Bad Faith Loan Modifications and Forbearance Agreements in California

Intro

Loan modifications and forbearance agreements are often presented as lifelines for borrowers facing short-term distress. In practice, these negotiations can become leverage points for lenders—particularly when borrowers are encouraged to rely on assurances that never materialize. In California, lenders may face liability when modification or forbearance discussions are conducted in bad faith, induce detrimental reliance, or are used to manufacture default. Presidio Law Firm LLP represents borrowers and business owners in disputes where modification and forbearance processes crossed legal boundaries.

What Modifications and Forbearance Are Supposed to Do

A loan modification typically alters existing terms—such as interest rate, maturity, or payment schedule—while forbearance temporarily suspends or reduces enforcement to allow stabilization. Both are intended to address temporary hardship without forcing liquidation or foreclosure.

Problems arise when lenders treat these processes as open-ended negotiations without genuine intent to modify or forbear.

Bad Faith in the Modification Process

California law does not require lenders to modify loans. It does require that lenders not engage in conduct that is deceptive, opportunistic, or designed to frustrate the borrower’s legitimate contractual expectations.

Bad faith may be found where a lender:

• Encourages a borrower to pursue modification while intending to deny it
• Repeatedly requests updated financials without progressing toward a decision
• Conditions consideration on payments or concessions not required by the contract
• Uses delay to trigger or deepen default

Courts look at conduct, not labels.

“Stringing Along” and Detrimental Reliance

A common fact pattern involves prolonged modification discussions during which borrowers are told approval is likely or imminent. Relying on these assurances, borrowers may forgo alternative financing, inject additional capital, or delay asset sales.

When lenders reverse course after inducing reliance, resulting losses may support claims for misrepresentation, promissory estoppel, or breach of the implied covenant of good faith and fair dealing.

Forbearance Agreements and Hidden Traps

Forbearance agreements can provide breathing room—but they often include provisions that increase risk if not carefully negotiated. These may include:

• Admissions of default
• Broad releases of lender claims
• Waivers of defenses
• Acceleration triggers upon minor breaches

When lenders pressure borrowers to sign forbearance terms without transparency or while making contradictory assurances, liability may arise.

Dual Tracking and Foreclosure Pressure

In some cases, lenders pursue enforcement actions while simultaneously engaging in modification discussions. This creates uncertainty and may undermine the purpose of the process.

Where enforcement advances despite representations that relief is under active consideration, courts may scrutinize the lender’s conduct closely.

Commercial vs. Residential Contexts

While many high-profile cases arise in residential lending, commercial borrowers are not without protection. Even in commercial settings, lenders may not misuse discretion, manipulate timelines, or exploit informational asymmetries to the borrower’s detriment.

Sophistication does not excuse bad faith.

Evidence That Often Decides These Cases

Bad-faith modification claims are evidence-driven. Key proof often includes:

• Email and text communications
• Internal lender notes and timelines
• Requests for documents and interim payments
• Statements regarding likelihood of approval
• Inconsistent positions taken by the lender

Early preservation of communications is critical.

Damages and Remedies

Borrowers may seek damages for losses caused by bad-faith conduct, including lost refinancing opportunities, increased costs, business interruption, and diminished asset value. In appropriate cases, equitable relief may be available to halt enforcement while claims are litigated.

Strategic framing of claims often determines whether relief is achievable.

Why Lenders Aggressively Contest These Claims

Financial institutions often argue that modification discussions are nonbinding and discretionary. Courts evaluate whether discretion was exercised honestly and consistently with the parties’ reasonable expectations.

Where conduct contradicts stated discretion, liability may follow.

Closing

Loan modifications and forbearance are meant to stabilize—not to create leverage through uncertainty. When lenders conduct these processes in bad faith, induce reliance, or use delay to manufacture default, California law provides remedies. Presidio Law Firm LLP represents borrowers and business owners in lender liability disputes involving modification and forbearance misconduct, with a focus on careful factual development and strategic litigation in complex financial matters.