Homeowners should be suing lenders!

Posted on June 26, 2009. Filed under: Foreclosure Defense, Fraud, Loan Modification, Mortgage Audit, Mortgage Law, Predatory Lending, right to rescind, Truth in Lending Act | Tags: , , , , , , , , , , , , , , , , , |

Homeowners, welcome to Paradise Lost, the fate of millions of financially strapped boomers. A simultaneous loss of life savings, job income and foreclosure has many of them wondering, “Whose America is this, anyway? The bankers got bonuses to defraud us, and our industries and economy are in the pits. We worked for decades to live the American dream, and now we are out of work, saddled with debt and thrown out on the streets! What retirement? When I’m too old to enjoy it? More like I’m living a nightmare.”

You might be quite inclined to agree. However, there is light at the end of the tunnel, even for those that have already been foreclosed and evicted from their precious homes.

Although lately, while it feels like we are in the same boat as a third world country, we still have a little document on our side called The United States Constitution, which states, among other things that, “Citizens of the United States shall not be deprived of life, liberty or prosperity without due process of law.”

Now, there’s a mouthful. So don’t despair! And don’t get left out in the cold! Baby, it’s warm inside!

Homeowners, listen up! It is time to begin a reversal of your misfortune by gearing up and waging your mortgage war. Even if you have wearily given up your keys and angrily moved out, there are legal remedies that can make you whole. Your lender has broken so many laws that you may end up with more money than you had in cash and equity in your home!

And, no, this is not a pipe dream. But it is the repossession of your American dream. And the statute of limitation is greater than three years if your lender committed fraud.

How to tell if you are a victim of illegal foreclosure and unlawful eviction? Read on. Hint: you are in good company. Your platoon is millions strong.

If you have an adjustable rate mortgage and your loan has been securitized, there is a high probability that the securitization was done illegally. Further, if you have been defrauded by a predatory lender or broker, it’s time to fight back and go to court.

I recently asked Ohio attorney Dan McCookey, an expert in foreclosure defense and offense, what traumatized and victimized homeowners can do even after they have lost their homes, and find themselves figuratively and literally, out on the street. He provided some strategic counsel and laid out two hopeful options for now homeless homeowners:

Option #1: the “void judgment defense.” Your attorney files a motion to set aside the judgment, as the court never had proper jurisdiction to begin with.

What does this mean to you? If your loan was securitized, your lender sold your note and quite profitably, retained the mortgage servicing rights. When your note was sold, your lender gave up its legal ownership of your note and was paid in full for your loan, and then some. Therefore, your lender had no legal standing to foreclose! And no matter how many times your servicer was acquired, it has no right to foreclose!

In fact, your lender is not considered by the Court, a “true party of interest” or a “holder in due course.” Since the Court’s jurisdiction was never evoked, any and all proceedings found by the Court are void. That right is given to the current holder of the note. If only your lender could remotely identify whom that is.

Your lender has no idea where your original note currently is, as it traveled the globe, during its metamorphosis from a secured interest in your property to a mere shadow of its former self. The poor thing was sliced and diced multiple times by the depositor and a series of trustees, each earning profits and fees along the way.

More….

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Boulware v. Crossland Mortgage Corp. (RESPA §8)

Posted on January 25, 2009. Filed under: Case Law, Mortgage Law, RESPA | Tags: , , , , |

TYNA L. BOULWARE, on behalf of

herself and all others similarly

situated,

Plaintiff-Appellant,

v.No. 01-2318

CROSSLAND MORTGAGE CORPORATION,

Defendant-Appellee,

UNITED STATES OF AMERICA,

Amicus Curiae.

————————————————*

Appeal from the United States District Court
for the District of Maryland, at Greenbelt.
Frederic N. Smalkin, Chief District Judge.
(CA-01-2114-S)

Argued: April 4, 2002

Decided: May 22, 2002

Before WILKINSON, Chief Judge, and WILLIAMS and
TRAXLER, Circuit Judges.

____________________________________________________________

Affirmed by published opinion. Chief Judge Wilkinson wrote the

opinion, in which Judge Williams and Judge Traxler joined.

____________________________________________________________

COUNSEL

ARGUED: James Evan Felman, KYNES, MARKMAN & FEL-

MAN, P.A., Tampa, Florida, for Appellant. Christine N. Kohl, Appel-

late Staff, Civil Division, UNITED STATES DEPARTMENT OF

JUSTICE, Washington, D.C., for Amicus Curiae. Michael Schatzow,

VENABLE, BAETJER & HOWARD, L.L.P., Baltimore, Maryland,

for Appellee. ON BRIEF: Katherine Earle Yanes, KYNES, MARK-

MAN & FELMAN, P.A., Tampa, Florida; Andrew N. Friedman,

Gary E. Mason, Victoria S. Nugent, COHEN, MILSTEIN, HAUS-

FELD & TOLL, Washington, D.C.; Lee S. Shalov, SHALOV,

STONE & BONNER, New York, New York; Peter D. Fastow, Steven

B. Preller, TROESE, FASTOW & PRELLER, L.L.C., Annapolis,

Maryland, for Appellant. Robert D. McCallum, Jr., Assistant Attorney

General, Thomas M. DiBiagio, United States Attorney, Michel Jay

Singer, Appellate Staff, Civil Division, UNITED STATES DEPART-

MENT OF JUSTICE, Washington, D.C.; Richard A. Hauser, General

Counsel, Peter S. Race, Assistant General Counsel, Joan L. Kayagil,

UNITED STATES DEPARTMENT OF HOUSING AND URBAN

DEVELOPMENT, Washington, D.C., for Amicus Curiae. Mark D.

Maneche, VENABLE, BAETJER & HOWARD, L.L.P., Baltimore,

Maryland, for Appellee.

____________________________________________________________

OPINION

WILKINSON, Chief Judge:

Plaintiff Tyna Boulware claims that § 8(b) of the Real Estate Set-

tlement Procedures Act (“RESPA“) is a broad price control statute

prohibiting any overcharge for real estate settlement services. Boul-

ware seeks to certify a class to challenge Crossland Mortgage Corpo-

ration’s alleged overcharge for credit reports. The district court found

that Boulware did not allege any split or kickback of the overcharge

from Crossland to a third party. It thus dismissed Boulware’s com-

plaint and denied class certification. We agree with the Seventh Cir-

cuit that § 8(b) is a prohibition on kickbacks rather than a broad price

control provision. See Echevarria v. Chi. Title & Trust Co., 256 F.3d

623 (7th Cir. 2001); Durr v. Intercounty Title Co., 14 F.3d 1183 (7th

Cir. 1994). We therefore affirm the judgment.

2

I.

In November 2000, Tyna Boulware, a Maryland consumer,

obtained a federally related home mortgage loan from Crossland

Mortgage Corporation.1 In connection with this loan, Crossland pur-

chased Boulware’s credit report from a third-party credit reporting

agency. On July 18, 2001, Boulware initiated this action, alleging that

Crossland violated RESPA § 8(b), 12 U.S.C. § 2607(b) (2000), by

charging her $65 for the credit report when it cost Crossland $15 or

less to obtain it. Boulware claimed that Crossland kept the $50 over-

charge for itself without performing additional services. She did not

allege that the credit reporting agency or any other third party

received payment from Crossland beyond that owed to it for services

actually performed.2

Boulware sought civil remedies under RESPA, including treble

damages, attorneys’ fees, and costs. See 12 U.S.C. § 2607(d). In addi-

tion, she sought to certify a class of all parties who had received simi-

lar mortgages from Crossland in the past twelve months, and who had

paid Crossland for a credit report in connection with their loans.

On October 2, 2001, the district court dismissed Boulware’s com-

plaint and denied class certification. Following two Seventh Circuit

decisions, the district court held that the “plain words” of RESPA

§ 8(b) “support the proposition that the statute is only violated where

there is a charge for a real estate settlement service that is split or

kicked back, not simply where there has been an overcharge.” See

Echevarria, 256 F.3d 623; Durr, 14 F.3d 1183. The district court rec-

ognized that the Department of Housing and Urban Development was

authorized to promulgate regulations and interpretations of RESPA,

see 12 U.S.C. § 2617, and intimated that HUD’s view of the statute

was consistent with Boulware’s. However, the court refused to adopt

a construction of the statute that went beyond § 8(b)’s plain meaning,

____________________________________________________________

1 On January 2, 2001, Crossland merged into Wells Fargo Home Mort-

gage, Inc. However, we follow the practice of the district court and par-

ties by referring to the defendant as Crossland.

2 Because the district court dismissed Boulware’s complaint under Fed.

R. Civ. P. 12(b)(6), we accept her allegations as true. See, e.g., Mayes

v. Rapoport, 198 F.3d 457, 460 (4th Cir. 1999).

3

“whether condoned by administrative agency utterances or not.” Boul-

ware appeals.

II.

A.

RESPA § 8(b) provides:

No person shall give and no person shall accept any por-

tion, split, or percentage of any charge made or received for

the rendering of a real estate settlement service in connec-

tion with a transaction involving a federally related mort-

gage loan other than for services actually performed.

12 U.S.C. § 2607(b). The plain language of § 8(b) makes clear that it

does not apply to every overcharge for a real estate settlement service

and that § 8(b) is not a broad price-control provision. Therefore,

§ 8(b) only prohibits overcharges when a “portion” or “percentage” of

the overcharge is kicked back to or “split” with a third party. Compen-

sating a third party for services actually performed, without giving the

third party a “portion, split, or percentage” of the overcharge, does not

violate § 8(b). By using the language “portion, split, or percentage,”

Congress was clearly aiming at a sharing arrangement rather than a

unilateral overcharge.3

Here, Crossland collected an overcharge and kept it as a “windfall”

for itself. See Durr, 14 F.3d at 1187. We therefore reject Boulware’s

argument that § 8(b) applies, and conclude that the district court cor-

rectly dismissed her complaint under Rule 12(b)(6).

This very case demonstrates the problems with concluding other-

wise. As previously noted, Boulware does not allege that Crossland’s

purported overcharge was kicked back to or split with the credit

____________________________________________________________

3 An overcharge or unearned fee must be present in order for § 8(b) to

apply because the charge must be one “other than for services actually

performed.” However, the presence of an overcharge alone, without any

portion of the overcharge being kicked back to or split with a third party,

is not sufficient to fall within the purview of § 8(b).

4

reporting agency or any other third party. Outside of a kickback or

fee-splitting situation, there is no way to make sense of the statutory

directive that “[n]o person shall give and no person shall accept” any

portion of an unearned fee. In fact, under Boulware’s view, Boulware

herself would have to be the giver contemplated by the statute in

order for § 8(b) to apply.

It would be irrational to conclude that Congress intended consum-

ers to be potentially liable under RESPA for paying unearned fees. In

addition to civil penalties, RESPA § 8(d) establishes criminal sanc-

tions for violations, including up to one year in prison. And it makes

both the giver and the acceptor jointly and severally liable. See 12

U.S.C. § 2607(d)(1)-(2). It would be perverse to find that Congress

intended to impose such liability on consumers – the very group it

was trying to protect in enacting RESPA. See 12 U.S.C. § 2601.

Accordingly, the giver in § 8(b) must be some party in the settlement

process besides the borrower herself.

Boulware, joined by HUD as amicus curiae, contended at oral

argument that the government would not prosecute consumers. How-

ever, it is unclear whether the government would be bound by HUD’s

statement that it is “unlikely to direct any enforcement actions against

consumers for the payment of unearned fees.” RESPA Statement of

Policy 2001-1, 66 Fed. Reg. 53,052, 53,059 n.6 (October 18, 2001).

Moreover, it is insufficient for HUD to proclaim that the statute will

not be enforced against consumers. We cannot interpret § 8(b) so as

to compel the absurd conclusion that Congress drafted it to apply to

consumers in the first place. See, e.g., United States v. Wilson, 503

U.S. 329, 334 (1992) (citing United States v. Turkette, 452 U.S. 576,

580 (1981)).

Boulware cannot give a satisfactory explanation of what the phrase

“[n]o person shall give and no person shall accept” means under her

interpretation of the statute. She attempts to avoid the problem posed

by the prospect of applying § 8(b) to consumers by asserting that a

giver and acceptor do not both have to be present for the statute to

apply. Alternatively she claims that § 8(b) only applies if the giver

knows that services were not rendered. But Boulware’s arguments are

unpersuasive because these qualifications find no expression in the

plain language of the statute. The use of the conjunctive “and” indi-

5

cates that Congress was clearly aiming at an exchange or transaction,

not a unilateral act.

Our interpretation of § 8(b) makes sense of all of the statute’s terms

and leaves a wide variety of conduct prohibited. For example, the pro-

vision would clearly apply to situations where a mortgage lender

overcharges a consumer and splits the overcharge with a mortgage

service provider, such as a credit reporting agency. In such a case,

both the lender/giver and the credit-reporting agency/acceptor would

violate § 8(b). In addition, the statute would apply if a mortgage ser-

vice provider overcharged for its services and gave a mortgage lender

a portion of the unearned fee.

In holding that § 8(b) requires fee-splitting or a kickback, our result

is consistent with the only other federal appellate court that has

addressed the question of whether § 8(b) requires unearned fees to

pass from one settlement service provider to another. See Echevarria,

256 F.3d 623; Durr, 14 F.3d 1183; Mercado v. Calumet Fed. Sav. &

Loan Ass’n, 763 F.2d 269 (7th Cir. 1985). The Seventh Circuit has

held on three occasions that § 8(b) does not apply to all overcharges

for real estate settlement services. Instead, the court explained that

§ 8(b) “is an anti-kickback statute” which “requires at least two par-

ties to share fees.” Mercado, 763 F.2d at 270. And the court stressed

that “under RESPA’s express terms,” the broad protection of the stat-

ute “extends only over transactions where the defendant gave or

received any portion, split, or percentage of any charge to a third

party.” Durr, 14 F.3d at 1187 (internal quotation omitted). Further-

more, in both Echevarria and Durr, the Seventh Circuit confronted

facts almost identical to those in the case at bar and found no viola-

tion of § 8(b) in the absence of any allegation of a kickback to a third

party. Echevarria, 256 F.3d at 626-27; Durr, 14 F.3d at 1186-87.

Boulware contends that our interpretation of § 8(b) is incorrect

because it makes § 8(a) and § 8(b) both proscribe the same conduct.

However, a comparison of these two subsections does not affect our

conclusion. Section 8(a) states:

No person shall give and no person shall accept any fee,

kickback, or thing of value pursuant to any agreement or

understanding, oral or otherwise, that business incident to or

6

a part of a real estate settlement service involving a federally

related mortgage loan shall be referred to any person.

12 U.S.C. § 2607(a). It is apparent that § 8(a) is not rendered mean-

ingless by our interpretation of § 8(b). The provisions both seek to

eliminate kickbacks or referral fees paid to a third party, but they do

so by prohibiting different actions. Section 8(a) prohibits the payment

of formal kickbacks or fees for the referral of business and does not

require an overcharge to a consumer. On the other hand, § 8(b) pro-

hibits “splitting fees with anyone for anything other than services

actually performed.” Willis v. Quality Mortgage USA, Inc., 5 F. Supp.

2d 1306, 1308 (M.D. Ala. 1998) (noting the differences between

§ 8(a) and (b)). Section 8(b) therefore requires an overcharge and pro-

hibits conduct where money is moving in the same way as a kickback

or referral fee even though there is no explicit referral agreement.

B.

In a further attempt to salvage her claim, Boulware urges us to pro-

ceed past the language of § 8(b) to HUD’s broader interpretation of

the provision. See 24 C.F.R. § 3500.14(c) (2001) (“Regulation X”); 66

Fed. Reg. at 53,057-59. Deference might well be due Regulation X

or HUD’s statement of policy if § 8(b) were ambiguous. See Chevron

U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-43

(1984). But the text of the statute controls in this case. Id.; see also,

e.g., Hillman v. IRS, 263 F.3d 338, 342 (4th Cir. 2001) (citing Cami-

netti v. United States, 242 U.S. 470, 485 (1917)). Although it is true

that “RESPA is a broad statute, directed against many things that

increase the cost of real estate transactions,” it is equally true that “the

objective of a statute is not a warrant to disregard the terms of the

statute.” Mercado, 763 F.2d at 271.

III.

Despite the textual directive of § 8(b), Boulware argues that Con-

gress’ intent in enacting § 8(b) was far broader than our reading of it,

and that her claim should accordingly not be dismissed. She maintains

that Congress intended to forbid all overcharges and markups by

mortgage lenders for every real estate settlement service they might

provide. Boulware is in effect asking us to subject all settlement ser-

7

vices, including, inter alia, title searches, title examinations, title

insurance, attorneys’ services, property surveys, credit reports, pest

inspections, real estate agents’ and brokers’ services, and loan pro-

cessing, to broad price regulation. In fact, under her interpretation of

the statute, HUD or the federal courts could determine what settle-

ment service fees are reasonable in the first instance, without an alle-

gation that the fees were even marked up. See 66 Fed. Reg. at 53,059

(stating that under HUD’s interpretation of § 8(b), which mirrors

Boulware’s, “[a] single service provider also may be liable under

§ 8(b) when it charges a fee that exceeds the reasonable value of

goods, facilities, or services provided”). Further, Boulware would

provide both a private right of action and potential criminal penalties

to enforce the price controls she envisions § 8(b) creating. See 12

U.S.C. § 2607(d).

If Congress had intended § 8(b) to sweep as broadly as Boulware

proposes, it could easily have written § 8(b) to state that “there shall

be no markups or overcharges for real estate settlement services.” Or

Congress could have explained that “a mortgage lender shall only

charge the consumer what is paid to a third party for a real estate set-

tlement service.” But Congress chose not to draft the statute that way.

And we have no authority to recast it. If we were to read § 8(b) in the

way Boulware suggests, every settlement fee would be the subject of

potential litigation and discovery, leading perhaps to increased costs

for real estate settlement services in the long run. Though the regula-

tion of charging practices would not be beyond the purview of Con-

gress, this was not Congress’ intent in enacting RESPA.

Instead, the view that § 8(b) only applies when there is a kickback

or split with a third party is actually the view that is consistent with

RESPA’s stated purposes. In enacting RESPA, Congress proclaimed

that “significant reforms in the real estate settlement process” were

needed to protect consumers “from unnecessarily high settlement

charges caused by certain abusive practices that ha [d] developed in

some areas of the country.” 12 U.S.C. § 2601(a). Congress went on

to explain that one of the purposes of RESPA was “to effect certain

changes in the settlement process,” which would result “in the elimi-

nation of kickbacks or referral fees that tend to increase unnecessarily

the costs of certain settlement services.” 12 U.S.C. § 2601(b)(2).

8

Nothing in § 2601 indicates that RESPA § 8 was intended to elimi-

nate all settlement service overcharges. Instead, its purpose was “to

prohibit all kickback and referral fee arrangements whereby any pay-

ment is made or thing of value furnished for the referral of real estate

settlement business.” Mercado, 763 F.2d at 270-71 (quoting Senate

report). And the provision was designed to prohibit “a person that ren-

ders a settlement service from giving or rebating any portion of the

charge to any other person except in return for services actually per-

formed.” Id. at 271 (quoting Senate report); see also Echevarria, 256

F.3d at 627; Durr, 14 F.3d at 1186; Duggan v. Indep. Mortgage

Corp., 670 F. Supp. 652, 654 (E.D. Va. 1987). Therefore, if we sub-

jected a settlement service provider to RESPA liability for keeping an

overcharge without requiring an allegation that the unearned fee was

shared with a third party, “we would radically, and wrongly, expand

the class of cases to which RESPA § 8(b) applies.” Echevarria, 256

F.3d at 627.4

IV.

RESPA was meant to address certain practices, not enact broad

price controls. Congress chose to leave markups and the price of real

estate settlement services to the free market by “consider[ing] and

explicitly reject[ing] a system of price control for fees.” Mercado, 763

F.2d at 271 (citing Senate report). Instead, Congress “directed § 8

against a particular kind of abuse that it believed interfered with the

operation of free markets – the splitting and kicking back of fees to

parties who did nothing in return for the portions they received.” Id.

Accordingly, we decline to extend § 8(b) beyond its text, and we

affirm the judgment.

AFFIRMED

____________________________________________________________

4 In deciding whether to certify a class, a district court has “broad dis-

cretion” within the framework of Fed. R. Civ. P. 23. Lienhart v. Dryvit

Sys., Inc., 255 F.3d 138, 146 (4th Cir. 2001). Because Boulware failed

to state a claim as the purported named plaintiff, and because all other

similarly situated plaintiffs would likewise fail to state a claim, the dis-

trict court necessarily acted within its discretion in denying class certifi-

cation.

