Loan Modifications: How Banks Require Struggling Homeowners to Waive Rights

A few months ago, Bank of America offered Sergio Cortez of Staten Island, N.Y., the help he desperately needed to stay in his home: a break on his mortgage. Like millions of others, he was facing foreclosure. But there was a catch buried in the fine print. Cortez had to waive any possibility of ever suing the bank for anything relating to the loan.

Cortez isn’t alone. While regulators have banned the practice, some banks and others who handle mortgages have still been forcing homeowners into a corner: You want a chance at saving your home? Then you’ll have to waive your rights.

“It’s just unfair,” said Jane Azia, director of consumer protection for the New York State Banking Department. “It puts borrowers in a very vulnerable situation.”

We identified eight banks and other mortgage servicers who offer help that limits homeowners’ ability to sue or fight foreclosure. When we contacted them, they offered a variety of responses. Some said the inclusion of the waivers had been a mistake and would stop. Some argued that language that seemed to waive the homeowner’s rights didn’t actually do so. One argued that a loophole in a rule barring the practice meant their inclusion in certain agreements was proper.

Homeowners face a tough choice with these offers. Despite the overwhelming need, it remains a struggle for borrowers to get help. Any offer might be the last one to come along. Yet if a homeowner signs away their right to sue, they might be forfeiting the best leverage they have to get a lasting solution, borrower attorneys say.

The companies that handle mortgage payments and evaluate whether to modify a loan or foreclose — known as mortgage servicers — have been facing a rising tide of litigation by homeowners for their widespread abuses and violations of law, giving them motivation to want to head off more suits. The companies’ problems range from long delays, errors, and lost documents when reviewing homeowners for modifications to violations during the foreclosure process, such as the use of so-called “robo-signers” and forging of documents.

“I’m troubled, but not surprised, that this is still occurring,” said Rep. Maxine Waters, D-Calif., who has been pushing a bill to ban these waiver clauses since 2008. “The mortgage servicing industry has been broken for quite some time and needs substantial reforms.”

Borrower attorneys and counselors told ProPublica that such waiver clauses, which were once standard practice for banks and mortgage servicers, declined markedly after the Obama administration launched its mortgage modification program in early 2009. The program forbids the practice for government-sponsored modifications.

But fewer modifications are now done through the program, and some of the industry’s old practices have been making a comeback — despite regulators’ efforts. It’s impossible to say precisely just how common the clauses are now, but attorneys said there was no doubt they were seeing more of them lately. (If you’re a homeowner who received an agreement with a waiver clause, ProPublica wants to hear from you.)

In New York, regulators banned waiver clauses in modification agreements last year, but ProPublica found several examples of banks and mortgage servicers like Bank of America continuing to include such clauses in temporary payment agreements.

Recently, for example, two homeowners working with a legal aid organization in the Bronx received temporary payment agreements from two different servicers that required the borrower to waive any potential defense to foreclosure. Both companies, Selene Finance and Carrington Mortgage Services, specialize in handling troubled or subprime loans.

What made the agreements particularly unfair, said Justin Haines, director of foreclosure prevention at Legal Services NYC in the Bronx, was that they required his clients to waive rights without receiving a permanent solution.

The offers were forbearance agreements, which typically last three to six months and are frequently used by servicers as short-term solutions. They can be a prelude to an actual modification but offer no guarantee of one if all the payments are made, and they explicitly state that if a foreclosure is pending, it won’t be dismissed.

“The agreements are extremely one-sided and offer no real benefit for the borrower,” Haines said. “If these borrowers did not have attorneys to advocate for the removal of this language they would just be regularly waiving their claims for nothing.”

The overwhelming majority of homeowners facing foreclosure don’t have legal representation, said Diane Thompson of the National Consumer Law Center. The legal aid organizations that do offer such services are overwhelmed, she said, and “few homeowners facing foreclosure make enough to hire an attorney.”

On the face of it, both agreements seem like clear violations of a recent New York state regulation: “A Servicer shall not require a homeowner to waive legal claims and defenses as a condition of a loan modification.”

