Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_09-md-02015/USCOURTS-cand-3_09-md-02015-63/pdf.json

Nature of Suit Code: 371
Nature of Suit: Truth in Lending
Cause of Action: 15:1601 Truth in Lending

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UNITED STATES DISTRICT COURT 

NORTHERN DISTRICT OF CALIFORNIA 

IN RE: WACHOVIA CORP. “PICK-APAYMENT” MORTGAGE MARKETING 

AND SALES PRACTICES LITIGATION 

Case No. 09-md-02015-RS 

ORDER ON MOTION TO ENFORCE 

SETTLEMENT 

I. INTRODUCTION 

In a battle seemingly without end, plaintiffs, representatives of the Pick-a-Payment 

(“PAP”) mortgage settlement class, move for an order finding that defendant Wells Fargo 

breached the parties’ 2011 agreement resolving the underlying litigation. They contend Wells 

Fargo employs an inconsistent and improper standard to deny applications for loan modification 

on the grounds that class members are not at imminent risk of default. Wells Fargo counters that it 

is invested with substantial discretion to develop and implement imminent default standards and 

claims its policies are fully compliant with the agreement. 

While the agreement affords Wells Fargo some flexibility in crafting and applying its 

imminent default standards, its discretion is limited by the plain terms of the settlement and 

federal loan modification guidelines incorporated therein. As explained in more detail below, 

Wells Fargo failed to develop and implement imminent default procedures consistent with the 

settlement agreement. The parties shall meet and confer to develop a joint proposal for 

remediation of Wells Fargo’s violations. Further, Wells Fargo shall file a supplemental brief 

explaining its financial hardship policies in greater detail. 

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II. BACKGROUND 

On December 10, 2010, the parties executed a settlement agreement (“the agreement”) to 

resolve claims arising out of the origination of PAP mortgage loans. Among other benefits, Wells 

Fargo promised to make two loan modification programs available to qualifying settlement class 

members with outstanding PAP loans: the federal government’s Home Affordable Mortgage 

Program (“HAMP”) and a proprietary Wells Fargo program called MAP2R. 

The agreement divides the settlement class into three groups. Relevant for the purposes of 

the instant dispute, Class B members are defined as borrowers who still had a PAP loan at the time 

of the settlement and were not then in default and Class C members are defined as borrowers 

already in default. Agreement § IV(B)-(C). Because of their existing default status, Class C 

members were immediately eligible for loan modification review. Pursuant to the agreement, 

Class B members were also prospectively entitled to loan modification if they later defaulted on 

their loans or could demonstrate they were at imminent risk of default at any time during the 

period from December 18, 2010 until June 30, 2013.1

 Agreement § VI(E). 

This court retained jurisdiction to enforce the terms of the settlement, which is governed by 

California law. Id. §§ XIV(B), XVII(B). In their present motion to enforce the settlement, 

plaintiffs contend that Wells Fargo breached the agreement by crafting an unduly restrictive 

imminent default evaluation process and improperly applied the standards it did develop. This is 

not the first time plaintiffs have identified alleged deficiencies in Wells Fargo’s imminent default 

procedures. In two prior orders—one issued on May 8, 2014 (“May Order”) and the other on June 

26, 2014 (“June Order”)—this court addressed related claims brought by plaintiffs. 

As a consequence of their previous motions, plaintiffs were granted limited discovery: 

Wells Fargo’s written policies governing imminent default and a deposition of a witness 

 

1

 Although the loan modification period specified in the agreement closed almost two years ago, in 

light of the need to define the parties’ prospective rights and responsibilities in connection with 

future remediation, this order generally refers to Wells Fargo’s imminent default obligations in the 

present tense. 

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knowledgeable about the bank’s methodology. Over the ensuing months, Wells Fargo ultimately 

provided the required discovery materials and produced Claire Paris (an executive familiar with 

the bank’s imminent default procedures) for deposition. After receiving this discovery, plaintiffs 

renewed their motion, contending once again that Wells Fargo’s imminent default procedures do 

not comply with the requirements of the agreement.2 At the hearing on plaintiffs’ motion, the 

parties did little to crystallize the issues presented in their moving papers. Accordingly, they were 

ordered to submit a joint supplemental brief. 

III. LEGAL STANDARD 

 “The construction and enforcement of settlement agreements are governed by principles of 

local law which apply to interpretation of contracts generally.” O’Neil v. Bunge Corp., 365 F.3d 

820, 822 (9th Cir. 2004) (internal citations and quotation marks omitted). In construing a contract 

under California law, “the trial court gives effect to the mutual intention of the parties as it existed 

at the time the contract was executed.” Cachil Dehe Band of Wintun Indians v. California, 618 

F.3d 1066, 1073 (9th Cir. 2010) (quoting Cal. Civ. Code § 1639) (internal quotation marks 

omitted). 