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Darling v. Indymac Bank (TILA Audit)

Posted on January 19, 2009. Filed under: Case Law, Mortgage Audit, Mortgage Law, Predatory Lending, RESPA, right to rescind, Truth in Lending Act, Yield Spread Premium | Tags: , , , , , , , , , , , , , , , , , , , , , |

Darling v. Indymac Bank, F.S.B., No. 06-123-B-W (D.Me. 12/03/2007)

[1] UNITED STATES DISTRICT COURT DISTRICT OF MAINE
[2] Civ. No. 06-123-B-W
[3] 2007.DME.0000264
[4] December 3, 2007
[5] JOSEPH AND ROXANNE DARLING, PLAINTIFFS,
v.
INDYMAC BANK, F.S.B., AND WESTERN THRIFT & LOAN, DEFENDANTS.
[6] The opinion of the court was delivered by: Margaret J. Kravchuk U.S. Magistrate Judge
[7] MEMORANDUM OF DECISION ON MOTION TO EXCLUDE OR LIMIT EXPERT TESTIMONY
[8] The plaintiffs, Joseph and Roxanne Darling, have designated TJ Henderson, a consumer advocate and self-styled “auditor” of consumer mortgage loans, to offer expert testimony to the effect that, among other things, the Darlings “are unsophisticated borrowers [who] had no idea what was taking place” with a loan issued by defendant IndyMac Bank and brokered by co-defendant Western Thrift & Loan, that the loan in question was fraudulent and predatory due to the way in which the defendants made, or failed to make, required disclosures in various closing documents and other communications, and that these circumstances give rise to “a continuing right to rescind the loan transaction.” (Aff. of TJ Henderson ¶¶ 1-3, Doc. No. 18-2.) In addition to these opinions, Mr. Henderson would testify that the defendants’ conduct violated a number of state and federal laws. (Id. ¶ 3.) The defendants ask the Court to exclude any such testimony on the grounds that the opinions impermissibly intrude upon the Court’s duty to instruct on the law, the designated expert is not qualified to testify about the standard of care that applies to mortgage lenders and brokers, the opinions impermissibly and unhelpfully characterize the plaintiffs’ mental capacity, and the designation fails to fully comply with Rule 26(a)(2)(B). (Mot. to Exclude, Doc. No. 18.) The motion is GRANTED IN PART.
[9] Background
[10] The Darlings assert that they have filed their lawsuit under the Truth in Lending Act, 15 U.S.C. §§ 1601 et seq.*fn1 (“TILA”) in order to rescind a consumer credit transaction, void the IndyMac Bank’s security interest in their home, and recover statutory damages, fees and costs based on alleged violations of the TILA and Regulation Z, 12 C.F.R. § 226. They have joined the mortgage loan broker Western Thrift & Loan as an additional defendant to pursue claims of unfair and deceptive business practices, breach of fiduciary duty, fraud, and negligent misrepresentation arising from statements allegedly made by a Western agent*fn2 in order to induce a closing on the mortgage loan. (Am. Compl., Doc. No. 3.)
[11] Discovery in this case has essentially proceeded without incident. There have been two limited extensions to date and discovery remains open until December 31 for the limited purpose of conducting certain depositions. On June 12, 2007, the Darlings timely designated TJ Henderson as an expert witness. According to Mr. Henderson’s resume, he appears to be someone who has made a career out of consumer advocacy related to the TILA. He does not appear to have a law degree, though his resume includes as relevant experience the “practice of law” in certain county courts in the State of Washington. Mr. Henderson also reports years of unspecified education in consumer protection law and recent professional experience as an auditor (presumably unlicensed as no licenses are disclosed) who has worked to combat predatory lending on behalf of companies named Co3m, Premier Mortgage Auditing, Consumer Guardian, and Advocates for Justice. Mr. Henderson identifies his current position as president for Consumer Guardian and also as someone who provides paralegal services, including mortgage auditing services. Business tools at his disposal include West Law and a consumer library made available by the National Consumer Law Center. (See TJ Henderson Resume, Doc. No. 18-2 at 4-5.)
[12] The Darlings also attached to their disclosure an affidavit prepared by TJ Henderson in support of their claims. (TJ Henderson Aff, Doc. No. 18-2 at 6-10.) The affidavit recites a number of legal conclusions or characterizations concerning the Darlings and their mortgage transaction. These include the following statements:
[13] 1. That the Darlings “are unsophisticated borrowers” (id. ¶ 2);
[14] 2. That, “based upon my audit and study of the [closing] documents . . ., the Darlings had no idea what was taking place with the loan or that they could reasonably determine what the loan cost or finance charge would consist of,” which is described as an “unreasonable tactic” (id.);
[15] 3. That the HUD-1 statement issued by IndyMac was “deceiving” because of the way it characterized a yield spread premium paid to Western as a “Broker Comp.” to be paid from the Darlings funds at closing and because of the location on the form where this reference was made (id.);
[16] 4. That a second group of disclosure forms were issued without including a new notice of the Darlings’ right to cancel (id.);
[17] 5. That these and other irregularities or misstatements give rise to “a continuing right to rescind the loan transaction” (id.);
[18] 6. That due to his training and experience TJ Henderson was able to perform a “proper audit” which disclosed the following additional violations of law:
[19] a. failure to make all disclosures required by the TILA, including a failure to disclose the existence of yield spread premium (YSP) or to explain its significance and a failure to make disclosures required by 12 C.F.R. §§ 226.17, 226.18 and 226.19;
[20] b. an overstatement of the loan’s annual percentage rate, referencing 12 C.F.R. § 226.22;
[21] c. an understatement of the loan’s finance charge, referencing 12 C.F.R. § 226.18(d)(1)(i);
[22] d. failure to inform the Darlings where to find the appropriate contract documents and clause for information about non-payment, default, and the lender’s right to accelerate payments, referencing 12 C.F.R. § 226.18(p); and
[23] e. failure to provide the required HUD booklet on loans, referencing 12 U.S.C. § 2406 et seq.
[24] (id. ¶ 3);
[25] 7. That, in his opinion, “this loan is fraudulent and consists of unjust enrichment and is predatory in nature (id. ¶ 3(i)); and, finally;
[26] 8. That these violations expose the lender to severe penalties, which he then characterizes (id. ¶ 5).
[27] Discussion
[28] Western challenges TJ Henderson’s proposed testimony on Rule 26 and Rule 702 grounds. (Mot. to Exclude, Doc. No. 18.) I address the Civil Rules issue first and then turn to the evidentiary challenge.
[29] A. Rule 26 of the Federal Rules of Evidence
[30] Western argues that Mr. Henderson’s testimony should be excluded because it “consists almost entirely of unsupported legal conclusions that merely advocate the positions of his retainers,” without articulating any industry standards or other reasons in support of his conclusions. (Mot. to Exclude at 12.) Western also notes that the Darlings failed to disclose the expert compensation they are providing to Mr. Henderson. (Id.) Rule 26 and the Court’s scheduling order require that an expert disclosure set forth a “complete statement of all opinions . . . and the basis and reasons therefor.” Fed. R. Civ. P. 26(a)(2)(B); Scheduling Order at 2, Doc. No. 13. Both the Rule and the scheduling order also call for a disclosure of, among other things, the compensation to be paid to the expert for his or her work and testimony.
[31] In regard to Mr. Henderson’s compensation, the Darlings report that they made no disclosure because they had engaged and paid Mr. Henderson to conduct an audit of their mortgage loan prior to commencing this litigation, that no fee has been requested for the Henderson affidavit that comprises Mr. Henderson’s “report” because it is just a restatement of his audit, and that the defendants have not deposed Mr. Henderson so there has been no occasion to determine what compensation he would require for services as an expert witness. (Pl.’s Opposition at 4, Doc. No. 23.) Although this manner of proceeding is unorthodox, I can discern no prejudice to the defendants from the mere fact that they do not yet know what, if any, compensation Mr. Henderson will receive for his litigation-related services. This failure of disclosure does not independently warrant the exclusion of Mr. Henderson’s opinions. The Darlings are required, however, to make a supplemental disclosure setting forth the terms of Mr. Henderson’s compensation as soon as they are established, or by the close of discovery, whichever occurs sooner.
[32] The second aspect of Western’s Rule 26 argument is that Mr. Henderson’s opinions should be excluded because the Darlings have not, in Western’s view, disclosed the basis and reasons for the opinions, only “unsupported legal conclusions.” (Mot. to Exclude at 12.) I conclude that this issue is best addressed as an evidentiary matter under Rule 702 of the Federal Rules of Evidence, rather than as a disclosure matter under Rule 26. The Darlings have made a disclosure of Mr. Henderson’s opinions and the reasons he offers for them. To the extent the Darlings are able to demonstrate that the basis and reasons they offer satisfy the standards of Rule 702 they will to that same extent meet the disclosure requirement of Rule 26.
[33] B. Rule 702 of the Federal Rules of Evidence
[34] Pursuant to Rule 702 of the Federal Rules of Evidence: If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise, if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.
[35] In Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), the Supreme Court discussed the gate-keeping role federal judges play under Rule 702 in screening unreliable expert opinion from introduction in evidence. Id. at 597. That role is “to ensure that an expert’s testimony ‘both rests on a reliable foundation and is relevant to the task at hand.'” United States v. Mooney, 315 F.3d 54, 62 (1st Cir. 2002). The proponent of the expert opinion must demonstrate its reliability, but need not prove that the opinion is correct. Id. at 63. “Once a trial judge determines the reliability of the expert’s methodology and the validity of his reasoning, the expert should be permitted to testify as to inferences and conclusions he draws from it and any flaws in his opinion may be exposed through cross-examination or competing expert testimony.” Brown v. Wal-Mart Stores, Inc., 402 F. Supp. 2d 303, 308 (D. Me. 2005). “Vigorous cross examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence.” Daubert, 509 U.S. at 596. It has been said that, ultimately, the Court must determine simply whether “the testimony of the expert would be helpful to the jury in resolving a fact in issue.” Cipollone v. Yale Indus. Prods., 202 F.3d 376, 380 (1st Cir. 2000).
[36] 1. Legal conclusions cannot be countenanced, but testimony concerning regulatory compliance should be facilitated rather than barred where regulatory compliance is at the heart of the case and the plaintiffs are not independently qualified to discuss the regulatory framework.
[37] Western’s overarching theme is that the proposed opinion testimony is riddled with statements of legal standards and legal conclusions that are not really opinions at all. (Mot. to Exclude, passim.) It is the Court’s duty, naturally, to instruct the jury*fn3 concerning the applicable legal standards that govern this action. Nieves-Villanueva v. Soto-Rivera, 133 F.3d 92, 99-100 (1st Cir. 1997). It will fall to the fact witnesses to provide the jury with evidence of the facts and circumstances that gave rise to this action. The question, then, is whether Mr. Henderson, by dint of his mortgage auditing experience and any specialized knowledge he possesses, might be able to help the jury better understand the evidence to determine a fact in issue. Id. at 100. The Darlings assert in their opposition that Mr. Henderson will be able to articulate “various improprieties with the loan/mortgage transaction and documentation,” listing his observations that certain required documentation was missing and that the APR and finance charge calculations were erroneous. (Pls.’ Opposition at 1-2.) However, they acknowledge the appearance of a problem, noting, “if and to the extent that Mr. Henderson has gone beyond those factual observations and opined that same represent violation(s) of law, his testimony can be easily limited/prescribed at trial to conform to an appropriate scope.” (Id. at 2.) I fail to understand why this particular problem should not be addressed ahead of trial. Mr. Henderson should not be permitted to take the witness stand and simply state such things as “this loan is fraudulent and consists of unjust enrichment and is predatory in nature.” (TJ Henderson Aff. ¶ 3(i).) However, in fairness, it does not appear likely that that would be the extent of his testimony. Although Mr. Henderson’s affidavit is peppered with recitations of legal conclusions, his material opinions are really quite straightforward: (1) certain required TILA disclosures and/or documents were missing and (2) certain required disclosures were false. He is able to draw the first conclusion based on an audit of the closing documents. He has articulated which documents were missing. He is able to draw the second conclusion based on independent calculations. It is not difficult to conclude that the typical layperson would be unable to review a set of mortgage loan closing documents to assess whether a particular, required document was present or not. Nor is it difficult to imagine that the typical layperson would not be familiar with calculating finance charges and annual percentage rates. In other words, there does not appear to be anything inherently wrong with having an expert state that certain required documents were missing from the closing documents of a transaction or that certain calculations were erroneous, without straying into the territory of legal conclusions such as that the loan is “unjust” or “predatory,” or that it gives rise to liability or justifies any particular remedy. Thus, I conclude that the “legal conclusion” argument for exclusion does not entirely undermine Mr. Henderson’s audit or his opinions as to regulatory compliance. It does, however, call for a limitation to be placed on Mr. Henderson’s testimony. There is no reason apparent in this case why Mr. Henderson should need to tell the jury what the penalties of noncompliance are, what remedies are appropriate (such as contract rescission, which is an equitable remedy reserved to the Court, in any event), that the circumstances demonstrate unjust enrichment, predatory lending or fraud. Those particular opinions are hereby excluded on the ground that they are inappropriate legal conclusions and, as such, would not really help the jury make sense of the facts.
[38] There remains the matter of how to best address testimony to the effect that certain conduct was “in violation of TILA” or other federal or state laws and regulations. The issue of how to handle testimony concerning regulatory compliance is not as easy to resolve as either party suggests. In this case, although an expert might need to speak in terms of the TILA’s regulatory framework in order to discuss regulatory compliance, that is not necessarily the same thing as instructing the jury on issues of law or merely reciting legal conclusions. On the other hand, for testimony about noncompliance to have meaning there is a need to convey to the fact finder that there exists a regulatory framework that mandates compliance. Probably the most appropriate way to handle a situation like this one is not to preclude the testimony altogether, but to provide the jury with preliminary instructions concerning the regulatory framework and require the expert to couch his compliance testimony in terms of the Court’s instructions on the law, rather than in terms of his private characterizations of the law. See, e.g., United States v. Caputo, 382 F. Supp. 2d 1045, 1053 (N.D. Ill. 2005) (taking this approach in a criminal case involving FDA regulatory “enforcement policies”). Alternatively, the Court could leave for trial the task of drawing the “fine” distinction between proper expert testimony and legal conclusions, to avoid setting an over-exacting standard in a case that appears to turn almost entirely on regulatory compliance. See, e.g., TC Sys. Inc. v. Town of Colonie, 213 F. Supp. 2d 171, 181-82 (N.D. N.Y. 2002) (“[T]he Court is reluctant to preclude all testimony regarding FCC criteria at this early stage. If a proper foundation is laid and Kravtin can establish a nexus between the FCC criteria and the facts here, her testimony may be appropriate.”).
[39] 2. The Darlings’ expert disclosure is sufficient to qualify Mr. Henderson to testify about regulatory compliance matters, but not about the customs and practices of mortgage loan brokers and lenders.
[40] Western’s next argument is that Henderson should not be permitted to testify about any deviation from customary practice because he is not a broker with experience in mortgage lending or any professional license in that commercial practice area. (Mot. to Exclude at 9-10.) The Darlings respond that it is “premature” for the Court to conclude that Mr. Henderson lacks the qualifications “to render opinions describing the applicable yield rate, actual and stated percentage interest rates and the presence of hidden and undisclosed charges.” (Pls.’ Opposition at 3.) They say that they are not required to retain a “blue-ribbon practitioner,” quoting United States v. Malone, 453 F.3d 68, 71 (1st Cir 2006). (Id. at 3-4.) They do not expand upon the qualifications set forth in Mr. Henderson’s resume and affidavit.
[41] Based on a review of the expert disclosure materials, Mr. Henderson has been obtaining education in law and consumer protection since 1989, practiced law for five years in certain county courts in Washington, participated in at least eight seminars and workshops on the TILA between 2002 and 2006, and has been active with four “companies” in organized efforts to combat predatory lending. The companies in question are Co3m, Premier Mortgage Auditing, Advocates for Justice, and Consumer Guardian. Henderson is currently the president and owner of Consumer Guardian. Mr. Henderson’s affidavit indicates that he has been “in the mortgage auditing business for 9 years and legal industry for the past 15 years.” (TJ Henderson Aff. at 1.) Henderson’s affidavit does not otherwise elaborate on any of the qualifications sketched out in his resume, such as by better describing the work performed by the companies he has worked for or the type of legal work he used to perform in Washington.
[42] An expert’s qualifications, like other issues addressed to the admissibility of an expert’s opinions, “should be established by a preponderance of proof.” Daubert, 509 U.S. at 592 n.10. The proponent of the challenged evidence carries the burden of proof. The proponent must not assume that an evidentiary hearing will be held; the Court has the discretion to decide the motion on briefs and with reference to expert reports, depositions and affidavits on record. United States v. Diaz, 300 F.3d 66, 73-74 (1st Cir. 2002).
[43] The trouble here is that the Darlings have designated an unconventional expert and given short shrift to Western’s arguments that their designee has questionable qualifications. The fact that Mr. Henderson is an unconventional expert is not a bar in itself, but there needs to be some reassurance here that Mr. Henderson’s specific training and experience make him a suitable person to educate the jury about issues of fact. Instead, the Darlings rest on Mr. Henderson’s resume and affidavit and casually argue that the record does not in its present state prove he is not qualified, partly because Western has not deposed Mr. Henderson. (Pls.’ Opposition at 3.) I conclude on this record that Mr. Henderson’s qualifications to address the specific issue flagged here by Western, i.e., the customs and practices of mortgage lenders and brokers, are not adequately established. That does not mean, however, that Mr. Henderson is unqualified to serve as an expert witness regarding compliance with the TILA regulatory framework and related consumer law. Mr. Henderson has made a practice of educating himself on consumer law matters, including the requirements of the TILA, and he has worked for several years consulting with borrowers to determine whether the mortgage loans they have entered into have complied with that law and others. Thus, he appears to be suited to the task of helping to shepherd the Darlings’ regulatory compliance claims through the trial process, provided he does so within appropriate parameters set by the Court to prevent him from purporting to state the law to the jury.*fn4 He may not, however, speak to what is customary practice among mortgage lenders and brokers, only to what is required by the regulatory framework.
[44] 3. Mr. Henderson’s views concerning the Darlings’ relative sophistication and their understanding of the terms of the loan are unreliable and unhelpful and must be excluded.
[45] Western challenges Mr. Henderson’s basis and qualifications to offer opinions about the Darlings’ level of sophistication or their level of knowledge about the terms of the transaction they entered into. (Mot. to Exclude at 11.) The Darlings do not even attempt to preserve these facets of their expert disclosure. As there is no apparent basis to support a finding that Mr. Henderson is qualified to testify-or possesses specialized knowledge enabling him to testify-about the Darlings’ level of sophistication or their understanding of the loan’s terms, these opinions are excluded. Mr. Henderson may discuss what he considers to be noncompliant disclosures without having to opine that the Darlings were actually misled.
[46] Conclusion
[47] For the reasons stated above, Western’s motion to exclude the testimony of TJ Henderson is GRANTED, IN PART. Mr. Henderson is precluded from testifying about the penalties and remedies available in cases of regulatory noncompliance. He is also precluded from testifying that the circumstances of this case demonstrate unjust enrichment, predatory lending or fraud. Additionally, Mr. Henderson is precluded from testifying about the customary practices observed by mortgage lenders and brokers. Finally, Mr. Henderson is precluded from characterizing the Darlings’ level of sophistication or their level of knowledge about the terms of the transaction they entered into.
[48] CERTIFICATE
[49] Any objections to this Order shall be filed in accordance with Fed.R.Civ. P. 72. So Ordered.

Opinion Footnotes

[50] *fn1 Components of the Truth in Lending Act are distributed throughout the United States Code. The sections cited here, as cited by the Darlings in their pleadings, refer to the TILA’s consumer credit cost disclosure provisions.
[51] *fn2 The Darlings originally named the agent as an additional defendant but have since voluntarily dismissed the claims against him. (Voluntary Dismissal, Doc. No. 17.)
[52] *fn3 Because the Darlings’ plea for relief requests more than equitable remedies, there is a legal component to their TILA claim that is properly submitted to a jury in light of their jury demand. See Franklin v. Hartland Mortgage Ctrs., Inc., No. 01 C 2041, 2001 U.S. Dist. LEXIS 24238 (N.D. Ill. June 18, 2001) (order on motion to strike jury demand) (concluding in a TILA action that the plaintiff had the right to have his claim for statutory damages submitted to the jury and quoting Beacon Theaters, Inc. v. Westover, 359 U.S. 500, 510 (1959)) (“[W]hen legal and equitable claims are joined in one action, absent exceptional circumstances, a litigant has a right to have the issues common to the legal and equitable claims tried first to a jury”)). Additionally, the claims against Western are traditional tort claims appropriately tried to a jury.
[53] *fn4 In its reply, Western argues for the first time that Mr. Henderson’s percentage rate calculations and finance charge calculations should be excluded because there are merely factual matters for which no expert testimony is needed or which should be presented by an accountant. (Def.’s Reply at 1, Doc. No. 24.) I disagree with Western’s contentions. Mr. Henderson discloses that performing these calculations is part of his auditing function and it seems plain that the average layperson is not accustomed to computing annual percentage rates or even finance charges. Having someone other than the plaintiffs articulate the process is apt to save time at trial and prove beneficial to the jury.

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Smith v. Encore Credit Corp. (TILA/HOEPA/RESPA)

Posted on January 19, 2009. Filed under: Case Law, Foreclosure Defense, Legislation, Mortgage Law, Predatory Lending, RESPA, right to rescind, Truth in Lending Act | Tags: , , , , , , , , , , , , , , , |

Smith v. Encore Credit Corp., No. 4:08 CV 1462 (N.D.Ohio 12/09/2008)