But Owen Blicksilver, a spokesman for Selene, argued that the regulation forbade only loan modifications from including such language, not the more short-term forbearance agreements.

State regulators said while that may technically be true, it didn’t mean such clauses would be allowed. “Even if we had no rule, we would find a problem with requiring borrowers to waive their legal claims in a forbearance or a modification,” said Azia, of the New York State Banking Department.

Despite the company’s stance, Selene did remove the clause from the agreement after Legal Services NYC objected, Blicksilver said, because “we were committed to a good faith resolution.”

Chris Orlando, a spokesman for Carrington, did not defend the practice. “Any reference to such a waiver has been removed from our documents.”

There have been other examples. In January, HSBC, which services approximately 340,000 mortgages throughout the United States, offered a client of Wendy Dolce, an attorney with the City Bar Justice Center in New York, a payment plan with a similar clause.

“It’s something that I would never counsel a client to sign or accept,” said Dolce.

Neil Brazil, a spokesman for HSBC, said the bank doesn’t include any rights waiver in its standard modification agreements, but that attorneys pursuing foreclosure on its behalf might include them when offering a homeowner a forbearance plan. Brazil declined to say if HSBC included the clauses more generally. He emphasized that HSBC had been working with the borrower for over two years.

Bank of America, the country’s largest servicer, included similar language in agreements late last year not only in New York, but several other states.

It’s not a new practice for Bank of America. Back in July 2008, Rep. Waters confronted Bank of America executive Michael Gross over the practice during a congressional hearing. When Gross said he wasn’t aware that the bank had ever required that borrowers waive their rights, Rep. Waters read out an excerpt from a Countrywide agreement. Bank of America had bought Countrywide that year.

After hearing the excerpt, Gross apologized and promised the issue would “be under review by Bank of America very quickly.”

But ProPublica spoke to attorneys in New York, Maine, Connecticut, Indiana and North Carolina who received agreements with waiver clauses from Bank of America in the last year. In four cases, the clause was word-for-word the same as the one discussed in the 2008 hearing, a lengthy paragraph involving a release of all of Bank of America’s “investors, employees and related companies from any and all claims.”

Bank of America’s language even waives the right to invoke a California law that limits the scope of waiver clauses, “so that this release shall include all and any claims whatsoever of every nature concerning the loan.”

Cortez, the homeowner from Staten Island, had been trying to get a loan modification since 2008, ever since his monthly payments had doubled and his son, who lived in the home, lost his job. He said he probably would have signed the forbearance agreement if he hadn’t had legal representation, since any offer at all from Bank of America had been so difficult to come by.

“I might have signed it, but that would have been worse for us. I’ve heard of people who signed their three-month agreement and then don’t get their modification and then get foreclosed on.”

When Cortez’s attorney objected to the clause, the bank initially resisted removing it. At a court hearing in January as part of New York’s foreclosure settlement process, Bank of America’s attorney said it was standard language for the bank’s agreements and shouldn’t be removed, said Diane Johnston, a paralegal at Staten Island Legal Services. The agreement was eventually withdrawn. Having resubmitted their documents once again, Cortez’s family is still waiting to hear whether they’re getting a modification.

Rick Simon, a spokesman for Bank of America, said it wasn’t standard to have a waiver clause in its agreements, and there’d simply been a mistake.

Bank of America had stopped the practice back in 2008, he said, but a “specialized unit of the home retention division” had been mistakenly sending out agreements with the waiver language last year. “The mistaken presence of waiver clauses in some agreements appears to be limited to the unit and was discovered in December. The situation was rectified in January.”

Asked about a North Carolina case where a modification agreement offered in March contained similar waiver language — two months after the problem was “rectified” — Bank of America’s Simon said that, too, had been a mistake.

“In the interest of expediting the modification, a previous template for a similar modification was used,” Simon said.

Rochelle Sparko, an attorney with the North Carolina Justice Center, said the homeowner involved had been seeking a modification since 2008.

“In cases where a waiver is mistakenly included in a modification or forbearance agreement, it is not the bank’s policy or intent to enforce it,” said Simon.