 “Ordinarily, the objective intent of the contracting parties is a legal question determined 

solely by reference to the contract’s terms.” Id. (internal citation and quotation marks omitted). 

“Any contract must be construed as a whole, with the various individual provisions interpreted 

together so as to give effect to all, if reasonably possible or practicable.” People v. Doolin, 45 Cal. 

4th 390, 413 n. 17 (2009) (citing Cal. Civ. Code § 1641). 

 

2

 Plaintiffs initially sought a temporary restraining order (which was denied) and a preliminary 

injunction. At the preliminary injunction hearing, however, plaintiffs set aside their request for 

immediate injunctive relief and characterized their filing instead as a simple motion to enforce the 

settlement agreement. 

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IV. DISCUSSION 

A. Wells Fargo’s Imminent Default Obligations 

1. The Agreement

Contract interpretation is aimed at discerning the “mutual intention of the parties,” gleaned 

from the plain language of disputed provisions “construed in the context of the agreement as a 

whole.” Pardee Const. Co. v. Ins. Co. of the West, 77 Cal. App. 4th 1340, 1352 (2000). The 

settlement agreement in this case, in addition to providing pecuniary relief, creates an affirmative 

obligation to “make loan modifications available for Settlement Class B Members in Imminent 

Default [or] who later become in Imminent Default.” Agreement § VI(E). The agreement defines 

the term “imminent default” as: 

[A] Borrower (as defined in Section 1.7) who the Defendants have determined, in 

accordance with applicable HAMP guidance, as necessary, that default by the 

Borrower in making scheduled payments on his or her Pick-a-Payment mortgage 

loan is reasonably foreseeable. In assessing whether a Borrower is facing 

Imminent Default, the Defendants will not consider funds held in a 401K, 457, 

401(a), or 503 retirement account, an IRA, SEP IRA, Simple IRA, or Roth IRA. 

Additionally, the fact that a Borrower is projected to Recast to a fully amortizing 

payment under the terms of the Pick-a-Payment mortgage loan within the 

upcoming four (4) contractual Monthly Payments (as defined in Section 1.41 

hereafter) using the current applicable interest rate as determined under the terms of 

the note, and the resulting increase, if any, to the respective Borrower’s DTI (as 

defined in Section 1.22) shall be considered as a factor in the determination of 

Imminent Default. [Agreement § I, 1.33] 

Before wading into the parties’ dispute as to the ultimate import of this definition, a few 

basic observations must be made. First, it is clear that the agreement imposes a discretionary 

responsibility on Wells Fargo. As loan servicer, it is affirmatively obligated by the agreement to 

evaluate loan modification applicants to determine whether they are at imminent risk of default. 

At the same time, Wells Fargo is empowered by the agreement to discriminate among prospective 

candidates for loan modification, offering benefits to some borrowers but not others. Id. (loan 

modification must be made available to borrowers “the Defendants have determined” to be at 

imminent risk of default) (emphasis added). Finally, Wells Fargo’s discretion in this regard is 

limited: it is required to make imminent default determinations “in accordance with applicable 

HAMP guidance, as necessary.” Id. 

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The Class B Notice (“notice”), negotiated by the parties and expressly incorporated into the 

terms of the agreement, gives further contours to Wells Fargo’s imminent default responsibilities: 

Imminent Default describes a borrower who meets a test to show the borrower is 

reasonably likely to default on his or her Pick-a-Payment mortgage because of 

financial hardship or other changed circumstances. Generally, the current test for 

“Imminent Default” is as follows: 

1. Long Term Hardship, meaning a borrower that is having difficulty making 

his or her mortgage payments and the duration of that difficulty is expected 

to be greater than 12 months; and 

2. Financial Hardship, defined as one of the following that currently exists or 

occurs prior to June 30, 2013: 

a. Death of a borrower; 

b. Long-term or permanent disability or illness of a borrower or dependent 

family member; 

c. Legally-documented divorce or separation of the borrower and 

coborrower; 

d. Separation of borrowers unrelated by marriage, civil union, or similar 

civil domestic partnership under applicable law; 

e. A combination of reduction of income and increase in housing expenses 

(principal and interest only) that exceeds 10% of current income. The 

comparison period shall be approximately 12 months prior to the date 

modification is sought; however, a greater period may be used if the 

condition has been consistent; and 

3. Cash reserves of less than $25,000, excluding retirement accounts; and 

4. The property is occupied by the borrower as his or her principal residence; 

and 

5. The borrower’s loan-to-value ratio must exceed 80%, or the loan must have 

 a positive “Net Present Value.” 

