Massive Wachovia “Pick-a-Payment” Settlement Underscores Continuing Vitality of Class Actions

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Now, nearly two-and-a-half years after the September 2008 collapse of Lehman Brothers (the emotional, if not technical, start of the “Great Recession”), we are seeing the resolution of litigation related to the phenomenon that most agree was the tripwire to the economy’s sudden fall: sub-prime mortgages and their too-good-to-be true consumer inducements.

One notable settlement was recently reached in the case of In re: Wachovia Corp. “Pick-a-Payment” Mortgage Marketing and Sales Practices Litigation, No. 5:09-md-02015-JF (C.D. Cal. filed Feb. 13, 2009). A copy of the Settlement Agreement is available here. The Wachovia Corp. “Pick-a-Payment” class had alleged that Wachovia (itself a casualty of the economic crisis and now owned by Wells Fargo) deceived customers by failing to disclose that borrowers could face negative amortization of their payment option mortgages by choosing to make minimum payments in amounts less than the interest accrued during the payment period. The remaining interest would then be capitalized, or added to the loan principle, which would itself accrue interest. The tantalizingly low payments of these “Pick-a-Payment” loans were a common feature of home mortgage loans that, in the expectation of a perpetual refinancing market, eventually entailed enormous balloon payments once the early-phase, unnaturally low payments expired. Apart from deceiving consumers, this and other negative amortization schemes directly contributed to the mortgage defaults that triggered the collapse of mortgage-backed securities, a wholly separate source of litigation. In a related matter, Wells Fargo entered into individual settlement agreements with the Attorneys General of at least ten states, including California, to provide mortgage modification and restitution to customers who obtained Pick-a-Payment loans from Wachovia and World Savings Bank.

The immediate significance of the Pick-a-Payment settlements is three-fold. First, the settlements are notable in their magnitude: the In re: Wachovia Corp. settlement pool is over $50 million, exclusive of attorneys’ fees and administrative costs, and the Wells Fargo settlement with the State of California includes over $2 billion in loan modifications. In addition, the California settlement obligates Wells Fargo to make direct restitutionary cash payments totaling $32 million to over 12,000 California borrowers who lost their homes through foreclosure on Pick-a-Payment loans. Second, the Pick-a-Payment settlements underscore the continuing relevance of government entities’ prosecution of consumer-based civil claims. Then-Attorney General, now governor, Jerry Brown is understood to have been personally invested in the litigation, a pro-consumer zeal that will likely carry over into his newest gubernatorial administration. (Similarly, in the wage-and-hour realm, President Barack Obama has substantially expanded the federal Department of Labor’s enforcement of misclassification violations, in which employers attempt to elude overtime obligations by titling employees as “managers” or “administrative” but without satisfying the requisite criteria for an overtime exemption.) Finally, with the term “class action” having unfortunately acquired an unearned negative connotation among some due to ongoing corporate campaigns, the Pick-a-Payment settlements serve as a reminder that only class actions are capable of the sort of massive remedial action that was called for here, which directly benefited victims of deceptive loan practices who had been put out of their homes.