[1] UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF OHIO EASTERN DIVISION
[2] Case No. 4:08 CV 1462
[3] 2008.NOH.0001120
[4] December 9, 2008
[5] RONALD J. SMITH, ET AL., PLAINTIFFS,
v.
ENCORE CREDIT CORP., ET AL., DEFENDANTS.
[6] The opinion of the court was delivered by: Judge Dan Aaron Polster
[7] MEMORANDUM OF OPINION AND ORDER
[8] After LaSalle Bank National Association (“LaSalle”) obtained a judgment entry of foreclosure on the residence of Plaintiffs Ronald J. and Nancy L. Smith in state court, the Smiths filed this action alleging four federal law claims and seven state law claims against persons and entities related to the underlying refinancing mortgage loan transaction (“the Loan”) other than LaSalle. The Smiths seek a declaration that the Loan was illegal, rescission of the Loan, an injunction against the foreclosure sale of their residence, and damages. Defendants have filed the following motions, which have been fully briefed and are ripe for review:
[9] *Motion of Defendant Bear Stearns Residential Mortgage Corporation to Dismiss Plaintiffs’ Complaint (ECF No. 11);
[10] *Motion of Defendants Motion Financial and Ellyn Klein Grober to Dismiss Plaintiffs’ Complaint (ECF No. 14);
[11] *Motion of Defendant Sand Canyon Corporation F/K/A Option One Mortgage Corporation to Dismiss Plaintiffs’ Complaint (ECF No. 16); and
[12] *Defendant Encore Credit Corporation’s Motion to Dismiss the Complaint of Donald J. Smith and Nancy L. Smith (ECF No. 19).
[13] For the reasons articulated below, the Motions are GRANTED IN PART, the federal law claims (Counts I through IV) are dismissed with prejudice, and the state law claims (Counts V through XI) are dismissed without prejudice.
[14] I.
[15] In January 2004, the Smiths had several discussions over the telephone with agents of Defendant Motion Financial (“Motion”) concerning a possible refinancing of the mortgage on their home. (ECF No. 1 (“Compl.”) ¶ 13.) The Smiths “directed Defendant Motion to extract equity from their home for the purpose of paying credit cards and other personal loans due to a deteriorating income stream versus prior year and also to be able to fund the March, 2004 mortgage payments.” (Id.) The Smiths “believed that the best way to accomplish this would be through a fix-rate loan at the lowest interest rate for which [they] qualified and with a monthly payment plan which [they] could afford given their financial situation as to income and expenses.” (Id.) On January 7, 2004, Defendant Ellyn Klein Grober allegedly represented to the Smiths that they qualified for a fixed rate mortgage loan in the principal amount of $528,500. (Id. ¶ 14.) Grober prepared a Uniform Residential Loan Application indicating that the Smiths were applying for a fixed rate loan, which the Smiths executed on January 9, 2004. (Id.) Grober also provided the Smiths with an early Truth In Lending Statement setting forth the fixed rate mortgage loan. In February 2004, Grober informed the Smiths that the fixed rate loan they initially qualified for would not provide a sufficient loan-to-value ratio to enable them to obtain a cash-out refinance program. (Compl. ¶ 17.) Grober told them that the only loan program available to them to obtain a cash-out refinance would be a program with a two-year fixed rate and an adjustable rate every six months thereafter that required an appraised value of the property of $630,000. (Id.) Grober arranged for an appraisal that valued the residence at $570,000 — insufficient to provide cash to the Smiths. (Id. ¶ 20.) She arranged a second appraisal which valued the residence at $630,000 — sufficient to provide a cash payout. (Id. ¶ 22.) With less than two weeks remaining before the Smiths would default on numerous obligations (including, presumably, their March 2004 mortgage payment), the Smiths “agreed to proceed with the closing on the adjustable rate mortgage.” (Compl. ¶ 23.) On March 5, 2004, Defendants Motion and Encore Credit Corporation (“Encore”) executed the refinancing Loan with the Smiths. (Id. ¶ 24.) The Smiths allege that the Loan, which was the result of predatory lending practices, “was sold to a securities firm” immediately after the closing and, within the Loan year, “ended up as collateral for Bear Stearns Asset-Backed Securities LLC Asset-Backed Certificates Series 2004-HES.” (Id. ¶ 28(g).)
[16] The Smiths subsequently defaulted on the loan and, on October 18, 2005, LaSalle, as Trustee for Certificate Holders of Bear Stearns Asset-Backed Securities LLC Asset-Backed Certificates Series 2004-HES (“LaSalle”), filed a foreclosure action against the Smiths and others in the Court of Common Pleas for Mahoning County, Ohio, in Case No. 2005-CV-3869 (“the Foreclosure Case”). (Compl. ¶ 49.) Nancy Smith filed an answer on December 29, 2005, and Ronald Smith filed an answer on January 10, 2006.
[17] After an evidentiary hearing, the state court granted LaSalle’s motion for summary and default judgment, and entered judgment against the Smiths on January 12, 2007. (ECF No. 12-2 at 1.) The state court decreed that if the amount then due on the loan was not fully paid within three days of the judgment, the right of the Smiths in the property “shall be foreclosed and [ ] an order of sale may be issued to the Mahoning County Sheriff, directing him to appraise, advertise in a paper of general circulation within the County and sell said premises as upon execution and according to law free and clear of the interest of all parties to this action.” (Id. at 4.)
[18] In August 2007, LaSalle filed a motion to withdraw the order of sale scheduled for August 7, 2007 upon the representation that Ronald Smith had filed a Chapter 13 bankruptcy proceeding on August 3, 2007. The court granted LaSalle’s request to have the order of sale returned by the sheriff unexecuted and granted leave to LaSalle to file an alias order of sale. On October 15, 2007, the state court granted LaSalle’s request to vacate the bankruptcy stay, reinstate the case to the active docket and for leave to continue with the prosecution of the case.
[19] On June 17, 2008, the Smiths filed this case in federal court asserting a laundry list of state and federal claims against Defendants Grober, Motion, Encore, Bear Stearns Residential Mortgage Corporation (“BSRMC”) and Option One Mortgage Corporation (which is alleged to be in an agency relationship with Encore, Compl. ¶ 4) for their predatory lending practices.*fn1 Specifically, the Smiths allege claims for violation of the Homeowners Equity Protection Act, 15 U.S.C. § 1639, the Real Estate Settlement Procedures Act , 12 U.S.C. § 2601, the Truth in Lending Act, 15 U.S.C. § 1605, the Fair Credit Reporting Act, 15 U.S.C. § 1681, the Ohio Consumer Protection Act, O.R.C. Chapter 1345, the Ohio Mortgage Brokers Act , O.R.C. Chapter 1322, and the Ohio Racketeer Influenced and Corrupt Organizations (“RICO”) Act, O.R.C. § 2929.32. They also allege claims of fraudulent misrepresentation, breach of fiduciary duty, unjust enrichment, and civil conspiracy. The Smiths ask this Court to treat the Complaint as a “Notice of Rescission” and declare the refinancing transaction illegal and void in the first instance, rescind the Loan, and enjoin the foreclosure sale of their home. They seek damages as well.
[20] On July 21, 2008, Defendant BSRMC filed the first motion to dismiss, followed by the other pending motions to dismiss. Defendants all argue that the Court lacks the jurisdiction to granted the requested declaratory and injunctive relief based on the Rooker-Feldman doctrine and the Anti-Injunction Act, that the Court should abstain from adjudicating the case based on Younger v. Harris, 401 U.S. 37 (1971), and that issue preclusion bars adjudication of the alleged claims. They argue, in the alternative, that most of the claims are time-barred and all of them fail to state a claim for which relief can be granted. Having reviewed the motions, the briefs and the record, the Court is prepared to issue its ruling.
[21] II.
[22] Defendants move for dismissal for lack of subject matter jurisdiction and for failure to state a claim upon which relief can be granted. Defendants make a facial attack on the subject matter jurisdiction of this Court. In reviewing a facial attack, a trial court takes the allegations in the complaint as true, which is a similar safeguard employed under 12(b)(6) motions to dismiss. Ohio Nat’l Life Ins. Co. v. United States, 922 F.2d 320, 325 (6th Cir. 1990); see also Nat’l Ass’n of Minority Contractors v. Martinez, 248 F.Supp.2d 679, 681 (S.D. Ohio 2002) (applying standard).
[23] When ruling on a Rule 12(b)(6) motion to dismiss, the Court must construe the complaint liberally in a light most favorable to the non-moving party. Bloch v. Ribar, 156 F.3d 673, 677 (6th Cir. 1998). The Court “must accept as true all of the factual allegations contained in the complaint.” Erickson v. Pardus, — U.S. —, 127 S.Ct. 2197, 2200 (2007) (citing Bell Atl. Corp. v. Twombly, — U.S. —, 127 S.Ct. 1955, 1965 (2007) (citations omitted)). See also, NicSand, Inc. v. 3M Co., 507 F.3d 442, 449 (6th Cir. 2007) (en banc) (viewing a complaint “through the prism of Rule 12(b)(6) [requires] us to accept all of its allegations and all reasonable inferences from them as true”) (citing Mich. Paytel Joint Venture v. City of Detroit, 287 F.3d 527, 533 (6th Cir. 2002)). When reviewing a Rule 12(b)(6) motion to dismiss, the Court must “determine whether the plaintiff can prove a set of facts in support of its claims that would entitle it to relief.” Daubenmire v. City of Columbus, 507 F.3d 383, (6th Cir. Nov. 6, 2007) (quoting Bovee v. Coopers & Lybrand C.P.A., 272 F.3d 356, 360 (6th Cir. 2001)). In order to preclude dismissal under Rule 12(b)(6), a complaint must contain either direct or inferential allegations which comprise all of the essential, material elements necessary to sustain a claim for relief under some viable legal theory. Lewis v. ACB Bus. Serv., Inc., 135 F.3d 389, 406 (6th Cir. 1998).
[24] III.
[25] Defendants argue that the district court lacks subject matter jurisdiction to adjudicate the claims and grant the requested relief based on the Rooker-Feldman doctrine, issue preclusion, the Anti-Injunction Act, and the Younger abstention doctrine. The Court will address each argument in turn.
[26] A. Rooker-Feldman
[27] First, Defendants argue that the Rooker-Feldman doctrine prohibits this federal district court from granting the Smith’s request for declaratory and injunctive relief (i.e., declaring the refinancing Loan illegal and void, and enjoining the foreclosure sale of their residence). The Smiths disagree.
[28] The Rooker-Feldman doctrine stands for the proposition that federal district courts generally lack subject matter jurisdiction to review state court judgments. It derives from two Supreme Court decisions: Dist. of Columbia Court of Appeals v. Feldman, 460 U.S. 462 (1983) and Rooker v. Fidelity Trust Co., 263 U.S. 413 (1923).
[29] For years, a standard employed by the Sixth Circuit in determining whether Rooker-Feldman barred federal court adjudication of claims was whether the claims in the federal case were “inextricably intertwined” with claims previously asserted in a state court proceeding. See, e.g., Tropf v. Fidelity Nat’l Title Ins. Co., 289 F.3d 929, 937-38 (6th Cir. 2002); Kafele v. Lerner, Sampson & Rothfuss, LPA, 161 Fed. Appx. 487, 489-90 (citing Catz v. Chalker, 142 F.3d 279, 293 (6th Cir. 1998)). “Where federal relief [could] only be predicated upon a conviction that the state court [was] wrong,” the federal claims were determined to be inextricably intertwined with the state court claims and thus barred by Rooker-Feldman from adjudication in federal court. Id.
[30] After various circuits adopted differing interpretations regarding the breadth of Rooker-Feldman, the Supreme Court recently took the opportunity to clarify the doctrine’s limited scope. In re Hamilton, 540 F.3d 367-371 (6th Cir. 2008) (citing Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280 (2005)).
[31] The Rooker-Feldman doctrine, we hold today, is confined to cases of the kind from which the doctrine acquired its name: cases brought by state court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments.
[32] Id. (quoting Exxon, 544 U.S. at 284).
[33] Following Exxon, the Sixth Circuit further refined the doctrine, distinguishing between plaintiffs who bring an impermissible attack on a state court judgment, in which case Rooker-Feldman does apply — and plaintiffs who assert independent claims before the district court, in which case Rooker-Feldman does not apply. Pittman v. Cuyahoga County Dep’t of Children & Family Serv., 241 Fed. Appx. 285, 287 (6th Cir. 2007) (citing McCormick v. Braverman, 451 F.3d 382, 393 (6th Cir. 2006)). The Sixth Circuit stated that the pertinent inquiry is whether the “source of the injury” upon which a plaintiff bases his federal claim is the state court judgment:
[34] If the source of the injury is the state court decision, then the Rooker-Feldman doctrine would prevent the district court from asserting jurisdiction. If there is some other source of injury, such as a third party’s actions, then the plaintiff asserts an independent claim.
[35] McCormick, 451 F.3d at 394-95. Thus, the Sixth Circuit concluded that jurisdiction is proper if a plaintiff presents an independent claim in federal court, “albeit one that denies a legal conclusion that a state court has reached in a case to which he was a party.” Id. (quoting GASH Assocs. v. Rosemont, 995 F.2d 726, 728 (7th Cir. 1993)). In fact, the Sixth Circuit recently reversed a ruling that Rooker-Feldman barred claims (including a request for rescission of a mortgage loan) brought by a mortgagor against individuals involved in state mortgage foreclosure proceedings where the source of injury was the defendants’ conduct preceding the foreclosure decree. Brown v. First Nationwide Mortg. Corp., 206 Fed. Appx. 436 (6th Cir. 2006). See also Lawrence v. Welch, 531 F.3d 364, 369 (6th Cir. 2008) (holding that claims that certain defendants committed fraud and misrepresentation in a state probate proceeding did not allege an injury caused by state court judgment and were not barred by Rooker-Feldman; however, claims that the probate court’s order of receivership violated the plaintiff’s constitutional rights were barred because “the count alleges that the state court order itself was illegal and harmed plaintiff”); Pittman, 241 Fed. Appx. at 288 (holding that claims of improper conduct by employees of a family services agency were not barred by Rooker-Feldman because their actions were independent from a juvenile court’s custody decision; plaintiff did not seek reversal of the custody order); Loriz v. Connaughton, 233 Fed. Appx. 469, 474-75 (6th Cir. 2007) (holding that a landowners’ claims challenging a zoning decision as unconstitutional were barred by Rooker-Feldman).
[36] Here, the Smiths allege that Defendants violated the Homeowner Equity Protection Act (“HOEPA“), 15 U.S.C. § 1639, by charging excessive fees, expenses and costs exceeding 10% of the financed amount (Count 1); Defendants violated the Real Estate Settlement Procedures Act (“RESPA”), 12 U.S.C. § 2601, by accepting charges for services not performed (Count 2); Defendants violated the Truth in Lending Act (“TILA”), 15 U.S.C. § 1605, by failing to disclose certain charges associated with the Loan (Count 3); Defendants violated the Fair Credit Reporting Act (“FCRA”), 15 U.S.C. § 1681s-2(b), by failing to undertake an investigation of disputed credit information (Count 4); Defendants violated the Ohio Consumer Protection Act, O.R.C. § 1345.01 by failing to disclose, altering and misrepresenting material terms of the Loan (Count 5); Defendants Motion and Grober violated the Ohio Mortgage Brokers Act by misrepresenting and concealing the knowledge that the Smiths would not qualify for the loan after the first two years; Defendants fraudulently misrepresented the Loan terms (Count 7); Defendants breached their fiduciary duty to the Smiths (Count 8); Defendants enjoyed unjust enrichment by their unlawful conduct (Count 9); Defendants engaged in a civil conspiracy (Count 10); and Defendants violated the Ohio RICO statute, O.R.C. § 2929.32, by their fraudulent conduct (Count 11). These are all independent claims against third parties where the source of injury is not the state court foreclosure judgment itself but the alleged conduct of these particular parties leading up to and encompassing the refinancing transaction. Because the source of injury is not the state court judgment, Rooker-Feldman does not bar adjudication of these claims in federal court.*fn2
[37] B. Issue Preclusion
[38] Next, Defendants argue that issue preclusion prevents the Smiths from seeking a declaration that the Loan was illegal and void, rescission of the Loan, and termination of the Loan documents. The Full Faith and Credit Act, 28 U.S.C. § 1738, requires federal courts to give state court judgments the same preclusive effect that the state would afford such judgment. McCormick, 451 F.3d at 397 (citing Exxon, 125 S.Ct. at 1527). Ohio’s doctrine of issue preclusion, also known as collateral estoppel, holds that a party asserting issue preclusion has the burden of establishing the following elements:
[39] (1) the party against whom estoppel is sought was a party or in privity with a party to the prior action;
[40] (2) there was a final judgment on the merits in the previous case after a full and fair opportunity to litigate the issue;
[41] (3) the issue must have been admitted or actually tried and decided and must be necessary to the final judgment; and
[42] (4) the issue must have been identical to the issue involved in the prior suit.
[43] Dye v. City of Warren, 367 F. Supp. 2d 1175, 1184-85 (N.D. Ohio 2005); see also, Knott v. Sullivan, 418 F.3d 561, 568 (6th Cir. 2005); State ex rel. Stacy v. Batavia Local Sch. Dist. Bd. of Educ., 779 N.E.2d 216, 219 (Ohio 2002) (“[T]hat a fact or a point that was actually and directly at issue in a previous action, and was passed upon and determined by a court of competent jurisdiction, may not be drawn into question in a subsequent action between the same parties or their privies, whether the cause of action in the two actions be identical or different.”). Issue preclusion cannot be invoked because similar issues were previously litigated and decided; rather, the same issue must have been actually litigated and decided. See Thompson v. Wing, 637 N.E.2d 917 (Ohio 1994); Goodson v. McDonough Power Equip., Inc., 443 N.E.2d 978, 987 (Ohio 1983) (“Collateral estoppel precludes relitigation only when the identical issue was actually decided in the former case.”).
[44] Defendants argue that issue preclusion is proper because the issue of the Loan’s validity was actually litigated and decided in the Foreclosure case when the state court determined that LaSalle was owed money on the note in connection with the Loan. Defendants reason that the Smiths’ claims are precluded since the previous and present issues both encompass the broad topic of the Loan’s validity. The Smiths counter that the issues in the Complaint were not “passed upon or determined” by the Mahoning County Court. Instead, the issues raised here deal with fraud, violations of federal lending laws, violations of the Ohio Consumer Practices Act, violations of the Ohio RICO Act and conspiracy, all of which are distinct from the question of the Loan’s validity.
[45] Based on case law, the Court cannot apply the broad application of the term “issue” that is espoused by Defendants to the claims in this case. The Court finds that Defendants have failed to show that the claims in the Complaint are identical to issues actually litigated and decided by the Mahoning County Court in the Foreclosure case.
[46] C. Younger Abstention
[47] Defendants argue that the Court must abstain from adjudicating this case based on Younger v. Harris, 401 U.S. 37 (1971). Under the abstention doctrine articulated in Younger, “when state proceedings are pending, principles of federalism dictate that the constitutional claims should be raised and decided in state court without interference by the federal courts.” Doscher v. Menifee Circuit Court, 75 Fed. Appx. 996, 997 (6th Cir. 2003) (citing Pennzoil Co. v. Texaco, Inc., 481 U.S. 1, 17 (1987)). “[O]nly exceptional circumstances justify a federal court’s refusal to decide a case in deference to the States.” Leatherworks P’ship v. Boccia, 245 Fed. Appx. 311, 317 (6th Cir. 2007) (citing New Orleans Pub. Servs., Inc. v. Council of the City of New Orleans, 491 U.S. 350, 368 (1989)). In order for a federal district court to abstain from hearing a claim pursuant to Younger, it must find that (1) there is an ongoing state judicial proceeding, (2) the proceeding implicates important state interests, and (3) there is an adequate opportunity in the state proceeding to raise constitutional challenges. Id. (citing Middlesex County Ethics Comm’n v. Garden State Bar Ass’n, 457 U.S. 423 (1982)). The court should proceed deliberately “to ensure that abstention remains ‘the exception, not the rule.'” Id. (quoting New Orleans, 491 U.S. at 359, in turn quoting Hawaii Hous. Auth. v. Midkiff, 467 U.S. 229, 236 (1984)). Because the Smiths have not raised any constitutional challenges to the foreclosure judgment, Younger does not require this Court to abstain from adjudicating the claims before it.
[48] D. Anti-Injunction Act
[49] Defendants argue that the Anti-Injunction Act, 28 U.S.C. § 2283, prohibits the Court from issuing the requested injunctive relief. The Court agrees.
[50] The Anti-Injunction Act states, in full, that “[a] court of the United States may not grant an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.”
[51] 28 U.S.C. § 2283. The Supreme Court has acknowledged that the Act creates “an absolute prohibition against enjoining state court proceedings, unless the injunction falls within one of the three specifically defined exceptions.” Atlantic Coast Line R.R. Co. v. Bhd. of Locomotive Eng’rs, 398 U.S. 281, 286-87 (1970). The three exceptions are: (1) where Congress expressly authorizes, (2) where necessary in aid of the court’s jurisdiction, or (3) where necessary to protect or effectuate the court’s judgments. Martingale LLC v. City of Louisville, 361 F.3d 297, 302 (6th Cir. 2004); see 28 U.S.C. § 2283. Once the Anti-Injunction Act defense is raised, the party pursuing the injunction bears the burden of establishing that the injunction falls within one of the exceptions. See id.
[52] The Smiths contend that the Court can enjoin the foreclosure sale because the Ohio RICO statute expressly authorizes injunctive relief. (ECF No. 20, at 5-6.) To qualify as an “expressly authorized” exception to the Anti-Injunction Act, the test is “whether an Act of Congress, clearly creating a federal right or remedy enforceable in a federal court of equity, could be given its intended scope only by the stay of a state court proceeding.” Mitchum v. Foster, 407 U.S. 225, 238 (1972); see also, Atlantic Coast Line R.R., 398 U.S. at 297 (“Any doubts as to the propriety of a federal injunction. . . should be resolved in favor of permitting the state courts to proceed . . .”). The Ohio RICO statute permits an injunction, but the statute was not “expressly authorized” by an Act of Congress. Therefore, it does not fall within any exception to the Anti-Injunction Act.
[53] Thus, to the extent that the Smiths are asking the federal district court to stay the Foreclosure case, the request is moot because the state court has stayed the Foreclosure case pending the adjudication of claims presented in this federal case. To the extent that the Smiths are asking the federal district court to enjoin the foreclosure sale ordered by the state court, the federal district court is barred from providing that relief by the Anti-Injunction Act.
[54] IV.
[55] Defendants argue that all the federal claims and most of the state law claims are time-barred. The Court finds that all the federal claims are barred by the relevant statutes of limitations for the following reasons.
[56] A. HOEPA (Count I) and TILA (Count III)
[57] Count I alleges that “Defendants”*fn3 engaged in predatory lending practices, charged “excessive fees, expenses and costs which exceeded more than 10% of the amount financed” and failed to make required disclosures to the Smiths no later than 3 days prior to closing in violation of HOEPA, 15 U.S.C. § 1639. Count III alleges that Defendants failed to disclose certain charges incident to the extension of credit to the Smiths that were associated with the loan transaction on the Truth in Lending Statement and calculated the annual percentage rate based upon improperly calculated, undisclosed or inconsistent amounts — all in violation of TILA statutes and regulations.
[58] The TILA is a federal consumer protection statute intended to promote the informed use of credit by requiring certain uniform disclosures from creditors. In re Community Bank of Northern Virginia, 418 F.3d 277, 303-04 (3d Cir. 2005) (citing15 U.S.C. § 1607, as implemented by Regulation Z, 12 C.F.R. §§ 226.1 et seq.) Creditors who make loans secured by a borrower’s principal dwelling are required to provide borrowers with disclosures such as the annual percentage rate, the finance charge, the amount financed, the total payments, and the payment schedule. Id. at 304 (citing 12 C.F.R. § 226.23) (quotations omitted). The HOEPA, enacted as an amendment to the TILA, creates a special class of regulated loans that are made at higher interest rates or with excessive costs and fees. Id. These loans are not only subject to the restriction on terms commonly used by predatory lenders to manipulate the cost of the loans, but are also subject to special disclosure requirements. Id. (citing 15 U.S.C. § 1639). Under 15 U.S.C. § 1640(e), TILA and HOEPA must be brought “within one year from the date of the occurrence of the violation.”
[59] Defendants argue that the HOEPA and TILA claims are barred by the relevant one-year statute of limitations. These claims, which are based on the failure of Defendants to disclose certain material information leading up to or at the time the Loan transaction was entered, accrued no later than the closing date of March 5, 2004. As such, the claims expired one year later on March 5, 2005.
[60] Rather than address the many and varied claims independently, the Smiths generally assert that Defendants’ pattern “during the life of the mortgage loan, of defrauding the Smiths including failing to credit payments made, incorrectly calculating interest on the accounts and failing to accurately debit fees” entitles all of their claims to equitable tolling. Putting aside for the moment the dubious question of whether accounting errors fall within the ambit of TILA or HOEPA (or RESPA or FCRA for that matter), it is true that the HOEPA and TILA limitations statute may be subject to equitable tolling. Borg v. Chase Manhattan Bank USA, NA, 247 Fed. Appx. 627, 633 (6th Cir. 2007). When equitable tolling is applied, the one-year period begins to run when the borrower discovers or had reasonable opportunity to discover the fraudulent concealment of charges. Id. (citing Jones v. TransOhio Sav. Ass’n, 747 F.2d 1037, 1041 (6th Cir. 1984)). The Smiths argue that there was no practical way for them to know about the alleged fraudulent concealment of charges prior to being sued for foreclosure. Giving the Smiths every benefit of the doubt (i.e., assuming that the statute was tolled until the foreclosure action was commenced on October 18, 2005 or until Nancy Smith filed her answer on December 29, 2005 and Ronald Smith filed his answer on January 10, 2006), the Smiths still had until October 18, 2006 (or December 29, 2006 or January 10, 2007) to file their TILA and HOEPA claims against the appropriate entities and failed to do so.
[61] Moreover, “[a]n obligor’s right of rescission shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first.”
[62] 15 U.S.C. § 1635(f). The Supreme Court has interpreted this section to be an absolute three-year bar to claims for rescission under TILA or HOEPA. Beach v. Ocwen Fed. Bank, 523 U.S. 410, 411-12 (1998) (holding that “§ 1635(f) completely extinguishes the right of rescission at the end of the 3-year period.”). Accordingly, the Smiths’ right to rescission of the refinancing loan under TILA and HOEPA was absolutely statutorily extinguished on March 5, 2007.
[63] The Court notes in passing that nothing prevented the Smiths from adding these Defendants to their foreclosure case and bringing these claims (or any of the other claims) against them in the course of those proceedings. See, e.g., 15 U.S.C. § 1536(f). For all these reasons, Counts I and III are barred by the statute of limitations.
[64] B. RESPA (Count II)
[65] Count II alleges that Defendants’ conduct in accepting charges for settlement services not rendered violates 12 U.S.C. § 2607 of the RESPA, and seek an amount equal to three times the amount of charges paid for “settlement services” under § 2607(d)(2). Among the abusive practices Congress sought to eliminate through the enactment of RESPA was the unlawful payment of referral fees, kickbacks and other unearned fees. Sosa v. Chase Manhattan Mortg. Corp., 348 F.3d 979, 981 (11th Cir. 2003) (citation omitted); see also 12 U.S.C. §§ 2601(b), 2607. Claims for violations of § 2607 of the RESPA must be brought within 1 year of the violation. 12 U.S.C. § 2614. There is no dispute that this claim accrued on March 5, 2004 and that it expired on March 5, 2005. The Smiths acknowledge that the Sixth Circuit has yet to decide whether equitable tolling applies to claims brought under § 2607 of the RESPA. See, e.g., Egerer v. Woodland Realty, Inc., No. 1:06 CV 789, 2007 WL 3467263 at *4 (W.D. Mich. Nov. 13, 2007). Even assuming that equitable tolling applies, it would fail here for the same reasons set forth respecting the TILA and HOEPA claims. Accordingly, Count II is time-barred.
[66] C. FCRA (Count IV)
[67] In Count IV, the Smiths assert that “Defendants wrongfully, improperly, and illegally reported negative information as to the Smiths to one or more credit reporting agencies” and that the Smiths are thereby entitled to maintain a private cause of action against Defendants pursuant to § 1681s-2(b). Compl. ¶¶ 73, 74. The Smiths claim that they are entitled to recover damages for Defendants’ alleged negligent non-compliance with the FCRA under § 1681o, and punitive damages for Defendants’ alleged willful noncompliance with the FCRA under § 1681(n)(a)(2). Id. ¶¶ 75, 76.
[68] Congress enacted the FCRA as part of the Consumer Credit Protection Act “to ensure fair and accurate credit reporting, promote efficiency in the banking system, and protect consumer privacy.” Safeco Ins. Co. of Am. v. Burr, 127 S.Ct. 2201 (2007) (citing 84 Stat. 1128, 15 U.S.C. § 1681 and TRW Inc. v. Andrews, 534 U.S. 19 (2001)). The Sixth Circuit has explained that the FCRA is aimed at protecting consumers from inaccurate information in consumer reports and establishing credit reporting procedures that utilize correct, relevant, up-to-date information in a confidential and responsible manner. Jones v. Federated Fin. Reserve Corp., 144 F.3d 961, 965 (6th Cir. 1998) (citation omitted).
[69] Under § 1681s-2(b), those who furnish information to credit reporting agencies have the obligation to undertake an investigation upon receipt of notice of dispute regarding credit information that they had previously furnished. Defendants contend that a claim for violation of § 1681s-2(b) is time-barred by the relevant statute of limitations. Furthermore, Defendants argue that the Smiths have failed to state a claim under § 1681s-2(b).
[70] Violations of the FCRA may be brought no later than the earlier of (1) two years after the date of discovery by the plaintiff that is the basis for such liability or (2) five years after the date on which the violation that is the basis for such liability occurs. 15 U.S.C. § 1681p. The Smiths have not alleged the date on which any alleged § 1681s-2(b) violation occurred. Indeed, any claims based violations of the FCRA prior to June 17, 2006 are time-barred.
[71] Furthermore, this claim fails to state a claim for which relief can be granted for two reasons. First, it’s not entirely clear in the Sixth Circuit whether a consumer has a private cause of action against a furnisher of information under § 1681s-2(b). Compare Downs v. Clayton Homes, Inc., 88 Fed. Appx. 851, 853 (6th Cir. 2004) (“If it is assumed that a private right of action exists under § 1681s-2(b), . . . “) and Zamos v. Asset Acceptance, LLC, 423 F.Supp.2d 777 (N.D. Ohio 2006) (“[D]isputes currently exist among the courts as to whether the FCRA creates a private cause of action for a consumer against a furnisher of credit information.”) with Bach v. First Union Nat’l Bank, 149 Fed. Appx. 354, 359-60 (6th Cir. 2005) (“While a consumer cannot bring a private cause of action for a violation of a furnisher’s duty to report truthful information, a consumer may recover damages for . . . violation of . . . § 1681s-2(b)(A)-(D).”) and Sweitzer v. Am. Express Centurion Bank, 554 F.Supp.2d 788, 794 (noting that “[t]he majority consensus among the courts that have addressed the issue is that . . . § 1681s-2(b) created a private right of action by a consumer against a data furnisher,” and declining to follow the minority view espoused in Zamos).
[72] Second, assuming for the moment that there is such cause of action, the Smiths have not alleged that they notified a credit reporting agency that (1) they had a dispute over inaccurate information on their credit report that was furnished to the agency by any of the Defendants, (2) the agency notified Defendants of the dispute, and (3) Defendants failed to undertake an investigation of the dispute. The Smiths assert only that “Defendants” negligently or willfully furnished inaccurate information to the credit reporting agencies. These allegations are insufficient to state a claim for relief, if there is such a thing, under § 1681s-2(b).
[73] For all these reasons, Count IV is dismissed.
[74] V.
[75] The Smiths filed this case in federal court based on the Court’s federal question jurisdiction over the four federal claims, 28 U.S.C. § 1331, and supplemental jurisdiction over the seven state-law claims, 28 U.S.C. § 1367(a). Compl. ¶¶ 8, 10. Because the Court has dismissed the federal claims, the Court declines to exercise its supplemental jurisdiction over the state-law claims. See 28 U.S.C. § 1367(c)(3); see also United Mine Workers v. Gibbs, 383 U.S. 715, 726 (1966) (“[I]f the federal claims are dismissed before trial, . . . the state claims should be dismissed as well.”); Experimental Holdings, Inc. v. Farris, 503 F.3d 514, 521 (6th Cir. 2007) (“Generally, once a federal court has dismissed a plaintiff’s federal law claim, it should not reach state law claims.”) Thus, the state-law claims (Counts V through XI) are hereby dismissed without prejudice.
[76] VI.
[77] In summary, the Court GRANTS IN PART the pending Motions as follows. The Court grants the pending Motions with respect to Counts I through IV and dismisses those claims with prejudice for reasons set forth in Section III. The Court dismisses without prejudice Counts V through XI for the reason articulated in Section IV. The Court also notes that, if the federal claims were not dismissed, the Court would be unable to grant the Smiths’ request to enjoin the foreclosure sale of their home as ordered by the state court by the federal Anti-Injunction Act.
[78] IT IS SO ORDERED.
[79] Dan Aaron Polster United States District Judge