The enumerated financial hardships found in the notice are expressly incorporated into the 

agreement’s definition of imminent default. See May Order at 6. 

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2. Prior Orders 

Like other post-settlement skirmishes, much of the instant dispute focuses on whether 

Wells Fargo’s imminent default policies are “in accordance with applicable HAMP guidance, as 

necessary.” Neither the May nor June Order delineates the precise extent to which HAMP 

guidance3 must bear on Wells Fargo’s imminent default analysis. Instead, as those Orders make 

clear, while the agreement’s definition of imminent default clearly contemplates reference to 

federal loan modification guidelines, other provisions limit the degree to which Wells Fargo is 

required to rely on HAMP guidance. 

The May Order addressed two questions regarding Wells Fargo’s imminent default 

obligations under the agreement. First, it rejected plaintiffs’ argument that Wells Fargo 

improperly limited its financial hardship analysis to the five factors listed in the class notice rather 

than more expansive HAMP guidance issued by the federal government. As the Order 

determined, the agreement provides “for loan modification only upon a finding that the borrower 

has experienced one of the five grounds for financial hardship specified in the class notice.” In 

addition, the May Order denied plaintiffs’ claim that the agreement requires an accounting of tax 

liabilities in assessing imminent default. In so holding, the Order observed that while HAMP 

imminent default guidelines contain no reference to tax liabilities, they do, in contrast, require 

servicers to consider various other enumerated expenses. 

The June Order dealt with plaintiffs’ renewed motion to enforce the settlement, predicated 

again on the argument that Wells Fargo’s imminent default test does not comply with the 

agreement. As the June Order observed, Wells Fargo advanced “various articulations of its 

imminent default analysis” in post-settlement proceedings. At the hearing on plaintiffs’ renewed 

motion, Wells Fargo described its imminent default analysis as entailing six distinct steps, largely 

mirroring the terms of the notice. While this “latest articulation” of the test did not “necessarily 

 

3

 The “HAMP guidance” in effect at the time of the settlement was the Making Home Affordable 

Program Handbook for Servicers of Non-GSE Mortgages, Version 2.0 (September 22, 2010) 

(“HAMP Handbook,” “guidelines,” or “guidance”). 

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contradict the terms of the settlement agreement,” this court found “troubling” Wells Fargo’s 

continued equivocation “on its process for complying with the terms of a settlement agreement 

entered by the parties more than three and a half years ago.”4 

Although the foregoing orders touch on Wells Fargo’s obligations under the HAMP 

guidelines, neither one expressly defines the boundaries of the lender’s responsibilities. Given the 

parties’ present dispute, unequivocal instruction is now required. The phrase “in accordance with 

applicable HAMP guidance, as necessary” must be interpreted as it relates to Wells Fargo’s 

obligation to consider non-mortgage obligations and living expenses in its imminent default 

analysis. 

3. “HAMP Guidance, As Necessary”

Despite the plain language of the agreement and the direction provided by prior orders, 

there remains a wide gulf between the parties’ views on the extent to which Wells Fargo was 

required to incorporate HAMP guidance into its imminent default procedures. The parties seem to 

have almost no idea what, exactly, they agreed to more than four years ago. Despite the 

expenditure of considerable rhetorical resources, neither has proposed a sensible interpretation of 

the phrase “in accordance with applicable HAMP guidance, as necessary.” 

According to plaintiffs, the settlement agreement establishes the following framework: (1) 

any class member who meets the criteria enumerated in the notice must be deemed by Wells Fargo 

to be at imminent risk of default; and (2) if a class member does not satisfy the test in the notice, 

Wells Fargo is then required to consider separately whether the applicant’s default was reasonably 

foreseeable under the HAMP guidelines. This interpretation finds no support in the language of 

the agreement. Further, plaintiffs’ vision of a two-step imminent default process is in direct 

conflict with the law of this case. In no uncertain terms, the May Order determined that the parties 

had, in the notice, agreed upon a narrower test for financial hardship than that found in the HAMP 

 

4

 As evidenced by the above language, contrary to Wells Fargo’s characterizations, this court has 

not affirmatively “approved” the servicer’s imminent default test in its entirety. 

