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From Banking and Finance Law Daily, August 9, 2013

Full performance during loan modification trial period could create right to permanent modification

By Richard A. Roth, J.D.

Consumers who fully complied with a mortgage loan modification trial period plan under the Home Affordable Modification Program (HAMP) and were never told they were not qualified would have a contractual right to a permanent modification, the U.S. Court of Appeals for the Ninth Circuit has decided. The court followed a 2012 opinion by the U.S. Court of Appeals for the Seventh Circuit in determining that the HAMP documents were contradictory but were to be interpreted in favor of the consumers (Corvello v. Wells Fargo Bank, NA, Aug. 8, 2013, per curiam).

The facts outlined by the consumers in the two consolidated cases essentially were the same, the court observed. The consumers claimed they had contacted Wells Fargo, which was servicing their mortgage loans, to ask for modifications under HAMP. They signed and returned the trial plan period (TPP) documents sent to them by Wells Fargo and they made the required payments, which the bank kept. However, at the end of the trial period, Wells Fargo neither offered them permanent modifications nor notified them that they had not qualified. In fact, in one of the cases the bank foreclosed on the consumers’ home and sold it.

HAMP operation. HAMP is a program established by the Treasury Department that is intended to encourage mortgage loan servicers to modify troubled mortgages rather than foreclose, the court observed. Servicers wishing to participate in the program, such as Wells Fargo, signed agreements with the Treasury obligating them to follow the Treasury’s procedures in exchange for a payment of $1,000 for each permanent loan modification.

Under the Treasury’s procedures, the first step in the HAMP process was for the consumers to give their loan servicer information on their finances and their inability to make payments required under the loan. The servicer was to use that information to determine whether the consumers qualified for a modification and compute the modified payments.

If the consumers were eligible, the servicer would prepare a TPP for the consumers to sign and return. The TPP would require the consumers to make the new payments and also to provide information confirming the accuracy of their financial representations.

According to the court, the servicer then was to tell the consumers whether they qualified for a permanent modification. If they did not qualify, they were to be told of any options that were available to them. However, if the consumers qualified for a modification and made the payments when they were due, the servicer was required by Treasury’s procedures to offer them a permanent modification, the court said.

The consumers claimed they had done everything required of them but that Wells Fargo had never taken that final step.

Conflicting TPP terms. The TPP documents contained contradictory statements about what was necessary for a permanent modification. On one hand, the TPP told consumers that if their financial representations were accurate and they made their payments, “the Lender will provide me with a Loan Modification Agreement.” On the other hand, the TPP said that there would be no modification if the lender did not supply an executed copy of the modification agreement before the specified Loan Modification Date.

Wells Fargo contended that because it had never sent the executed modification agreements there were no contracts to modify the consumers’ loans. That argument succeeded in the trial court, which concluded that Wells Fargo’s obligation to offer a permanent modification was conditioned on the bank’s execution of the modification agreement. In essence, no signed agreement meant no permanent modification, regardless of the consumers’ performance under the TPP.

Unfettered discretion rejected. The appellate court observed that in Wigod v. Wells Fargo Bank NA the Seventh Circuit considered and rejected the same argument raised by the same bank. The Seventh Circuit determined that the Treasury Department’s HAMP procedures did not allow loan servicers unfettered discretion over whether a permanent modification would be offered.

The proper interpretation of the TPP documents was that there was no permanent modification until a permanent modification agreement was signed, but the servicer was obligated to offer that agreement if the borrower fully complied with the TPP, the court decided. Otherwise, a loan servicer could accept and keep the consumers’ payments without having any reciprocal obligations, which would be an unfair result.

The court was unconvinced by Wells Fargo’s effort to distinguish the Wigod decision on the factual basis that Wigod had been sent a copy of the TPP executed by the bank, which had not happened in the two cases before the Ninth Circuit. Receipt of a signed TPP was irrelevant, the court said. The TPP required the bank to determine whether the consumers qualified for a permanent modification and notify them if they failed. Wells Fargo never sent the consumers any notice, and it could not rely on its own failure to notify as a reason to decline a permanent modification.

The bottom line is that unless Wells Fargo notified the consumers that they did not qualify for a permanent modification, it became obligated to offer that modification once the consumers satisfied the TPP.

The case is consolidated Nos. 11-16234 and 11-16242.

Attorneys: Leslie E. Hurst (Blood Hurst & O’Reardon, LLP) for plaintiff Phillip R. Corvello. Gretchen Carpenter (Strange & Carpenter) for plaintiffs Karen Lucia and Jeffrey Lucia. Irene C. Freidel (K&L Gates LLP) for defendant Wells Fargo Bank, NA.

Companies: America’s Servicing Company; Wells Fargo Bank, NA; Wells Fargo Home Mortgage, Inc.

LitigationEnforcement: ConsumerCredit Loans Mortgages

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