Opinion Footnotes

[80] *fn1 The Court notes in passing that the Smiths defaulted on the Loan well before entering the adjustable rate portion of their refinancing program.
[81] *fn2 Given the limited scope of Rooker-Feldman, the Court is concerned that future plaintiffs may use the federal courts to collaterally attack state court judgments, as in this case. The Sixth Circuit acknowledged this problem, but noted that “this is an inevitable byproduct of the Supreme Court’s confining the scope of Rooker-Feldman in Exxon Mobil, 544 U.S. at 284. . ..” Pittman, 241 Fed. Appx. at 289.
[82] *fn3 The Court takes this opportunity to mention that the Smiths’ referral to “Defendants” as targets of all their allegations and claims is unduly vague. It is difficult to determine, for instance, how BSMRC can be liable for failure to provide the proper truth-in-lending disclosures on March 5, 2004 or what role Option One Mortgage plays in this case at all.

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Mincey v. World Savings Bank

Posted on December 11, 2008. Filed under: Case Law, Foreclosure Defense, Loan Modification, Mortgage Audit, Mortgage Law, right to rescind, Truth in Lending Act | Tags: , , , , , , , , , , , , , , |

Mincey v. World Savings Bank, FSB, No. 2:07-cv-03762-PMD (D.S.C. 08/15/2008)

[1]         IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF SOUTH CAROLINA CHARLESTON DIVISION

[2]         C.A. No. 2:07-cv-03762-PMD

[3]         2008.DSC.000

[4]         August 15, 2008

[5]         BONNIE MINCEY, STEPHANIE O’ROURKE, AND TINA SINGER, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS,
v.
WORLD SAVINGS BANK, FSB; GOLDEN WEST FINANCIAL CORPORATION; AND WACHOVIA CORPORATION, DEFENDANTS.

[6]         ORDER

[7]         This matter is before the court upon three motions: (1) a Motion to Dismiss filed by Defendants Golden West Financial Corporation (“Golden West”) and Wachovia Corporation (“Wachovia”); (2) a Motion for Judgment on the Pleadings filed by Defendant World Savings Bank, FSB (“WSB” or “World”); and (3) a Cross-Motion for Judgment on the Pleadings filed by Plaintiffs Bonnie Mincey, Stephanie O’Rourke, and Tina Singer (“Plaintiffs”). For the reasons set forth herein, the court grants the Motion to Dismiss filed by Golden West and Wachovia. The court grants in part and denies in part WSB’s Motion for Judgment on the Pleadings and also grants in part and denies in part Plaintiffs’ Motion for Judgment on the Pleadings.*fn1

[8]         BACKGROUND

[9]         Plaintiffs filed the instant lawsuit on November 16, 2007 as a class action, though as of this date, a class has not been certified, and an Amended Complaint was filed on January 18, 2008. The Amended Complaint states that such action is brought based on Defendants’ failure to clearly and conspicuously disclose to Plaintiffs and the Class Members, in Defendants’ Option Adjustable Rate Mortgage (“Option ARM”) loan documents and in the required disclosure statements accompanying the loans, (i) the actual interest rate on which the payment amounts listed in the Truth in Lending Disclosure Statements are based (12 C.F.R. § 226.17); (ii) that making the payments according to the payment schedule in the Truth in Lending Disclosure Statement provided by Defendants will result in negative amortization and that the principal balance will increase (12 C.F.R. § 226.19); and (iii) that the payment amounts listed on the Truth in Lending Disclosure Statement are insufficient to pay both principal and interest. (Am. Compl. ¶ 1.) The Amended Complaint explains that an Option ARM “is a monthly adjustable rate mortgage that gives the borrower multiple monthly payment options. When the borrower receives his or her monthly statement, it provides options to pay a minimum payment amount, an interest only payment, a payment based on a 30-year amortization, or a 15-year amortization.” (Id. ¶ 20.) The Amended Complaint also states,

[10]        Up to 80 percent of all Option ARM borrowers make only the minimum payment each month, often because they are not properly informed about the terms of the loan. The unpaid interest is then added to the balance of the mortgage, a process called “negative amortization.” Once the balance reaches a set amount, usually 125 percent of the original loan principal, the loan is automatically reset to a higher rate. (Id. ¶ 23.)

[11]        Plaintiffs assert the Defendants “engaged in a campaign of deceptive conduct and concealment aimed at maximizing the number of consumers who would accept this type of loan in order to maximize Defendants’ profits, even as Defendants knew their conduct could cause long-term difficulties for consumers and could result in the loss of their homes through foreclosure.” (Id. ¶ 29.) According to Plaintiffs, Defendants “failed to disclose, and by omission, failed to inform Plaintiffs of the fact that Defendants’ Option ARM loan was designed to, and did, cause negative amortization to occur.” (Id. ¶ 30.) Plaintiffs further allege that “the payment schedule provided by Defendants was guaranteed to be insufficient to pay all of the interest due, let alone both principal and interest, which was certain to result in negative amortization.” (Id. ¶ 34.) These interest charges above and beyond the fixed payment “were added to the principal balance on [Plaintiffs’] home loans in ever-increasing increments, substantially increasing the principal balance on their home loans and reducing the equity in these borrowers’ homes.” (Id. ¶ 38.) The Amended Complaint also states,

[12]        The Option ARM loans sold by Defendants all have the following uniform characteristics:

[13]        (a) The loan has a low fixed payment amount for the first 10 years of the Note, as evidenced in the payment schedule provided by Defendants;

[14]        (b) The payment amount is wholly unrelated to the interest rate listed on the Note and Truth in Lending Disclosure Statement;

[15]        (c) The Note states that each payment will go to both principal and interest; (d) The payment amounts listed in the Truth in Lending Disclosure Statement are not sufficient to pay the actual interest being charged, and none of the payments up through the first 10 years of the Note are applied to the principal balance;

[16]        (e) The low payment amount listed in the Note and Truth in Lending Disclosure Statement was intended by Defendants to mislead consumers into believing that the low payments for the first 10 years of the loan were based on the listed interest rate;

[17]        (f) The chief marketing gimmick, minimum payment, was intended to misleadingly portray to consumers that the low payments would continue for years with no negative amortization;

[18]        (g) The payment has a capped annual increase on the payment amount;

[19]        (h) If the unpaid balance on the loan exceeds a certain percentage of the original principal borrowed (usually 125 percent), the payment automatically reset[s] at a higher interest rate and/or payment amount; and

[20]        (i) The loan includes a prepayment penalty for a period up to three (3) years, thereby preventing consumers from refinancing during that time.

[21]        (Id. ¶ 45.) Plaintiffs list the following causes of action in their Amended Complaint: (1) violation of the Truth in Lending Act (“TILA”) and the corresponding regulations; (2) “fraudulent omissions;” (3) violation of the South Carolina Unfair Trade Practices Act (“SCUTPA”); and (4) breach of contract and the implied covenant of good faith and fair dealing. (See Am. Compl.) As noted above, several motions are pending in the instant case, and the court will address each one in turn.

[22]        ANALYSIS

[23]        A. Motion to Dismiss Filed by Golden West and Wachovia

[24]        Golden West and Wachovia filed a Motion to Dismiss pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure on February 21, 2008. (See Doc. No. [23].) This motion asserts Plaintiffs “have inappropriately sued two entities [(Golden West and Wachovia)] with which they have no relationship whatsoever.” (Mem. in Supp. of Mot. to Dismiss at 1.) These Defendants state,

[25]        Plaintiffs do not allege that they had any contact with either Wachovia or Golden West, nor do the loan documents attached to their Complaint support any such allegations. Plaintiffs’ Complaint alleges essentially nothing against Wachovia or Golden West. Instead, Plaintiffs improperly lump Wachovia and Golden West with World but make no specific, substantive allegations against Wachovia or Golden West. (Id. at 1-2.) Golden West and Wachovia assert the documents attached to the Complaint*fn2 demonstrate that Plaintiffs’ only relationship was with WSB and that “Plaintiffs’ conclusory allegations of ‘agency, servitude, joint venture, division, ownership, subsidiary, alias, assignment, alter-ego, partnership, or employment,’ without any factual support, are insufficient” under Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955 (2007). (Id. at 2.) Golden West and Wachovia further state,

[26]        [T]he loan documents attached to [Plaintiffs’] Complaint clearly disclose that Golden West and Wachovia are not “creditors” under the TILA, thereby mandating dismissal of those claims. . . Plaintiffs have failed to plead fraud with sufficient particularity. Finally, because Plaintiffs have no relationship with Golden West or Wachovia, whether contractual or otherwise, they cannot assert claims for unfair trade practices, breach of contract, and breach of the implied covenant of good faith and fair dealing against them. (Mem. in Supp. of Mot. to Dismiss at 3.)

[27]        Plaintiffs filed a Response in Opposition on April 4, 2008, asserting they “have properly pleaded that World Savings Bank acted as the agent of Golden West and Wachovia in making the loan, and that Defendants were acting in concert with each other or were joint participants and collaborators in the acts complained of in Plaintiffs’ First Amended Class Action Complaint.” (Resp. in Opp’n to Mot. to Dismiss at 1.) Plaintiffs further assert “there is ample evidence that these Defendants are properly named parties and had direct involvement in Plaintiffs’ and Class Members’ loans.” (Id.)

[28]        1. Standard of Review for Motion to Dismiss Pursuant to Rule 12(b)(6)

[29]        Upon reading all the documents in the record associated with the Motion to Dismiss, it is clear the parties have differing views on the standard this court should employ in evaluating a Motion to Dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Golden West and Wachovia cite Twombly for the proposition that “‘[w]hile a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff’s obligation to provide the grounds of his entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the speculative level . . . .'” (Mem. in Supp. of Mot. to Dismiss at 3-4 (quoting Twombly, 127 S.Ct. at 1965).) Plaintiffs, however, assert the standard of review is as follows:

[30]        “A Rule 12(b)(6) motion should be granted only if, after accepting all well-pleaded allegations in the complaint as true, it appears certain that the plaintiff cannot prove any set of facts in support of his claims that entitles him to relief.” Mattress v. Taylor, 487 F. Supp. 2d 665, 667-68 (D.S.C. 2007); see also, Edwards v. City of Goldsboro, 178 F.3d 231, 244 (4th Cir. 1999). “[A] complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Wood v. Moseley Architects, P.C., No. 4:07-147-RBH, 2007 WL 2428630, at *1 (D.S.C. Aug. 21, 2007) (quoting Republican Party of N.C. v. Martin, 980 F.2d 943, 952 (4th Cir. 1992)). “A motion to dismiss under Rule 12(b)(6) tests the sufficiency of the complaint; importantly, it does not resolve contests surrounding the facts, the merits of a claim, or the applicability of defenses.” Id. (quoting Republican Party of N.C., 980 F.2d at 952). “Further, ‘[u]nder the liberal rules of federal pleading, a complaint should survive a motion to dismiss if it sets out facts sufficient for the court to infer that all the required elements of the cause of action are present.'” Mattress, 487 F. Supp. 2d at 668 (quoting Wolman v. Tose, 467 F.2d 29, 33 n.5 (4th Cir. 1972)). The court “must assume that the allegations of the complaint are true and construe them in the light most favorable to the plaintiff.” Republican Party of N.C., 980 F.2d at 952. (Resp. in Opp’n to Mot. to Dismiss at 2.) Plaintiffs then assert Defendants’ heavy reliance on Twombly is misplaced, as it is based on the mistaken assumption that Twombly “has re-instated the intricate fact-based pleading requirements of the nineteenth century.” (Id. at 3.)

[31]        In order to resolve the disagreement, two Supreme Court opinions merit discussion: Bell Atlantic Corporation v. Twombly, 127 S.Ct. 1955 (2007), and Erickson v. Pardus, 127 S.Ct. 2197 (2007). The question in Twombly was whether an action pursuant to § 1 of the Sherman Act “can survive a motion to dismiss when it alleges that major telecommunications providers engaged in certain parallel conduct unfavorable to competition, absent some factual context suggesting agreement, as distinct from identical, independent action.” Twombly, 127 S.Ct. at 1961. The district court dismissed the complaint for failure to state a claim, understanding that allegations of parallel conduct, taken alone, do not state a claim under § 1. Id. at 1963. The district court concluded the plaintiffs “must allege additional facts that tend to exclude independent self-interested conduct as an explanation for defendants’ parallel behavior.” Id. (internal quotation marks omitted). The United States Court of Appeals for the Second Circuit reversed, holding the district court tested the complaint by the wrong standard. Id. The Second Circuit held that “plus factors are not required to be pleaded to permit an antitrust claim based on parallel conduct to survive dismissal.” Id. (internal quotation marks omitted). The Supreme Court granted certiorari to address the proper standard for pleading an antitrust conspiracy through allegations of parallel conduct. Id.

[32]        The Court began its analysis by stating that the “crucial question is whether the challenged anticompetitive conduct stems from independent decision or from an agreement, tacit or express.” Id. at 1964 (internal quotation marks omitted). In other words, while a showing of parallel business behavior “‘is admissible circumstantial evidence from which the fact finder may infer agreement,’ it falls short of ‘conclusively establish[ing] agreement or . . . itself constitut[ing] a Sherman Act offense.'” Id. (quoting Theatre Enters., Inc. v. Paramount Film Distrib. Corp., 346 U.S. 537, 540-41 (1954)). In a frequently quoted passage, the Supreme Court stated,

[33]        Federal Rule of Civil Procedure 8(a)(2) requires only “a short and plain statement of the claim showing that the pleader is entitled to relief,” in order to “give the defendant fair notice of what the . . . claim is and the grounds upon which it rests,” Conley v. Gibson, 355 U.S. 41, 47 (1957). While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, ibid.; Sanjuan v. American Bd. of Psychiatry and Neurology, Inc., 40 F.3d 247, 251 (7th Cir. 1994), a plaintiff’s obligation to provide the “grounds” of his “entitle[ment] to relief” requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do, see Papasan v. Allain, 478 U.S. 265, 286 (1986) (on a motion to dismiss, courts “are not bound to accept as true a legal conclusion couched as a factual allegation”). Factual allegations must be enough to raise a right to relief above the speculative level, see 5 C. Wright & A. Miller, Federal Practice and Procedure § 1216, pp. 235-236 (3d ed. 2004) . . . (“[T]he pleading must contain something more . . . than . . . a statement of facts that merely creates a suspicion [of] a legally cognizable right of action”), on the assumption that all the allegations in the complaint are true (even if doubtful in fact), see, e.g., Swierkiewicz v. Sorema N.A., 534 U.S. 506, 508 n.1 (2002); Neitzke v. Williams, 490 U.S. 319, 327 (1989) (“Rule 12(b)(6) does not countenance . . . dismissals based on a judge’s disbelief of a complaint’s factual allegations”); Scheuer v. Rhodes, 416 U.S. 232, 236 (1974) (a well-pleaded complaint may proceed even if it appears “that a recovery is very remote and unlikely”).

[34]        Twombly, 127 S.Ct. at 1964-65.

[35]        Applying those standards, the Court held “that stating such a claim [pursuant to § 1 of the Sherman Act] requires a complaint with enough factual matter (taken as true) to suggest that an agreement was made.” Id. at 1965. The Court continued,

[36]        The need at the pleading stage for allegations plausibly suggesting (not merely consistent with) agreement reflects the threshold requirement of Rule 8(a)(2) that the “plain statement” possess enough heft to “sho[w] that the pleader is entitled to relief.” A statement of parallel conduct, even conduct consciously undertaken, needs some setting suggesting the agreement necessary to make out a § 1 claim; without the further circumstance pointing toward a meeting of the minds, an account of a defendant’s commercial efforts stays in neutral territory. An allegation of parallel conduct is thus much like a naked assertion of conspiracy in a § 1 complaint: it gets the complaint close to stating a claim, but without some further factual enhancement it stops short of the line between possibility and plausibility of “entitle[ment] to relief.” Cf. DM Research, Inc. v. College of Am. Pathologists, 170 F.3d 53, 56 (1st Cir. 1999) (“[T]erms like ‘conspiracy,’ or even ‘agreement,’ are border-line: they might well be sufficient in conjunction with a more specific allegation–for example, identifying a written agreement or even a basis for inferring a tacit agreement, . . . but a court is not required to accept such terms as a sufficient basis for a complaint.”).

[37]        Id. at 1966.

[38]        The plaintiffs in Twombly argued against the plausibility standard, asserting such a standard is in conflict with a statement in Conley v. Gibson, 355 U.S. 41 (1957), construing Rule 8. See Twombly, 127 S.Ct. at 1968. In Conley v. Gibson, the Court noted “the accepted rule that a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.”

[39]        Conley, 355 U.S. at 45-46. The Court in Twombly indicated this language “can be read in isolation as saying that any statement revealing the theory of the claim will suffice unless its factual impossibility may be shown from the face of the pleadings.” Twombly, 127 S.Ct. at 1968. The Court stated the “no set of facts” language “is best forgotten as an incomplete, negative gloss on an accepted pleading standard: once a claim has been stated adequately, it may be supported by showing any set of facts consistent with the allegations in the complaint. Conley, then, described the breadth of opportunity to prove what an adequate complaint claims, not the minimum standard of adequate pleading to govern a complaint’s survival.” Twombly, 127 S.Ct. at 1969 (citations omitted).

[40]        Ultimately, the Court agreed with the district court’s determination that the plaintiffs’ claim should be dismissed. Id. at 1970. “Although in form a few stray statements speak directly of agreement, on fair reading these are merely legal conclusions resting on the prior allegations.” Id. The Court stated, “Here . . . we do not require heightened fact pleading of specifics, but only enough facts to state a claim to relief that is plausible on its face. Because the plaintiffs here have not nudged their claims across the line from conceivable to plausible, their complaint must be dismissed.” Id. at 1974.

[41]        Plaintiffs rely heavily on Erickson, which was issued shortly after Twombly. See Erickson, 127 S.Ct. 2197. In that case, the United States Court of Appeals for the Tenth Circuit affirmed the district court’s dismissal of the plaintiff’s § 1983 complaint, and the Court granted review because the “holding departs in [a] stark . . . manner from the pleading standard mandated by the Federal Rules of Civil Procedure.” Erickson, 127 S.Ct. at 2198. The plaintiff therein alleged that he had been removed from treatment for hepatitis C, an action that endangered his life and continued to damage his liver. Id. at 2199. The Court of Appeals concluded the plaintiff had made only conclusory allegations that he had suffered a cognizable independent harm as a result of removal from the treatment program. Id. The Court determined this conclusion was erroneous and stated,

[42]        Federal Rule of Civil Procedure 8(a)(2) requires only “a short and plain statement of the claim showing that the pleader is entitled to relief.” Specific facts are not necessary; the statement need only “‘give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.'” Bell Atlantic Corp. v. Twombly, 550 U.S.-, -, 127 S.Ct. 1955, 167 L.Ed. 2d 929, – (2007) (slip op., at 7-8) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). In addition, when ruling on a defendant’s motion to dismiss, a judge must accept as true all of the factual allegations contained in the complaint.

[43]        Erickson, 127 S.Ct. at 2200 (some citations omitted). The Court thus vacated the judgment of the Court of Appeals and remanded the case for further proceedings. Id.

[44]        Returning to the case sub judice, the court determines Plaintiffs advocate a standard of review that is contrary to law. Plaintiffs have cited the “no set of facts” language, despite the fact that the Supreme Court characterized it as “an incomplete, negative gloss on an accepted pleading standard.” Twombly, 127 S.Ct. at 1969.*fn3 Furthermore, Plaintiffs seem to be saying that because they have complied with Rule 8 of the Federal Rules of Civil Procedure, the court should not grant the Motion to Dismiss filed pursuant to Rule 12(b)(6). (See Resp. in Opp’n to Mot. to Dismiss at 5.) The problem with this argument, however, is that it simply does not follow; assuming Plaintiffs’ Amended Complaint complies with Rule 8 does not automatically indicate the Amended Complaint states a claim upon which relief can be granted.