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guidelines. The HAMP hardship criteria discussed in that Order are not incorporated into the 

agreement, which provides “for loan modification only upon a finding that the borrower has 

experienced one of the five grounds for financial hardship specified in the class notice” (emphasis 

added). Yet, per the interpretation now advanced by plaintiffs, if an applicant does not satisfy 

these criteria, Wells Fargo is nevertheless required to conduct a separate imminent default analysis 

under the framework of the broader HAMP guidelines. Their proposal is foreclosed by the plain 

language of the May Order. 

Plaintiffs’ interpretation is crystalline, however, when compared to Wells Fargo’s opaque 

and internally contradictory construction. The lender first suggests that the agreement gives it “the 

right to determine when, and to what extent, it [is] ‘necessary’ to refer to HAMP guidance.” 

According to Wells Fargo, this discretion is limited only by (1) terms of the notice, which requires 

that the test “always be ‘generally’ the same as the then-‘current’ test,” and (2) general principles 

of contract law. Inconsistently, Wells Fargo later concedes that the agreement requires an 

accounting of non-mortgage monthly expenses, thus obviating its claim of the right to determine 

when reference to HAMP guidance is “necessary.” 

It is true that the generous terms of the agreement (“the Defendants have determined”) 

imbue Wells Fargo with discretion to develop the exact contours of its imminent default test. But, 

again, its discretion is clearly cabined by the requirement that it arrive at standards “in accordance 

with applicable HAMP guidance, as necessary.” That language does not confer upon Wells Fargo 

license to choose when reliance on HAMP guidance is necessary and, when necessary, the degree 

of such reliance. 

Instead, reasonably construed, the phrase “in accordance with applicable HAMP guidance, 

as necessary” embodies an intent that gaps in the agreement’s broad definition of imminent default 

be filled by the terms of specific and mandatory obligations created by federal program guidelines. 

This portion of the agreement did not, of course, prevent the parties from contracting out of the 

HAMP guidelines and into more specific imminent default criteria, as they did in agreeing upon 

the limited financial hardship criteria listed in the notice. Where, however, the agreement is silent, 

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it incorporates mandatory imminent default guidance found in the HAMP handbook into its 

imminent default procedures. Wells Fargo is not permitted to determine unilaterally when reliance 

on HAMP guidance is “necessary”; the bounds of necessity are supplied by the terms of the federal 

guidelines themselves. 

4. Non-Mortgage “Monthly Obligations” and “Living Expenses”

With these principles in place, it is evident that Wells Fargo is required under the 

agreement to consider “monthly obligations (including personal debts, revolving accounts, and 

installment loans), and a reasonable allowance for living expenses” in determining whether a class 

member is in imminent default and thus entitled to loan modification. The HAMP guidelines 

provide: 

When making an imminent default determination, the servicer must evaluate the 

borrower’s hardship as well as the condition of and circumstances affecting the 

property securing the mortgage loan. The servicer must consider the borrower’s 

financial condition, liquid assets, liabilities, combined monthly income from wages 

and all other identified sources of income, monthly obligations (including personal 

debts, revolving accounts, and installment loans), and a reasonable allowance for 

living expenses such as food, utilities, etc. The hardship and financial condition of 

the borrower must be verified through documentation. [HAMP Handbook ¶4.4 

(emphasis added)]. 

The above language is specific and mandatory; it is incorporated by reference into the agreement. 

As Wells Fargo correctly observes, however, the HAMP guidelines do not specify how a servicer 

is required to account for non-mortgage expenses. Conceding that it has an affirmative obligation 

to consider non-mortgage expenses, Wells Fargo claims it does consider such expenses, in two 

ways. 

 First, it contends, the threshold Debt-to-Income (“DTI”)5 requirement contained in its 

imminent default test implicitly embodies the principle that “if a borrower’s payment is below 

 

5

 In keeping with their inability to agree on much of anything, the parties have interchangeably 

used the terms “DTI” and “HTI” (Housing-to-Income) in moving papers. Because “DTI” is 

expressly defined by the agreement, that term is used throughout this order. 

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31%, then he has sufficient income for other liabilities, obligations, and living expenses.” This 

argument finds no support in the agreement or HAMP guidance. As both parties agree, a threshold 

requirement to loan modification under the agreement and the HAMP guidelines is that an 

applicant must have a DTI in excess of 31%. DTI, however, is calculated solely by reference to 

mortgage expenses; other liabilities and expenses are irrelevant to the math. Agreement § I, 1.22. 

