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Loan Modifications and Minefields

So…you have a high-interest mortgage or an adjustable rate mortgage, and you notice that there are better deals out there. In fact, after the real estate crisis in 2007-08, the federal government encouraged lenders to offer “loan modifications,” and many lenders in fact offered these programs.

The federal government was mostly interested in helping families in distress. The government wanted to avoid foreclosures which could bring down the banks, destroy neighborhoods, and impact families throughout the country. As a result of the policy issues, customers were often told the following:

  1. The bank is more likely to help people who are in distress, so failure to make payments on time may actually improve your chances of getting a loan modification because you will look like you are in financial distress.
  2. The bank has tentatively approved your loan modification, so you can stop making payments until we close your new loan, and we’ll fold the amount you owe then into the new loan balance.
  3. It may take some time to finalize this loan modification, but don’t worry about that.

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All of these “assurances” and “statements” usually come during phone conversations. The customers often do not know the name of the person on the phone, and often the person on the phone is in a “call center” in another state.

When the customer/borrower fails to make timely mortgage payments, the loan goes into default, and the bank then begins foreclosure procedures.

In Comerica Bank v Maniaci and Pricles, LLC, Docket No. No. 321251 (a Wayne Circuit Court case that resulted in an appeal to the Michigan Court of Appeals), the facts were as follows. In 2008, Prickles secured a $277,500 business loan from Comerica that required monthly payments of $2,356.94. The payments included interest and principal, and Cheryl Maniaci personally guaranteed payments that Prickles, LLC (the “Company”) failed to make. On 10/15/13, the loan matured, and then the Company was obligated to have paid it in full.

In late 2012 according to the Court of Appeals decision: “Prickles came upon hard financial times.” In fact, the Company did not make the October, November, or December payments. At that point, John Maniaci (a member of the Company) contacted Comerica representative Mathew Rybinski for assistance. Mr. Rybinski orally informed the Maniacis that he had spoken to Comerica officers Bruce Carlton and John Ryan to discuss the situation. According to Mr. Rybinski, both Carlton and Ryan agreed that the Company could make interest-only payments until the Maniacis were able to sell the company’s commercial property.

After this agreement was reached, John Maniaci contacted Mr. Rybinski by email and instructed him to withdraw the interest payments for October, November, and December 2012 from the Company’s Comerica bank account. Then Comerica employee Angela Cherry contacted Mr. Maniaci by email with information regarding the January and February 2013 interest payments. The company approved the withdrawal of interest payments from its bank account.

On 4/2/13, Cheryl Maniaci contacted Ms. Cherry about the March interest payment. Ms. Cherry responded that Barbara Utterback would be “respond[ing] to your emails going forward[].” Ms. Utterback then refused to accept an interest-only payment for March 2013, and the Company fell into default. At that point, Comerica filed suit against the Company for breach of the loan contract and against Cheryl Maniaci for enforcement of her personal guaranty.

Even though the Maniacis and/or the Company had made five interest-only payments and even though Comerica had orally assured them that interest-only payments were acceptable, the court entered judgment for the bank, and the borrowers appealed.

On appeal, the court noted that common law principles regarding contracts do not apply to financial institutions. If they did, the borrowers might have won this case. Instead, Michigan has a special law that applies to financial institutions. MCL 566.132(2)(b) provides that you cannot sue a financial institution to enforce a promise or commitment to renew, extend, modify, or permit a delay in repayment or performance of a loan unless there is a written promise that is signed by the financial institution’s “authorized” person.

Regardless of which party brings a lawsuit, “the party seeking to enforce a promise or commitment must present evidence that the promise or commitment itself was reduced to writing and properly signed.” See Huntington Nat Bank v Daniel J Aronoff Living Trust, 305 Mich App 496, 508-510 (2014). That means that there must be writing to enforce an agreement and/or a writing to support a defense or counter-claim if the bank sues you. In this case, the assurance that Comerica would accept interest-only payments was “oral.” Further, even though there were follow-up emails regarding the amount, payment, and acceptance of interest-only payments in January, February, and March 2013, those messages were not “signed with an authorized signature by the financial institution.”

The emails did not contain the terms of any alleged loan modification or any statement that Comerica was forbearing on principal-reduction payments. Instead, the Court of Appeals concluded that the messages included only directions regarding the amount and withdraw of interest payments. In the end, the evidence of a loan modification did not comply with the statute of frauds set forth in MCL 566.132.

To most people (and especially to lay people), this outcome seems patently unfair. When you talk to someone from the bank or a “financial institution,” you usually hear a tape recording telling you, “This conversation may be recorded for quality assurance purposes.” It should be possible to get a copy of the phone conversation assuring you that you can skip a few mortgage payments or that you can send in interest-only payments as in the Manciatis did with Comerica. Unfortunately, even if you have 100 hours of tape recordings, that will not be enough to overcome the statute that requires all agreements about loan modifications to be in writing.

There is a take-away from this. If you have a loan from a bank—whether secured by a mortgage or a personal guarantee or both—you must make the payments required by that loan until and unless the bank, in writing, assures you that your loan has been modified. If you do not get such written assurances by someone with authority to give you such assurance (and not just a “Bob” from Comerica’s call center), you may fall into default, have a judgment entered against you, and then lose your home through foreclosure or your life savings through a garnishment. It would be wise to have an attorney represent you during any negotiations for a loan modification.

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