Homeowners Can Sue Over HAMP Denial

Homeowners Can Sue Over HAMP Denial
by Dean Kanellis

A homeowner who was denied a permanent loan modification can sue her lender for fraud and other state law claims. According to the Seventh Circuit Court of Appeals, while HAMP does not provide for a private right of action, it does not preempt valid state law claims that a borrower may otherwise be able to raise.

In September 2007, Lori Wigod obtained a home mortgage loan from Wachovia Mortgage, which later merged with Wells Fargo. Sometime in 2009, she encountered financial difficulties that led her to make a written request for a HAMP modification from Wells Fargo. Wells Fargo placed Wigod on a four-month trial modification, under which it agreed to permanently modify the loan if she satisfied HAMP guidelines. According to Wigod, although she qualified, Wells Fargo refused to grant her a permanent loan modification.

Several years later, in 2011, Wigod brought a putative class action lawsuit against Wells Fargo, alleging violations of Illinois law under common-law contract and tort claims, as well as violations of the Illinois Consumer Fraud and Deceptive Business Practices Act (“ICFA”). The district court dismissed Wigod’s complaint, reasoning that her claims were based on HAMP, which does not confer a private cause of action on borrowers. Wigod appealed(1), and in a unanimous decision, a three judge panel of the Seventh Circuit Court of Appeals reversed the decision of the district court.

The appellate court observed that Wigod alleged that Wells Fargo agreed to permanently modify her loan, deliberately misled her into believing it would do so, and then refused to honor its promise. According to the court, these allegations support claims for common law breach of contract, promissory estoppel, fraud, and violation of the ICFA. Moreover, while the court acknowledged that HAMP and its enabling statute do not contain a federal cause of action, it concluded that the federal framework does not preempt otherwise viable state law claims. Accordingly, the appellate court remanded Wigod’s case for further proceedings, presumably on the merits of her claims.

The most obvious impact of this decision is that lenders and servicers in Illinois may now face lawsuits for wrongful loan modification denial. This risk certainly warrants concern, but the impact and scope of this decision will likely not stop there.

Any viable claim that can be filed against one’s lender can just as easily be raised as a counterclaim or affirmative defense in a foreclosure case. Moreover, these types of claims are often based on particularized written and verbal communication between the parties. Stated another way, these are “he said – she said” cases that involve a lot of discovery and are more difficult to dispose of by summary judgment. Wigod also provides a borrower with a counterclaim under a state’s consumer protection statute, which almost always provides for an award of attorney fees to a prevailing consumer. In this respect, this decision may serve to monetize foreclosure defense.

The full impact of this decision remains to be seen, and the extent to which it will spread to other jurisdictions is presently unknown. At the present time, at least one copycat lawsuit has been filed, in the Southern District of New York. If recent history is any indication, more lawsuits will follow, and lenders and servicers are urged to proactively take steps to minimize risk.

A complete list of steps that could serve to minimize the risk posed by Wigod is beyond the scope of this writing, and any effective program has to be tailored to the particular needs and business of a client. Generally, however, every company that participates in HAMP, or any other loss mitigation process, has to be careful of representations that are made during the process and be mindful that the work product of loss mitigation efforts may be the proper subject of a discovery request.

For more information, or to learn about what your company can do to protect itself from this emerging risk, feel free to contact our office.

1 Wigod v. Wells Fargo Bank, N.A., U.S. Court of Appeals, 7th Cir., Case No. 11-1423 (March 7, 2012).