Per HAMP guidance, a servicer “must” also consider non-mortgage expenses in determining 

whether default is imminent. The guidelines contemplate that the servicer will analyze specific 

obligations, such as “personal debts, revolving accounts, and installment loans.” HAMP 

Handbook ¶ 4.4. If such consideration were implicitly embedded in the threshold DTI 

requirement, the guidelines’ mandate that a lender consider particular non-mortgage expenses 

would be wholly redundant. Gustafson v. Alloyd Co., Inc., 513 U.S. 561, 574 (1995) (textual 

interpretation must “avoid a reading which renders some words altogether redundant”). Wells 

Fargo’s calculation of borrowers’ DTI does not satisfy its further obligation to determine whether 

additional “monthly obligations” suggest default is imminent. 

Wells Fargo also contends that it accounts for a borrower’s monthly expenses by 

considering whether the applicant qualifies for one of the five financial hardships enumerated in 

the notice. This claim would seem to be supported (at least in part) by Wells Fargo’s written 

imminent default policies. Yet plaintiffs contend, and Wells Fargo does not specifically refute, 

that although the servicer collects documentation of non-mortgage expenses from loan 

modification applicants, it does not actually rely on that information in making imminent default 

decisions. The deposition testimony of Claire Paris further appears to confirm that, apart from 

calculating DTI, Wells Fargo’s imminent default process does not account for non-mortgage 

expenses. 

Finally, Wells Fargo asserts that non-mortgage expenses are actually analyzed in 

connection with the “long-term hardship” prong of its imminent default framework. According to 

Wells Fargo, an accounting of non-mortgage obligations occurred when, “in assessing their own 

situation, borrowers were free to conclude that their non-housing debt levels, food and clothing 

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expenses, and dependent care expenses were making their housing payment unaffordable.” While 

creative, this theory neglects the plain language of the HAMP guidelines, which affirmatively 

requires a servicer actively to consider specific non-mortgage obligations and living expenses. See 

People v. Stephen, 182 Cal. App. 3d Supp. 14, 18 (1986) (“words such as ‘must’ and ‘shall’” 

convey a “mandatory or an imperative connotation in the obligatory sense”). There is no evidence 

that Wells Fargo’s long-term hardship test entails any affirmative analysis of a borrower’s specific 

obligations and expenses. 

Yet, despite Wells Fargo’s apparent failure to comply with mandatory HAMP guidance, 

plaintiffs have not demonstrated that they are entitled to any relief. As determined in the May 

Order, the agreement provides for loan modification “only upon a finding that the borrower has 

experienced one of the five grounds for financial hardship specified in the class notice.” 

Accordingly, the law of the case prevents plaintiffs from creating, out of whole cloth, a novel 

financial hardship criteria based on non-mortgage obligations and living expenses. 

If Wells Fargo’s consideration of the enumerated financial hardships also entails some 

individualized analysis of a borrower’s expenses, HAMP guidance requires that non-mortgage 

obligations and living expenses be included in that calculus. If, on the other hand, Wells Fargo 

applied its limited criteria in a lenient fashion throughout the modification period, by concluding, 

for example, that disabled class members satisfied the financial hardship prong of the test without 

analyzing any specific expenses, further consideration of non-mortgage obligations and living 

expenses would only serve to impose additional barriers to loan modification for otherwise 

qualified class members. As detailed below, despite two rounds of briefing, the exact contours of 

Wells Fargo’s financial hardship test remain inscrutable. Upon receiving the additional briefing 

ordered herein, the court will finally determine whether plaintiffs are entitled to any relief based 

on Wells Fargo’s apparent failure to consider specific non-mortgage expenses in accordance with 

HAMP guidance. 

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B. Major Change in Circumstances Test 

Plaintiffs also contend that Wells Fargo uses obscure and shifting standards to evaluate 

whether borrowers meet the final financial hardship category listed in the notice (termed “major 

change in circumstances” by the parties). As stated above, in addition to divorce, death, and other 

intervening events, the notice provides that a borrower can qualify for imminent default by 

demonstrating: “A combination of reduction of income and increase in housing expenses 

(principal and interest only) that exceeds 10% of current income. The comparison period shall be 

approximately 12 months prior to the date modification is sought; however, a greater period may 

be used if the condition has been consistent.” 

In her deposition and again in a declaration submitted in support of defendant’s opposition, 

Paris explained that Wells Fargo’s criteria for determining reduction in income went through two 

different iterations. For the period from December 18, 2010 to April 25, 2011, it calculated the 

reduction by measuring the difference between a borrower’s verified current monthly gross 

income and his prior stated monthly gross income. On April 26, 2011, these criteria changed and 

the reduction in income was subsequently measured by the difference between the borrower’s 

verified current monthly gross income and his monthly gross income at origination. 

