The federal government’s “help” for struggling homeowners has been irritating for consumer advocates, displeased that it hasn’t been more effective. But the Home Affordable Modification Program (HAMP) may turn out to be an even bigger headache for banks, as consumers take their complaints from the helpdesk to the courthouse.

And Massachusetts judges are providing a sympathetic ear.

Over the next year, “absolutely, I think [these claims] are going to be a bigger deal, particularly in states with broad consumer protection statutes such as Massachusetts,” said Kathleen Engel, a law professor at Suffolk University in Boston and an expert on the foreclosure crisis. “As more evidence comes to light about the way banks were handling the HAMP modifications, the more grounds borrowers will have to bring claims based on [problems].”

‘Third Party Beneficiaries’

The government programs were formulated with the express intent of helping homeowners avoid foreclosure through mortgage loan modifications intended to lower monthly payments. The federal government hasn’t been inclined to come down hard on participating banks for failing to follow the letter of the agreements – though the programs have fairly clear and strict guidelines, there’s no real mechanism for oversight or enforcement. The Treasury Department, which oversees the program, has mostly been content to sit on the sidelines, even though far fewer homeowners have received modifications than initially projected.

But foreclosure defense attorneys have been eager to hold lenders’ feet to the fire. Overwhelmed, disorganized servicers have been a focus for homeowner, advocate and attorney complaints almost since the programs’ launch, with many reports of lost paperwork, confusion and broken promises as assurances made by one representative were overridden by another.

The question is whether such problems amount to illegal behavior. So far, courts have provided mixed answers, but that’s enough to keep advocates pressing forward.

Last month, Associate Justice Thomas Billings of Middlesex Superior Court ruled in two cases that since the banks agreed with the feds to enter into the programs to help homeowners, that meant they had a duty to live up to their promises to borrowers. Essentially, he said that borrowers were “third party beneficiaries” to a contract, with a right to sue if the contract was broken.

“[T]here is nothing in the [agreements] to suggest that borrowers – who were obviously and primarily intended to benefit from the contractual commitments made by servicers in exchange for their receipt of billions of TARP dollars – should not be allowed to enforce those commitments,” Billings wrote. “They have no other forum in which their claims may be heard and adjudicated. Denial of third-party beneficiary status to persons aggrieved by violations such as are alleged here would be…to ‘mock the very goals of’ the program.”

Billings acknowledged in his decision that while one federal court, in California, had previously ruled in line with him on this issue, several other federal courts in other states have since disagreed.

Variations By State

“What usually happens if people raise this issue in state court is that the banks remove them to federal courts, and they end up being federal cases,” said Esme Caramello, deputy director of the Harvard Legal Aid Bureau, which represents distressed homeowners unable to afford their own attorney.

But rulings like Billings’ will nonetheless give attorneys in Massachusetts plenty of incentive to pursue such claims.

“Definitely, people who are doing pre-foreclosure [defense] work or wrongful foreclosure are routinely raising it in state court,” Caramello said.

Nadine Cohen, managing attorney of the Consumer Rights Unit of Greater Boston Legal Services, said she’s already had some success raising the issue of loan modification problems in cases where homeowners are seeking to block evictions. Though none of the cases she’s aware of have yet gone to trial – keeping it unclear whether a homeowner could successfully win damages from a bank with problematic loan modification processes – merely the prospect of further legal proceedings has often been enough to prompt lenders to try and settle the cases.

Consumer protection laws also may provide a legal avenue for homeowners to pursue banks over modification-related disputes, even if all courts don’t agree that consumers are beneficiaries of the contract between the government and the banks to create the program.

“A lot will turn on states’ individual consumer protection law,” Engel said. “In some states, consumers can’t bring a private right of action. So it’s going to vary a great deal based on the text of the law and the consumer’s right to bring a suit.”

Massachusetts does allow such suits.

With different courts offering differing interpretations of banks’ duties, and few if any cases on the issue having gone all the way through trial, it may take years for the law to be settled on what a bank’s responsibility is when it comes to modification programs.

But in the meantime, the issue opens up another front in the continuing liability battles of the foreclosure crisis.