New Foreclosure Defense: Bank’s Misconduct with Loss Mitigation Applications

In August 2019, the Connecticut Supreme Court confirmed that a bank’s misconduct in handling post-default loss mitigation applications can be a defense to foreclosure. More specifically, the court’s decision in U.S. Bank v. Blowers expands the “making, validity, or enforcement” test for the legal sufficiency of foreclosure special defenses and counterclaims to include a bank’s wrongful conduct in loss mitigation negotiations.

This is a big change from prior law, which seemed to say that nothing that happened after the mortgage documents were signed ever could satisfy the test. That made sense for the “making” and “validity” aspects. Anything that leads up to the signing of the documents is part of their “making.” After that, the documents are no longer in the making; they are are “made.” And, “validity” is determined at the time of the signing. The documents are either valid or invalid at that point.

But this idea that no post-signing conduct could satisfy the test made no sense for the “enforcement” aspect. You can’t enforce an unsigned loan document. All enforcement activity must take place after signing. So, in effect, the courts were applying the test in a way that wrote “enforcement” right out of it.

The Supreme Court recognized the problem and fixed it. Now, “enforcement” includes allegations of harm from the bank’s misconduct in handling loss mitigation applications, provided the bank’s conduct materially added to the debt and substantially prevented the mortgagor from curing the default. A mortgagor may defend itself with allegations that the bank “wrongly and substantially increased the mortgagor’s overall indebtedness, caused the mortgagor to incur costs that impeded the mortgagor from curing the default, or reneged upon modifications.”

Though allegations like this may be difficult to prove, the right to try is a victory in itself.

Click here to learn about another important foreclosure defense – predatory lending – that the Connecticut Appellate Court gave us in 2016.