Loan Modification Hell May Lead To Class Action Lawsuits. A Federal Appeal court in Chicago seems willing to allow the case to move forward.

Q: I was listening to your radio show recently when a gentleman called in to talk about his loan modification situation.

The man has a family, became unemployed and got behind on his loan. He said he was able to get a modification that really seemed ridiculous for what he was going through, and the size of his loan payment reduction he got seemed miniscule in comparison to the money the government gave the mortgage companies for their bailout.

My husband has said all along that this whole situation was 100 percent the fault of the government and the financial institutions of this country.

Our house developed a bad septic system in 2007 but its value has gone down significantly and we are now under water on our mortgage. It will take $20,000 to $30,000 to fix the septic system. So we may be paying on a $213,000 mortgage for a home currently valued at $105,000.

Our mortgage company won’t work with us and with all the extenuating circumstances. involved I feel our only option is to file to bankruptcy. But then I won’t have a house to live in.

Is it true the mortgage company cannot foreclose on you if you are going through bankruptcy? I have friends that are buying houses now when they couldn’t before. I am totally sick over this. Why is there not a large class action lawsuit against the responsible parties for the actions they allowed or encouraged this to happen through practice or policy change?

If you or I make a mistake in our finances, we are punished and have to pay either in higher interest rates or credit score a score. I can’t understand why the government bailed out the banks with tax money with our money. They should have gone out of business. Let the banks go somewhere else to become solvent. After all, isn’t that what we have to do? Then maybe the banks can someday earn the right again to be in business just like every other American business.

You hit the nail on the head when you discussed the mortgage crisis. I just wish it were a hammer to the head of the government and bank controllers.

A: Thanks for listening to my radio show (Sundays, 11a ET, and for taking the time to comment.

The wheels of justice grind slowly, but there have been, and continue to be, lawsuits filed against the banks relating to their handling of the mortgage loan modification process. You listened to that part of the show in which we discussed a specific federal case in Illinois that was dismissed at the trial court level, but the Seventh Circuit Court of Appeals reversed the dismissal of the case.

The reason the case is interesting to us is that when the Home Affordable Modification Program (HAMP) first came out, most people believed that the program was consumer-friendly and was going to make it relatively easy to obtain a loan modification from most borrowers’ lenders. A borrower would need to comply with a simple set of uniform requirements, including documenting a hardship, submitting documentation and other paperwork, and qualifying for a three-month trial loan modification. If the borrower met all the requirements and made the required payments during the trial loan modification, then the borrower was under the impression that a permanent loan modification would be automatically granted.

But the permanent loan modifications were few and many borrowers were worse off by participating in HAMP than if they had not. Many ended up more in debt after HAMP as lenders failed to grant permanent loan modifications, then charged their borrowers late payment charges and other fees, and even reported these same applicants to the credit reporting bureaus negatively for not having made their original loan payments but rather the payments required under the trial loan modifications.

The borrower in the Illinois case sued her bank under state law fraud claims, breach of contract claims and under various other legal theories. The Federal District Court in each case dismissed each theory on the basis that the borrower did not have a right to sue her bank either because the HAMP legislation did not contain language allowing her to sue her lender or because the HAMP legislation would prevent her from suing her lender under state law.

The Federal Appellate court disagreed with the lower court in finding that the HAMP legislation did not prevent the borrower from suing her lender and that she had her rights under state law or under contract law to sue her lender.

This particular borrower appeared to have applied for her loan modification under HAMP and delivered the various documents to her lender for them to evaluate her and give her a trial loan modification. The lender even gave her a trial loan modification document that stated that if she complied with the terms of the trial loan modification and all of the statements she made to the bank were verified to be true and remained true, she would be entitled to a permanent loan modification.

The appeals court rejected the banks arguments that the trial loan modification document they gave the borrower wasn’t a contract and rejected the banks argument that she could not sue them based on the terms of the temporary loan modification document, or based on fraud and several other legal arguments. The court did say that the borrower couldn’t sue under certain legal theories, but left the meat of her complaint intact.

The decision is significant in that it now places the bank in a defensive position of having to go before the lower court and disprove conclusions that the appellate court might have reached relating to the claims the borrower has against her bank. If the borrower prevails in the lower court, the lower court would then also have to determine whether the her complaint should be given class action status to allow her to represent all borrowers in the United States that were denied HAMP loan modifications in the same manner she sued Wells Fargo Bank N.A.

If this borrower prevails in obtaining class action status against Wells Fargo, the bank may find itself in a situation of having to remedy the denial of the thousands of loan modifications to its customers. The result in this case may also give a great incentive to additional class action cases against the other major lenders that used similar documentation in their HAMP dealings with borrowers.

(And imagine the remedies required for homeowners who were denied a permanent loan modification who then went into foreclosure and lost their homes.)

During the housing crisis it seems that the Federal government was asleep when these problems were developing, or worse, they actively worked with financial institutions to enhance the possibility of larger problems in the real estate and financial markets. At the same time, the banks and financial institutions were working with government officials to keep the merry-go-round of money moving to increase the financial compensation for top financial and bank employees and shareholders.

It doesn’t appear that the problem of twenty years of mismanaged legislation and oversight will go away soon. The problems will now move from the legislative and executive branches of government to the judicial branch. If you are interested in reading up on the case, put the following case into your search engine: Wigod v. Wells Fargo Bank, N.A. Case no. 11-1423, 7th Circuit Court of Appeals (decided March 7, 2012).