Wells Fargo admits that the second iteration of its test does not mirror the description 

found in the notice. Instead, it contends that because the language found in the notice only 

“generally” represented the “current” test, it had discretion to tinker with its “major change of 

circumstances” criteria. Yet, while some flexibility is permitted by the broad language found in 

the agreement, the HAMP guidelines squarely demand that once “written standards for imminent 

default” have been developed, a servicer is required to apply those standards “equally to all 

borrowers.” HAMP Handbook, ¶ 4.4. Indeed, Wells Fargo has previously acknowledged to this 

court that it “must apply the same Imminent Default standard ‘equally to all borrowers’ or run 

afoul of HAMP.” Dkt. 614 at 14. This obligation cannot be satisfied by fluctuating policies. 

It is of little significance that the notice indicates its terms only “[g]enerally” constitute the 

“current” test. That vague language did not give Wells Fargo discretion to fiddle with its 

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imminent default test during the settlement period, administering certain standards to some class 

members and changing the loan modification calculus applicable to others, particularly where 

more specific HAMP guidance requires that written standards be applied equally across the class. 

See Cal. Civ. Proc. Code § 1859. Moreover, plaintiffs contend—and Wells Fargo apparently does 

not refute—that it lacks written policies documenting certain key contours of its major change in 

circumstances test. 

The notice defines Wells Fargo’s major change in circumstances test as entailing a 

comparison period of “approximately 12 months prior to the date modification is sought.”6 That 

definition, expressly incorporated into the agreement, must form the foundation of the servicer’s 

major change in circumstances test. Wells Fargo is required to apply that standard equally across 

the settlement class. By employing evolving and perhaps ill-defined standards which did not 

always mirror the test described in the notice, Wells Fargo breached the settlement agreement. 

C. Evaluation of Financial Hardship Criteria 

Next, plaintiffs contend that Wells Fargo failed to apply the other financial hardship 

criteria—death, long-term disability, divorce, separation—consistently and in accordance with the 

terms of the agreement. Again, the notice allows class members to qualify for imminent default 

by demonstrating a reasonable likelihood of default “because of financial hardship or other 

changed circumstances.” Financial hardship is defined as “one of” five conditions “that currently 

exists or occurs prior to June 30, 2013.” 

Despite two attempts, the parties have done very little to frame this issue meaningfully for 

judicial review. At bottom, Wells Fargo seeks a nebulous ruling that the financial hardship 

element required proof of an occurrence which “actually affect[ed] a borrower’s ability to pay.” It 

does not explain, however, the manner in which it determines whether one of the enumerated 

hardships affects a class member’s ability to pay. Plaintiffs, in contrast, request a holding that 

 

6

 Neither party seems to think the notice’s statement that “a greater period may be used if the 

condition has been consistent” has much relevance to Wells Fargo’s obligations. 

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Wells Fargo must “consider a borrower in imminent default if he or she satisfies any of the 

enumerated financial hardships.” Neither of these expansive standards is adequate. 

Some guidance, however, can be provided to the parties. Plaintiffs interpret the agreement 

to mean that any class member who was deceased, disabled, or divorced at any time “prior to June 

30, 2013”—even if the hardship occurred many years before loan origination—may qualify for 

imminent default. This reading is inconsistent with the plain language of the notice, which defines 

a “financial hardship” as interchangeable with “other changed circumstances.” That terminology 

indicates that only a post-origination change in circumstances renders a borrower eligible for loan 

modification. A borrower divorced or disabled prior to origination cannot reasonably be deemed 

to have experienced any “changed circumstances” relevant to his or her relationship with Wells 

Fargo. Accordingly, applicants such as Francis Matijevich, who had a disability predating the 

origination of his PAP loan by decades, did not qualify for financial hardship on that basis alone. 

This interpretation does not, contrary to plaintiffs’ rhetoric, amount to “adding language” to the 

contract. Rather, it is consistent with the fundamental principle that “language must be read in 

context since a phrase gathers meaning from the words around it.” Hibbs v. Winn, 542 U.S. 88, 

101 (2004). 

This does not, however, fully resolve the parties’ dispute. Throughout its briefing, Wells 

Fargo fails to explain satisfactorily how it considers the timing of a class member’s financial 

hardship, if at all. The cryptic explanations offered by Paris are suggestive of further 

indeterminacy in Wells Fargo’s imminent default standards, potentially constituting additional 

violations of the agreement and HAMP guidance.7

 Plaintiffs also maintain that, instead of finding 

 

7

 Robert Raby, one of the class members discussed in plaintiffs’ motion, was denied loan 

modification on uncertain grounds. Wells Fargo determined that he had not suffered a financial 

hardship because his divorce had occurred more than three years prior to his loan modification 

application. At the time he was approved for the loan, however, he was married. It is unclear 

from Paris’ testimony whether he was denied loan modification because he failed to represent that 

he had a long-term hardship, or whether Wells Fargo deemed his three-year-old divorce too 

temporally distant to warrant a finding of imminent default. The latter rationale would be highly 

questionable. 

