The Appellate Division of the New Jersey Superior Court recently decided the case of Marra v. Wells Fargo Bank, N.A., No. A-5747-11T2, which concerned modifications of residential mortgage loans. This case gives us insight as to the factors courts will consider to determine when a borrower is entitled to a loan modification under the Home Affordable Modification Program (“HAMP”). The court decided the borrower here was not, and affirmed dismissal of the case.

The plaintiff in this case defaulted on his residential mortgage and approached his mortgage company regarding a loan modification. The bank informed plaintiff that he might qualify for a loan modification under the federal HAMP program. The bank explained to plaintiff that a HAMP modification would entail a two-step process. The lender would first verify plaintiff's income while it allowed plaintiff to participate in a Trial Period Plan (TPP). Then, if plaintiff qualified under the HAMP, the bank would finalize HAMP loan modification terms. Thus, obtaining a loan modification under the HAMP was conditioned on confirmation of plaintiff's income and eligibility. The bank deemed plaintiff unqualified for the HAMP, and the parties therefore never reached the second step of HAMP process. Thereafter, and of great significance to the outcome, the parties then agreed to a non-HAMP modified loan. This agreement allowed the plaintiff to remain in his house. Unfortunately, plaintiff then defaulted under the non-HAMP modification loan. The plaintiff then filed suit and alleged he was entitled to a HAMP loan modification. Both the trial judge and the appellate court disagreed.

In reaching its decision, the court pointed out that the TPP contained clear language that explained that it was the first step of a two-step process; mere participation in the TPP was not enough. As a condition precedent to the creation of an enforceable HAMP loan modification, the bank had to sign and deliver either a TPP or a HAMP modification agreement. The fact that the bank did not do so was undisputed and fatal to plaintiff’s case.

To protect against similar claims, all banks should consider using the same conditional loan modification formation language as was used in this case, in their own TPPs and related documents.