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Gilberto Mendez, On Behalf of Himself and All Others Similarly Situated v. Bank of America Home Loans Servicing

January 14, 2012

GILBERTO MENDEZ, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
v.
BANK OF AMERICA HOME LOANS SERVICING, LP, A SUBSIDIARY OF BANK OF AMERICA, N.A.,
DEFENDANT.



The opinion of the court was delivered by: Spatt, District Judge.

MEMORANDUM OF DECISION AND ORDER

The Plaintiff in this case, Gilberto Mendez, brings this action against the Defendant Bank of America Home Loans Servicing, LP, a subsidiary of Bank of America, N.A. (the "Defendant" or "BAC"), on behalf of himself and all others similarly situated, alleging common law claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and promissory estoppel, as well violations of the New York General Business Law § 349. The Defendant has filed a motion to dismiss the Plaintiff's claims pursuant to Federal Rule of Civil Procedure ("Fed. R. Civ. P.") 12(b)(6), for failure to state a claim upon which relief can be granted. For the reasons set forth below, the Court grants the Defendant's motion in part and denies it in part.

I. BACKGROUND

The following facts are drawn from the Plaintiff's complaint and the documents that were incorporated by reference in the complaint. See Doherty v. Am. Home Prods. Corp., 216 F.3d 1071, No. 99 Civ. 9533 (Table), at *2 (2d Cir. 2000) ("We also consider the Option Plans and April 11 letter because they are referenced in the complaint and form the sole basis for the complaint."); Steger v. Delta Airlines, 382 F. Supp. 2d 382, 385 (E.D.N.Y. 2005) ("Because the Plan is directly referenced in the complaint and is the basis of this action, the Court may consider the Plan in deciding the motion to dismiss.").

A. The Alleged Mortgage Modification Agreement

The Plaintiff, Gilberto Mendez, is a homeowner with a mortgage on his primary residence. For several years prior to April 2009, this mortgage was serviced by Countrywide Home Loans Servicing LP ("Countrywide"). As of March 23, 2009, Mendez had fallen three months behind on his monthly mortgage payments, which totaled $2,794.50 per month. Therefore, the Plaintiff requested a loan modification from Countrywide. On March 26, 2009, Mendez received an offer from Countrywide entitled a "Step Rate" home loan modification offer, which was part of Countrywide's Homeownership Retention Program. This offer provided a ten year interest only payment period and would reduce the Plaintiff's monthly mortgage payments to approximately $984.94, plus taxes and insurance. It would also resolve any past due amounts. After the ten year payment period expired, Mendez would be required to make monthly payments of combined principal and interest according to a specific interest rate schedule as set forth in the offer.

Of particular importance, the offer letter sent by Countrywide to the Plaintiff stated that:

To Accept the Enclosed Modification, Here's What You Need To Do

1. Carefully review all documentation enclosed. . . .

2. Sign and date the enclosed document in the presence of a notary. .

3. Include any and all of the following income information applicable to your situation with your signed and notarized loan-modification agreement:

a. Copies of two recent . . . paystubs for each income earner, and/or

b. Copies of your past three banks statements if . . . you are self-employed, or if you have any other sources of Income . . .

4. Return the signed documents to us in the pre-paid FedEx envelope no later than April 26, 2009 in order for it to take effect.

(Def. Ex. 1) (emphasis added). In addition, under a section of the offer titled "Important Terms", the offer stated to "Remember to include copies of your paychecks and/or bank statements along with your loan modification documents in the Federal Express envelope by the date indicated above." It also specified "that this offer is contingent upon verification of your income. Even if you sign and return the loan modification documents; this modification will not take effect if we are not able to verify your income."

The Complaint alleges that "Mendez signed and accepted the offer, had his signature notarized, and returned the executed agreement to Countrywide in April 2009." (Compl. at ¶ 11.) It goes on to state that at some time after returning the executed loan modification agreement to Countrywide, at an unspecified date, Mendez called to inquire about his loan modification and was told that Countrywide was now operating as BAC. The Defendant told Mendez that certain documents necessary to support his loan modification, such as his income statement, were missing and/or had not been received by BAC. Mendez alleges that he promptly provided the requested documents to the Defendant.

In June 2009, and for at least the next three months, the Plaintiff began making mortgage payments to the Defendant in the amount set forth in the loan modification agreement with Countrywide. However, BAC refused to accept these mortgage payments and returned them to Mendez because according to the Defendant, they were partial payments that did not satisfy the original amount due under his mortgage agreement. The Defendant then continued to bill Mendez at approximately $2,794.50 per month, plus late charges of approximately $41.68 per month for the months that he had not paid the $2,794.50 amount in full.

By August 2009, Mendez had again fallen seven months behind on his mortgage payments. When he spoke to the Defendant at that time regarding his monthly payments and the Countrywide loan modification agreement, they directed him to apply for a new loan modification agreement with BAC. He did as instructed and provided all of the necessary documentation in support of his new loan modification application.

