Recent Court Decision Places Modifications Back in the Spotlight!

Recently, the California Third District Court of Appeals issued a ruling requiring servicers/lenders to provide detailed reasons why a borrower may be denied a modification. In the end, the question becomes, will this decision prove to be a useful tool for borrowers to obtain modifications of home loans? Only time will tell.

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Recent Court Decision Places Modifications Back in the Spotlight!
By: D. Keith Dunnagan, Esq.

During the housing crisis many individuals sought to modify their loans so that they could keep their homes. The vast majority of those that sought to modify were denied and most were denied without much of a reason. California fought back and enacted the Home Owners Bill of Rights (“HOBR”) which became law on January 1, 2013. In theory the law was designed to protect borrowers in the foreclosure process, create mechanisms for borrowers to communicate with lenders/services and create some transparency in the modification process.

One of the laws passed in the overhaul of the foreclosure process required lenders/servicers of first position loans to state with specificity the reasons why an individual was denied a modification. In practice what happened was that many servicers simply denied the modifications by stating something to the effect that the servicer “does not have contractual authority to modify the loan because of servicing agreement limitations”. In effect, the servicer was simply pointing blame back to the investor without really giving any information to the borrower as to why they had been denied.

Many borrowers accepted this denial and watch as their homes were foreclosed on or sold short to other buyers. For years, litigation has waged in the courts over alleged non-compliance by lenders with the mandates of the law. Many such cases were summarily dismissed at the beginning stages of litigation an no further action was taken. However, in the recent case of Potocki v. Wells Fargo Bank, the Third Appellate District of California was asked to look directly at Wells Fargo’s compliance with the HOBR and specifically the laws requirement to provide specific reasons for denial.

Initially, the trial court, like many other trial courts dismissed the case. However, on appeal, Potocki argued that the letter generally denying the modification was not compliant with the law. The Appellate Court agreed and stated that if a servicer denies a modification because of investor disallowance, then the servicer must provide “specific reasons for the investor disallowance”. Hence, going forward a simple statement that the investor disallows is not enough to satisfy the legal requirements and may be determined to be a violation of the HOBR.

In making the ruling, the court specifically stated that at least for analysis at the beginning of the case if a specific reason for denial is not provided it cannot be determined to be immaterial. The court focused on the strict compliance of the law and ultimately remanded the case back to the trial court allowing the Potocki’s case to proceed against Wells Fargo based upon a violation of the HOBR.

The question that now exists, is whether this case will ultimately reshape the ability to modify home loans in California going forward? The ruling clearly places an obligation on servicers to be more forthcoming about why a loan might be denied, which in theory, should give borrowers a better ability to understand how the modification options are being measured and give borrowers the ability to conform their applications to the modification requirements of investors. Whether that ultimately happens remains to be seen. We will continue to watch as this case unfolds in the trial court and see what the trial judge ultimately says as the trial unfolds.

The attorneys at BPE Law Group have counseled thousands of Californians related to their loan issues and have significant experience navigating California’s complex foreclosure/lender laws. Every situation is unique. If you or someone you know is facing a loan issue they should seek competent legal counsel to assist.


The attorneys of BPE Law Group, PC. have been advising our clients on real estate, business and estate planning issues for over 20 years and have assisted numerous clients in business and real estate matters and have represented and advised brokers on their professional obligations as well as consumers on their rights. If you have questions concerning legal matters, give us a call at (916) 966-2260 or e-mail Keith at Our flat fee consult for new clients may get you the answers you need for the questions you have.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are facing a legal issue of any kind, get competent legal advice in your State immediately so that you can determine your best options.