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Cover Letter from Loan Servicer May Unwittingly Change Terms of Forbearance Agreement

In Traut v. Quantum Servicing Corp., on the grounds that a cover letter accompanying a forbearance agreement may have altered the terms of that agreement, the Massachusetts federal court denied a loan servicer's motion for summary judgment in a lawsuit where the borrowers claimed breach of contract arising out of a loan modification agreement. The forbearance agreement required an additional down payment and six monthly installment payments. The cover letter to that agreement stated that the loan "will be modified," modification documents "will be generated" and some of the arrearage would be forgiven if six monthly payments were made. The servicer did not permanently modify the loan because two of the six payments on the forbearance agreement were late resulting in a breach.

On summary judgment, the servicer argued that the Massachusetts parol evidence rule excluded the cover letter as extrinsic evidence, because the letter contradicted the terms of the forbearance agreement and because the forbearance agreement included an integration clause meaning it was the only agreement made with the borrowers. The court, however, ruled that the borrowers created a genuine issue of material fact as to whether the cover letter formed part of the forbearance agreement simply because the letter accompanied the forbearance agreement.

The court's decision is noteworthy because the evidence established that the borrowers did not make six timely payments, which appeared to have been a prerequisite for permanently modifying the loan. The decision points out that borrowers could only submit that they were not late on at least one of the six payments in question, and the servicer confirmed that it did not honor the forbearance agreement due to late payments. Despite this, the court held that the borrowers raised a genuine of material issue of fact as to whether at least one of the payments was timely. In the end, the court was unwilling to strictly apply the parol evidence rule perhaps because of the bargaining difference between the plaintiffs, who were two individuals, and the servicer, which was a large company. The parties recently filed a notice of settlement, so an appeal of this decision appears unlikely.

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