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class members eligible for imminent default if they satisfy “any of” the financial hardship criteria, 

Wells Fargo actually applies the major change of circumstances test to all borrowers regardless of 

whether, for example, they have also experienced death or divorce. If true, this might very well 

constitute another violation of the settlement agreement, which requires a finding of imminent 

default if “any” of the financial hardship criteria are satisfied. Wells Fargo refutes this point, but 

only by conclusory reference to the muddled Paris testimony. 

Before the parties can be extricated from their self-made morass, Wells Fargo must provide 

additional clarity. No later than one week from the date of this order, it shall submit a 

supplemental brief (of no more than five pages) specifically addressing the following questions, 

with accompanying citations to the Paris deposition transcript and Wells Fargo’s written imminent 

default policies:

 Do Wells Fargo’s imminent default policies account for the timing of applicants’ 

financial hardships? Provide a yes or no answer. If yes, in what manner and 

pursuant to which specific policies? 

 Do Wells Fargo’s imminent default policies allow an applicant to satisfy the 

financial hardship prong of the imminent default test solely by providing 

documentation of death, long-term disability, divorce, or separation? If not, what 

specific further analysis do the policies undertake to determine whether such 

applicants are entitled to a finding of imminent default? 

 If an applicant was recently divorced, disabled, separated, or deceased, do Wells 

Fargo’s imminent default policies consider the impact that divorce, disability, 

separation, or death had on the class member’s income and expenses? If so, how 

and pursuant to which policies? Does such consideration take into account nonmortgage obligations and living expenses? If so, how? 

D. Calculation of MAP2R DTI 

 Finally, plaintiffs claim that Wells Fargo breached the agreement because, in analyzing 

imminent default in connection with the MAP2R program, its policies calculate a borrower’s DTI 

by reference to his “minimum, required payment” instead of his fully amortizing payment. As 

plaintiffs emphasize, the agreement defines DTI with specific reference to the borrower’s fullyamortizing payment, including “first-lien monthly mortgage obligations (including monthly 

amounts for principal, interest [and other expenses]) . . . regardless of whether any of the 

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foregoing are included in the Borrower’s Monthly Payment.” Agreement § I, 1.22 (emphasis 

added). 

Wells Fargo agrees that the agreement’s definition of DTI refers to the fully amortizing 

payment and not the minimum required payment and further acknowledges that its policies 

employ the minimum required payment to calculate DTI in the context of determining whether 

MAP2R applicants are at risk of imminent default.8 It contends, however, that the definition of 

DTI quoted by plaintiffs is only applicable in the context of loan modification waterfalls (i.e., the 

process of decreasing the monthly payments of borrowers already approved for loan 

modification). In the context of determining whether particular borrowers are entitled to a finding 

of imminent default, Wells Fargo contends, it is free to use the minimum monthly payment to 

calculate DTI.9 

 The agreement, it is true, does not specifically define imminent default by reference to 

DTI. As the May Order observed, however, the threshold DTI inquiry is an uncontroversial 

component of the imminent default test because “the objective of both HAMP and MAP2R is to 

reduce a borrower’s DTI to no great than 31%. A borrower whose DTI is already 31% or less 

would not benefit from either modification program.” This settled understanding of the DTI 

threshold is derived from the HAMP guidelines, which define DTI based on a borrower’s fullyamortizing payment, “regardless of whether these expenses are included in the borrower’s current 

mortgage payment.” HAMP Handbook ¶¶ 1.1, 6.1.2. Wells Fargo previously confirmed this 

rationale for the threshold DTI inquiry contained in its imminent default analysis. Dkt. 640 at 12 

 

8

 According to plaintiffs, Wells Fargo’s DTI formula differs depending on whether a particular 

loan modification applicant qualifies for HAMP or, instead, for MAP2R. Plaintiffs claim that 

Wells Fargo uses the fully-amortizing monthly payment to calculate DTI in determining whether 

HAMP applicants are at imminent risk of default but the minimum monthly payment to calculate 

DTI for MAP2R in addressing the same question. Wells Fargo does not address this discrepancy. 

