Can An Unexecuted Loan Modification Coupled With Performance Satisfy The Statute Of Frauds? A Simple Step Can Help Your Financial Institution Avoid Being The First To Find Out In Texas.

No Texas Court has considered whether a written offer to enter into a loan modification satisfies the requirement under Texas law—known as the statute of frauds—that all loan agreements over $50,000 must be in writing and signed by the party to be bound.  However, the Fifth Circuit's June 5, 2017 opinion in Owens v. Specialized Loan Servicing, L.L.C. mentions this issue and leads to the suggestion that lenders and servicers include language in modification documents stating that any offer to modify a loan is not binding until executed by the lender or servicer.

In the Owens case, Jason and Terry Marie Owens executed a note and deed of trust in favor of First Consolidated Mortgage Company.  Specialized Loan Servicing, L.L.C. ("SLS") was the mortgage servicer on the note.  The Owens eventually defaulted on their mortgage and sought modification.  To become eligible for modification, the Owens were required to make reduced trial period payments.  They made these payments and later received a letter from SLS offering to permanently modify their loan.  The letter listed two steps for acceptance: (1) sign (or electronically sign) and return an enclosed Modification Agreement (the "Agreement") by December 31, 2013 and (2) make any remaining trial period payments on time.  The Owens electronically signed and returned the Agreement using SLS's electronic "signing room" on December 20, 2013.  SLS later claimed that the Owen's attempt to sign was unsuccessful and that SLS did not timely receive an executed copy of the Agreement.  It was undisputed that SLS never signed the Agreement.

After accepting two payments called for under the Agreement, SLS rejected a third payment and sent the Owens a letter explaining that the Agreement was not valid because it had not been properly signed or received.  SLS then moved to foreclose and the Owens filed a lawsuit seeking a temporary restraining order and temporary injunction to prevent foreclosure.

SLS prevailed in the trial court and on appeal.  One of the arguments raised by SLS was that the statute of frauds barred enforcement of the loan modification because the Agreement was never signed.  Interestingly, in analyzing this argument, the Fifth Circuit noted that it was arguable that the written modification offer itself, along with the attached Modification Agreement, satisfied the statute of frauds in light of the Owens performance under the Agreement.  However, the Fifth Circuit further noted that Texas courts have not considered whether a written offer to enter a unilateral contract satisfies the statute of frauds because many loan modification agreements are clearly bilateral (unlike the one SLS sent the Owens)—they require the signature of both parties and raise no questions as to whether acceptance by performance is possible.

Although the Fifth Circuit declined to consider whether a unilateral contract satisfies the statute of frauds because the Owens did not argue that the statute of frauds was satisfied, this issue is an important consideration for lenders and servicers.  In order to avoid any argument that unilateral execution and/or performance of a loan modification satisfies the statute of frauds, documentation sent to borrowers should note that any modification is not binding until signed by the lender and/or servicer and returned to the borrower.