Second strikeIn its second opinion this summer that involved Wells Fargo and mortgage modifications, the Ninth Circuit ruled that Wells Fargo violated the Equal Credit Opportunity Act (ECOA) when it agreed modify the mortgage of Mr. and Mrs. Schlegel, accepted payments from them under the new agreement, but then pursued foreclosure anyway.

(In the other case this summer, the Ninth Circuit told Wells Fargo that it cannot enter into a trail plan period agreement with a homeowner under the HAMP program, and then fail to live up to its end of the bargain after the homeowner has done his part.  See 9th Circuit Tells Wells Fargo: You Can’t Have Your Cake and Eat it Too.)

Saying Sorry Is Not Enough

In 2010, Wells Fargo and the Schlegels entered into an agreement that modified their mortgage. The Schlegels began making payments in accordance with the new agreement. When the Schlegels received a default notice from Wells Fargo, they contacted the bank. When they got no action, they eventually filed a lawsuit. After receiving the lawsuit, Wells Fargo sent two more default notices. After the fifth notice (and presumably after a lawyer finally read the Shlegels’ complaint), Wells Fargo admitted that the default notices were sent in error.

According to the Ninth Circuit, Wells Fargo’s belated apology was not enough to get it off the hook. Schlegel v. Wells Fargo, No. 11-16816 (9th Cir. July 3, 2013) It ruled that Wells Fargo’s threats to foreclose on the Schlegels violated the modification agreement and therefore also violated the section of the ECOA that prohibits lenders from taking an “adverse action” without providing the consumer with a statement of reasons for taking such action.

(The Schlegels also argued that Wells violated the Federal Fair Debt Collection Practices Act, but the court said that Wells did not qualify as a “debt collector” for purposes of the act.)

Wells Fargo Cannot Rely on Its Own Wrongdoing to Get Out of Liability

Wells Fargo  argued that it didn’t violate the ECOA because it’s threats of foreclosure violated the modification agreement and therefore were unenforceable. Because the threats were unenforceable, said Wells, they didn’t really constitute an adverse action. What???  Yep, that’s what the Ninth Circuit thought too. You can’t rely on the illegality of your actions, said the court, to get out of liability.

Dual-Tracking Now Expressly Prohibited in California

While the Schlegels had to rely on the ECOA in seeking monetary damages for Wells’ egregious actions, getting relief is now more straightforward. The events in the Schlegels case arose in 2010. Since then, the California legislature passed the California Homeowner Bill of Rights, which prohibits a mortgage holder from pursing foreclosure while its considering a loan modification. The new law provides a private right of action (meaning consumers can sue) and allows for monetary damages. (To learn more, see Nolo’s article California Foreclosure Protection: The Homeowner Bill of Rights.)