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Mortgage bankers afraid Montana case could open up Pandora’s box of risk

Homeowners claim verbal loan mods are sufficient

pandorasbox

Montana’s Supreme Court is about to hear oral arguments in a case that has the potential to disrupt the legal concepts governing mortgage contracts nationwide, mortgage bankers claim in a brief filed with the state’s highest court.

The case, which is scheduled for oral arguments, involves a couple who are challenging a Bank of America (BAC) default notice on the grounds that they were verbally offered a loan modification over the phone only to later face default.  

The plaintiffs, Abraham Morrow and Betty Jean Morrow, filed the case against Bank of America, BAC Home Loans Servicing and Countrywide Home Loans.

The couple sued Bank of America making claims under the Montana Consumer Protection Act, while also asserting claims of fraud, negligent misrepresentation, negligence and breach of contract.

The state’s supreme court will be asked to decide whether an oral modification of a written real estate loan agreement can be implemented if it has not been signed, notarized and recorded.

The Montana Bankers Association filed a brief in the case stating that an oral modification would go against the statute of frauds, which requires real estate contracts of this nature to be in writing.

It also has the potential to "open Pandora’s box and inject uncertainty into the lending environment which would increase community banks’ costs and ultimately, the cost of capital for borrowers," the Montana Bankers Association argued in its friend of the court brief.

The couple claims a BofA representative induced them to skip a mortgage payment, pushing them into default. The couple claims they were told skipping the payment would result in them receiving a modification. Instead, they ended up in default and filed the case, according to their claims in court records.

A lower court agreed with BofA, holding that any modification to a mortgage agreement needs to be in writing. The couple is appealing the case to the highest court, sparking concerns that allowing an over-the-phone modification would lead to an influx of cases and a massive undermining of established real estate law.

The Montana Mortgage Bankers Association pointed out that the statute of frauds, which requires formalities to be followed in making modifications, has been around since 1677 and requires real estate loan agreements to be in writing.

The MBA writes, "If these formalities are ignored and oral modifications are allowed, uncertainty and confusion will reign. These formalities are the foundation of our economy and the community banking system."

Oral arguments in the case are scheduled for Wednesday morning.

A list of all documents tied to the case is available online.

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