Enhancing the Home Affordable Modification Program

\\jciprod01\productn\N\NYS\70-2\nys201.txt unknown Seq: 1 26-JUN-15 11:29 ENFORCING THE HOME AFFORDABLE MODIFICATION PROGRAM JONATHAN A. MARCANTEL* ABSTRACT In 2009 the Secretary of the Treasury (Secretary) implemented the Home Affordable Modification Program (HAMP), a program designed to minimize foreclosures by providing incentives to loan servicers who modify eligible mortgages. Notwithstanding both its design and goal, HAMP has largely failed to achieve its projected impact, due, at least in part, to servicer noncompliance with HAMP’s mandates. Nevertheless mortgagors who are injured by servicer noncompliance lack legal remedies to compel servicer compli- ance, as HAMP lacks a private right of action. Furthermore, and notwithstanding an array of governmental reports specifically finding systemic servicer noncompliance, the Secretary has not exer- cised any available enforcement mechanisms. Consequently unnecessary foreclosures have continued to occur in derogation of HAMP’s goals. As a remedy for both servicer noncompliance and the resulting, negative effect of unnecessary foreclosures, this Arti- cle argues that Congress should enact legislation that provides for a private right of action for violations of HAMP. Introduction ................................................ 122 R I. A Brief Discussion of the Statutory Scheme .......... 129 R II. TARP Claims Based on Federal Law and Their Reception in the Courts ............................. 134 R A. Rights of Action Pursuant to the Statutory Scheme.......................................... 134 R B. Third-Party Beneficiary Claims ................... 137 R * Associate Professor of Law, Charleston School of Law. The author would like to thank the Southeastern Association of Law Schools (SEALS) for permitting him to present an earlier version of this Article at the New Scholars Workshop (2012). The author would also like to thank Professors Timothy A. Canova, William M. Janssen, Paul E. Lund, Richard E. Mendales, Sheila B. Scheuerman, Miller W. Shealy, Jr., William L. Want, and Nancy L. Zisk for their comments, criticisms, and helpful advice on an earlier version of this Article. Finally the author would like to thank Travis Anderson, Valencia Thurman, Julie Jackson- Bailey, Kevin DeAntonio, Lauren Wilson, Michael Gossett, Robert Crabtree, Sean Pearman, Matthew Craft, and Virginia Rogers for their invaluable research assistance. 121 \\jciprod01\productn\N\NYS\70-2\nys201.txt unknown Seq: 2 26-JUN-15 11:29 122 NYU ANNUAL SURVEY OF AMERICAN LAW [Vol. 70:121 1. The Absence of Clear Intent ................. 138 R 2. In the Wake of Astra ......................... 141 R C. Due Process Claims .............................. 143 R D. TPP Claims ...................................... 147 R III. Claims Based on State Law and Their Reception in the Courts ....................... 151 R A. Actions Based in Contract Theory ............... 151 R 1. Actions Based upon Promissory Estoppel .... 151 R 2. Actions Based upon Breach of the Implied Duty of Good Faith and Fair Dealing ........ 156 R B. Actions Based in Tort Theory.................... 159 R 1. Negligence-Based Claims .................... 161 R 2. Intentional Tort-Based Claims ............... 164 R C. Actions Based on a State Statutory Scheme ...... 169 R IV. Oversight and Systematic Noncompliance............ 172 R V. A Proposal, Its Justifications, and Its Elemental Requirements ......................... 176 R A. Clear Language Indicating a Right of Action Exists and Explicitly Defining the Prohibited Conduct ............................. 177 R 1. Misrepresentation-Based Conduct ............ 179 R a. Relaxed Pleading Requirements ......... 179 R b. Modified Elemental Requirements ....... 182 R 2. Eschewing Intent: Scienter and the Intent to Induce Reliance ............................. 184 R 3. Eschewing Objective Reliance ................ 186 R 4. The Remaining Liability Facets: Eligibility Assessment Problems, Communication Problems, and Failures to Transmit .......... 192 R a. Congress’ Goals and Identification of the Remaining Liability Facets ............... 193 R b. The Elemental Requirements of the Remaining Liability Facets ............... 196 R B. A Prevention-Based System of Equitable Relief . 197 R Conclusion ................................................. 