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Bank Had to Offer Mortgage Modification To Debtors Who Completed Trial Period Plan

Wednesday, August 14, 2013
By Bernard J. Pazanowski

A bank was contractually liable to offer its customers a mortgage modification after they successfully completed the requirements of their trial period plan, the U.S. Court of Appeals for the Ninth Circuit held Aug. 8 (Corvello v. Wells Fargo Bank NA, 9th Cir., No. 11-16234, 8/8/13).

The per curiam opinion was guided by the Seventh Circuit's opinion in Wigod v. Wells Fargo Bank, NA, 673 F.3d 547 (7th Cir. 2012).

In 2009, in the face of the mortgage crisis, the Treasury Department started the Home Affordable Modification Program to encourage banks to refinance the loans of distressed homeowners so they could stay in their homes. Under HAMP, banks sign an agreement with Treasury that gives them $1,000 for each permanent modification they make to a mortgage while following Treasury guidelines and procedures.

Under the process established by Treasury, borrowers supply financial information to the banks to evaluate and determine whether they qualify for a loan modification. If the borrower appears eligible to participate in HAMP, the bank prepares a TPP, under which the borrowers confirm their financial information and make trial payments of the modified amount. The banks must then report their eligibility determinations to the borrowers. For borrowers who made all their payments and whose financial information is accurate, a bank must offer a permanent home loan modification. 

Missing Confirmation

Phillip Corvello, and Karen and Jeffrey Lucia applied for mortgage modifications from Wells Fargo Bank NA. While Corvello received a written contract, the Lucias' offer and acceptance was over the phone. They complied with their trial plans and made the required payments.

Corvello asserted that Wells Fargo never offered him a permanent modification. The Lucias claimed that Wells Fargo never offered them a permanent modification either, and, instead, foreclosed on their home and sold it.

Corvello and the Lucias sued Wells Fargo, claiming that because they complied with the obligations of their TPPs, there was an enforceable contract and the bank was bound to modify their mortgages. The district court disagreed. It said that under the terms of the TPP the bank's promise to offer a permanent modification was conditioned on it sending the plaintiffs a signed modification agreement. Because the bank did not send such agreements, it was not obligated to offer a permanent modification, it said. 

Wigod Leads the Way

The leading case on the contractual obligations of banks under TPP agreements is Wigod, the court said. In that case, the Seventh Circuit held that banks are required to offer permanent modification to borrowers who complete their TPP obligations, “unless the banks timely notified those borrowers that they did not qualify for a HAMP modification.”

Wells Fargo's argument, which the district court accepted, was that Paragraph 2G of the TPP, which says that the loan documents will not be modified “unless and until … (ii) [the borrower] receive[s] a fully executed copy of the Modification Agreement,” means that there can be no contract until the bank sends the borrower a signed modification agreement. But this argument was rejected in Wigod, and the court here followed suit.

The Ninth Circuit explained that Wells Fargo's interpretation is “suspect,” because it allows “banks to avoid their obligations to borrowers merely by choosing not to send a signed Modification Agreement, even though the borrowers made both accurate representations and the required payment.”

The court added, “Paragraph 2G cannot convert a purported agreement setting forth clear obligations into a decision left to the unfettered discretion of the loan servicer.” Instead, it said that the better interpretation of the TPP “is that the servicer must send a signed Modification Agreement offering to modify the loan once borrowers meet their end of the obligation.” The appropriate reading of Paragraph 2G is that there cannot be an “actual mortgage modification until all the requirements [are] met, but the servicer [cannot] unilaterally and without justification refuse to send the offer,” it said. 

Avoiding Injustice

The court said that its interpretation of the TPP “avoids the injustice” of allowing the bank to keep the borrowers' payments without fulfilling any obligations in return. “The TPP does not contemplate such an unfair result,” it said.

The court also noted that the Wigod court applied Illinois contract law, while California contract law is at issue in this case. It said, however, that there “is no material difference” between the two. It also rejected Wells Fargo's other attempts to distinguish Wigod.

Judges Mary M. Schroeder, John T. Noonan Jr., and Mary H. Murguia were on the panel.

In a separate opinion, Noonan explained that he concurred in the judgment because the TPP between Corvello and Wells Fargo “makes no sense,” and because Wells Fargo drafted the document, it “must be held responsible for it.” He added that the Lucias's position is “analogous to Corvello's.”

Leslie E. Hurst, Blood Hurst & O'Reardon, San Diego, argued for Corvello. Gretchen Carpenter, Strange & Carpenter, Los Angeles, argued for the Lucias. Irene C. Freidel, K&L Gates, Boston, argued for the bank.

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