9

 Wells Fargo also observes that, in defining imminent default, the agreement refers to the term 

“scheduled payments,” as opposed to the “fully-amortizing payment.” This is not persuasive 

evidence that Wells Fargo had authority to create a redundant analytical framework for evaluating 

MAP2R imminent default applicants. Nor does this theory explain why, in contrast, fullyamortizing DTI was used to evaluate HAMP applicants. 

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(Step 1 of the imminent default test, “calculating the borrower’s DTI, looks at whether the 

borrower’s DTI is in excess of the federal government’s affordable 31% ‘target’”); Dkt. 614 at 8-

9. Finally, section VI(E)(2) of the agreement, which generally governs eligibility for the MAP2R 

program, reflects this understanding: 

Settlement Class B Members in Imminent Default, [or] who later become in 

Imminent Default . . . shall be considered for a MAP2R Modification on the terms 

as outlined in Sections VI(E)(3) and (5) of this Agreement. The following process 

shall commence upon . . . verification that the Settlement Class Member’s DTI is 

above thirty-one percent (31%). (Emphasis added). 

Once again, the use of the term “DTI” in the above provision requires consideration of a 

borrower’s fully-amortizing payment. Agreement § I, 1.22. 

 Notwithstanding this background, and despite the fact that it apparently uses a fullyamortizing DTI threshold to analyze imminent default for HAMP applicants, Wells Fargo 

contends that the agreement leaves it free to apply a different formula in the MAP2R imminent 

default context. This argument has two fatal flaws. First, if the MAP2R imminent default 

framework Wells Fargo describes had been countenanced by the agreement, the DTI threshold 

found at section VI(E)(2) would have been largely superfluous. A borrower’s fully-amortizing 

DTI will always be greater than or equal to that borrower’s monthly minimum DTI measured at 

the same point in time. Consequently, any imminent default applicant with a monthly minimum 

DTI of greater than 31% would also have a fully-amortizing DTI above the threshold, eliminating 

the need for Wells Fargo to conduct the “verification” specified in section VI(E)(2). See, e.g., 

Crosby v. HLC Properties, Ltd., 223 Cal. App. 4th 597, 604 (2014) (“when interpreting a contract, 

we strive to interpret the parties’ agreement to give effect to all of a contract’s terms, and to avoid 

interpretations that render any portion superfluous”). Second, by articulating a unitary definition 

of the term “imminent default”—which is then used in provisions defining eligibility for HAMP 

and MAP2R—the agreement precludes Wells Fargo from developing separate imminent default 

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standards for the two programs. Accordingly, Wells Fargo breached the agreement by subjecting 

MAP2R applicants to an unwarranted additional hurdle not contemplated by the parties’ bargain.10 

IV. CONCLUSION 

 Wells Fargo breached the settlement agreement in at least two ways. First, it violated the 

agreement by failing to establish and apply equally across the class uniform written standards for 

its “major change of circumstances” test. Second, it breached the agreement by applying a DTI 

threshold based on borrowers’ monthly minimum payments in evaluating MAP2R applicants for 

imminent default. 

 The parties shall promptly meet and confer to develop a joint proposal for remediation of 

the violations described above. If agreement proves impossible, the parties must submit 

competing proposals. In either case, the parties’ proposed remedial approach must comply with 

the following parameters: (1) relief shall be prospective, allowing class members whose 

applications were denied for lack of imminent default to reapply, based on their current situations; 

(2) borrowers will not be permitted retroactive relief (i.e., based on information submitted in 

connection with a previously-denied modification application); (3) Wells Fargo must consider 

class members for prospective HAMP and MAP2R loan modification based on the “major change 

of circumstances” test articulated in the Class B notice, calculating prior monthly income from 

approximately 12 months prior to the evaluation or a longer period if the condition has been 

consistent; and (4) Wells Fargo must consider class members for prospective MAP2R loan 

modification based on an imminent default DTI threshold that accounts for a borrower’s fullyamortizing payment. The parties shall file their proposal or proposals no later than two weeks 

from the date of this order. 

 No later than one week from the date of this order, Wells Fargo shall file a supplemental 

brief describing its financial hardship policies in more detail, as specified herein. Upon receiving 

 

10 In their initial motion, plaintiffs also asserted that Wells Fargo has violated the agreement by 

failing to consider whether an imminent default applicant’s loan has a positive net present value. 

They have apparently abandoned this argument in their portion of the supplemental brief. 

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Wells Fargo’s supplemental brief, a further order will issue setting forth additional remediation, if 

any, which may be required. 

 IT IS SO ORDERED. 

Dated: April 15, 2015 

______________________________________ 

RICHARD SEEBORG 

United States District Judge 

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