any reliance on anything the lender told her.  She might have been disappointed when the lender did not agree to a forbearance or loan modification, but she had not changed her own position in reliance on any promise.

The Lender's Standing to Sue
In order to be entitled to judgment in any civil action, a plaintiff must establish that it is the "real party in interest."  In foreclosure cases, the lender must establish that it is the holder of the note and mortgage.  Foreclosures are frequently commenced in the name of an entity in anticipation of an assignment of the mortgage to that entity being recorded prior to judgment.  The borrower argued that the lender lacked standing to bring the foreclosure action because the assignment had not been filed for record prior to the commencement of the foreclosure.  The court decided to the contrary, holding that the plaintiff's commencement of the foreclosure in its own name was valid, and that the assignment of the mortgage to the lender could be recorded thereafter, as long as it was prior to judgment.

The Reinstatement Issue
The mortgage clearly provided the borrower with a right to reinstate the loan after acceleration.  Although the lender took three weeks to respond to the request for a reinstatement figure, the borrower failed to make the reinstatement payment despite having a period of almost two months between the "good through" date contained in the reinstatement quote, and the date of the judgment.

The Failure to Issue a Notice Prior to Acceleration
The lender was most vulnerable on this issue, because it admitted that it had failed to send a notice prior to acceleration, as required by the mortgage.  If the borrower had raised this issue as a defense in her answer, it is likely that the lender's case would have been defeated, and it would have become necessary to send a notice and then commence a new foreclosure after the time period to cure the default elapsed.  However, the borrower failed to raise this issue in her answer or even in her response to the lender's motion for summary judgment.  Rather, she raised the issue for the first time after the court had granted the lender's motion for summary judgment.  Therefore, the court held that the defense had been waived.

A Favorable Precedent That Should Be Unnecessary
This case is a helpful precedent in for lenders, with regard to these commonly raised issues in Ohio, at least within the jurisdiction of this particular court of appeals.  But these issues can be avoided altogether with some due diligence and good customer service.
 
As indicated above, the lender's case was most vulnerable due to its failure to serve a notice prior to acceleration as required by the mortgage.  The lender possibly avoided a dismissal of its foreclosure only because the borrower failed to raise the issue timely.  Issuing a proper notice prior to acceleration, if required by the terms of the mortgage, is a due diligence item, which should always be attended to prior to commencing the foreclosure.  Due diligence, like loss mitigation efforts, can pay for itself many times over to ensure a clean case.
More than ever, prudent loan servicers are maintaining highly proactive and responsive loss mitigation departments. In many cases, loss mitigation efforts produce clear economic benefits compared to foreclosure.  Moreover, even if the borrower is not a good candidate for loss mitigation, merely providing good customer service by responding promptly to loss mitigation applications or requests, can eliminate many grounds for contested litigation.  After all, in Ohio, foreclosures are deemed to be equitable actions, and debtors' attorneys are quick to cite as a defense, the well-known legal maxim that "he who seeks equity must do equity."

To view the online article and for contact information for Larry R Rothenberg, Esq., please click on the following link;

Ohio Favorable Court Decision for Lenders

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