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Fourth Circuit Rejects HAMP Loan Modification Fraud Lawsuit - Spaulding v. Wells Fargo Bank

May 1, 2013

Vincent Howard and our Rancho Cucamonga foreclosure defense lawyers have followed with great interest lawsuits alleging damages related to HAMP. The federal government's Home Affordable Modification Program was not a success, but extensive experience with the issues involved and representing people who attempted to use HAMP has helped us conclude that the lack of an enforcement mechanism (inadvertent or intentional) was the source of many of its problems, since lenders had no incentive to do anything that would have hurt them financially. So we were interested to see Spaulding v. Wells Fargo Bank, in which a Maryland couple unsuccessfully made six state-law claims against their mortgage servicer after it denied their HAMP application. Josephine Spaulding and Dale Haylett's case was dismissed for failure to state a claim, and the Fourth U.S. Circuit Court of Appeals upheld that ruling.

Under HAMP, borrowers who met the qualifications would have a three-month trial modification; if the borrowers made all their payments on time and nothing else changed, the servicer was required to offer a permanent modification. Spaulding and Haylett refinanced their mortgage in 2006 with a 30-year adjustable-rate loan. In early 2010, they ran into financial problems because Spaulding had a chronic illness that kept her from working and Haylett's work hours had been cut. They asked Wells Fargo for a loan modification. When Wells Fargo requested more information within 10 days, they sent it 11 days late without explanation. They went into default the following month and did make some payments, but stayed delinquent for four months before receiving a denial of their HAMP application in August. They continued applying and were denied each time.

They filed suit in July of 2011, alleging breach of implied contract, negligence, violations of Maryland's Consumer Protection Act, negligent misrepresentation and fraud. The district court dismissed, finding there was no contract, no tort duty owed and no false representation by Wells Fargo.

On appeal, the Fourth Circuit agreed. On the contract count, it found no implied-in-fact contract between the bank and the parties; they are not a party to Wells Fargo's contract with the federal government and thus cannot enforce it. The negligence claim failed because Wells Fargo didn't have a duty to Spaulding and Haylett and thus could not have breached it. Maryland law requires a closer connection, often established by contract, to establish a case for financial damages only--and, the Fourth said, there was no contract here. On the Maryland Consumer Protection Act claim, the couple alleged that Wells Fargo made a false statement when it said it needed more information to process their application because they had already sent the documents, but the Fourth said the extra pay stubs requested were part of evaluating whether they had financial hardship. The same was true on the fraud and negligent misrepresentation claims; the allegedly false statements were not false. For those and other reasons, the Fourth upheld the dismissal of their claim.

Vincent Howard and our Laguna Beach foreclosure defense attorneys wonder how many more HAMP lawsuits we would see if the program had included some serious "teeth" in the form of an enforcement mechanism. As this case shows, HAMP left loan servicers free to require reams and reams of paperwork and use other delaying tactics intended to drive borrowers into foreclosure. This would actually allow the loan servicer to make money; it gets extra money from late fees and interest, but takes none of the losses of the lender itself. As a result, servicers had every incentive to arbitrarily ask for more pay stubs or other documentation, "lose" it, and avoid giving clear answers when the borrower tried to get in touch. Since then, we've seen that this can only be the basis of a lawsuit when the facts and state laws are right; there is no federal right of action at all under HAMP, as even sympathetic courts have found. Vincent Howard and our San Bernardino County foreclosure defense lawyers believe this kind of misbehavior should not be rewarded with immunity from lawsuits.

Howard Law, P.C., represents Californians of all backgrounds who are fighting to hold on to their homes in the face of indifference or incompetence from their loan servicers. If you'd like to tell us your story and learn more about your legal options, call us today at 1-800-872-5925 or send us a message through our website.

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