An appellate court decision earlier this month would provide a new avenue for borrowers to file suit against mortgage servicers that deny permanent modifications under the Home Affordable Modification Program (HAMP).
The decision may prompt new lawsuits and lead to protracted litigation that could slow down the program and further delay assistance for borrowers. At issue is whether borrowers have the right to sue a servicer for failing to comply with a government program.
But the party responsible for administering that program — the Treasury Department — was notably absent from the debate and has so far stayed out of the fray in the hundreds of similar borrower suits. The administration's unwillingness to weigh in has drawn the attention of some judges.
"In my view, our task of adjudicating this matter would have been assisted significantly if the United States had entered this case as an amicus curiae," Judge Kenneth F. Ripple wrote in his concurring opinion on March 7.
Ripple said the program has been the subject of many cases in the district courts — bank lawyers have estimated them to be in the hundreds, possibly thousands — and he said prolonged litigation is "hardly a catalyst" to the effective administration of foreclosure prevention programs like Hamp.
"Efficient and accurate resolution in this court is important to the effective administration of the legislative program and, in that respect, the views of the executive department charged with the administration of the statute undoubtedly would have been of great assistance," he said.
Ripple acknowledged that the court could have asked Treasury to participate, but doing so would have significantly delayed a final decision.
A Treasury spokeswoman would not comment on the specifics of the case because the litigation is pending. But she said if the court had asked the agency to participate, it would have carefully considered how to proceed depending on the facts and circumstances of the case.
In the meantime, some industry sources said the decision could allow other HAMP lawsuits to move forward, which could slow down the program even further.
"If this creates a legal framework by which servicers can now be taken on individually by borrowers for this, I think that would probably have the unintended consequence of servicers . . . throttling back their participation in Hamp," said Tim Rood, a partner and managing director at the Collingwood Group. "Because this is only a proxy of other actions that could be taken that just haven't been exposed yet. So it's certainly a delicate balance, that's for sure, for the administration."
Lori Wigod sued Wells Fargo & Co. in 2010 when the bank denied her permanent modification under HAMP, after first agreeing to approve the modification if Wigod complied with the terms of a trial period plan.
Many similar cases have been dismissed because courts have found that borrowers do not have a federal private right of action, meaning they don't have the right to sue servicers for violating HAMP.
But the 7th Circuit Court of Appeals in Chicago, which often issues significant consumer protection decisions, overturned a district court ruling and found that Wigod does have the right to bring claims against a servicer for violating state laws.
Among other things, Wigod accused Wells of breach of contact — a claim grounded in state law — for rejecting her modification even though she met the terms of a trial modification.
Although the court did not weigh in on the merits of Wigod's claim, they essentially ruled that she should have her day in court.
Ira Rheingold, the executive director of the National Association of Consumer Advocates, said servicer compliance with HAMP is an ongoing problem, and allowing consumers to enforce the guidelines through lawsuits is essential.
"The fact that the court recognized that failure to meet the guidelines for a specific consumer raises a claim, I think that's really important," he said.
Given the potential implications, some industry lawyers wondered why the administration didn't weigh in on this case.
Ripple noted that the perspective the government could bring to the case is simply different from the plaintiff or defendant. "It is uniquely qualified to express the purpose and the operation of the statute and to represent the public interest," he wrote.
The Treasury spokeswoman would not comment on whether the agency believes individual borrowers have the ability to sue servicers for Hamp violations, or whether the sole responsibility for HAMP enforcements lay with the government.
But she said the agency has made a range of resources available for homeowners who believe their servicers are not compliant, and has enhanced requirements for servicers handling consumer complaints.
Rheingold said in many ways, Treasury has been caught in the middle between borrowers and banks, which they viewed as partners in the program.
"They didn't want to do anything to make the banks too mad, and they knew that we would be furious if they said consumers didn't have a right to enforce" Hamp, he said. "I think that silence may be the best thing we can expect from them."
Industry observers said the problem for Wigod and many other plaintiffs was a change in HAMP rules after the program had already started.
In the early days of Hamp, servicers were allowed to initiate trial modifications, known as a trial period plan or TPP, based on a borrower's stated income — a move designed to roll out the program faster.
When the administration later began requiring servicers to use financial documentation to verify eligibility for the program, many borrowers who were initially approved for trial plans were denied permanent modifications.
"It's an almost uniquely complex program, and it was changing all the time," said Jeffrey Naimon, a partner with BuckleySandler.
Naimon said the decision will cause servicers to look even more carefully at the various literature they send to determine what might create a potential lawsuit for unfair or deceptive practices.
"And then we'll have the same thing happen to this paperwork that's happened to regular mortgage paperwork," he said. "'Is this really the only name you've ever been known as? Does that application really have all your information in it? Sign here, notarize this.'"
Isaac Boltansky, a policy analyst at Compass Point Research and Trading, said the agency has taken a more hands-off approach to Hamp compared to other initiatives under the Troubled Asset Relief Program (TARP).
Boltansky, a former research analyst at the TARP Congressional Oversight Panel who conducted financial and economic analyses of Hamp, said that Treasury participated in lawsuits when it had an ownership stake in a company via the Capital Purchase Program or the Automotive Industry Financing Program.
Treasury did begin withholding incentive payments for servicers that failed to meet required Hamp benchmarks — including Wells, Bank of America Corp. and JPMorgan Chase — but those payments were returned as part of the $25 billion mortgage servicer settlement.
Part of the consideration to stay out of the fray may have to do with the settlement, Boltansky said.
"I think most of the decision-making process for the past 16 months within the federal levels or the state level has been focused on getting this settlement done, and they have wanted to avoid any pitfalls that might make the sides pull away," Boltansky said. "So direct involvement in these individual borrower cases could be one of these many different pitfalls that we've watched pop up over the past year."
Boltansky said he doesn't see the decision opening the spigot for individual claims.
"It still all comes down to the fact that it's a voluntary program with guidelines, and the only real teeth that Hamp has is Treasury's ability to withhold incentive payments," he said.
Rheingold agreed that a flood of litigation is unlikely, but said the decision gives new ammunition to consumers in HAMP lawsuits.
"What I expect is more homeowners who are represented by competent lawyers will have a new defense that they will be able to raise and courts will take that defense more seriously," Rheingold said. "Hopefully it will lead to more consistent rulings."
One servicing lawyer, who asked not to be named to avoid jeopardizing his clients' participation in the program, said the decision will undoubtedly cause more litigation, but is unlikely to cause servicers who are in HAMP to leave it.
"Does it make servicers who are in Hamp regret more that they are in Hamp?" he asked. "They won't ever say so publicly, but sure. They all regretted it from the start."