Yesterday, the Ninth Circuit ruled in Corvello v. Wells Fargo that when a bank tells a borrower it will modify his loan if certain conditions are met under the Treasury Department's Home Affordable Modification Program (“HAMP”), that promise is enforceable.
When Phillip Corvello applied for a home loan modification, Wells Fargo set up a trial period plan ("TPP") for him, under an agreement that "stated in the first line that if Corvello's representations were accurate and he complied with the terms of the trial plan, he would receive a modification offer." But then, although "Corvello alleges he complied with the TPP's terms, and made all three payments on time[,] Wells Fargo still never offered him a permanent modification, nor did it notify him that he did not qualify."
Seems like a straightforward breach of contract, right? But the district court threw the case out, holding that because the agreement stated that the loan wouldn't be modified “unless and until” the borrower received a “fully executed copy of a Modification Agreement,” the bank's promise to offer a modification was conditioned on the bank's own decision to provide a signed Modification Agreement later. In other words, the district court read the contract as giving the bank the power to undercut its own promise.
Reversing, the Ninth Circuit joined the Seventh Circuit in rejecting that reading of TPPs under HAMP:
As the Seventh Circuit put it, Wells Fargo's interpretation would allow it to “simply refuse to send the Modification Agreement for any reason whatsoever—interest rates went up, the economy soured, it just didn't like [the Borrower]—and there would still be no breach, turn[ing] an otherwise straightforward offer into an illusion.” Id. We believe the reasoning in [the Seventh Circuit's decision] is sound. Paragraph 2G cannot convert a purported agreement setting forth clear obligations into a decision left to the unfettered discretion of the loan servicer.
A nice victory for homeowners.