When is a loan modification that reduces the borrower’s interest rate fraudulent and not “benevolent” under the UCC? Maybe when the lender extends the loan repayment period or procures a guaranty from HUD, according to one federal district court.
A husband and wife took out a mortgage. After their divorce, the ex-wife agreed with the lender to modify the mortgage to lower the interest rate by 2%, allegedly without the knowledge or consent of her ex-husband. The lender considered the husband obligated to make the modified mortgage payments and reported him to credit reporting agencies when payments were missed.
The ex-husband brought claims against the bank for breach of contract, violation of the Fair Credit and Reporting Act and defamation. He asserted he was discharged from the mortgage due to the loan modification.
The lender moved to dismiss the case at the outset by arguing that as a matter of law the refinancing was not a material alteration of the loan agreement and therefore the credit report was accurate. The district court denied the motion, thus allowing all the claims to proceed to discovery and a future factual resolution, based in large part on its interpretation of UCC § 3-407.