200 R INTRODUCTION In 2008 the United States experienced a financial recession that was largely the result of toxic assets—mortgage-backed securi- ties primarily composed of nonconventional loans—,1 freezing the 1. This position is held by prominent economists. See, e.g., Alan Greenspan, The Crisis, BROOKINGS PAPERS ON ECON. ACTIVITY, Spring 2010, at 201, 202 (“The \\jciprod01\productn\N\NYS\70-2\nys201.txt unknown Seq: 3 26-JUN-15 11:29 2014] ENFORCING HAMP 123 liquidity of the credit markets.2 In response the U.S. Congress en- acted the Emergency Economic Stabilization Act of 2008 (EESA).3 The most significant, and perhaps most controversial, piece of the EESA was the Troubled Asset Relief Program (TARP),4 a statutory scheme that granted the Secretary of the Treasury (Secretary) ac- cess to 700 billion dollars5 of Treasury funds to purchase toxic assets from financial institutions and thus reestablish liquidity in credit markets.6 That extraordinary grant of authority, however, global proliferation of securitized, toxic U.S. subprime mortgages was the immedi- ate trigger of the [2008 financial] crisis.”). This position is additionally held by the primary drafter of the Emergency Economic Stabilization Act, Senator Dodd, as well as other congresspersons. See, e.g., 154 CONG. REC. S10252 (daily ed. Oct. 1, 2008) (statement of Sen. Chris Dodd) (stating that the high delinquency and foreclosure rates due to “adjustable rate mortgages, ARMs, interest-only loans, and pay- ment-option ARMs” were mainly responsible for the 2008 financial crisis); see also 154 CONG. REC. S10238–39 (daily ed. Oct. 1, 2008) (statement of Sen. Richard Shelby) (stating that the collapse of the mortgage-backed security market led to the 2008 financial crisis); 154 CONG. REC. H10801 (daily ed. Oct. 1, 2008) (statement of Rep. Jim Langevin) (“[The 2008 financial] crisis originated with faulty lending practices and the creation of subprime mortgages made to people who often could not afford to pay them back.”). See generally STAFF OF PERMANENT SUB- COMM. ON INVESTIGATIONS, S. COMM. ON HOMELAND SEC. AND GOVERNMENTAL AF- FAIRS, 112TH CONG., REP. ON WALL STREET AND THE FINANCIAL CRISIS: ANATOMY OF A FINANCIAL COLLAPSE 1 (Comm. Print 2011) (finding that high-risk mortgage lending contributed to the 2008 financial crisis). For purposes of this Article nonconventional loans shall refer to loans that are either Adjustable Rate Mortgages (ARM) or more generally to loans that originated or were sold on the subprime market. 2. See Greenspan, supra note 1, at 201. 3. Pub. L. No. 110-343, 122 Stat. 3765 (codified as amended at 12 U.S.C. §§ 5201-5261 (2012)). 4. Id. §§ 101–136, 122 Stat. 3767–3800 (codified as amended at 12 U.S.C. §§ 5211–5241 (2012)). 5. Id. § 115(a)(3), 122 Stat. 3780 (codified as amended at 12 U.S.C. § 5225(a)(3) (2012)). This amount was subsequently reduced to 698.741 billion dollars by the Public-Private Investment Program Improvement and Oversight Act of 2009, Pub. L. No. 111-22, § 402(f), 123 Stat. 1656, 1658 (codified as amended at 12 U.S.C. § 5225(a)(3) (2012)), and thereafter further reduced to 475 billion dollars by the Pay It Back Act of 2010, Pub. L. No. 111-203. § 1302(1)(A), 124 Stat. 2133, 2133 (codified at 12 U.S.C. § 5225(a)(3) (2012)). 6. Pub. L. No. 110-343, § 101, 122 Stat. 3765, 3767 (codified at 12 U.S.C. § 5211 (2012)). This section was initially subject to a December 31, 2009, sunset provision. Id. § 120(a), 122 Stat. 3788 (codified at 12 U.S.C. § 5230(a) (2012)). However, it was subsequently extended by the Pay it Back Act of 2010, Pub. L. No. 111-203, § 1302, 124 Stat. 2133, 2133 (codified at 12 U.S.C. § 5225 (2012)). There- after, under the Pay It Back Act of 2010, the Secretary was prohibited from incur- ring any additional obligations that were not initiated prior to June 25, 2010. Id. Nevertheless, portions of TARP—particularly those that focus on the foreclosure crisis—remain active, and thus “the Treasury could potentially disburse TARP \\jciprod01\productn\N\NYS\70-2\nys201.txt unknown Seq: 4 26-JUN-15 11:29 124 NYU ANNUAL SURVEY OF AMERICAN LAW [Vol. 70:121 came with a number of conditions. Specifically, TARP charged the Secretary with creating mechanisms to minimize foreclosures of consumer mortgages7—a “priority” goal of the legislation.8 In conformity with the commands of TARP, in 2009 the Secre- tary unveiled the Making Home Affordable Program,9 which in- cluded the Home Affordable Modification Program (HAMP).10 In the most general sense, HAMP has two primary components. First, it requires any servicer of a loan guaranteed or owned by a government-sponsored entity or insured or guaranteed by a government agency (GSE Loan) to comply with HAMP’s Supplemental Direc- tives and Guidelines (HAMP’s Guidelines).11 Among other things funds under [HAMP] for several more years.” U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-12-229, TROUBLED ASSET RELIEF PROGRAM: AS TREASURY CONTINUES TO EXIT PROGRAMS, OPPORTUNITIES TO ENHANCE COMMUNICATION ON COSTS EXIST 33 (2012). As of this writing, the HAMP application period has been extended through 2015. OFFICE OF THE SPECIAL INSPECTOR GEN. FOR THE TROUBLED ASSET RELIEF PROGRAM, SIGTARP QUARTERLY REPORT TO CONGRESS

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