[45]        Many courts have acknowledged that Twombly altered the standard of review for a Motion to Dismiss under Rule 12(b)(6), even if that alteration was slight. See Morales-Tañon v. Puerto Rico Elec. Power Auth., 524 F.3d 15, 18 (1st Cir. 2008) (stating that to survive a Rule 12(b)(6) motion, a complaint must contain factual allegations sufficient to raise a right to relief above the speculative level and noting that Twombly “retire[d] the seemingly broader language regarding pleading standards” in Conley); Mellon Investor Servs., LLC v. Longwood Country Garden Ctrs., Inc., 263 Fed. App’x 277, 281 (4th Cir. 2008) (“We must dismiss a complaint if it does not allege enough facts to state a claim to relief that is plausible on its face.”); Phillips v. County of Allegheny, 515 F.3d 224, 231-32, 234 (3d Cir. 2008) (noting two new concepts in Twombly: (1) the Court uses language that it has not used before, and (2) the Court disavowed the “no set of facts” language from Conley; also stating that Rule 8(a)(2) “has it right” in requiring “not merely a short and plain statement, but instead mandates a statement ‘showing that the pleader is entitled to relief'”);Williams v. United States, 257 Fed. App’x 648, 649 (4th Cir. 2007) (“To survive a Rule 12(b)(6) motion, factual allegations must be enough to raise a right to relief above the speculative level and have enough facts to state a claim to relief that is plausible on its face.” (internal quotation marks omitted)); St. John’s United Church of Christ v. City of Chicago, 502 F.3d 616, 625 (7th Cir. 2007) (“We may affirm dismissal [pursuant to Rule 12(b)(6)] only if the complaint fails to set forth enough facts to state a claim to relief that is plausible on its face.” (internal quotation marks omitted)); TON Servs., Inc. v. Qwest Corp., 493 F.3d 1225, 1236 (10th Cir. 2007) (“In Bell Atlantic, the Supreme Court articulated a new ‘plausibility’ standard under which a complaint must include ‘enough facts to state a claim to relief that is plausible on its face.'”); Alvarado v. KOB-TV, LLC, 493 F.3d 1210, 1215 n.2 (10th Cir. 2007) (“Although the Supreme Court was not clear on the articulation of the proper standard for a Rule 12(b)(6) dismissal, its opinion in Bell Atlantic and subsequent opinion in Erickson . . . suggest that courts should look to the specific allegations in the complaint to determine whether they plausibly support a legal claim for relief.”).*fn4

[46]        The court concludes that Twombly did slightly alter the standard of review for a Motion to Dismiss pursuant to Rule 12(b)(6). The court will use the following method in evaluating the motion filed by Wachovia and Golden West: When considering a Rule 12(b)(6) motion, a court must accept as true the facts alleged in the complaint and view them in a light most favorable to the plaintiff. See Ostrzenski v. Seigel, 177 F.3d 245, 251 (4th Cir. 1999).

[47]        While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff’s obligation to provide the “grounds” of his “entitlement to relief” requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true (even if doubtful in fact).

[48]        Twombly, 127 S.Ct. at 1964-65 (citations omitted).

[49]        2. Analysis

[50]        a. Insufficient Factual Allegations

[51]        Golden West and Wachovia argue that “Plaintiffs’ bald allegations of ‘agency,’ ‘alter ego,’ ‘conspiracy,’ and ‘joint venture’ cannot save their deficient claims.” (Mem. in Supp. of Mot. to Dismiss at 4.) These Defendants first assert that Plaintiffs have alleged no facts supporting an alter ego or veil-piercing theory. (Id. at 5.) Defendants state, “The only allegations supporting Plaintiffs’ alter ego or veil-piercing theory are that World is a wholly-owned subsidiary of Golden West, Golden West is a wholly-owned subsidiary of Wachovia, and, thus, these companies are ‘alter-egos.'” (Id. at 6.) Defendants next assert that Plaintiffs have alleged no facts supporting a conspiracy theory because (1) a corporation cannot conspire with its parents or subsidiaries; (2) the Amended Complaint “is devoid of any allegation that World, Golden West and/or Wachovia agreed to injure Plaintiffs”; and (3) the Amended Complaint “contains no specific allegation of special damages.” (Id. at 7-8.) Defendants further argue that Plaintiffs’ Amended Complaint contains no factual allegations supporting their claim of a joint venture. (Id. at 10.)

[52]        Golden West and Wachovia next argue Plaintiffs’ Amended Complaint fails to state a claim against them pursuant to the TILA because it “fails to allege that Golden West and Wachovia are ‘creditors’–which is a necessary element of their TILA claims.” (Id. at 11.) These Defendants further assert the Amended Complaint fails to state a claim for fraud against them, stating that while the Amended Complaint “asserts a myriad of allegations against all Defendants, [it] does not contain sufficient specificity for Golden West and Wachovia to ascertain the allegations against them individually.” (Id. at 13.) These Defendants continue, “Moreover, because the loan documents attached to Plaintiffs’ [Amended] Complaint prove that they have no relationship whatsoever with Golden West or Wachovia, there are, in fact, no circumstances under which they could plead fraud with the particularity required by Rule 9(b).” (Id. at 15.) Lastly, Golden West and Wachovia assert Plaintiffs’ claims for violation of the SCUTPA, breach of contract, and breach of the implied covenant of good faith and fair dealing cannot survive because “Plaintiffs have no relationship whatsoever with Golden West or Wachovia.” (Id.)

[53]        In their Response in Opposition, Plaintiffs assert they “have alleged a relationship between the Defendants by way of agency and have put them on notice as to the nature of Plaintiffs’ claims,” citing paragraphs 1, 6-11, 14, 42, and 43 of the Amended Complaint for support. (Resp. in Opp’n to Mot. to Dismiss at 5.) Plaintiffs state,

[54]        [A]ccording to an announcement made by Wachovia in May 2006 and information contained on their respective websites, Wachovia, Golden West, and World Savings Bank, FSB have “merged” under Wachovia and all World Savings’ accounts have been transferred to Wachovia. See Exh. 1. Furthermore, the “Pick-a-Payment” Option ARM loan that is the subject of this litigation is a registered service mark of Golden West, and the “Pick-a-Payment Premium” loan is a registered service mark of Wachovia. See Exh. 2. This may explain why World used Wachovia and Golden West’s indexes to calculate the interest rates on Plaintiffs’ loans. (Defendants’ Memorandum in Support of Motion to Dismiss, p. 2.)

[55]        Plaintiffs were also provided with documents at the time of their closing that stated, “I am aware that Wachovia Bank, National Association and its affiliates offer additional products and services that may meet my financial needs. I authorize Wachovia Bank, National Association to use the information contained in my application. . . .” See Exh. 3. Plaintiffs were also provided with affiliated business arrangement disclosures which state, “I have read this disclosure form and understand that Wachovia Bank, National Association is referring me to obtain the above described settlement service from World Savings Bank, FSB and that Wachovia Bank, National Association may receive a financial or other benefit as a result of this referral, and “this referral may provide Wachovia Bank, National Association a financial or other benefit.” See Exh. 3. (Id. at 5-6.)

[56]        Rule 12 of the Federal Rules of Civil Procedure provides that “[i]f, on a motion under Rule 12(b)(6) or 12(c), matters outside the pleadings are presented to and not excluded by the court, the motion must be treated as one for summary judgment under Rule 56. All parties must be given a reasonable opportunity to present all the material that is pertinent to the motion.” Fed. R. Civ. P. 12(d); see also Wilson-Cook Med., Inc. v. Wilson, 942 F.2d 247, 252 (4th Cir. 1991) (“Had the district court accepted and considered the affidavits relevant to the 12(b)(6) motion, the motion to dismiss for failure to state a claim would have been converted to a motion for summary judgment.”). Defendants Golden West and Wachovia did not submit any materials in support of their Motion to Dismiss. Plaintiffs, however, did submit such materials in their Response in Opposition.

[57]        The court will begin its analysis with the allegations in the Amended Complaint. In paragraph 1 of the Amended Complaint, Plaintiffs allege all Defendants failed to clearly and conspicuously disclose to Plaintiffs and the Class Members, in Defendants’ Option Adjustable Rate Mortgage (“Option ARM”) loan documents and in the required disclosure statements accompanying the loans, (i) the actual interest rate on which the payment amounts listed in the Truth in Lending Disclosure Statements are based (12 C.F.R. § 226.17); (ii) that making the payments according to the payment schedule in the Truth in Lending Disclosure Statement provided by Defendants will result in negative amortization and that the principal balance will increase (12 C.F.R. § 226.19); and (iii) that the payment amounts listed on the Truth in Lending Disclosure Statement are insufficient to pay both principal and interest. (Am. Compl. ¶ 1.) Plaintiffs allege WSB, Golden West, and Wachovia are in the business of “promoting, marketing, distributing and selling” Option ARM loans, and Golden West is the parent corporation of WSB. (Id. ¶¶ 6-7, 9.) The Amended Complaint also alleges that Wachovia is the parent corporation of Golden West. (Id. ¶ 8.) Furthermore, Plaintiffs allege

[58]        10. Plaintiffs are informed and believe that each and all of the aforementioned Defendants are responsible in some manner, either by act or omission, strict liability, fraud, deceit, fraudulent concealment, negligence, respondeat superior, breach of contract or otherwise, for the occurrences herein alleged, and that Plaintiffs’ injuries, as herein alleged, were proximately caused by the conduct of Defendants.

[59]        11. Plaintiffs are informed and believe that at all times material hereto and alleged herein each of the Defendants sued herein acted through and was the agent, servant, employer, joint venturer, partner, division, owner, subsidiary, alias, assignee and/or alter-ego of each of the remaining Defendants and was at all times acting within the purpose and scope of such agency, servitude, joint venture, division, ownership, subsidiary, alias, assignment, alter-ego, partnership or employment and with the authority, consent, approval and ratification of each remaining Defendant. . . .

[60]        14. Plaintiffs are informed and believe that at all times alleged herein, Defendants, were acting in concert or participation with each other, or were joint participants and collaborators in the acts complained of, and were the agents or employees of the others in doing the acts complained of herein, each and all of them acting within the course and scope of said agency and/or employment by the others, each and all of them acting in concert one with the other and all together.

[61]        (Id. ¶¶ 10-11, 14.)

[62]        Golden West and Wachovia cannot be held liable for World’s actions simply because Golden West is World’s parent, and Wachovia is Golden West’s parent. See United States v. Bestfoods, 524 U.S. 51, 61 (1998) (“It is a general principle of corporate law deeply ingrained in our economic and legal systems that a parent corporation . . . is not liable for the acts of its subsidiaries.”); Broussard v. Meineke Discount Muffler Shops, Inc., 155 F.3d 331, 349 (4th Cir. 1998) (stating, in applying North Carolina law, “A corporate parent cannot be held liable for the acts of its subsidiary unless the corporate structure is a sham and the subsidiary is nothing but a mere instrumentality of the parent.” (internal quotation marks omitted)); Carroll v. Smith-Henry, Inc., 281 S.C. 104, 106, 313 S.E.2d 649, 651 (Ct. App. 1984) (“Stock ownership alone ordinarily does not render a parent corporation liable for the contracts of its subsidiary irrespective of whether the subsidiary is wholly owned or only partially owned. . . .”). It is clear from Plaintiffs’ Amended Complaint that they recognize as much because they allege “each of the Defendants sued herein acted through and was the agent, servant, employer, joint venturer, partner, division, owner, subsidiary, alias, assignee and/or alter-ego of each of the remaining Defendants and was at all times acting within the purpose and scope of such agency, servitude, joint venture, division, ownership, subsidiary, alias, assignment, alter-ego, partnership or employment and with the authority, consent, approval and ratification of each remaining Defendant.” (Am. Compl. ¶ 11.) Such an allegation is a kitchen-sink approach to the task of attempting to hold Golden West and Wachovia liable for actions of WSB. Cf. Frank v. U.S. West, Inc., 3 F.3d 1357, 1362 & n.2 (10th Cir. 1993) (noting there are at least four possible theories under which a parent company may be held liable for the discriminatory acts of its subsidiaries–the integrated enterprise theory, the agency theory, the alter ego theory, and the instrumentality theory). Furthermore, vague and conclusory allegations do not suffice. See DeJesus v. Sears, Roebuck & Co., 87 F.3d 65, 70 (2d Cir. 1996) (“A complaint which consists of conclusory allegations unsupported by factual assertions fails even the liberal standard of Rule 12(b)(6).”); United Black Firefighters of Norfolk v. Hirst, 604 F.2d 844, 847 (4th Cir. 1979) (“Dismissal was proper as to the applicants-plaintiffs and the employee-plaintiff Mitchell. Their conclusory allegations of discrimination were not supported by any references to particular acts, practices, or policies of the Fire Department. They failed to state a claim under Rule 8(a)(2).”); cf. Papasan v. Allain, 478 U.S. 265, 286 (1986) (“Although for the purposes of this motion to dismiss we must take all the factual allegations in the complaint as true, we are not bound to accept as true a legal conclusion couched as a factual allegation.”).

[63]        The court concludes the allegations as stated in Plaintiffs’ Amended Complaint do not withstand the Motion to Dismiss filed by Golden West and Wachovia. As noted above, Plaintiffs have alleged Golden West and Wachovia are liable on numerous differing theories, but there are no factual allegations in the Amended Complaint to support these theories. Although Rule 8 only requires “a short and plain statement of the claim showing that the pleader is entitled to relief,” Fed. R. Civ. P. 8(a)(2), “a plaintiff’s obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Twombly, 127 S.Ct. at 1964-65 (internal quotation marks omitted). Plaintiffs’ Amended Complaint alleges very little against Golden West and Wachovia, other than their corporate relationship to WSB, and the remaining allegations simply state legal conclusions without any factual allegations. More is required to survive the Motion to Dismiss. See Jackam v. Hospital Corp. of America Mideast, Ltd., 800 F.2d 1577, 1580-81 (11th Cir. 1986) (concluding the district court erred in dismissing the action for failure to state a claim because the plaintiffs alleged, inter alia, “HCAME, as a subsidiary of HCA, is an agent of HCA which executes personnel and labor relations policy established by the parent corporation” and that “HCA exercised dominion and control over Appellee HCAME, and as the parent corporation, controlled the activities and decisions of its subsidiary HCAME”); Gill v. Byers Chevrolet LLC, No. 2:05-cv-00982, 2007 WL 3025328, at *6 (S.D. Ohio Oct. 15, 2007) (denying the defendant’s motion to dismiss because the court concluded the pleadings contained sufficient factual allegations but stating that “if Gill is seeking to pierce the corporate veil in order to hold Byers Holding liable, then he must allege facts in his Second Amended Complaint that, at the very least, implicate the Belvedere factors”)*fn5 ; Thompson v. Quorum Health Res., LLC, No. 1:06-cv-168-R, 2007 WL 2815972, at *2 (W.D. Ky. Sept. 27, 2007) (granting Triad’s motion to dismiss, stating, “There is nothing in the complaint that would lead the Court to regard Quorum as the alter ego of Triad. The complaint contains no allegations that Quorum is a mere instrumentality of Triad. There are no allegations of any misuse of the corporate form. If Triad and Quorum are separate legal entities, Plaintiff must allege facts in the complaint that would allow the Court to find that a legal entity that is separate from Plaintiff’s employer can still be considered Plaintiff’s employer under the F[alse Claims Act].” (emphasis added)); In re Alstom SA Securities Litigation, 454 F. Supp. 2d 187, 215-16 (S.D.N.Y. 2006) (concluding the plaintiffs’ allegations were sufficient under Rule 8 to plead a veil-piercing claim because they “alleged facts supporting their claim of control and dominance of ATI by Alstom and Alstom USA, including the disregard of corporate formalities . . . in suspending . . . [two employees], Alstom USA’s one hundred percent stock ownership of ATI and Alstom’s one hundred percent stock ownership of Alstom USA, that ATI and Alstom USA had shared offices, and that Alstom and Alstom USA used this control and dominance of ATI to carry out the ATI fraud”); Maung Ng We v. Merrill Lynch & Co., No. 99 Civ. 9687(CSH), 2000 WL 1159835, at *5 (S.D.N.Y. Aug. 15, 2000) (“[P]laintiff’s conclusory statements that MLIB and Teoh and Elias were ‘agents’ of MLC, MLG and/or MLIFC do not allege an agency relationship sufficient to withstand dismissal . . . . Plaintiffs must do more than state the legal conclusion that MLIB was the defendants’ agent[;] it must plead facts that support a finding that such agency existed.”); Richard v. Bell Atlantic Corp., 946 F. Supp. 54, 60 (D.D.C. 1996) (finding an allegation that BAC “operates through” its subsidiaries insufficient to hold BAC liable for the alleged discrimination of its subsidiaries).

[64]        In their Response in Opposition, Plaintiffs have presented evidence that (1) Wachovia, Golden West, and World have “merged” and that all of World’s accounts have been transferred to Wachovia; (2) the “Pick-a-Payment” Option ARM loan is a registered service mark of Golden West; (3) the “Pick-a-Payment Premium” loan is a registered service mark of Wachovia; and (4) a disclosure statement provided to Plaintiffs indicated that Wachovia Bank, National Association is referring them to obtain the described service from World and that Wachovia Bank, National Association may receive a financial benefit as a result of this referral. (See Resp. in Opp’n to Mot. to Dismiss at 5-6.)

[65]        Golden West and Wachovia argue in Reply that “Plaintiffs cannot correct their pleading deficiencies by making new factual assertions in their Response.” (Reply at 6.) These Defendants also assert that even if the court considers these new arguments, the arguments “do not save their deficient claims.” (Id. at 7.) Defendants state that in order to assert a veil-piercing or alter ego claim, Plaintiffs must allege the parent exerted undue control over the subsidiary or otherwise circumvented corporate formalities, but the new allegations “do not come even remotely close to alleging the requisite undue control or failure to observe corporate formalities.” (Id.) Defendants also argue these new allegations do not save the claim for conspiracy pursuant to South Carolina law, nor do they “save their claim of joint venture,” as the new allegations “do not allege that either Golden West, Wachovia, or World had any right to control the others.” (Id. at 7-8.)

[66]        “A memorandum in opposition or response . . . cannot remedy the defects in a party’s complaint.” Booker v. Washington Mut. Bank, F.A., 375 F. Supp. 2d 439, 441 (M.D.N.C. 2005). Instead, “[t]he remedy for an insufficient complaint is amendment under Rule 15 of the Federal Rules of Civil Procedure . . .” Id. at 441-42. In a footnote in the Response in Opposition, Plaintiffs state, “To the extent that this Court finds that Plaintiffs have not sufficiently pled the facts in their Complaint, Plaintiffs respectfully request this Court permit them to amend their Complaint to comply with this Court’s findings.” (Resp. in Opp’n to Mot. to Dismiss at 7 n.2.) From this single statement, it is unclear how Plaintiffs wish to amend their complaint. The court therefore concludes that if Plaintiffs wish to amend, they should file the appropriate motions. See McNamara v. Pre-Paid Legal Servs., Inc., 189 Fed. App’x 702, 718 (10th Cir. 2006); PR Diamonds, Inc. v. Chandler, 364 F.3d 671, 699-700 (6th Cir. 2004); see also Begala v. PNC Bank, Ohio, Nat’l Ass’n, 214 F.3d 776, 784 (6th Cir. 2000).

[67]        b. Violation of TILA against Golden West and Wachovia

[68]        Golden West and Wachovia assert they are entitled to dismissal with respect to Plaintiff’s TILA claim because “Plaintiffs’ [Amended] Complaint fails to allege that . . . [they] are ‘creditors’ . . .” (Mem. in Supp. of Mot. to Dismiss at 11.) Plaintiffs’ Response in Opposition does not address this argument. (See Resp. in Opp’n.)

[69]        Plaintiffs’ Amended Complaint does not allege that Golden West or Wachovia are creditors. The Amended Complaint does allege that “[t]he Option ARM loan Defendants sold to Plaintiffs violates the Truth in Lending Act.” (Am. Compl. ¶ 31.) There are three attachments to the Amended Complaint, and the first attachment concerns Plaintiff Mincey’s loan. It indicates that the “Lender is WORLD SAVINGS BANK, FSB, a FEDERAL SAVINGS BANK, its successors and/or assignees, or anyone to whom this Note is transferred.” (Am. Compl. Ex. 1.) Furthermore, the Truth in Lending Disclosure statement is titled “World Savings Federal Truth in Lending Disclosure Required by Regulation Z.” (Id.) The documents concerning Plaintiff O’Rourke and Plaintiff Singer are identical. (See Am. Compl. Exs. 2 and 3.)

[70]        The TILA requires creditors to disclose certain information about the terms of the loan to the prospective borrower. See, e.g., 15 U.S.C. §§ 1631-1632; 15 U.S.C. § 1638; 12 C.F.R. § 226.17. “Only ‘creditors’ are liable under TILA and Reg[ulation] Z.” Moore v. Flagstar Bank, 6 F. Supp. 2d 496, 500 (E.D. Va. 1997) (citing 15 U.S.C. § 1635(a); 15 U.S.C. § 1640(a); 12 C.F.R. § 226.17(a)(1)); see also Redic v. Gary H. Watts Realty Co., 762 F.2d 1181, 1185 (4th Cir. 1985) (“Only ‘creditors’ are subject to the [Truth in Lending] Act’s civil penalties.” (citing 15 U.S.C. § 1640(a))); Lukas v. Lucci Ltd., Inc., 966 F. Supp. 1163 (S.D. Fla. 1997) (granting the defendant’s motion for summary judgment because he did not fit the definition of a “creditor” under the TILA).

[71]        The TILA specifically defines the term “creditor”:

[72]        The term “creditor” refers only to a person who both (1) regularly extends, whether in connection with loans, sales of property or services, or otherwise, consumer credit which is payable by agreement in more than four installments or for which the payment of a finance charge is or may be required, and (2) is the person to whom the debt arising from the consumer credit transaction is initially payable on the face of the evidence of indebtedness or, if there is no such evidence of indebtedness, by agreement.

[73]        15 U.S.C. § 1602(f). Regulation Z contains a similar provision: Creditor means: (i) A person (A) who regularly extends consumer credit that is subject to a finance charge or is payable by written agreement in more than 4 installments (not including a downpayment), and (B) to whom the obligation is initially payable, either on the face of the note or contract, or by agreement when there is no note or contract.

[74]        12 C.F.R. § 226.2(a)(17).

[75]        In the case sub judice, there is no allegation that Plaintiffs’ obligation is initially payable to Golden West or Wachovia. Furthermore, the documents attached to the Amended Complaint as exhibits indicate the obligation is initially payable to WSB. The definition of the term “creditor” requires both prongs to be met, and the allegations in the Amended Complaint along with the attachments indicate that neither Golden West nor Wachovia qualifies as a “creditor” under the TILA. See Moore, 6 F. Supp. 2d at 503 (“Since the debt is not payable to Crossstate, it was not a creditor subject to liability under TILA and Reg Z at the time of closing.”); see also Piche v. Clark County Collection Serv., LLC, 119 Fed. App’x 104, 106 (9th Cir. 2004) (concluding the defendant was not subject to the TILA because it does not satisfy either condition in the definition of “creditor”). The court therefore grants the Motion to Dismiss filed by Golden West and Wachovia with respect to the TILA claim.

[76]        c. Fraud

[77]        Golden West and Wachovia assert Plaintiffs’ Amended Complaint fails to state a cause of action against them for fraud because while it “asserts a myriad of allegations against all Defendants,” it “does not contain sufficient specificity for Golden West and Wachovia to ascertain the allegations against them individually.” (Mem. in Supp. of Mot. to Dismiss at 13.)

