Wells Fargo Must Face Foreclosure Suit After Loan Accord

July 3 (Bloomberg) -- Wells Fargo & Co. must face borrowers’ claims that it violated the Equal Credit Opportunity Act by starting foreclosure proceedings while the customers were making payments under a loan-modification agreement.

The U.S. Court of Appeals in San Francisco today reinstated the claims of John and Carol Schlegel, who received default notices after the bank told them to proceed with payments under a loan-modification plan and failed to respond to their inquiry seeking an explanation.

The bank’s action, the court found, constituted a revocation of credit without notice required under the Equal Credit Opportunity Act, which makes it illegal for creditors to discriminate against applicants and requires them to provide an explanation within 30 days when denying or revoking credit or changing credit terms. The Schlegels sued on behalf of themselves and other borrowers.

“While sending a mistaken default notice would not necessarily constitute an adverse action, the Schlegels’ complaint describes egregious conduct that goes far beyond clerical error,” the three-judge panel said.

The bank sent five default notices before acknowledging the modification agreement was in effect and the notices were incorrect, according to the ruling. The panel sent the case back to federal court in San Francisco.

“We are reviewing the decision handed down by the court today and will assess our legal options going forward,” Tom Goyda, a spokesman for San Francisco-based Wells Fargo, said in an e-mail.

The case is John Schlegel v. Wells Fargo, 11-16816, U.S. Court of Appeals for the Ninth Circuit (San Francisco).

To contact the reporter on this story: Karen Gullo in San Francisco at kgullo@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net