Should we, as lenders in Ohio, try to prevent foreclosure where possible? That depends on whom you ask, but the general consensus is, of course, yes. In fact, we’re often required to do so by bodies like Fannie Mae, the CFPB, and courts. But when negotiations fail, do they affect foreclosure lawsuits? Are lenders worse off for offering modifications? No, at least for careful lenders, according to a recent case that clarifies a 20-year-old rule from the Ohio Supreme Court.
In Ohio, modification discussions do not bar lenders from seeking foreclosure.[1] That rule took form in 1996 when the Ohio Supreme Court held that a lender’s “decision to enforce … [mortgages] cannot be considered an act of bad faith.”[2] Later courts interpreting that rule took it to mean that offering to modify a mortgage did not bar a lender from filing a foreclosure lawsuit after failed negotiations or even during active talks.[3] But is that rule still applicable when a borrower alleges that the lender promised not to seek foreclosure during negotiations? The Second District Court of Appeals answered that question recently in Nationstar Mortgage, LLC v. Willis.[4]
In the Willis case, Mr. Willis had borrowed $180,000 from a predecessor to Nationstar, which he secured with a mortgage. When he failed to pay his loan, Nationstar, Mr. Willis, and his wife began negotiations to modify that debt. As part of that process, the Willises claimed that they received two written modification offers from Nationstar that they believed were contradictory. The Willises accepted neither, claiming that they didn’t know which was legitimate. In response, Nationstar filed suit to foreclose.
The Willises and Nationstar mediated the loan’s default shortly after the case began. In his report, the mediator noted that Nationstar was considering the Willises’ application for a HAMP modification and that Nationstar would decide within a few months whether to accept it. The case did not settle and proceeded to trial. At that trial, the Willises argued that foreclosure was improper because “there was no follow through from Nationstar after … [mediation].” Specifically, the Willises argued that since the foreclosure began, they submitted at least three packets of documents to Nationstar without any response. This, the Willises argued, was a bar to foreclosure. The trial court disagreed, so the Willises appealed.
On appeal, the Willises argued that Nationstar could not foreclose on their property “when they were still in the modification process” and the “review was not concluded after the mediation ended.” To support those arguments, the Willises cited to Wells Fargo Bank, N.A. v. Fortner. The rule in Fortner is important to Ohio’s lenders because it establishes when modification discussions can and cannot be used as a defense to foreclosure in Ohio.
In Fortner, the Second District Court of Appeals confirmed the rule that ongoing modification discussions “did not bar the bank from seeking foreclosure.”[5] But it went on to hold that where a borrower alleges that its lender promised not to foreclose or continue with foreclosure during negotiations, then the trial court must address whether (1) the lender made that promise, and (2) the borrower reasonably relied on that promise to its detriment.[6] A trial court cannot proceed with foreclosure otherwise.
In Willis, the appellate court found the Fortner case inapplicable because mediation concluded without success and because Nationstar’s letter offering a loan modification contained anti-waiver language (e.g., that if the Willises did not make a qualifying payment, then Nationstar had no obligation to modify the loan). As a result, the appellate court upheld Nationstar’s foreclosure.
What is the lesson for Ohio’s lenders from the Willis case? Routinely document anti-waiver and anti-forbearance terms whenever holding loan workout discussions. With proper documentation, lenders can contest claims brought by borrowers in cases like Willis and Fortner. For example, borrowers could agree in writing that their lender’s willingness to negotiate does not waive their lender’s right to proceed with foreclosure immediately. Likewise, borrowers could agree in writing (perhaps in a pre-workout agreement) that their lender’s willingness to negotiate neither creates a prerequisite to foreclosure nor a promise to conclude negotiations before suing.[7]
In the end, delinquent borrowers will continue to fight lenders in foreclosure using whatever theories are available—whether the facts support those theories or not. As it concerns defenses arising out of negotiations, lenders are best protected when they can establish they waived no rights or made no agreement to forbear. And the best way to establish those facts is through a writing signed by the negotiating borrower. In such a case, an ounce of prevention may very well be worth more than a pound of cure.
[1] See Wells Fargo Bank, N.A. v. Fortner, 2nd Dist. Montgomery No. 26010, 2014-Ohio-2212, ¶ 11, citing to Bank of N.Y. Mellon v. Ackerman, 2nd Dist. Montgomery No. 24390, 2012-Ohio-956, ¶ 8.
[2] Ed Schory & Sons v. Francis, 75 Ohio St.3d 433, 443, 662 N.E.2d 1074 (1996).
[3] See, e.g., Fortner at ¶ 11.
[4] Nationstar v. Willis, 2nd Dist. Miami No. 2014-CA-36, 2016-Ohio-4721.
[5] See Fortner at ¶ 11.
[6] See Fortner at ¶¶ 13–14.
[7] Note that in Fortner, the lender did use anti-waiver language but it did not use anti-forbearance language. Although it is impossible to determine whether that would have changed the opinion rendered by the Fortner court, the use of anti-forbearance terms gives lenders an additional argument.