[78]        Rule 9(b) of the Federal Rules of Civil Procedure states in part, “In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” In interpreting this rule, several courts “have held that a plaintiff alleging fraud must make particular allegations of the time, place, speaker, and contents of the allegedly false acts or statements.” Adams v. NVR Homes, Inc., 193 F.R.D. 243, 249-50 (D. Md. 2000) (citing Windsor Assocs., Inc. v. Greenfield, 564 F. Supp. 273, 280 (D. Md. 1983)). A complaint failing to specifically allege the time, place, and nature of the fraud is subject to dismissal pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. See Lasercomb America, Inc. v. Reynolds, 911 F.2d 970, 980 (4th Cir. 1990). However, “a court should hesitate to dismiss a complaint under Rule 9(b) if the court is satisfied: ‘(1) that the defendant has been made aware of the particular circumstances for which [it] will have to prepare a defense at trial, and (2) that plaintiff has substantial prediscovery evidence of those facts.'” Adams, 193 F.R.D. at 250 (quoting Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 784 (4th Cir. 1999)).

[79]        In the case sub judice, Plaintiffs do not appear to be asserting fraud on the basis of affirmative misrepresentations; Plaintiffs’ second cause of action instead alleges that Defendants had a duty to disclose certain information and that they failed to do so. (See Am. Compl. ¶¶ 108-121.)*fn6 As indicated by the United States District Court for the Middle District of North Carolina, “fraudulent concealment, or fraud by omission, . . . ‘is by its very nature, difficult to plead with particularity.'” Breeden v. Richmond Cmty. College, 171 F.R.D. 189, 195 (M.D.N.C. 1997) (quoting Daher v. G.D. Searle & Co., 695 F. Supp. 436, 440 (D. Minn. 1988)).

[80]        Plaintiffs have lumped all Defendants together in a manner that is impermissible for purposes of Rule 9(b). See Vicom Inc. v. Harbridge Merch. Servs., Inc., 20 F.3d 771, 778 (7th Cir. 1994); Zaremski v. Keystone Title Assocs., Inc., 884 F.2d 1391, at *2 (4th Cir. 1989) (unpublished table decision) (“Thus, ‘where multiple defendants are asked to respond to allegations of fraud, the complaint should inform each defendant of the nature of his alleged participation in the fraud.'” (quoting DiVittorio v. Equidyne Extractive Indus., 822 F.2d 1242, 1247 (2d Cir. 1987)); Adams, 193 F.R.D. at 250; Goldstein v. Malcom G. Fries & Assocs., Inc., 72 F. Supp. 2d 620, 627 (E.D. Va. 1999) (“A plaintiff may not group all wrongdoers together in a single set of allegations.”). It appears, however, from a fair reading of the Amended Complaint, that Plaintiffs are simply seeking to hold Golden West and Wachovia liable because of their relationship with WSB. The real problem with Plaintiffs’ Amended Complaint is that it is simply unclear on what basis Plaintiffs seek to hold Golden West and Wachovia liable. As the court in Adams stated,

[81]        Where a plaintiff is seeking to hold a defendant vicariously liable for the acts of its agents, it must allege the factual predicate for the agency relationship with particularity. Kolbeck v. LIT America, Inc., 923 F. Supp. 557, 568-69 (S.D.N.Y. 1996). When an agency relationship is allegedly part of the fraud, the circumstances constituting fraud on the part of the purported principal, which must be pled with particularity under Rule 9(b), include both the facts constituting the underlying fraud and the facts establishing the agency relationship. Id. at 569.

[82]        Adams, 193 F.R.D. at 250. The court therefore grants the Motion to Dismiss with respect to Plaintiffs’ fraud claim.

[83]        d. Claims for Violation of the SCUTPA, Breach of Contract, and Breach of the Implied Covenant of Good Faith and Fair Dealing

[84]        Golden West and Wachovia argue Plaintiffs’ claims for violation of the SCUTPA, breach of contract, and breach of the implied covenant of good faith and fair dealing fail because “Plaintiffs have no relationship whatsoever with Golden West or Wachovia.” (Mem. in Supp. of Mot. to Dismiss at 15.) Again, the documents attached to the Amended Complaint reveal that WSB was the lender; Plaintiffs seek to hold Golden West and Wachovia liable for WSB’s actions through a variety of different theories, such as agency and joint venture, without alleging any facts to support those theories.

[85]        Defendants first assert the SCUTPA claim should be dismissed because the documents attached to the Amended Complaint reveal that Plaintiffs did not engage in any transactions with Golden West or Wachovia. (Id. at 16.) Defendants cite South Carolina Department of Mental Health v. Hoover Universal, Inc., C.A. No. 3:03-4118, at 8 (D.S.C. Oct. 4, 2005), for support. In that case, Judge Joseph Anderson stated,

[86]        SCUTPA remedies are limited to purchasers who engaged in a consumer transaction with the defendant. . . [P]laintiffs must have purchased the product directly from the defendant in order to recover under SCUTPA. Plaintiffs assert that privity is not required by the SCUTPA, though they do not cite to any authority for this proposition and do not otherwise distinguish Reynolds [v. Ryland Group, Inc., 340 S.C. 331, 531 S.E.2d 917 (2000)].

[87]        While Defendants seemingly characterize this area of law as settled, Judge Norton has interpreted Reynolds to impose a privity requirement for SCUTPA claims only in the home builder/buyer context. See Colleton Preparatory Academy, Inc. v. Hoover Universal, Inc., 412 F. Supp. 2d 560, 565 (D.S.C. 2006). In fact, he certified the following question to the South Carolina Supreme Court:

[88]        Can a plaintiff who used but did not purchase a product directly from the defendant and nonetheless suffered a loss as a result of the defendant’s unfair or deceptive acts obtain relief under the South Carolina Unfair Trade Practices Act? (Order on Motion to Reconsider [84] at 11 in Colleton Preparatory Academy.)

[89]        The court need not tarry on this issue. It is clear from the documents attached to the Amended Complaint that Plaintiffs’ relationship was with WSB, not Golden West or Wachovia. Plaintiffs cannot hold Golden West or Wachovia liable under the SCUTPA simply because they are related to WSB. Plaintiffs are seeking to hold Golden West and Wachovia liable on a number of theories–such as agency and joint venture–but as noted above, there are simply no factual allegations in the Amended Complaint to support these theories. For this reason, the court concludes the SCUTPA claim fails.

[90]        Golden West and Wachovia next argue Plaintiffs’ breach of contract action fails. “‘Generally, one not in privity of contract with another cannot maintain an action against him in breach of contract . . . .'” Windsor Green Owners Ass’n, Inc. v. Allied Signal, Inc., 362 S.C. 12, 17, 605 S.E.2d 750, 752 (Ct. App. 2004) (quoting Bob Hammond Constr. Co. v. Banks Constr. Co., 312 S.C. 422, 424, 440 S.E.2d 890, 891 (Ct. App. 1994)); see also Battle v. Seibels Bruce Ins. Co., 288 F.3d 596, 603 (4th Cir. 2002) (affirming grant of summary judgment to Seibels Bruce with respect to all of plaintiff’s claims against it, including breach of contract, based on the lack of privity between the plaintiff and Seibels Bruce). Moreover, this is not a case involving a third-party beneficiary because Plaintiffs were in fact parties to the contract at issue–the contract at issue simply did not have Defendants Golden West and Wachovia as parties to the agreement. Plaintiffs do not have a breach of contract claim against Golden West or Wachovia.

[91]        Lastly, Golden West and Wachovia argue they are entitled to dismissal with respect to the claim for breach of the implied covenant of good faith and fair dealing. (Mem. in Supp. of Mot. to Dismiss at 16.) Defendants assert that because Plaintiffs’ only contractual relationship was with WSB, this cause of action must be dismissed. (Id. at 16-17.) The court agrees with Golden West and Wachovia. In RoTec Services, Inc. v. Encompass Services, Inc., 359 S.C. 467, 473, 597 S.E.2d 881, 884 (Ct. App. 2004), the Court of Appeals of South Carolina “conclude[d] that the implied covenant of good faith and fair dealing is not an independent cause of action separate from the claim for breach of contract.” Because Plaintiffs do not have a cause of action against Golden West or Wachovia for breach of contract, they likewise cannot state a claim against these Defendants for breach of the implied covenant of good faith and fair dealing.

[92]        B. Cross-Motions for Judgment on the Pleadings

[93]        As noted above, Plaintiffs brought suit against WSB for (1) violation of the Truth in Lending Act (“TILA”) and the corresponding regulations; (2) “fraudulent omissions;” (3) violation of the South Carolina Unfair Trade Practices Act (“SCUTPA”); and (4) breach of contract and the implied covenant of good faith and fair dealing. The parties filed Cross-Motions for Judgment on the Pleadings. Before turning to the parties’ arguments, the court will review of some of the terms of the loans as well as the disclosures given to Plaintiffs.

[94]        1. Standard of Review for Motion for Judgment on the Pleadings

[95]        Rule 12(c) of the Federal Rules of Civil Procedure states, “After the pleadings are closed–but early enough not to delay trial–a party may move for judgment on the pleadings.” In evaluating a Motion for Judgment on the Pleadings, the district court uses the same standard it uses when evaluating a Motion to Dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. See Burbach Broad. Co. of Del. v. Elkins Radio Corp., 278 F.3d 401, 405-06 (4th Cir. 2002); see also Edwards v. City of Goldsboro, 178 F.3d 231, 243 (4th Cir. 1999). In ruling on the Motion to Dismiss, the court may consider the pleadings as well as any documents attached to the pleadings. See Fayetteville Investors v. Commercial Builders, Inc., 936 F.2d 1462, 1465 (4th Cir. 1991); see also Fed. R. of Civ. P. 10(c) (“A copy of a written instrument that is an exhibit to a pleading is a part of the pleading for all purposes.”).

[96]        2. Terms of the Loans and Disclosures

[97]        Plaintiff Bonnie Mincey obtained her loan from WSB on May 25, 2007, and it carried an initial interest rate of 7.170%. (Def.’s Mot. for J. Ex. 1 at 1.)*fn7 The note explained that the interest rate Mincey “will pay may change on the 15th day of July, 2007 and on the same day every month thereafter,” but the “lifetime maximum interest rate limit is 11.950%, called the ‘Lifetime Rate Cap.'” (Id.) The note further states, “Beginning with the first Interest Change Date, my interest rate will be based on an index,” the “‘Cost of Savings Index’ as published by Wachovia Corporation.” (Id. at 2.) WSB, the Lender, calculates the “new interest rate by adding 2.250 percentage points, called the ‘Margin,’ to the Current Index.” (Id.) Section Three of the note contains many provisions relevant to this suit; it states, in part,

[98]        3. PAYMENTS

[99]        (A) Time and Place of Payments

[100]       I will pay Principal and interest by making payments every month. . . .

[101]       (B) Amount of My Initial Monthly Payments

[102]       (D) Calculation of Payment Changes

[103]       (E) Deferred Interest; Additions to My Unpaid Principal

[104]       (F) Limit on My Unpaid Principal; Increased Monthly Payment

[105]       (G) Payment Cap Limitation; Exceptions

[106]       Each of my initial monthly payments will be in the amount of U.S. $455.12. This amount will change as described in Sections 3(C) and 3(D) below. My initial monthly payment amount was selected by me from a range of initial payment amounts approved by Lender and may not be sufficient to pay the entire amount of interest accruing on the unpaid Principal balance. . . .

[107]       Subject to Sections 3(F) and 3(G), on the Payment Change Date my monthly payment may be changed to an amount sufficient to pay the unpaid principal balance, including any deferred interest as described in Section 3(E) below, together with interest at the interest rate in effect on the day of calculation by the Maturity Date. However, the amount by which my payment can be increased will not be more than 7-1/2% of the then existing Principal and interest payment. This 7-1/2% limitation is called the “Payment Cap” . . .

[108]       From time to time, my monthly payments may be insufficient to pay the total amount of monthly interest that is due. If this occurs, the amount of interest that is not paid each month, called “Deferred Interest,” will be added to my Principal and will accrue interest at the same rate as the Principal.

[109]       My unpaid principal balance can never exceed 125% of the Principal I originally borrowed, called “Principal Balance Cap.” If, as a result of the addition of deferred interest to my unpaid principal balance, the Principal Balance Cap limitation would be exceeded on the date that my monthly payment is due, I will instead pay a new monthly payment. Notwithstanding Sections 3(C) and 3(D) above, I will pay a new monthly payment which is equal to an amount that will be sufficient to repay my then unpaid principal balance in full on the Maturity Date at the interest rate then in effect, in substantially equal payments.

[110]       Beginning with the 10th Payment Change Date and every 5th Payment Change Date thereafter, my monthly payment will be calculated as described in Section 3(D) above except that the Payment Cap limitation will not apply. Additionally, the Payment Cap limitation will not apply on the final Payment Change Date. (Id. at 2-3.)

[111]       The Truth in Lending Disclosure Statement given to Plaintiff Mincey indicates the annual percentage rate for her loan is 7.230%, and it also indicates the finance charge is $268,840.75; the amount financed is $140,016.00; and the total payments are $408,856.75. (Def.’s Mot. for J. Ex. 4.) The disclosure statement states, “THIS LOAN CONTAINS AN ADJUSTABLE RATE FEATURE. SEE THE ADJUSTABLE LOAN PROGRAM DISCLOSURE STATEMENT PREVIOUSLY GIVEN TO YOU.” (Id.) Furthermore, it contains the following table indicating Mincey’s payment schedule:

[112]
Number of Payments    Amount of Payments    When Payments Are Due: MONTHLY beginning on
12    $455.12    07/15/07
12    489.25    07/15/08
12    525.94    07/15/09
12    565.39    07/15/10
12    607.79    07/15/11
12    653.37    07/15/12
12    702.37    07/15/13
12    755.05    07/15/14
3    811.68    07/15/15
260    1,338.59    10/15/15
1    1,336.95    06/15/37

[113]       (Id.)

[114]       Plaintiff O’Rourke’s loan closed on June 29, 2006, and the note indicated the initial interest rate was 7.060%. (Def.’s Mot. for J. Ex. 2 at 1.) This note indicated the interest rate changes biweekly but that the rate can never be higher than 11.950%. (Id. at 1-2.) The biweekly adjustments to the interest rate are based on an index, specifically the “weighted average of the interest rates in effect as of the last day of each calendar month on the deposit accounts of the federally insured depository institution subsidiaries . . . of Golden West Financial Corporation . . .” (Id. at 2.) The note also states that the initial amount of O’Rourke’s biweekly payments is $229.28 and that this payment was selected by O’Rourke “from a range of initial payment amounts approved by Lender and may not be sufficient to pay the entire amount of interest accruing on the unpaid Principal balance.” (Id.) The remainder of the terms are substantially similar to the terms of Mincey’s loan, and the note contains a similar Section 3(E):

[115]       (E) Deferred Interest; Additions to My Unpaid Principal

[116]       From time to time, my biweekly payments may be insufficient to pay the total amount of biweekly interest that is due. If this occurs, the amount of interest that is not paid each payment, called “Deferred Interest,” will be added to my Principal and will accrue interest at the same rate as the Principal. (Id. at 3.)

[117]       The Truth in Lending Disclosure Statement given to Plaintiff O’Rourke indicates the annual percentage rate for her loan is 7.317%, and it also indicates the finance charge is $169,081.42; the amount financed is $118,661.50; and the total payments are $287,742.92. (Def.’s Mot. for J. Ex. 5.) The disclosure statement states, “THIS LOAN CONTAINS AN ADJUSTABLE RATE FEATURE. SEE THE ADJUSTABLE LOAN PROGRAM DISCLOSURE STATEMENT PREVIOUSLY GIVEN TO YOU.” (Id.) Furthermore, it contains the following table indicating O’Rourke’s payment schedule:

[118]
Number of Payments    Amount of Payments    When Payments Are Due: BIWEEKLY beginning on
26    $229.28    08/07/06
26    246.48    08/06/07
26    264.97    08/04/08
26    284.84    08/03/09
26    306.20    08/02/10
26    329.17    08/01/11
26    353.86    07/30/12
26    380.40    07/29/13
26    408.93    07/28/14
26    439.60    07/27/15
354    572.98    07/25/16
1    571.02    02/18/30

[119]       (Id.)

[120]       Plaintiff Singer’s loan closed on November 29, 2005, and the note indicated the initial interest rate was 6.420%. (Def.’s Mot. for J. Ex. 3 at 1.) This note indicated the interest rate changes biweekly but that the rate can never be higher than 11.950%. (Id. at 1-2.) The biweekly adjustments to the interest rate are based on an index, specifically the “weighted average of the interest rates in effect as of the last day of each calendar month on the deposit accounts of the federally insured depository institution subsidiaries . . . of Golden West Financial Corporation . . .” (Id. at 2.) The note also states that the initial amount of Singer’s biweekly payments is $470.83 and that this payment was selected by Singer “from a range of initial payment amounts approved by Lender and may not be sufficient to pay the entire amount of interest accruing on the unpaid Principal balance.” (Id.) The remainder of the terms are substantially similar to the terms of both Mincey’s and O’Rourke’s loan, and the note also states:

[121]       (E) Deferred Interest; Additions to My Unpaid Principal

[122]       From time to time, my biweekly payments may be insufficient to pay the total amount of biweekly interest that is due. If this occurs, the amount of interest that is not paid each payment, called “Deferred Interest,” will be added to my Principal and will accrue interest at the same rate as the Principal. (Id. at 3.)

[123]       The Truth in Lending Disclosure Statement given to Plaintiff Singer indicates the annual percentage rate for her loan is 6.513%, and it also indicates the finance charge is $290,340.35; the amount financed is $244,659.46; and the total payments are $534,999.81. (Def.’s Mot. for J. Ex. 6.) The disclosure statement states, “THIS LOAN CONTAINS AN ADJUSTABLE RATE FEATURE. SEE THE ADJUSTABLE LOAN PROGRAM DISCLOSURE STATEMENT PREVIOUSLY GIVEN TO YOU.” (Id.) Furthermore, it contains the following table indicating Singer’s payment schedule:

[124]
Number of Payments    Amount of Payments    When Payments Are Due: BIWEEKLY beginning on
26    $470.83    01/09/06
26    506.14    01/08/07
26    544.10    01/07/08
26    584.91    01/05/09
26    628.78    01/04/10
26    675.94    01/03/11
26    726.64    01/02/12
26    781.14    12/31/12
26    839.73    12/30/13
26    902.71    12/29/14
367    983.20    12/28/15
1    981.49    01/21/30

[125]       (Id.)

[126]       3. Analysis

[127]       a. The TILA Claim

[128]       In its Motion for Judgment on the Pleadings, WSB asserts Plaintiffs fail to allege a violation of the TILA. (Def.’s Mem. in Supp. of Mot. for J. at 14.) WSB states,

[129]       All of Plaintiffs’ theories of liability in their First Cause of Action under the TILA rest on their argument that a lender violates the TILA when it makes an “Option ARM” or Pick-a-Payment Loan that offers the borrower the ability to make periodic payments that are insufficient to cover the accrued interest and the lender does not (1) provide the borrower with a payment schedule showing the payments needed to avoid negative amortization; and (2) include an affirmative representation on the final TILA disclosure statement that negative amortization “will” occur if the borrower makes only the minimum payments. These arguments are wrong. The TILA Disclosure Statements attached to Plaintiffs’ Complaint establish that World fully complied with its obligations under the TILA. Thus, World’s Motion should be granted. (Id.) WSB argues the court should grant its Motion for Judgment on the Pleadings because: (1) O’Rourke and Singer’s claims for actual and statutory damages are time-barred, and Plaintiffs cannot seek rescission for allegedly deficient “negative amortization” disclosures; (2) WSB’s payment schedules complied with the TILA; and (3) WSB’s “negative amortization” disclosures fully complied with the TILA. (See id. at 18-28.)

[130]       Plaintiffs, on the other hand, argue the court should grant their Motion for Judgment on the Pleadings because the pleadings reveal that Defendants have failed to comply with the TILA. (See Pl.’s Mem. in Supp. of Mot. for J. at 12.) Plaintiffs state that the note and program disclosures provided to them “contradict the payment schedule as set forth on the” Truth in Lending Act Disclosure Statement “and are misleading.” (Id.) According to Plaintiffs, the disclosure statement “fails to disclose that negative amortization will occur under the payment schedule as set forth.” (Id.) Plaintiffs point out that although the note indicates that Plaintiffs “will pay the Principal and interest by making payments” every month or every two weeks, the payment schedule disclosed in the Truth in Lending disclosure statement “does not reflect any payment of principal for approximately the first ten years.” (Id. at 14.) Plaintiffs next assert that “Defendants’ failure to disclose the other payment options is a violation of the letter and spirit of the TILA.” (Id.) Although there were four different payment options, Plaintiffs assert “Defendants failed to disclose the different payment options available and their effects anywhere” in the disclosure statement, the note, or the program disclosure form provided to Plaintiffs at the time of their closings. (Id. at 15.) Lastly, Plaintiffs assert the Defendants “failed to disclose the actual interest rate on which the payments set forth in the schedule” on the TILA disclosure statement are based. (Id. at 16.)

[131]       WSB first argues O’Rourke’s and Singer’s claims for actual and statutory damages are time-barred and that Plaintiffs cannot seek rescission for the allegedly deficient “negative amortization” disclosures. (Def.’s Mem. in Supp. of Mot. for J. at 18.) Plaintiffs have not responded to this argument.

[132]       Title 15, United States Code, Section 1640(e) provides a statute of limitations; it states in part, “Any action under this section may be brought in any United States district court, or in any other court of competent jurisdiction, within one year from the date of the occurrence of the violation.” See also Tucker v. Beneficial Mortgage Co., 437 F. Supp. 2d 584, 589 (E.D. Va. 2006) (“15 U.S.C. § 1640(e) establishes a one (1) year statute of limitations period applying to claims for civil damages arising from TILA violations, which begins running from the date of the complained of violation. If the violation is one of disclosure in a closed-ended credit transaction, the date of the occurrence of the violation is no later than the date the plaintiff enters the loan agreement.” (internal quotation marks omitted)); Davis v. Edgemere Fin. Co., 523 F. Supp. 1121 (D. Md. 1981); cf. Ellis v. Gen. Motors Acceptance Corp., 160 F.3d 703 (11th Cir. 1998) (evaluating whether equitable tolling applies to the one-year statute of limitations in 15 U.S.C. § 1640(e)).

[133]       O’Rourke’s loan closed on June 29, 2006, and Singer’s loan closed on November 29, 2005. The instant lawsuit was filed on November 16, 2007, and O’Rourke and Singer became Plaintiffs in this action on January 18, 2008. Regardless of whether the court uses the November 16, 2007, or the January 18, 2008, date, the one-year statute of limitations has run.

[134]       WSB then argues that none of the Plaintiffs can rescind their loans for the allegedly defective “negative amortization” disclosures because “allegedly defective ‘negative amortization’ disclosures do not extend the period in which a borrower may rescind her transaction.” (Def.’s Mem. in Supp. of Mot. for J. at 18.) Title 12, Code of Federal Regulations, § 226.23 states in part,

[135]       The consumer may exercise the right to rescind until midnight of the third business day following consummation, delivery of the notice required by paragraph (b) of this section, or delivery of all material disclosures, whichever occurs last. If the required notice or material disclosures are not delivered, the right to rescind shall expire 3 years after consummation, upon transfer of all of the consumer’s interest in the property, or upon sale of the property, whichever occurs first. . . .

