Banks face class actions for not modifying mortgage loans

By Sylvia Hsieh
Staff writer
Published: November 15, 2010

 

Several class actions have been filed against banks around the country for not fulfilling promises to modify borrowers’ mortgage loans under the federal HAMP program.

 

The Home Affordable Modification Program was launched in March 2009 to help stave off the national foreclosure crisis by allowing qualified borrowers to redo their mortgages at lower rates.

 

Consumer lawyers complained from the program’s inception that lenders strung borrowers along with temporary payment plans that lowered their monthly payments, but when it came time to make loan modifications permanent, banks dragged their feet with delay tactics, such as multiple requests for documents borrowers had already filed.

 

Now homeowners are suing in droves, calling the banks’ loan modification methods a “nightmare” for borrowers, alleging breach of contract, consumer fraud, deceptive business practices and negligent hiring.

 

“The basic thrust of these lawsuits is banks place people into temporary payment plans, the homeowners comply with all the terms of the agreement and forego other opportunities like selling their home or filing for bankruptcy, then the banks lose documents, route borrowers through a dozen or more customer service reps and eventually send some reason that is entirely unfounded for denying a permanent modification,” said Steven Lezell, an attorney at The Edelson Firm in Chicago.

 

Lezell represents putative class representative Lori Wigod, the owner of a condo unit who paid a reduced monthly mortgage of $1,756.14 for four months before Wells Fargo denied permanent modification. That suit, which aims to represent a nationwide class and a subset of Illinois homeowners, seeks $5 million in damages.

 

In October, seven class actions against Bank of America from Arizona, California, New Jersey, Pennsylvania and Washington were consolidated in multi-district litigation in U.S. District Court in Boston.

 

Similar class actions, seeking nationwide and state class status, have been filed against other banks, including J.P. Morgan Chase and Wells Fargo.

 

Lezell estimates that nationwide the lawsuits affect about 70 percent of the estimated 3 to 4 million homeowners eligible under HAMP.

 

First test

 

The suits advance for the first time the assertion that mortgage lenders are obligated under HAMP to make permanent changes to their mortgages if borrowers meet specific criteria set forth in the program guidelines.

 

Under HAMP, at-risk homeowners may avoid foreclosure by permanently altering the terms of their mortgages to make them more affordable. To be eligible, borrowers must be 60 days delinquent or face imminent default, use the property as their primary residence and have a mortgage issued on or before Jan. 1, 2009, and have an outstanding principal balance of no more than $729,750 for a single-unit residence.

 

Those who satisfy the criteria and successfully pass a Net Present Value test to assess their ability to pay their mortgage in the future then enter a trial period. During the trial period, they must pay the reduced mortgage on time for three consecutive months before getting any permanent loan modification. Lenders receive a fee from the federal government for each borrower who successfully stays on track.

 

“Our argument is very straightforward. Borrowers were promised modifications if they completed the [trial] payments and made accurate representations about their circumstances,” said Gary E. Klein of Roddy, Klein & Ryan in Boston, who has filed three putative class actions against Bank of America, JP Morgan Chase and Wells Fargo.

 

Lezell points to language in a form contract that banks provide to borrowers on temporary payment plans.

 

“The terms state that if you provide the proper information and make payment under the agreement, the bank will send you an offer for permanent loan modification. It says will, not may,” said Lezell.

 

But the first legal hurdle will be pending motions to dismiss based on the banks’ argument that homeowners don’t have a private right of action to enforce HAMP and, even if they did, the agreements aren’t binding.

 

The banks say that the agreements lacked the required specificity to form binding contracts, and that they were only required to consider permanent modification.

 

An alternate claim is that borrowers are third party beneficiaries of the agreement that bailed out the banks in exchange for providing loan modifications.

 

Charles M. Delbaum, an attorney at the National Consumer Law Center in Boston and co-counsel in three of the class actions, said borrowers have the right to enforce the terms under HAMP because they are the “intended beneficiaries” of the original agreement between the servicers and the U.S. Treasury.

 

This claim is also designed for plaintiffs who were allowed to get into temporary modification plans without verification of eligibility after the Obama administration tried to jump-start the program following complaints that banks were slow to move, said Lezell. He said that his cases only involve borrowers whose eligibility was verified ahead of time.

 

Two imminent decisions in Illinois and Massachusetts on these arguments will either stifle the litigation or open the door for more.

 

“Lawyers are still testing these claims. We’re waiting on these rulings on motions to dismiss. This is where every one of the lawsuits is,” said Lezell, who is looking into filing other suits.

 

Irene Freidel, a partner at K&L Gates in Boston who represents Wells Fargo, declined to comment for this article.

 

Bank of America spokeswoman Shirley Norton said the company supports the consolidation of cases and intends to aggressively defend against the allegations but declined further comment.

 

‘Burger King kids’

 

The suits also claim that the banks negligently hired and supervised untrained temporary workers to handle loan modifications while incentivizing them to give borrowers the run-around.

 

At JP Morgan Chase, they were known as “Burger King kids” for being hired off the street when banks were desperate for warm bodies to process the wave of foreclosures, according to the New York Times.

 

Lezell alleges in his complaint that Wells Fargo had a “dump rate” that rewarded workers who could get a customer off the phone the fastest, and a “one call resolution” policy that said no caller could speak to the same customer representative twice, thereby requiring a customer to start from square one with a new rep on every call.

 

The banks have claimed that forcing them to turn every temporary payment plan into a permanent modification would endanger the voluntary program and that they have already provided hundreds of thousands of homeowners with permanent loan modifications.

 

But Lezell said banks have only recently changed their ways.

 

“After the lawsuits were filed, the numbers of permanent modifications have shot through the roof,” he said.

 

Questions or comments can be directed to the writer at: sylvia.hsieh@lawyersusaonline.com

 

Massachusetts Lawyers Weekly reporter Christina Pazzanese contributed to this article.

 

Published on 16/11/2010 11:16:02