Can Litigation Result from COVID-19 Deferred Mortgage Payments?

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Duane Tyler, head of litigation at Moore Brewer Wolfe Jones Tyler & North.

As a result of the Covid-19 pandemic, credit unions and other financial institutions are offering mortgage payment relief through modifications or skip a pay programs.  Generally, two or three monthly payments are being deferred to the end of the deferral period, or are being moved to the end of the loan either as a balloon payment or by extending the maturity date by adding the two or three payments to the end of the loan.  The number of applications for mortgage relief has required an all hands-on deck effort to timely respond to and assist members facing financial stress due to loss of income. 

There’s an old saying that no good deed goes unpunished.  Despite this valiant effort to assist members who face financial issues as a result of governments’ shut down of many businesses, it is not a stretch of the imagination to expect claims and lawsuits alleging failures in that effort. As credit union counsel, we have seen class action type claims in the past against multiple credit unions based on auto loan Notice of Intent to Sell Personal Property, GAP coverage, an alleged violation of the Americans with Disabilities Act, and other purported claims despite credit unions’ compliance with applicable law. 

So, what type of claims might follow mortgage modifications or skip a pay agreements deferring mortgage payments? For example, by deferring two or three loan payments either 90 days or to the end of the loan, the principal balance of the loan will not be reduced as it would have if the payments were made under the original amortization schedule.  The higher principal balance will result in increased interest charges over the life of the loan.  Could a consumer attorney later claim on a class-wide basis that members are not liable for the increased interest (and of course also claim exorbitant attorney fees in prosecuting such a claim)?  The answer is consumer attorneys are likely analyzing potential claims as you read this article.  Unfortunately, there is little you can do to stop a claim from being filed, but you can take steps now to maximize your ability to defend against and defeat such claims, and if your apparent defense is strong enough you may potentially convince a consumer attorney not to file it. 

Of course, modifications and skip a pay agreements are governed by statute and regulations.  Obviously, any such modification or skip a pay agreement must comply with those laws and you should consult with your counsel to ensure compliance. 

In addition, mortgage modifications and skip a pay programs are contractual agreements.  Contract claims in lawsuits allege that the defendant breached a term of the contract.  Therefore, to defeat and possibly avoid a breach of contract claim it is imperative that mortgage modification or skip a pay agreements you enter into with your members clearly disclose the terms, and to the extent reasonably possible, the effect of the modification or skip a pay.  This is not always easy, as predicting all possible effects of an agreement is difficult.  Unforeseen collateral effects are not easy to predict.  The increased interest impact of deferred mortgage payments referenced above is apparent and should be included in the disclosures that accompany your mortgage modification or skip a pay agreements.  Another potential impact involves shortages in impound accounts for taxes or insurance.  Your disclosures and agreements should disclose the need to make those payments so the impound accounts have sufficient funds to timely make taxes and insurance payments. Also, GAP and disability coverage may lapse if the term of the loan is extended rather than providing for a balloon payment on the original maturity date.

Credit unions should get input from the employees in the departments in your credit union that could be impacted by deferred mortgage payments and with credit union counsel in order to ensure that disclosures and agreements with members provide as much information as possible on the impact of deferred payments.  By doing so, you could possibly avoid future litigation and certainly put your credit union in the best position to successfully defend any such claim.

Article by Duane Tyler, Head of Litigation at Moore Brewer Wolfe Jones Tyler & North.  

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