Third Circuit Holds Mortgage Servicer May Not Recalculate Mortgage Insurance Termination Date Based on Updated Home Value After Loan Modification

In a homeowner class action, the United States Court of Appeals for the Third Circuit recently held that a lender that modifies a mortgage cannot rely on an updated property value to recalculate the length of the homeowner’s mortgage insurance obligation under the Homeowners Protection Act (the “HPA”) unless same is expressly set forth in the loan modification agreement. See Fried v. JP Morgan Chase & Co, 2017 WL 929752 (3d Cir. Mar. 9, 2017). Plaintiff purchased a home in 2007 with a loan for $497,950 that was serviced by defendant.  Because the loan-to-purchase-price ratio was more than 80%, defendant required that plaintiff obtain private mortgage insurance. Under the HPA, the insurance would terminate when the ratio reached 78%, which was scheduled to occur in 2016. 12 U.S.C. 4901 et seq. In 2011, plaintiff modified her mortgage under the Home Affordable Mortgage Program (“HAMP”). Per the modification, the outstanding principal was reduced to $431,597 and, based on this reduced amount, the principal balance would reach 78% of the original value of the home in 2014. However, when plaintiff inquired about this termination date, defendant informed her that the insurance obligation would not terminate until 2026, ten years after the original termination date. After a series of letters and inquiries, defendant informed plaintiff that it recalculated the value of the property at the time of the modification and reduced the value by about 25%. Using these reduced numbers, the new outstanding principal exceeded the new property value, increasing both the duration and the amount of the mortgage insurance payments. Plaintiff then initiated this action on behalf of herself and similarly-situated individuals, alleging defendant violated the HPA by using this new property value to calculate the termination date. Defendant filed a motion to dismiss, arguing that it was allowed to substitute this new value under the HPA. The District Court denied the motion but certified its appeal to the Third Circuit, “recognizing that whether Chase violated the [HPA] is a controlling question of law with substantial grounds for difference of opinion that is likely to advance this case’s resolution.”

On appeal, the Third Circuit affirmed the District Court’s denial of the motion to dismiss, holding that defendant must continue to use the original value of the property in calculating the termination date. First, the Court addressed the plain language of the HPA and HAMP regulations. Under Section 4902(d) of the HPA, if the mortgagor and mortgagee “agree to a modification,” the termination date “shall be recalculated to reflect the modified terms and conditions of such loan.” The defendant argued that it was required to obtain a new property value assessment under HAMP guidelines and that this “condition precedent” necessarily was incorporated as a condition of the loan. The Court rejected this argument, holding that the new valuation was not a term or condition of the loan, even if it was a condition precedent to defendant’s decision to modify. More importantly, plaintiff and defendant did not “agree” on this new value as part of the modification, so it could not be a term or condition of the agreed-upon loan. The Court also noted that defendant had at least twice successfully argued in other courts that the borrowers there could not use HAMP’s rules to modify their loan documents, and defendant cannot argue that “HAMP’s provisions do not bind the parties to a mortgage modification only when they benefit” defendant.

Second, the Court held that the HPA expressly states that the termination date should be adjusted based on the new property value after a refinancing. This language is not included in the section of the HPA discussing modifications. Based on this different language, the Court found that Congress did not intend for servicers to automatically incorporate new valuations into termination calculations after modifications without the borrowers’ agreement thereto. Third, the Court rejected defendant’s argument that the interpretation of the HPA is controlled by Fannie Mae’s Servicing Guidelines, which state that the home’s value at the time of the modification should be used to calculate the termination date. The Court held that Section 4908(b) of the HPA explicitly provides that the HPA takes precedence over any conflicting Guidelines, and the HPA therefore controlled. Fourth, the Court found that allowing changes to termination dates based on fluctuating property values would undermine the predictability of consumers’ mortgage insurance obligations, which was one of the priorities of the HPA.

Finally, the Court affirmed the District Court’s decision to deny the motion to dismiss based on defendant’s statute of limitations argument. Defendant had argued that plaintiff knew of the new termination date in 2012 but did not bring the action until 2015, which was outside the HPA’s two-year statute of limitations. The Court found that plaintiff’s argument that the limitations period did not begin running until 2013, when she discovered the reasoning for the new termination date, was plausible and enough to defeat the motion to dismiss.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Michael Crowley at mcrowley@riker.com or Clarissa Gomez at cgomez@riker.com.