[136]       12 C.F.R. § 226.23(a)(3); see also 15 U.S.C. § 1635; Travis v. Prime Lending, No. 3:07cv00065, 2008 WL 2397330, at *2 (W.D. Va. June 12, 2008). In a footnote, the regulations state that the term “‘material disclosure’ means the required disclosures of the annual percentage rate, the finance charge, the amount financed, the total payments, the payment schedule, and the disclosures and limitations referred to in § 226.32(c) and (d).” 12 C.F.R. § 226.23 n.48; see also Hager v. American Gen. Fin., Inc., 37 F. Supp. 2d 778, 785 (S.D.W. Va. 1999). Furthermore, the Official Staff Commentary states,

[137]       Material disclosures. Footnote 48 sets forth the material disclosures that must be provided before the rescission period can begin to run. Failure to provide information regarding the annual percentage rate also includes failure to inform the consumer of the existence of a variable rate feature. Failure to give the other required disclosures does not prevent the running of the rescission period, although that failure may result in civil liability or administrative sanctions.

[138]       12 C.F.R. Pt. 226, Supp. I, § 226.23(a)(3).

[139]       It does not appear that any of the Plaintiffs exercised the right to rescind within the three- day period, and Plaintiffs do not allege WSB failed to notify them of their right to rescind. The court must thus determine whether WSB failed to deliver a “material disclosure.” The Truth in Lending Disclosure Statements at issue in the case sub judice all list the annual percentage rate, the finance charge, the amount financed, the total of payments, and the payment schedule, and the statements note the existence of a variable rate. Because the disclosure statements include these disclosures, the court concludes WSB made all “material disclosures.” See 12 C.F.R. § 226.23 n.48; see also Hager, 37 F. Supp. 2d at 785 (noting that if a lender fails to disclose the annual percentage rate, the finance charge, the amount financed, the total payments, or the payment schedule, the right to rescind is extended from three days to three years); Moore v. Flagstar Bank, 6 F. Supp. 2d 496, 504 (E.D. Va. 1997) (“Material disclosures are the annual percentage rate, the finance charge, the amount financed, the total of payments, and the payment schedule. Thus, failure to provide any of these material disclosures to a consumer may result in rescission of the transaction and civil liability on behalf of the creditor.”); Mills v. Home Equity Group, Inc., 871 F. Supp. 1482, 1485 (D.D.C. 1994) (“Five specific disclosures are considered to be ‘material disclosures’: 1) the amount financed; 2) the finance charge; 3) the annual percentage rate; 4) the payment schedule; and 5) the total of payments. If these material disclosures are not made, then the consumer retains for three years the right to rescind the transaction.” (internal citation omitted)). Because WSB made the material disclosures, Plaintiffs cannot now seek rescission of their loans.

[140]       Although there are several points of contention about the TILA’s disclosure requirements, the main one is whether it is a violation of the TILA to disclose that negative amortization may occur when in fact it will occur if Plaintiffs make the payments as indicated in the payment schedule listed on the TILA disclosure statement. Congress enacted the TILA “to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices.” 15 U.S.C. § 1601(a). The TILA requires lenders to make certain prominent disclosures when extending credit, including the amount financed, the finance charge, and the annual percentage rate. See 15 U.S.C. § 1638; see also 12 C.F.R. §§ 226.17 and 226.18. The required disclosures must be made “clearly and conspicuously in writing.” 12 C.F.R. § 226.17(a)(1).

[141]       Title 12, section 226.19 of the Code of Federal Regulations states in part,

[142]       (b) Certain variable-rate transactions. If the annual percentage rate may increase after consummation in a transaction secured by the consumer’s principal dwelling with a term greater than one year, the following disclosures must be provided at the time an application form is provided or before the consumer pays a nonrefundable fee, whichever is earlier:

[143]       (1) The booklet titled Consumer Handbook on Adjustable Rate Mortgages published by the Board and the Federal Home Loan Bank Board, or a suitable substitute.

[144]       (2) A loan program disclosure for each variable-rate program in which the consumer expresses an interest. The following disclosures, as applicable, shall be provided:

[145]       (i) The fact that the interest rate, payment, or term of the loan can change.

[146]       (ii) The index or formula used in making adjustments, and a source of information about the index or formula. . . .

[147]       (vii) Any rules relating to changes in the index, interest rate, payment amount, and outstanding loan balance including, for example, an explanation of interest rate or payment limitations, negative amortization, and interest rate carryover. . . .

[148]       12 C.F.R. § 226.19(b). The Official Staff Commentary concerning 12 C.F.R. § 226.19(b)(2)(vii) states in part,

[149]       Negative amortization and interest rate carryover. A creditor must disclose, where applicable, the possibility of negative amortization. For example, the disclosure might state, “If any of your payments is not sufficient to cover the interest due, the difference will be added to your loan amount.” Loans that provide for more than one way to trigger negative amortization are separate variable-rate programs requiring separate disclosures. (See the commentary to § 226.19(b)(2) for a discussion on the definition of a variable-rate loan program and the format for disclosure.) If a consumer is given the option to cap monthly payments that may result in negative amortization, the creditor must fully disclose the rules relating to the option, including the effects of exercising the option (such as negative amortization will occur and the principal loan balance will increase); however, the disclosure in § 226.19(b)(2)(viii) need not be provided.

[150]       12 C.F.R. Pt. 226, Supp. I, § 226.19(b)(2)(vii) (emphasis added).

[151]       WSB argues that its disclosures complied with the TILA because “[t]he language used by World in its Loan Program Disclosures is virtually identical to the language contained in the Commentary.” (Def.’s Resp. in Opp’n to Mot. for J. at 4.) WSB also states that “contrary to Plaintiffs’ allegations, the Loan Program Disclosures make it clear that, if the payments are insufficient to cover accrued interest, World will add the unpaid interest to the principal balance, thus resulting in ‘negative amortization.'” (Id.)

[152]       In Andrews v. Chevy Chase Bank, FSB, 240 F.R.D. 612 (E.D. Wis. 2007), the plaintiffs brought a putative class action against the defendants, alleging inter alia that the defendant “did not sufficiently disclose the consequences of negative amortization.” Andrews, 240 F.R.D. at 620. The disclosure at issue in that case stated,

[153]       Interest Rate changes and your ability to make less than a Fully Amortizing Payment each month, or a combination of the two, may result in the accumulation of accrued but unpaid interest (‘Deferred Interest Balance’).

[154]       Each month that the payment option you choose is less than the entire interest portion, we will add the Deferred Interest Balance to your unpaid principal. We will also add interest on the Deferred Interest Balance to your unpaid principal each month. The interest rate on the Deferred Interest Balance will be the Fully Indexed Rate.

[155]       Id. The court found this disclosure satisfied the requirements of the TILA, stating, “Although [the] defendant did not use the language suggested by the commentary, it did inform borrowers as to what would occur if they made only the minimum monthly payments. Thus, defendant’s disclosure satisfied TILA.” Id. In this case, however, it appears that at least initially a portion of the minimum monthly payment of $701.21 went to pay down the principal of the loan. Id. at 615. However, “[a]s the interest rate increased, an ever increasing portion of the minimum monthly payment . . . was needed to cover interest, and the minimum payment itself soon became insufficient to cover accrued interest.” Id. Thus, while WSB relies heavily on this case, the case is distinguishable from the case sub judice, as in Andrews negative amortization was simply a mere possibility.

[156]       Two recent orders of the United States District Court for the Northern District of California counsel in favor of denying WSB’s Motion to Dismiss. See Plascencia v. Lending 1st Mortgage, No. C 07-4485 CW, 2008 WL 1902698 (N.D. Cal. Apr. 28, 2008); Mandrigues v. World Savs., Inc., No. C 07-04497 JF, 2008 WL 1701948 (N.D. Cal. Apr. 9, 2008). In Mandrigues, the court denied the defendants’ motion to dismiss. Mandrigues, 2008 WL 1701948, at *2. The disclosure at issue in Mandrigues was very similar to the disclosure in the case sub judice; it stated,

[157]       From time to time my monthly payments may be insufficient to pay the total amount of the monthly interest that is due. If this occurs, the amount of interest that is not paid each month, called deferred interest, will be added to my principal and will incur interest at the same rate as the principal.

[158]       Id. The plaintiffs argued this disclosure was “false and misleading because in reality the loans were designed to guarantee that negative amortization would occur,” and plaintiffs asserted the defendants failed to disclose the effect the payment cap would have on the loan. Id. The court noted,

[159]       Defendants argue that because the TILDS identify the creditor, the amount financed and the APR, they meet the disclosure requirements of TILA. Plaintiffs respond that under the terms of the promissory notes, when the increase in the interest rate exceeded the increase in the payment amounts that were kept at or below the payment cap, the deficiency alleged resulted in further negative amortization being added to the principal. Plaintiffs claim that Defendants completely failed to disclose the effect that the payment cap would have on the loans. The Court concludes that at least at the pleading stage, Plaintiffs adequately have alleged a claim under 12 C.F.R. § 226.17 and 12 C.F.R. § 226.19.

[160]       Id.

[161]       Likewise, the plaintiffs in Plascencia brought suit against the defendants for violations of the TILA. Plascencia, 2008 WL 1902698. The plaintiffs claimed the defendants violated the TILA by failing to clearly and conspicuously disclose, inter alia, the fact that negative amortization was certain to occur. Id. at *2. The defendants moved to dismiss plaintiffs’ claim “based primarily on the Note and the Statement, which they claim defeat any contention that TILA’s disclosure requirements were not satisfied.” Id. at *3. The court denied the defendants’ motion to dismiss the plaintiffs’ claim that defendants violated the TILA by failing to disclose that negative amortization was certain to occur. See id. at *5-6. The court examined 12 C.F.R. § 226.19(b)(2)(vii) and the Official Staff Commentary. See id. at *5. The plaintiffs asserted the defendants violated this section by “failing to disclose that, if [p]laintiffs followed the payment schedule listed in the Statement, negative amortization was certain to occur.” Id. at *6. The court noted the disclosure referred to negative amortization as a possibility; the disclosure stated in part,

[162]       Because my monthly payment amount changes less frequently than the interest rate, and because the monthly payment is subject to the 7.5% Payment Cap described in Section 5(B), my monthly payment could be less than or greater than the amount of interest owed each month. For each month that my monthly payment is less than the interest owed, the Note Holder will subtract the amount of my monthly payment from the amount of the interest portion and will add the difference to my unpaid Principal.

[163]       Id.

[164]       In evaluating the motion to dismiss, the court stated,

[165]       While these statements are literally accurate, they refer to negative amortization as a mere possibility. Yet under any conceivable Index value, it was clear at the time the disclosures were provided that Plaintiffs’ initial minimum monthly payment would not be sufficient to cover interest. Thus, negative amortization was a certainty if [p]laintiffs followed the payment schedule listed in the Statement.

[166]       Plaintiffs may be able to show that the Note’s reference to negative amortization as a hypothetical event does not clearly and conspicuously disclose “the effects of exercising the [payment cap] option”–i.e., that “negative amortization will occur and the principal loan balance will increase.” 12 C.F.R. Pt. 226, Supp. I, at ¶ 19(b)(2)(vii)(2) (emphasis added). Accordingly, this claim will not be dismissed.

[167]       Id.

[168]       The court finds the reasoning of the United States District Court for the Northern District of California to be persuasive. WSB does not deny that following the payment schedule listed in the Truth in Lending Disclosure Statement will result in negative amortization; instead it states, Plaintiffs ignore that their payment schedules very clearly contemplate negative amortization by showing payment increases in excess of 7 1/2 percent prior to the tenth payment change date. . . . [T]he TILA simply does not require a statement as advocated by Plaintiffs. Instead, a lender is required only to disclose the possibility of negative amortization. (Def.’s Mem. in Supp. of Mot. for J. at 22-23.) The problem with WSB’s argument is that it is arguing the TILA allows it to disclose something that is false: that negative amortization is merely a possibility when in fact it is a certainty. The court concludes that disclosing the possibility of negative amortization is misleading when the reality is that it will occur. The court therefore denies WSB’s Motion for Judgment on the Pleadings and grants Plaintiffs’ Motion for Judgment on the Pleadings with respect to the claim that WSB violated the TILA by disclosing negative amortization was a possibility when in fact it was a certainty.

[169]       Plaintiffs next argue that WSB violated the TILA because the payment schedule as set forth on the disclosure statement contradicted the note. (Pls.’ Mem. in Supp. of Mot. for J. at 13.) Plaintiffs point to the following statement in the notes: “I will pay Principal and interest by making payments every month” or “I will pay Principal and interest by making payments every two weeks.” (See Def.’s Mot. for J. Exs. 1-3.) Despite this statement, Plaintiffs assert the payment schedule in the disclosure statements “do[] not reflect any payment of principal for approximately the first ten years.” (Pl.’s Mem. in Supp. of Mot. for J. at 14.) WSB argues that Plaintiffs are wrong, stating that if it had provided a payment schedule of a payment amount sufficient to pay both principal and interest so as to avoid negative amortization, such a schedule “would have violated the TILA and Regulation Z because it would not have been based on the parties’ legal obligations at the time of consummation.” (Def.’s Mem. in Supp. of Mot. for J. at 23.)

[170]       Title 12, Code of Federal Regulations, section 226.17(c)(1) states that disclosures “shall reflect the terms of the legal obligation between the parties.” The Official Commentary indicates the disclosures “shall reflect the credit terms to which the parties are legally bound as of the outset of the transaction.” 12 C.F.R. Pt. 226, Supp. I, § 226.17(c)(1) (emphasis added). The commentary further states, 8. Basis of disclosures in variable-rate transactions. The disclosures for a variable-rate transaction must be given for the full term of the transaction and must be based on the terms in effect at the time of consummation. Creditors should base disclosures only on the initial rate and should not assume that this rate will increase. For example, in a loan with an initial rate of 10 percent and a 5 percentage points rate cap, creditors should base the disclosures on the initial rate and should not assume that this rate will increase 5 percentage points.

[171]       Id.

[172]       The problem with Plaintiffs’ argument is that had Defendants made the disclosure Plaintiffs advocate, it would not have reflected the legal obligation of Plaintiffs. In arguing for a TILA violation for failure to disclose that negative amortization was certain to occur, Plaintiffs argue such fact should have been disclosed as a certainty rather than a possibility because negative amortization was a certainty. Now Plaintiffs argue the disclosure statement should have listed a payment schedule showing individual monthly payments that would fully amortize principal and interest. The terms of the legal obligation did in fact call for negative amortization to occur, so any disclosure to the contrary would have been erroneous. The court therefore grants WSB’s Motion for Judgment on the Pleadings on this ground.*fn8 Plaintiffs third argument is that WSB’s failure to disclose the other payment options is a violation of the letter and spirit of the TILA. (Pls.’ Mem. in Supp. of Mot. for J. at 14.) Plaintiffs state,

[173]       Here, the borrowers are legally obligated to pay one of several amounts at the time they make a payment[;] however, they have the option as to which they will pay. These options include the minimum payment (which is the assumed payment in the schedule disclosed on the TILDS), an interest-only payment, a payment of interest and principal that would fully amortize the loan over thirty years at the then-current interest rate, and a similar payment that would amortize over 15 years.

[174]       Defendants failed to disclose the different payment options available and their effects anywhere in the TILDS, the Note, or the Program Disclosure Form that were provided to Plaintiffs at the time of their closings. Indeed, the only payment option that Plaintiffs were shown was the option that resulted in the most risk to the consumer, and the most pecuniary benefit to the Defendants. (“Your payment schedule will be.”) By failing to provide Plaintiffs with the different payment options and their effects, Defendants failed to comply with TILA. (Pls.’ Mem. in Supp. of Mot. for J. at 15.)

[175]       The only authority Plaintiffs have cited in support of this argument is Town & Country Co-op v. Lang, 286 N.W.2d 482, 486 (N.D. 1979), and Plaintiffs cited it for the proposition that “[t]he congressional purpose of enacting the TILA was to require creditors to disclose the true cost of consumer credit, so that consumers could make informed choices among available methods of payment.” WSB did make the proper disclosures (with the exception concerning the certainty of negative amortization) concerning the loan agreement signed by Plaintiffs. WSB is not required to make disclosures above and beyond those required by the TILA. See Cosby v. Mellon Bank, N.A., 407 F. Supp. 233, 234 (W.D. Pa. 1976) (“[T]he requirements of disclosure under the [Truth in Lending] Act do not apply to all information that a creditor might furnish to a customer but only to that information the Act requires to be ‘disclosed’ to a customer.”).

[176]       In Plaintiffs’ Memorandum in Support of their Motion for Judgment on the Pleadings, Plaintiffs last assert a violation of the TILA because “Defendants failed to disclose the actual interest rate on which the payments set forth in the schedule on the TILDS are based.” (Pls.’ Mem. in Supp. at 16.) Plaintiffs present the following example: the disclosure statement provided to Plaintiff Mincey lists an annual percentage rate of 7.230%, and the payments for the first year of her loan are $456.12 per month. (Id. at 17.) Plaintiffs assert that “[i]f this payment were an actual payment of principal and interest, it would represent a rate of approximately 1.25% and not the 7.230% listed on the TILDS.” (Id.) According to Plaintiffs, “Defendants violated 12 C.F.R. § 226.17(a)(1) and 12 C.F.R. § 226.19 in that they failed to disclose that the payment amounts listed in their Truth in Lending Disclosure Statements were not based upon the disclosed interest rate, but instead, were based upon an undisclosed, much lower interest rate, and were certain to result in negative amortization.” (Id.)

[177]       While Plaintiffs seem to be asserting WSB was required to disclose the interest rate on the disclosure statement, WSB was actually required to disclose the annual percentage rate, which it did. See 12 C.F.R. § 226.18; see also Andrews v. Chevy Chase Bank, FSB, 240 F.R.D 612, 619-20 (E.D. Wis. 2007) (concluding the defendant violated the TILA by disclosing the loan’s interest rate of 1.950 percent when that rate only applied to the first monthly payment). Plaintiffs have not argued the figure listed for the annual percentage rate is incorrect. Because the TILA required WSB to disclose the annual percentage rate, and because WSB did so, the court concludes WSB’s disclosures did not violate the TILA in this regard. Cf. Smith v. Anderson, 801 F.2d 661, 663 (4th Cir. 1986) (“‘APR’ likewise differs from the general definition of interest rate because it considers, by definition, a broader range of finance charges when determining the total cost of credit as a yearly rate.”); Enright v. Beneficial Fin. Co. of N.Y., 527 F. Supp. 1149, 1157 (N.D.N.Y. 1981) (“[T]he Annual Percentage Rate is not, under the TILA, a true interest rate, but rather reflects the annual percentage rate of the Finance Charge which includes items besides interest.”).

[178]       b. State Law Claims

[179]       In its Memorandum in Support of its Motion for Judgment on the Pleadings, WSB asserts Plaintiffs’ second, third, and fourth causes of action are preempted by the Home Owners’ Loan Act of 1933 (“HOLA”). (Def.’s Mem. in Supp. of Mot. for J. at 28.) WSB states,

[180]       Plaintiffs merely repackage their deficient TILA claims and allege that World’s allegedly deficient disclosures amounted to fraudulent omissions, a breach of contract and a breach of the implied covenant of good faith and fair dealing, and violated the [SC]UTPA. Not only do Plaintiffs’ allegations of inadequate disclosures lack merit, . . . but these claims, which are all based on the content of World’s loan disclosures, are preempted by the Home Owners’ Loan Act of 1933 (the “HOLA”). (Id.) Plaintiffs, on the other hand, argue their claims are not preempted because the causes of action at issue “are expressly excluded from preemption under the HOLA.” (Pls.’ Mem. in Supp. of Mot. for J. at 20.)

[181]       Title 12, Code of Federal Regulations, section 560.2(a) states, Occupation of field. Pursuant to sections 4(a) and 5(a) of the HOLA, 12 U.S.C. § 1463(a), 1464(a), OTS [(the Office of Thrift Supervision)] is authorized to promulgate regulations that preempt state laws affecting the operations of federal savings associations when deemed appropriate to facilitate the safe and sound operation of federal savings associations, to enable federal savings associations to conduct their operations in accordance with the best practices of thrift institutions in the United States, or to further other purposes of the HOLA. To enhance safety and soundness and to enable federal savings associations to conduct their operations in accordance with best practices (by efficiently delivering low-cost credit to the public free from undue regulatory duplication and burden), OTS hereby occupies the entire field of lending regulation for federal savings associations. OTS intends to give federal savings associations maximum flexibility to exercise their lending powers in accordance with a uniform federal scheme of regulation. Accordingly, federal savings associations may extend credit as authorized under federal law, including this part, without regard to state laws purporting to regulate or otherwise affect their credit activities, except to the extent provided in paragraph (c) of this section or § 560.110 of this part. For purposes of this section, “state law” includes any state statute, regulation, ruling, order or judicial decision.

[182]       12 C.F.R. § 560.2(a). The regulation lists, by way of example, some of the types of state laws preempted by § 560.2(a): requirements regarding (1) “the terms of credit, including amortization of loans and the deferral and capitalization of interest and adjustments to the interest rate, balance, payments due, or term to maturity of the loan”; (2) loan-related fees; and (3) “[d]isclosure and advertising, including laws requiring specific statements, information, or other content to be included in credit application forms, credit solicitations, billing statements, credit contracts, or other credit-related documents . . .” 12 C.F.R. § 560.2(b). The regulation also indicates that certain state laws are not preempted:

[183]       State laws of the following types are not preempted to the extent that they only incidentally affect the lending operations of Federal savings associations or are otherwise consistent with the purposes of paragraph (a) of this section:

[184]       (1) Contract and commercial law;

[185]       (2) Real property law;

[186]       (3) Homestead laws specified in 12 U.S.C. 1462a(f);

[187]       (4) Tort law;

[188]       (5) Criminal law; and

[189]       (6) Any other law that OTS, upon review, finds:

[190]       (i) Furthers a vital state interest; and

[191]       (ii) Either has only an incidental effect on lending operations or is not otherwise contrary to the purposes expressed in paragraph (a) of this section.

[192]       12 C.F.R. § 560.2(c).

[193]       In addition to these rules, OTS outlined the proper analysis in evaluating whether a state law is preempted under the regulation:

[194]       When analyzing the status of state laws under § 560.2, the first step will be to determine whether the type of law in question is listed in paragraph (b). If so, the analysis will end there; the law is preempted. If the law is not covered by paragraph (b), the next question is whether the law affects lending. If it does, then, in accordance with paragraph (a), the presumption arises that the law is preempted. The presumption can be reversed only if the law can clearly be shown to fit within the confines of paragraph (c). For these purposes, paragraph (c) is intended to be interpreted narrowly. Any doubt should be resolved in favor of preemption.

[195]       Lending and Investment, 61 Fed. Reg. 50951-01, 50966-67 (Sept. 30, 1996).

[196]       Two recent circuit court opinions shed some light on when a state law claim is preempted by HOLA. In Silvas v. E*Trade Mortgage Corp., 514 F.3d 1001 (9th Cir. 2008), the Ninth Circuit affirmed the district court’s application of field preemption to bar the plaintiffs’ claims. The plaintiffs sought to refinance their mortgage with the defendant and paid a $400 fee to lock in the interest rate during this process. Silvas, 514 F.3d at 1003. The plaintiffs rescinded, but the defendant refused to refund the $400 fee. Id. Nearly four years later, the plaintiffs brought suit alleging that the defendant violated California’s Unfair Competition Law “by misrepresenting rescission rights under TILA and by failing to provide a refund of the deposit as required by TILA.” Id. Although the state-law claims “were predicated exclusively on a violation of TILA, [the plaintiffs] did not assert a claim under TILA itself.” Id.*fn9

[197]       The defendant moved to dismiss on the ground that federal law preempted the state-law claims, and the district court granted the motion. Id. The Ninth Circuit affirmed, concluding the OTS regulation occupies the field. Id. at 1005. Of the first claim, the court stated,

[198]       Here, [plaintiffs] allege that E*TRADE violated [California law] by including false information on its website and in every media advertisement to the California public. Because this claim is entirely based on E*TRADE’s disclosures and advertising, it falls within the specific type of law listed in § 560.2(b)(9). Therefore, the preemption analysis ends. [The California law] as applied in this case is preempted by federal law.