Over the next year and a half, Mendez went through the process of applying for a loan modification with the Defendant multiple times. Each time, according to the Plaintiff, BAC would tell him that it needed additional paper work and/or that certain paperwork was missing and needed to be submitted. Often, this paperwork was duplicative documentation that the Defendant already had in its possession. In addition, the Plaintiff alleges that the Defendant in its communications often promised to resolve the Plaintiff's loan modification applications but did not do so in a timely manner.

For instance, on or about January 25, 2010, BAC sent Mendez correspondence that confirmed it had received financial documents in support of his loan modification. A letter sent to Mendez stated "Your request for assistance, along with your personal financial information, has been received. . . . be aware that receipt of your documentation starts the review process, which may take up to 45 days to complete." (Compl. at ¶ 16.) However, according to the Plaintiff, BAC did not complete the review process within 45 days as promised. Moreover, nearly identical letters were sent to the Plaintiff on March 15, 2010 and April 13, 2010, although both times BAC once again did not complete the review process within 45 days as promised. The Plaintiff claims that the futileness of the process was especially highlighted and caused in part by the incompetence and inconsistency of BAC's employed representatives.

In sum, although Mendez claims he "has timely provided BAC with all requested documentation, including utility bills, bank statements, income statements and tax filings, and has submitted the requested documentation multiple times to BAC, BAC has refused to honor the terms of his ten year loan modification with Countrywide or provide Mr. Mendez with a new loan modification." (Compl. at ¶ 24.) As a result, Mendez's monthly mortgage payments are now greater than his original monthly mortgage payments with Countrywide because of late fees, interest and other default related servicing fees.

B. The Default Related Servicing Fees

In addition to claims relating to his loan modification agreement, the

Plaintiff alleges that BAC charged him excessive and unlawful default related servicing fees, including monthly inspection fees ranging in amounts from $15 to $195.

Default related services are those that protect a lender's interest in the property, such as property inspections in order to verify whether a home is occupied. The standard mortgage contract between a borrower and a servicer allows the servicer to pay for such default related services when necessary and appropriate, and to have these fees reimbursed by the borrower. However, under the terms of the standard mortgage contract, those fees must be reasonable or appropriate to protect the note holder's interest in the property and rights under the security instrument.

However, mortgage servicers have been accused of not consistently charging borrowers "reasonable or appropriate" default related services fees. For example, Countrywide, when still in existence, did not obtain default related services directly from third-party vendors and then pass that exact cost onto borrowers. Rather, according to the Plaintiff, it formed subsidiaries to obtain the services from third-party vendors and then the subsidiaries charged Countrywide a significantly higher fee, which was then passed on to homeowners. (Compl. at ¶ 29.)

As a result of this behavior, on June 7, 2010, the Federal Trade Commission ("FTC") brought a civil enforcement action in the United States District Court for the Central District of California against Countrywide Home Loans, Inc., and BAC, formerly doing business as Countrywide Home Loans Servicing, LP, for charging borrowers excessive and unlawful fees for "default related services." See FTC v. Countrywide Home Loans, Inc., and BAC Home Loans Servicing, LP, No. 10 Civ. 4193 (C.D. Cal. 2010) (the "FTC Complaint"). In particular, the FTC alleged that the Defendants violated its mortgage contracts with borrowers by (1) charging substantially marked up default related servicing fees in excess of the actual cost of the services; and (2) charging for services that were not reasonable and appropriate to protect the note holder's interest in the property and rights under the security instrument. The FTC Complaint alleged that this was especially problematic because the homeowners in default lacked meaningful bargaining power: they had no choice as to what default related services were performed, the cost therefore, or who performed the services.

One week after the filing of the FTC Complaint, a stipulated Consent Judgment and Order was entered on June 15, 2010, which provided that the Defendants would immediately cease and desist charging homeowners marked-up and unnecessary default related fees. As part of this judgment, BAC was required to make clear and prominent disclosures on its website as to the prices charged to homeowners for default services. (See Consent Judgment and Order, Pl. Ex. C, at 9-10) ("This Fee Schedule shall include a description of the Fees that may be charged, the amount or, where applicable, the range of each Fee, and if the Fee will or may be paid to an Affiliate, a disclosure of that fact and the names of the affiliated services providers. . . .")

The Plaintiff now alleges that BAC has again violated the mortgage contracts and the 2010 Consent Judgment and Order by charging borrowers such as the Plaintiff for "marked-up" default services "at prices well in excess of the actual cost of the services performed and also by charging for services, including monthly property inspections, that are not reasonable or appropriate to protect the note holder's interest in the property and rights under the security instrument." (Compl. at ¶ 33.) For example, BAC's website provides a price list for "Default Related Service Fees" and it states that it will charge between $14 and $26.25 for the inspection of property. However, BAC charged the Plaintiff inspection fees as high as $195 in February 2011. (Compl. at ¶ 45.)

C. Procedural History

On March 28, 2011, the Plaintiff Mendez, on behalf of himself and all others similarly situated, filed this Complaint against the Defendant BAC alleging breach of the loan modification contract; breach of the implied covenant of good faith and fair dealing; promissory estoppel; breach of the original mortgage contract; and violation of the New York General Business Law ("GBL") § 349.

On June 14, 2011, the Defendant filed a Motion to Dismiss each of the five ...


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