Borrower attorneys say that in some cases there’s language in the agreements that doesn’t constitute an explicit waiver but that could have the intended effect of restricting a homeowner’s defense to foreclosure.

GMAC, for instance, the fifth-largest servicer, which oversees about 2.5 million mortgages, includes a clause in its modification agreements that the “Borrower acknowledges that Lender is the legal holder of the owner of the Note and Security Instrument.”

Franklin Romeo, an attorney with Queens Legal Services, said he’d objected to the clause on behalf

of his client because there is some doubt about who the legal holder is. Last September, GMAC suspended foreclosure evictions and sales in 23 states after the revelation over its use of “robo-signers,” employees who signed thousands of documents each month falsely swearing that they’d personally verified the details of the mortgage. In the case of Romeo’s client, one key document is signed by one of those robo-signers.

“My concern is that, if the borrower were ever to face another foreclosure in the future, the lender would argue that this paragraph would preclude the borrower from challenging the way in which the lender acquired the note and mortgage even though, in this case, we believe the assignment transferring the mortgage to the lender was faulty,” Romeo said.

Azia, of the New York State Banking Department, said given the vagueness of the language, it wasn’t clear whether the clause was meant to act as a waiver. But if GMAC relied on it to preempt a borrower’s defense, she said, it would clearly be a violation of the state rule.

GMAC did not respond to a request for comment. Romeo said the bank had so far resisted removing the clause.

GMAC is not alone. Citibank’s servicing arm, the fourth-largest servicer, included a very similar clause in a recent modification agreement with another client of Queens Legal Services.

Mark Rodgers, a spokesman for Citi, said the language “does not waive any rights to claims or defenses. It requires the borrower to acknowledge that the lender is the owner of the note, and that should the note be transferred, the new owner will be entitled to payments. We believe the language is appropriate.”

A case in Florida shows how servicers can invoke such waivers to smooth the way to foreclosure — even when servicer error is the apparent cause of default.

Facing foreclosure in August 2008, Joseph and Myrna Strain of St. Augustine, Fla., signed a modification agreement with American Home Mortgage Servicing, Inc., a large servicer that handles about 430,000 mortgages. It contained a waiver clause.

“My client had no choice but to agree it,” said Chip Parker, the couple’s attorney. “Otherwise they were going to foreclose on the home.”

Parker says the Strains made the payments as agreed, but that American Home did not credit them correctly, a common mistake by servicers. As a result, American Home started the foreclosure process again in 2009.

On the Strains’ behalf, Parker raised a number of defenses to the foreclosure. In response, the servicer’s attorney pursuing foreclosure argued that the waiver signed in 2008 precluded any defense: “Defendants expressly waived the right to challenge or contest the foreclosure process.”

“They were clearly relying upon the waiver language to try and get around all of the very complex securitization problems plaguing their case,” said Parker. Furthermore, he said, it didn’t make sense to rely on a waiver that was part of an agreement American Home had breached by not properly handling the payments.

Early in April, shortly before the foreclosure suit was about to go to trial, American Home’s attorney suddenly dropped it. The Strains, meanwhile, are pursuing a countersuit.

American Home spokeswoman Philippa Brown said the company could not respond to the specifics of the Strains’ case because it is in litigation. She said American Home no longer includes that waiver clause in its agreements but continues to use another clause from the Strains’ agreement: That language says the borrower has no “defense to the obligations of the note.”

Brown argued the language in the clause “is not a waiver” because it did not expressly waive the borrower’s rights.

But Azia, of the New York Banking Department, said it sounded like a waiver to her. “That’s exactly what a waiver is — a relinquishment of your claims and defenses.”

It’s unclear whether such clauses are ultimately successful in blocking homeowners’ challenges to foreclosures. Many attorneys said the waivers might not hold up in court because they sought to waive rights that couldn’t be waived (like whether the bank even had the right to foreclose). The inherent unfairness of the tactic might also get them thrown out. But all of them said it was particularly unfair to homeowners without legal representation.

“It’s a horrible tactic by the banks because most homeowners give up,” said Parker.

–Paul Kiel, ProPublica, in association with Slate.