A recent class action lawsuit filed on behalf of thousands of homeowners in New York against Wells Fargo alleges that while the bank received $25 billion in government bailout funds it failed to make a good faith effort to help borrowers avoid foreclosure in compliance with the federal government’s Home Affordable Modification Program (HAMP). The complaint, filed in the US District Court for the Eastern District of New York, accuses Wells of breach of contract, fraudulent inducement, unjust enrichment and violations of consumer protection laws. The lawsuit is one of several cases across the country alleging similar misconduct against banks.

HAMP was launched in 2009 as part of the federal government’s initiative to ease the foreclosure crisis. In exchange for receiving federal bailout funds, Wells Fargo was obligated to participate in HAMP, which precluded the initiation of foreclosure actions against struggling borrowers without first evaluating their eligibility for assistance.

In the lawsuit, the distressed homeowners claim Wells intentionally delayed modifying loans so it could collect additional fees, penalties and interest. In fact, the lead plaintiff, Shea Hecht, waited two years before his loan was modified, so that after additional interest and penalties were added to his loan balance, he was in a worse position than when he started the process, according to his lawyer.

Wells is also accused in the suit of engaging in gamesmanship to delay decisions on modification requests by demanding irrelevant documents or documents it had already received. The lawsuit claims that Wells even assessed hidden and prohibited fees for modifications that were ultimately tacked on to the loan balances of struggling borrowers once the modification went into effect.

In response to the lawsuit, bank spokesman Tom Goyda claimed that, “Wells Fargo works hard to help our customers remain in their homes when they encounter financial difficulties,” noting the bank had completed more than a million mortgage modifications through HAMP since the start of 2009.

Implications for Correspondent Lenders

The consequences of failing to comply with the requirements of the HAMP program for a bank accused of engaging in similar misconduct could be far reaching. For example, the intentional delay in foreclosing on distressed loans and improperly adding to homeowner’s loan balances demonstrates how in subsequent pre-litigation buyback demands or lawsuits, the bank may have failed to properly mitigate its damages or artificially inflated its damages it is seeking from correspondent lenders. In certain circumstances, the affirmative defense of unclean hands may possibly bar recovery for the bank.