An appeals court has ruled in favor of a Chicago homeowner who’s been trying to sue Wells Fargo for turning her down for a permanent loan modification. Attorneys across the country say it’s a big deal for homeowners because it’s the first time a higher federal court has ruled on a case like this, and that now sets a precedent as judges in lower courts consider similar cases.

The decision by the Seventh Circuit Court of Appeals says Chicago homeowner Lori Wigod does have the right to sue Wells Fargo for fraud and breach of contract.

The bank had given Wigod a temporary loan modification under HAMP – the Home Affordable Modification Program. Wigod’s lawyer Steven Woodrow says the bank promised to make the modification permanent, but then didn’t, even though he says she made her payments on time and did everything else she was supposed to.

According to the judge’s decision, Wells Fargo said it was denying her the modification because it couldn’t reduce her payment to an amount affordable to her that would still meet the investor guidelines on the loan. Wells Fargo spokeswoman Vickee Adams declined to comment.

Woodrow says the judge’s ruling could provide relief for lots of homeowners battling unsuccessfully to get loan modifications.

“If you speak with any homeowner who’s been placed into any of these trial plans, it becomes a two-year nightmare of lost paperwork, inconsistent instructions from various bank representatives and ultimately, false reasons for denying the modification followed by an unlawful threat of or actual foreclosure,” Woodrow said. “It’s been an absolute mess and now these people get their day in court.”

Woodrow said now he’ll take the case back to district court and hopefully get a permanent modification for his client, who got a mortgage for $728,500 from Wells Fargo in September 2007 to buy a home in the Bucktown/Wicker Park area of Chicago. After “finding herself in financial distress,” according to the decision, she asked the bank for a HAMP modification in April 2009.

Michael van Zalingen is an attorney in Chicago who says banks could face a big financial hit as more homeowners decide to sue. He said ultimately, banks could be on the hook for even more than the $25 billion recent mortgage settlement with state attorneys general.

“If you start thinking about potential punitive damages, the plaintiffs’ attorneys’ fees, it could really rack up,” van Zalingen said.