SAN FRANCISCO (CN) - A federal judge Thursday said he does not believe Wells Fargo breached contracts or misled homebuyers, but he's not sure he can deny borrowers class certification on that basis.
Karen and Jeffrey Lucia et al. say Wells Fargo failed to offer permanent loan modifications to homeowners who participated in the federal Home Affordable Mortgage Program from April 2009 to March 2010.
A trial period agreement required the bank to notify borrowers if they qualified for permanent loan changes within three months, the plaintiffs say.
In August 2013 the Ninth Circuit reversed dismissal of two class actions accusing Wells Fargo of offering temporary loan modifications with no intention to make them permanent. Offering borrowers permanent loan modifications was one of two conditions the bank agreed to when it accepted federal bailout money in 2008, according to the lawsuits .
On Thursday, U.S. District Judge Vince Chhabria heard two hours of arguments on a motion for class certification for three related class actions, filed the Lucias, Phillip R. Corvello and Amira Jackmon.
Plaintiffs' attorney Thomas Loeser said Wells Fargo steered troubled borrowers into the HAMP to soak money from them, without ever intending to permanently modify their loans as promised.
"They took people that were in default and converted them into cash cows and made millions and millions of dollars," Loeser said.
Loeser said the proposed class members made timely payments to the bank during the trial period, fulfilling their obligations under the terms of the contract. At the same time, he said, Wells Fargo breached the temporary period plan (TPP) contract by failing to permanently modify the loans or notify borrowers of their eligibility within the required three months.
Wells Fargo attorney Irene Freidel told the judges that Wells Fargo followed federal guidelines, which prohibit the bank from ending trial periods until eligibility is determined.
Because making three timely trial payments was a condition for obtaining a permanent loan modification, Freidel said, it was impossible to qualify borrowers for the loan changes before the trial period ended.
She said that several borrowers did not submit documentation on time, which made it unfeasible to qualify those homeowners within three months.
"You have to look at each borrower individually to see if they experienced any actual harm," Freidel said.
But because all borrowers signed the same TPP agreement with Wells Fargo, Loeser said, determining whether that document was deceptive is a common question applicable to all of them.
"You must certify the class to answer that question," Loeser said. "It applies to the contract claim as well."
But Chhabria said unambiguously that he did not find the contract misleading, nor that it required the bank to qualify borrowers for permanent loan alterations within the three-month trial period.
"My strong inclination is to agree with you about the meaning of the contract, but should I deny class certification based on that?" Chhabria asked the Wells Fargo attorney.
Freidel said he should, because it speaks to the standard of the defendant's liability for class certification.
Plaintiffs' co-counsel Timothy Blood disagreed, saying if Chhabria were to rule that way, the Ninth Circuit would find that he improperly ruled on the merits at the class certification stage.
Freidel asked the judge if he could stay the motion for class certification and entertain a motion for summary judgment, but Chhabria denied that.
Nonetheless, "If you look at this document, it's not misleading the way the plaintiffs say it is," Chhabria said.
Blood said that if the judge plans to make that determination, the plaintiffs should be allowed to introduce expert testimony on the deceptiveness of the contract and its requirements.
Chhabria acknowledged that he has limited experience handling class actions and asked both parties to submit supplemental briefs on whether he can rule on the merits of the plaintiffs' claims in his ruling on the motion for class certification.
Wells Fargo must submit its supplemental brief on within 14 days, and the plaintiffs will have 14 days to respond.
Read the Top 8
Sign up for the Top 8, a roundup of the day's top stories delivered directly to your inbox Monday through Friday.