Loan Modifications Fell|Short, Lawyers Argue

SAN FRANCISCO (CN) - Wells Fargo is required to offer permanent loan modifications to homeowners who meet conditions under a trial period plan, lawyers for a class of distressed homeowners told the 9th Circuit Wednesday.

A federal judge had dismissed two class actions accusing the bank of offering temporary loan modifications without the intention of making them permanent -- one of the conditions of accepting federal bailout money in 2008.

Bailed-out banks like Wells Fargo, which received $25 million in Troubled Asset Relief Program funds, are required to participate in the Home Affordable Mortgage Program, a government program that gives banks "incentive payments" for issuing permanent loan modifications.

Under HAMP, loan servicers must provide a trial period plan followed by an agreement outlining the terms of the final modification.

In his dismissal, U.S. District Judge Jeffrey White said the homeowners failed to state a claim for breach of contract and unfair debt collection practices.

Plaintiffs Phillip Corvello and Karen and Jeffrey Lucia appealed that decision to the 9th Circuit.

Corvello's attorney, Leslie Hurst, argued before the three-judge panel Wednesday that her client qualified for a permanent loan modification and had fulfilled his obligations under the trial period plan.

Wells Fargo allegedly agreed to let Corvello know within 30 days of submitting his application, in writing, if he did not qualify for a permanent modification. The bank let him make subsequent payments but did not respond within 30 days.

Hurst compared the scenario to the appellate ruling in Wigod v. Wells Fargo, which she argued held that if trial period plan conditions are met, the loan servicer must offer a permanent loan modification.

"In Wigod, Wells Fargo signaled to the borrower that they qualified," Hurst said. "Here they didn't respond within 30 days as required, which therefore communicated you are O.K."

The bank allegedly kept Corvello's next two payments after saying it would not keep the payments if he did not qualify for a permanent modification.

If a borrower meets the conditions in a trial period plan, Hurst said, then the bank "has to give him the option of entering into a permanent modification agreement, which in turn turns into a modified, secured mortgage."

Instead, she said, Wells Fargo foreclosed on his home.

Corvello claims he relied on Wells Fargo's promises that if he complied with the trial period plan he would be offered a permanent modification. As a result, he did things he otherwise would not have done, including sending in extra documentation, agreeing to credit counseling and opening an escrow account.

Hurst argued that such actions should be interpreted as sufficient consideration.

When Circuit Judge Mary Murguia mentioned that cases dealing with this matter are "all over the place," Hurst replied that while trial court decisions are split, appellate decisions are not. The appellate courts "say the servicer has to offer loan modifications if the conditions are met," Hurst said.

Gretchen Carpenter, arguing for Karen and Jeffrey Garcia in the related case, agreed with Hurst and claimed that Wigod has been adopted as a statement under California law that if conditions are met in a trial period plan, then the lender has to offer a loan modification.

She asked for damages, injunctive relief that sets aside certain foreclosures and an order to offer modifications.

Irene Friedel, a lawyer for Wells Fargo, said the lower court's dismissal "required common sense." "Borrowers can't be offered modifications if they don't qualify," Friedel said.

She argued that in Wigod, the borrower was deemed qualified. In this case, she continued, there was no indication that the borrowers were qualified. Wigod says the borrower has to be qualified.

"I urge the court to read Wigod," she said.

Judge Mary Schroeder said that she could not understand how Wells Fargo could say the Lucias and Corvello did not qualify when no decision was made as to whether they qualify.

Friedel replied that the lender cannot modify a loan without the borrower actually being qualified, despite the bank's failure to respond within 30 days.

"There was no signal here to the borrowers that they qualify," she said. "That distinguishes this case from Wigod."

"The 7th Circuit found [qualification] had to happen," she added. "It cannot be that the right is waived. The HAMP settlement between the banks and the federal government says banks must re-review loan modification requests. We offered to re-review the Lucias'. They declined, saying they deserved a modification."

When pressed about whether the bank has to respond to requests for modification, Friedel said it did respond: Corvello was told he did not qualify, and the Lucias were asked for more documents.

She also agreed that Wells Fargo was bound to respond.

"We are bound to follow HAMP guidelines," she said. "We can't simply decide not to respond. And we must give them modifications if they qualify."

Judge Schroeder asked, "If your position is that they don't qualify, why not tell them that? Why try to dismiss now?"

Friedel replied, "We made no commitment that they qualify. The decision will just be put off to another day after lots of discovery. They have to allege a plausible claim to open the door to discovery. They can't even do that."

Hurst is a partner with Blood, Hurst & O'Reardon in San Diego. Carpenter is a partner with Strange & Carpenter in Los Angeles, and Irene Friedel is a partner with K&L Gates in Boston.

The three-judge panel also included Judge John Noonan.

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