Bank of America sued for not modifying mortgages

NEW YORK (Reuters) - Homeowners have sued Bank of America Corp for allegedly reneging on a promise it made to modify troubled mortgages as a condition of accepting $25 billion of federal bailout money.

In a lawsuit filed Monday in Seattle federal court and seeking class-action status, two Washington residents allege the largest U.S. bank puts its own financial interests ahead of obligations to help struggling homeowners.

According to the complaint, Bank of America agreed to take part in the Treasury Department's $75 billion Home Affordable Modification Program, known as HAMP, because it accepted bailout funds from the Troubled Asset Relief Program.

But the complaint said Bank of America had an incentive not to modify loans because doing so might cause it to repurchase more loans, collect lower servicing fees, or assess lower default charges because fewer payments would be deemed late.

As a result, Bank of America "has serially strung out, delayed, and otherwise hindered the modification processes," leaving thousands of borrowers "often worse off than they were before they sought a modification," the complaint said.

The plaintiffs Kamie and Daniel Kahlo alleged that they sought to modify their mortgage after their annual income fell to $20,000, too low to cover their $1,460 monthly payments.

They said Bank of America advised them to become delinquent so they would qualify, and that they then signed an agreement to cut their monthly payments almost in half.

Nevertheless, they alleged that despite their making the lowered monthly payments, which were cashed, Bank of America served them with a default notice and failed to provide final modification documents.

A Bank of America spokeswoman declined to comment, saying the bank had not been served with the lawsuit. The Charlotte, North Carolina-based lender has repaid the $25 billion of bailout money.

The complaint seeks class-action status, an order for Bank of America to perform its obligations under HAMP, compensatory and other damages, and other remedies.

The case is Kahlo v. Bank of America NA et al, U.S. District Court, Western District of Washington, No. 10-00488.

(Reporting by Jonathan Stempel; Additional reporting by Joe Rauch in Charlotte, N.C., editing by Matthew Lewis)