Borrowers sued Wachovia Mortgage in 2009, alleging violation of state and federal law for failing to adequately disclose terms of Pick-a-Payment mortgage loans offered from 2003 to 2008.
The loans allowed minimum payments for a limited time, under certain conditions. But Wachovia, a subsidiary of Wells Fargo, did not tell borrowers the minimum payments would not be enough to cover interest, which was tacked on to the loan balance, resulting in negative amortization, they claimed.
Wachovia agreed to a $50 million settlement in February 2011, though it denied wrongdoing.
Under the settlement, borrowers who still had Pick-a-Payment loans but were not yet in default were prospectively entitled to loan modification if they later defaulted on their loans or could demonstrate that they were at “imminent risk” of default.
Wells Fargo, as the loan servicer, has discretion to determine which borrowers are eligible for one of two loan modification programs: the federal government’s Home Affordable Mortgage Program (HAMP) and Wells Fargo’s “MAP2R” program.
Wells Fargo’s determination on which borrowers are likely to default is based, in part, on guidance under the federal HAMP program.
U.S. District Judge Richard Seeborg ruled on April 15 that his previous enforcement orders do not “delineate the precise extent to which HAMP guidance must bear on Wells Fargo’s imminent default analysis” and that Wells Fargo has taken too much liberty in deciding when, and to what extent, it should apply the guidance.
“It is true that the generous terms of the agreement … imbue Wells Fargo with discretion to develop the exact contours of its imminent default test. But, again, its discretion is clearly cabined by the requirement that it arrive at standards ‘in accordance with applicable HAMP guidance, as necessary.’ That language does not confer upon Wells Fargo license to choose when reliance on HAMP guidance is necessary and, when necessary, the degree of such reliance,” Seeborg wrote.
He added: “Wells Fargo is not permitted to determine unilaterally when reliance on HAMP guidance is ‘necessary’; the bounds of necessity are supplied by the terms of the federal guidelines themselves.”
Seeborg said Wells Fargo breached the settlement agreement in two ways.
“First, it violated the agreement by failing to establish and apply equally across the class uniform written standards for its ‘major change of circumstance’ test. Second, it breached the agreement by applying the DTI (Debt to Income) threshold based on borrowers’ monthly minimum payments in evaluating MAP2R applicants for imminent default.”
The parties have until April 28 to submit a joint proposal for remediation of the violations. Seeborg ordered Wells Fargo to file a supplemental brief by Wednesday, explaining in greater detail its financial hardship policies.
Jack Nelson, attorney for the plaintiffs, was traveling today and did not immediately return a phone call. Efforts to reach a Wells Fargo spokesperson were unsuccessful.
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