A Step Back From the Precipice: Wrongful Foreclosure Reconsidered
On September 18, 2014, in Frias v. Asset Foreclosure Services, et al., the Washington Supreme Court held that no cause of action for wrongful foreclosure exists under the Deed of Trust Act until after a foreclosure sale occurs. This decision overrules the August 2013 Court of Appeals decision in Walker v. Quality Loan Service Corp. of Washington. As to claims under the Consumer Protection Act (“CPA”), both Frias and Walker hold that the aggrieved borrower may still be able to assert claims where no foreclosure sale has taken place, although Frias significantly narrows the kinds of damages for which compensation may be sought.
Why This Matters
Liability and damage risks under the Deed of Trust Act are materially diminished for lenders during a flawed foreclosure process and prior to the sale. Nevertheless, liability risk remains with regard to claims brought under the Consumer Protection Act, where the greatest actual cost may be the attorney fee claim by the borrower’s counsel.
Frias and Walker both remind us that foreclosure sales end up in the appellate courts when the note-holding lender is disengaged from the process, often when MERS is involved. Ms. Frias was a U.S. Bank borrower in default on her loan and pursued a loan modification. Even while the bank considered her request for modification, Ms. Frias received a notice of default and notice of trustee’s sale. This initial sale was discontinued pending the loan modification discussions. Then, a new notice of trustee’s sale was issued, which would have required Ms. Frias to pay a slew of fees to cure the default, even though some of those fees would not be incurred until after the conclusion of the foreclosure sale and would have been avoided by the cure. After this second notice of sale, Ms. Frias received a loan modification offer from U.S. Bank, but one which she could not afford.
With the foreclosure sale pending, Ms. Frias pursued mediation under the Foreclosure Fairness Act. U.S. Bank failed to show up for the first mediation date. By the second, rescheduled mediation date, the foreclosure sale had already occurred. U.S. Bank committed to reversing the wrongful foreclosure sale, and a third mediation date was scheduled. At the third session, U.S. Bank arrived without the necessary documentation and refused to further consider a loan modification. The mediator concluded that U.S. Bank had not participated in mediation in good faith.
The Court’s Analysis
The Supreme Court concluded that the legislature intended to preserve claims arising from a process leading up to a completed foreclosure sale which had not complied with the Deed of Trust Act, but that there was no indication whatsoever that the legislature intended to create or allow claims under that statute when no sale had yet occurred. An aggrieved borrower still has pre-sale remedies under the Deed of Trust Act to enjoin a foreclosure sale prior and may assert claims for damages following a sale pursuant to RCW 61.24.127.
The Court also held that a borrower may pursue a claim for damages under the Consumer Protection Act (as distinct from the Deed of Trust Act) for a wrongful foreclosure, regardless of whether the sale ever takes place. The Court noted, however, that compensable injuries under the CPA are limited to injury to the borrower or grantor in his or her business or property—which excludes claims for personal injury, mental distress, embarrassment and inconvenience.
Under this reasoning, borrowers may have a claim for recoverable damages arising from the lender’s refusal to participate in mediation in good faith, if a favorable loan modification could have otherwise been obtained. Borrowers may also be entitled to equitable relief in the form of striking unreasonable fees and damages for the cost of investigating and repudiating fees of the kind demanded by the lender or trustee in Frias.
In sum, while remedies exist for borrowers under the CPA, they are decidedly limited, and relate to specific economic injury rather than the broad, vague noneconomic losses commonly claimed. Recall, however, that under the CPA, if a borrower were to prevail, he or she would be able to recover attorney fees and costs as well, which could dwarf the actual economic recovery.