The U.S. Court of Appeals for the Seventh Circuit recently held that a borrower may be able to sustain breach-of-contract and related claims against a servicer who fails to comply with a modification agreement under the Home Affordable Modification Program (HAMP). Although the decision in Wigod v. Wells Fargo Bank, N.A.should not be taken lightly, it is not as sweeping as it first appears and, most importantly, does not recognize a private right of action under HAMP as some have suggested.

An Overview of HAMP

The Secretary of the U.S. Department of the Treasury implemented HAMP in 2009 to encourage lenders to modify troubled mortgage loans rather than foreclose. For many servicers, participation was voluntary. Servicers that wanted to participate entered into Servicer Participation Agreements (SPAs) with Fannie Mae. These servicers agreed to identify borrowers who were in default (or at risk of default) and, assuming the borrower met certain income requirements and other criteria, modify their loans.

The modification process consisted of two stages. Servicers would first implement a three- or four-month Trial Period Plan (TPP) under the new repayment terms. If the borrower complied with the terms of the TPP agreement (and the borrower's representations remained true and correct), the servicer would then offer the borrower a permanent loan modification.

After HAMP was implemented, servicers were confronted with a deluge of claims (or counterclaims) by borrowers alleging they should have been given permanent loan modifications. Many of these cases were premised on a breach of contract theory, with borrowers arguing that servicers had failed to follow HAMP guidelines in violation of the SPAs when denying their request for a modification. The majority of courts dismissed these claims on the basis that there is no private right of action under HAMP and borrowers were not intended third-party beneficiaries of the SPAs.

Wigod's Factual and Procedural Background

Lori Wigod entered into a mortgage loan with Wells Fargo's predecessor in interest, Wachovia Mortgage, in September 2007. After falling into financial distress, Wigod allegedly submitted a written request for a HAMP modification in April 2009. Wells Fargo determined that Wigod was eligible for a modification under HAMP and sent her a TPP agreement. Wigod submitted signed copies of the TPP agreement to the bank and Wells Fargo allegedly countersigned and returned the agreement to Wigod in early June 2009.

The TPP agreement provided that Wells Fargo would provide Wigod with a permanent modification as long as she complied with the TPP agreement and her representations continued to be true in all material respects. Although Wigod allegedly made each of the payments under the TPP agreement, Wells Fargo did not offer her a permanent modification at the conclusion of her TPP.

On April 15, 2010, Wigod filed a putative class action in the U.S. District Court for the Northern District of Illinois against Wells Fargo (Wigod v. Wells Fargo Bank, N.A.). Wigod brought her action on behalf of all homeowners who had entered into TPP agreements with Wells Fargo and had complied with all terms, but were nevertheless denied permanent modifications. Her complaint alleged seven causes of action, including breach of contract (based both on breach of the TPP agreement and breach of the SPA), promissory estoppel, fraudulent misrepresentation and consumer fraud.

The district court (Judge Blanche M. Manning) granted Wells Fargo's motion to dismiss the complaint with prejudice. The court rejected Wigod's purported breach of contract, promissory estoppel, fraudulent misrepresentation and consumer fraud claims, reasoning that each was premised on a failure to comply with HAMP, which does not allow for a private right of action.

The Seventh Circuit Reverses

In a 73-page opinion, the Seventh Circuit reversed the dismissal of Wigod's breach of contract, promissory estoppel, consumer fraud and fraudulent misrepresentation claims. The court concluded that Wigod's allegations that Wells Fargo "agreed to permanently modify her home loan, deliberately misled her into believing it would do so, and then refused to make good on its promise" were sufficient to "support garden-variety claims for breach of contract or promissory estoppel." The court also concluded that it was at least plausible that Wells Fargo had committed common law fraud and violated the Illinois Consumer Fraud Act (ICFA).

However, the Seventh Circuit also reaffirmed its view that there is no federal private right of action under HAMP and that borrowers still cannot avail themselves of third-party beneficiary status to enforce the terms of an SPA. Wigod was allowed to proceed with her claims because they were premised on the TPP agreement rather than HAMP or Wells Fargo's SPA. According to the court, borrowers that have entered into a TPP agreement are in direct privity with their servicers and can seek relief when those servicers fail to abide by the terms of TPP agreement. That the TPP agreements are related to a federal law (HAMP) that lacks a private right of action will not, the court held, require the dismissal of state law claims that also arise under the agreements. Put another way, HAMP does not "preempt" valid state law claims that a borrower may otherwise be able to raise.

Although the Seventh Circuit declined to recognize a private right of action under HAMP, the result in Wigod is still harsh from a servicer's perspective. Since participation in HAMP (or similar private modification programs) creates legal exposure, servicers may be more reluctant to voluntarily participate and, instead, chose to foreclose. At a minimum, however, the result in Wigod cautions all servicers to be careful of the representations they make to borrowers when they enter into TPP agreements and to pursue loan modification with caution.