Insights

Since the inception of the Home Affordable Mortgage Program (“HAMP”), borrowers who were denied permanent loan modifications after they had complied with the trial modification have sued their servicers alleging that they were eligible for a permanent loan modification in accordance with Treasury Department Supplemental Directives. Most of these borrower suits have been dismissed by the courts because HAMP provides no private right of action.

In Wigod v. Wells Fargo Bank, N.A., the borrower took a different approach, basing her claims on the trial modification agreement. The Seventh Circuit Court of Appeals reversed the dismissal of the borrower’s suit against the servicer for failing to provide a permanent HAMP loan modification. Here’s what prompted the Seventh Circuit to reach its decision.

Lori Wigod defaulted on a mortgage loan owned and serviced by Wells Fargo Bank, N.A. After reviewing financial documentation provided by Wigod, Wells Fargo determined that she qualified for a loan modification under HAMP. Wells Fargo granted Wigod a four-month trial modification under the terms of a trial period plan (“TPP”). The TPP provided that Wigod would be granted a permanent modification if she complied with the TPP terms, which included making timely payments under the plan. After signing and returning the TPP, Wigod received an executed copy from Wells Fargo. Wigod complied with the terms of the TPP, but Wells Fargo refused to grant a permanent loan modification. Wigod contested Wells Fargo’s decision not to offer a permanent modification. However, Wells Fargo sent Wigod monthly default notices threatening to foreclose.

After Wells Fargo failed to offer Wigod a permanent loan modification, Wigod filed a class action complaint against Wells Fargo on behalf of all homeowners in the United States who had entered into TPPs with Wells Fargo and had complied with all of the terms of the TPP but were denied a permanent loan modification. Wigod alleged that Wells Fargo improperly reevaluated her for HAMP after Wells Fargo already had determined she was eligible and offered her a TPP. Wigod’s complaint alleged that Wells Fargo had violated the law, including breach of contract for violating the TPP by failing to offer a permanent modification after Wigod complied with the contract requirements, promissory estoppel based on the representations in the TPP and fraudulent misrepresentation for misrepresenting that a permanent modification would be offered.

The trial court dismissed Wigod’s allegations because they were based on HAMP, which does not have a private right of action. Wigod appealed.

The U.S. Court of Appeals for the Seventh Circuit reversed and remanded the dismissal of the breach of contract, promissory estoppel, and fraudulent misrepresentation claims.

On appeal, Wells Fargo argued that the TPP was not an enforceable contract because: (1) it did not contain a valid offer because it was conditioned on Wells Fargo’s additional review of financial information to determine Wigod’s qualification under HAMP; (2) it lacked consideration; and (3) it lacked clear and definite terms of the permanent modification.

The court of appeals determined that there was a valid offer of a permanent modification based on the language of the TPP that was conditioned on Wigod’s compliance with the agreement, not Wells Fargo’s review of additional financial information. The TPP stated that “the Lender will send me a signed copy of this Plan if I qualify for the offer or will send me written notice that I do not qualify for the offer.” The court reasoned that Wells Fargo was obligated to review the additional financial information to determine qualification under HAMP before executing and returning the TPP to Wigod. If Wells Fargo determined that Wigod didn’t qualify at that time, it should have sent a notice that she did not qualify. Signing the TPP established a valid offer of a permanent loan modification conditioned on Wigod’s compliance with the agreement.

The appeals court also relied on district court cases to determine that Wigod provided adequate consideration for the promise of a permanent modification by opening new escrow accounts, agreeing to participate in credit counseling if asked, and providing and vouching for the truth of financial information.

Finally, the appeals court relied on its prior case law establishing that a contract with indefinite terms can be enforced if the indefinite terms can be determined independently by the agreement or by commercial practice or custom to reject Wells Fargo’s indefinite terms argument. The appeals court noted that the Treasury directives established the criteria for calculating the modified terms and that the TPP implied that the HAMP program directives would be followed. Because the TPP established a valid offer of a permanent loan modification, Wigod adequately pled the elements of promissory estoppel which led the appeals court to reverse dismissal of that claim.

The court of appeals also reversed the dismissal of the fraudulent misrepresentation claim because it determined that Wigod could have reasonably relied on the TPP.

This is an important decision for mortgage servicers responsible for processing HAMP modifications.

Shawnielle Predeoux is an associate in the Maryland office of Hudson Cook, LLP. Shawnielle can be reached at 410-865-5425 or by email at spredeoux@hudco.com.