[199]       Id. at 1006. Turning to the plaintiffs’ claims of unfair competition, the court concluded plaintiffs’ claim that E*TRADE’s alleged practice of misrepresenting consumers’ legal rights in advertising and other documents violated California law was also preempted “because the alleged misrepresentation is contained in advertising and disclosure documents.” Id. The second claim of unfair competition, alleging that the lock-in fee itself was unlawful, was also preempted because “[s]section 560.2(b)(5) specifically preempts state laws purporting to impose requirements on loan related fees.” Id.

[200]       The plaintiffs’ last argument on appeal was that both of their state law claims fit under § 560.2(c)(1) and (4) “because they are founded on California contract, commercial, and tort law, merely enforcing the private right of action under TILA.” Id. The court did not reach this question, however, because the plaintiffs’ claims “are based on types of laws listed in paragraph (b) of § 560.2, specifically (b)(9) and (b)(5).” Id. at 1006-07.

[201]       Judge Posner’s analysis in In re: Ocwen Loan Servicing, LLC Mortgage Servicing Litigation, 491 F.3d 638 (7th Cir. 2007), is slightly different. The defendants in that case appealed the district judge’s refusal to dismiss, as preempted by HOLA, the plaintiffs’ claims under California, Connecticut, Illinois, New Mexico, and Pennsylvania law. Ocwen, 491 F.3d at 641. The defendant in Ocwen “ma[de] much of the fact that . . . [OTS] has said that in applying the regulation a court should first decide whether the state law in question is listed in subsection (b) [of § 560.2] and, if so, [the defendant] argues, that is the end of the case.” Id. at 643. Judge Posner responded,

[202]       Well, of course. And the OTS’s statement further explains that subsection (c), the list of laws that are not preempted, is designed merely to preserve the traditional infrastructure of basic state laws that undergird commercial transactions, not to open the door to state regulation of lending by federal savings associations. . . .

[203]       The line between subsections (b) and (c) is both intuitive and reasonably clear. [OTS] has exclusive authority to regulate the savings and loan industry in the sense of fixing fees (including penalties), setting licensing requirements, prescribing certain terms in mortgages, establishing requirements for disclosure of credit information to customers, and setting standards for processing and servicing mortgages. But though it has some prosecutorial and adjudicatory powers ancillary to its regulatory functions, [OTS] has no power to adjudicate disputes between the S&Ls and their customers. So it cannot provide a remedy to persons injured by wrongful acts of savings and loan associations, and furthermore HOLA creates no private right to sue to enforce the provisions of the statute or the OTS’s regulations.

[204]       Against this backdrop of limited remedial authority, we read subsection (c) to mean that OTS’s assertion of plenary regulatory authority does not deprive persons harmed by the wrongful acts of savings and loan associations of their basic state common-law-type remedies.

[205]       Id. (internal quotation marks and citations omitted). Judge Posner then provided two examples of actions that would not be preempted: if a savings and loan association specified an annual interest rate of six percent but then billed the homeowner at ten percent, “[i]t would be surprising for a federal regulation to forbid the homeowner’s state to give the homeowner a defense [to the association’s foreclosure action] based on the mortgagee’s breach of contract.” Id. at 643-44. In addition, if a mortgagee fraudulently represents to a mortgagor that it will forgive a default, and then forecloses, “it would be surprising for a federal regulation to bar a suit for fraud.” Id. at 644.

[206]       The Seventh Circuit ultimately affirmed the district court’s denial of the motion to dismiss, but part of its reasoning was that the Complaint simply was not clear enough to determine whether dismissal was warranted. See id. at 648-49. In reading Judge Posner’s analysis of the plaintiffs’ claims, it appears that a breach of contract claim is not preempted to the extent that it alleges a conventional breach of contract claim. See Ocwen, 491 F.3d 638. The claim pursuant to the Illinois Consumer Fraud and Deceptive Business Practices Act complains that the defendant “demands from the mortgagors payments of fees for an entire foreclosure case at its inception.” Id. at 647. The court stated that if this demand “is forbidden by the loan contract, then the charge is not preempted; otherwise, it probably is.” Id. Judge Posner also concluded that common law fraud is not likely preempted:

[207]       The tenth claim is based on . . . another California statute, the Consumers Legal Remedies Act, Cal. Civ. Code §§ 1750 et seq. The plaintiffs interpret the statute to forbid deceptive practices, such as falsely representing sponsorship or approval of Ocwen’s services. If this is like common law fraud, then it probably is not preempted. But is it? One cannot tell from the complaint whether, for example, the charge is limited to deliberate deception or whether as interpreted by the plaintiffs the Act creates a code of truthful marketing that would constitute the regulation of advertising, which is one of the preempted categories listed in subsection (b).

[208]       Id. at 647. A claim for fraud under New Mexico’s Unfair Trade Practices Act, New Mexico Stat. Ann. §§ 57-12-1 et seq., charging a gross disparity between the value received by class members and the price paid was, according to Judge Posner, “clearly . . . preempted.” Ocwen, 491 F.3d at 647.

[209]       Turning to the case sub judice, Plaintiffs listed their second cause of action as “fraudulent omissions.” In assessing whether this claim is preempted, it is helpful to review several allegations pertaining to this cause of action:

[210]       109. As alleged herein, pursuant to TILA, 15 U.S.C. § 1601, et. seq., Regulation Z (12 C.F.R. § 226), and the Federal Reserve Board’s Official Staff Commentary, Defendants had a duty to disclose to Plaintiffs and Class Members (i) the actual interest rate on which the payment amounts listed in the Truth in Lending Disclosure Statement are based (12 C.F.R. § 226.17(c)); (ii) that making the payments according to the payment schedule listed in the Truth in Lending Disclosure Statement will result in negative amortization and that the principal balance will increase (12 C.F.R. § 226.19); and (iii) that the payment amounts listed on the Truth in Lending Disclosure Statement are insufficient to pay both the principal and interest. 110. Defendants further had a duty to disclose to Plaintiffs (i) the actual interest rate being charge[d] on the Note; (ii) that negative amortization would occur and that the “principal balance will increase”; and (iii) that the initial interest rate on the Note was discounted, based upon Defendants’ partial representations of material facts when Defendants had exclusive knowledge of material facts that negative amortization was certain to occur. 111. The Note states at ¶ 3 (A) “I will pay Principal and interest by making payments” either monthly or every two weeks, based on whether the loan was paid on a biweekly or monthly basis. However, the true facts are that the payments listed by Defendants on the Truth in Lending Disclosure Statement are insufficient to pay both principal and interest. In fact, the payment amounts listed on the Truth in Lending Disclosure Statement are insufficient to pay enough interest to avoid negative amortization which, under the terms of the Note was certain to occur if Plaintiffs made the payments according to the payment schedule listed in the Truth in Lending Disclosure Statement. . . . 115. As alleged herein, Defendants had a duty to disclose to Plaintiffs, and at all times relevant, failed to disclose and/or concealed material facts by making partial representations of some material facts when Defendants had exclusive knowledge of material facts, including but not limited to (i) the payment amounts listed in the Truth in Lending Disclosure Statement were not based on the actual interest rate charged on the Note; (ii) that negative amortization was certain to occur; and (iii) that the payment amounts listed in the Note and Truth in Lending Disclosure Statement are insufficient to pay both principal and interest. . . . (Am. Compl. ¶¶ 109-115.)

[211]       Reading these allegations, it is clear that Plaintiffs’ second cause of action is preempted. The allegations concern what WSB should have disclosed, and 12 C.F.R. § 560.2(b)(9) specifically indicates that state laws purporting to impose requirements regarding “[d]isclosure and advertising” are preempted. See also Silvas, 514 F.3d at 1006; see also Reyes v. Downey Savs. & Loan Ass’n, F.A., 541 F. Supp. 2d 1108, 1115 (C.D. Cal. 2008) (concluding plaintiffs’ claim for violation of California’s unfair competition law was preempted because the state law claims were based on alleged violations of the TILA); Kajitani v. Downey Savs. & Loan Ass’n, F.A., No. 07-00398 SOM/LEK, 2008 WL 2164660, at *11 (D. Haw. May 22, 2008) (“Paragraph 32, which concerns Downey’s alleged promises regarding interest rates, charges, and the terms of financing, is not preempted if the Kajitanis are alleging that Downey orally misled them about those terms. But if the Kajitanis are alleging that these terms were not properly disclosed in the disclosure documents required under TILA, then that matter is preempted as concerning ‘disclosure and advertising,’ which falls under 12 C.F.R. § 560.2(b).”) Furthermore, to the extent Plaintiffs seek to invoke § 560.2(c), the court concludes a state law that would impose certain disclosure requirements upon WSB does more than “incidentally affect . . . lending operations.” 12 C.F.R. § 560.2(c).

[212]       Plaintiffs’ third cause of action alleges a violation of the South Carolina Unfair Trade Practices Act. For reasons substantially similar to those with respect to the second cause of action, the court concludes this claim is also preempted. Plaintiffs allege, inter alia,

[213]       125. At all times relevant, Defendants engaged in a pattern of deceptive conduct and concealment aimed at maximizing the number of borrowers who would accept their Option ARM loans. Defendants sold to Plaintiffs and the Class Members a deceptively devised financial product. Defendants sold their Option ARM loan product to consumers, including Plaintiffs and the Class Members, in a false or deceptive manner. Defendants promised that the loan would have a very low, fixed payment, with only a small annual increase in the payment amount, for a period of up to ten (10) years; and that the payment amount would be based on the listed interest rate. Defendants withheld from Plaintiffs and the Class Members the fact that Defendants’ Option ARM loan was designed to, and did, cause negative amortization to occur.

[214]       126. Defendants lured Plaintiffs and the Class Members into the Option ARM loans with promises of low payments. Once Plaintiffs and the Class Members entered into these loans, Defendants began taking away equity from Plaintiffs’ homes. And, Plaintiffs could not escape because Defendants purposefully placed into these loans an extremely onerous prepayment penalty that made it prohibitively expensive for consumers to extricate themselves from these loans.

[215]       Thus, once on the hook, consumers could not escape from Defendants’ loans during this prepayment penalty period. 127. Defendants sold their Option ARM loans as having a low payment.

[216]       However, Defendants failed to disclose, and by omission, failed to inform Plaintiffs that the low payments listed in the Note and Truth in Lending Disclosure Statement were insufficient to pay both principal and interest and were, in fact, at all times relevant, completely insufficient to pay all of the interest accruing on the loans. Further, and in addition to Defendants’ failure to disclose the actual costs of the loans, Defendants failed to disclose, and by omission, failed to inform Plaintiffs that there was a discrepancy between the interest rate upon which the payments were based that [sic?] the actual interest Defendants charged on the loans. (Am. Compl. ¶¶ 125-27.) Plaintiffs also allege that they were led “to believe that if they made payments according to Defendants’ payment schedule, that the loans would only ‘from time to time’ result in negative amortization. However, Defendants failed to disclose, and by omission, failed to inform Plaintiffs that if they made their payments according to Defendants’ payment schedule, that by the 11th year of the loans, the Plaintiffs will have lost between 15-25% of the equity in their home . . . .” (Id. ¶ 128.) Plaintiffs further state that “Defendants’ failures to disclose important material information concerning the actual cost of the loans is, and was, unfair, fraudulent, and deceptive.” (Id. ¶ 133.)

[217]       The alleged violation of the SCUTPA is in the failure to make certain disclosures concerning the loans at issue. Again, 12 C.F.R. § 560.2(b) specifically states that state laws purporting to impose requirements regarding disclosures are preempted.

[218]       Plaintiffs’ last cause of action is for breach of contract and the implied covenant of good faith and fair dealing. In reading the allegations contained under that cause of action, it appears Plaintiffs are again complaining, at least in part, about the failure to make certain disclosures. See Am. Compl. ¶ 158 (“The written payment schedules prepared and created by Defendants, and applicable to Plaintiffs’ loans, did not disclose, and by omission, failed to inform Plaintiffs that the payment amounts owed by Plaintiffs to Defendants in years one through ten are insufficient to cover the true costs of the loan.”). However, the court concludes that Plaintiffs’ fourth cause of action is not preempted. As previously noted, the Note states that Plaintiffs “will pay Principal and interest by making payments” monthly or every two weeks. The substance of the claim for breach of contract is that although the Note indicated that payments “will pay Principal and interest,” the payments did not in fact go to both principal and interest–the payments for the first ten years went solely to interest. Plaintiffs state,

[219]       157. The Note and Truth in Lending Disclosure Statement expressly and impliedly agreed that if Plaintiffs made the monthly/biweekly payments in the amount prescribed by Defendants in the Truth in Lending Disclosure Statement, that negative amortization would not occur. As alleged herein, the Note expressly states and/or implies that Plaintiffs’ monthly/biweekly payment obligations will be applied to pay both principal and interest on the loan. . . . (Am. Compl. ¶ 157.)

[220]       This cause of action is a straightforward breach of contract action: Plaintiffs allege the contract said payments will be applied to interest and principal but that WSB breached that contract by applying payments only to interest. The court therefore concludes this cause of action is not preempted. See Ocwen, 491 F.3d at 643-44 (indicating that HOLA would not preempt a breach of contract action in the case where a homeowner agreed to pay interest of six percent but was billed interest at a rate of ten percent); see also Reyes, 541 F. Supp. 2d at 1114 (“[A] law against breach of contract will not be preempted just because the contract relates to loan activity.”).

[221]       Having concluded Plaintiffs’ fourth cause of action, breach of contract and the implied covenant of good faith and fair dealing, is not preempted, the court will now address WSB’s remaining arguments for dismissal. WSB argues this cause of action should be dismissed “because the documents [Plaintiffs] signed contradict their allegations that World failed to act in accordance with the terms of Plaintiffs’ Notes.” (Def.’s Mem. in Supp. of Mot. for J. at 34.) WSB asserts that the documents attached to Plaintiffs’ Amended Complaint “which Plaintiffs signed–demonstrate that all of World’s alleged actions were permitted by Plaintiffs’ loan documents.” (Id.)

[222]       In Reyes, the defendants made a similar argument, stating that the “express terms of the signed contract provide for the exact behavior” of the defendants. Reyes, 541 F. Supp. 2d at 1116. The court denied the motion to dismiss, stating,

[223]       Plaintiffs demonstrate that the loan contract states, “I will pay Principal and interest by making a payment every month.” (Complaint 24:15-16.) This could easily be understood to mean that, if Plaintiffs made payments every month, their payments would be applied to both principal and interest. Plaintiffs have alleged that they were led to understand the contract in that way, and that Defendants breached that contract. Thus, Plaintiffs have sufficiently alleged that the terms of the contract were ambiguous.

[224]       Id.; see also Monaco v. Bear Stearns Residential Mortgage Corp., -F. Supp. 2d-, 2008 WL 867727, at *4-5 (C.D. Cal. 2008) (denying defendants’ motion to dismiss plaintiffs’ causes of action for breach of contract and breach of the implied warranty of good faith wherein the plaintiffs alleged the defendants breached the note by immediately raising the interest rate on plaintiffs’ loans and by not applying plaintiffs’ monthly payments to interest and principal). WSB points to another provision in the note indicating that “[f]rom time to time,” the monthly or biweekly payments “may be insufficient to pay the total amount” of interest due and that if that occurs, the amount of interest not paid will be added to the principal. The differing provisions, however, do nothing to cure the ambiguity. Based on the reasoning in Reyes and Monaco, the court denies WSB’s motion to dismiss Plaintiffs’ fourth cause of action.

[225]       CONCLUSION

[226]       It is therefore ORDERED, for the foregoing reasons, that the Motion to Dismiss filed by Defendants Golden West and Wachovia is GRANTED without prejudice. It is further ORDERED that WSB’s Motion for Judgment on the Pleadings is GRANTED IN PART and DENIED IN PART. Specifically, WSB’s Motion for Judgment on the Pleadings is granted with respect to Plaintiffs’ claims pursuant to the Truth in Lending Act except Plaintiffs’ claim that WSB violated the TILA by disclosing that negative amortization was a possibility when in fact it was a certainty. The court also grants WSB’s Motion for Judgment on the Pleadings with respect to Plaintiffs’ claims for fraud and violation of the SCUTPA. The court denies WSB’s Motion for Judgment on the Pleadings with respect to Plaintiffs’ claim for breach of contract and the implied covenant of good faith and fair dealing. It is also ORDERED that Plaintiffs’ Motion for Judgment on the Pleadings is GRANTED IN PART and DENIED IN PART. Plaintiffs’ motion is granted to the extent Plaintiffs claim WSB violated the TILA by disclosing that negative amortization was a possibility when in fact it was a certainty. Plaintiffs’ motion is denied with respect to all other alleged violations of the TILA.

[227]       AND IT IS SO ORDERED.

Opinion Footnotes

[228]       *fn1 Plaintiffs have only moved for Judgment on the Pleadings with respect to their claims pursuant to the Truth in Lending Act.

[229]       *fn2 Presumably Golden West and Wachovia are referring to Plaintiffs’ Amended Complaint.

[230]       *fn3 Plaintiffs have cited to this court’s order in Mattress v. Taylor, 487 F. Supp. 2d 665, 667-68 (D.S.C. 2007) (Duffy, J.), to support their position. This court decided Mattress on January 3, 2007, well before the Supreme Court issued its opinion in Twombly on May 21, 2007. In Mattress, this court cited Edwards v. City of Goldsboro, 178 F.3d 231, 244 (4th Cir. 1999), which in turn cited Republican Party of N.C. v. Martin, 980 F.2d 943, 952 (4th Cir. 1992). Republican Party cites the”no set of facts” language from Conley.

[231]       *fn4 In Anderson v. Sara Lee Corp., 508 F.3d 181 (4th Cir. 2007), the Fourth Circuit noted that the Court in Twombly used a plausibility standard and retired the “no set of facts” language from Conley. Anderson, 508 F.3d at 188 n.7. However, the Fourth Circuit stated, “In the wake of Twombly, courts and commentators have been grappling with the decision’s meaning and reach. In disposing of this appeal, there is no need for us to delve into or resolve any such issues.” Id.

[232]       *fn5 In Belvedere Condominium Unit Owners’ Association v. R.E. Roark Cos., 617 N.E.2d 1075, 1086 (Ohio 1993), the Supreme Court of Ohio stated,
[T]he corporate form may be disregarded and individual shareholders held liable for corporate misdeeds when (1) control over the corporation by those to be held liable was so complete that the corporation has no separate mind, will, or existence of its own, (2) control over the corporation by those to be held liable was exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity, and (3) injury or unjust loss resulted to the plaintiff from such control and wrong.

[233]       *fn6 As indicated, it does not appear that Plaintiffs seek to recover from affirmative misrepresentations, but the Amended Complaint does state, “The aforementioned omitted information was not known to Plaintiffs which, at all times relevant, Defendants failed to disclose and/or actively concealed by making such statements and partial, misleading representations to Plaintiffs and all others similarly situated.” (Am. Compl. ¶ 113.)

[234]       *fn7 All exhibits referred to in this Order are attached to the pleadings.

[235]       *fn8 In a footnote, WSB states that “Plaintiffs’ argument that the payment schedules ‘do not reflect any payment of principal for approximately the first ten years’ disproves their claim that World did not adequately disclose negative amortization.” (Def.’s Resp. in Opp’n at 7 n.5.) The court finds the violation, however, in the misleading nature of the disclosures as opposed to any technical misstatement. Over and over again, WSB indicated negative amortization was a possibility when in fact it was a certainty.

[236]       *fn9 The first claim in Silvas alleged that E*Trade violated California’s Unfair Competition Law by representing to its customers that the $400 fee was non-refundable when it was in fact refundable if the customer exercises his right to rescind under the TILA. Silvas, 514 F.3d at 1003. The second claim alleged the defendant violated the state’s unfair competition law in two ways: (1) the policy of refusing to refund the $400 fee was an unlawful business act, and (2) the practice of misrepresenting “consumers’ legal rights in advertisements and other documents is unfair, deceptive, and contrary to the policy of California.” Id.

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Set Aside Foreclosure and Decree and Motion for New Trial

Posted on November 8, 2008. Filed under: Case Law, Foreclosure Defense, Mortgage Audit | Tags: , , , , , , , |

By: Kenneth DeLashmutt

Prove Up of the Claim

To recover on a promissory note the Plaintiff (lender) must prove existence of the note.

To recover on a promissory note, the plaintiff must prove:

(1) the existence of the note in question;

(2) that the party sued signed the note;

(3) that the plaintiff is the owner or holder of the note in due course; and (4) that a certain balance is due and owing on the note.

In a foreclosure, if a default judgment is entered you can file a “Motion to Set Aside Foreclosure & Decree and Motion for New Trial.

This motion seeks relief from the judgment of foreclosure on the ground that the lenders failure to produce the original of the promissory note is newly discovered evidence justifying a new trial.

In the new trial you demand discovery of the “holder in due course” of the “ORIGINAL” promissory note. The plaintiff must produce the original promissory note.

Trial court is in error when it does not proceed to take testimony before it enters a default judgment in a foreclosure for the plaintiff; the unsworn statement of plaintiff’s attorney can not support default judgment rendered.

In the case of mortgage foreclosures, prove up of the claim requires presentment of the “original” promissory note and general account and ledger statement. Claim of damages, to be admissible as evidence, must incorporate records such as a general ledger and accounting of an alleged unpaid promissory note, the person responsible for preparing and maintaining the account general ledger must provide a complete accounting which must be sworn to and dated by the person who maintained the ledger.

Supporting Case Law

Where the complaining party cannot prove the existence of the note, then there is no note.

See Pacific Concrete F.C.U. V. Kauanoe, 62 Haw. 334, 614 P.2d 936 (1980),

GE Capital Hawaii, Inc. v. Yonenaka 25 P.3d 807, 96 Hawaii 32, (Hawaii App 2001),

Fooks v. Norwich Housing Authority 28 Conn. L. Rptr. 371, (Conn. Super.2000), and

Town of Brookfield v. Candlewood Shores Estates, Inc. 513 A.2d 1218, 201 Conn.1 (1986). See also Solon v. Godbole, 163 Ill. App. 3d 845, 114 Ill. Dec. 890, 516 N. E.2d 1045 (3Dist. 1987).

Siwooganock Bank in Lancaster NH, in alleged foreclosure suit, failed or refused to produce the actual note which Siwooganock alleges Eva J. Lovejoy owed. To recover on a promissory note, the plaintiff must prove:

(1) the existence of the note in question;

(2) that the party sued signed the note;

(3) that the plaintiff is the owner or holder of the note; and

(4) that a certain balance is due and owing on the note. See In Re: SMS Financial LLC. v. Abco Homes, Inc. No.98-50117 February 18, 1999 (5th Circuit Court of Appeals.)

Volume 29 of the New Jersey Practice Series, Chapter 10 Section 123, page 566, emphatically states, “…; and no part payments should be made on the bond or note unless the person to whom payment is made is able to produce the bond or note and the part payments are endorsed thereon. It would seem that the mortgagor would normally have a Common law right to demand production or surrender of the bond or note and mortgage, as the case may be.

See Restatement, Contracts S 170(3), (4) (1932); C.J.S. Mortgages S 469, in Carnegie Bank v, Shalleck 256 N.J. Super 23 (App. Div 1992), the Appellate Division held, “When the underlying mortgage is evidenced by an instrument meeting the criteria for negotiability set forth in N.J.S. 12A:3-104, the holder of the instrument shall be afforded all the rights and protections provided a holder in due course pursuant to N.J.S. 12A:3-302″

Since no one is able to produce the “instrument” there is no competent evidence before the Court that any party is the holder of the alleged note or the true holder in due course. New Jersey common law dictates that the plaintiff prove the existence of the alleged note in question, prove that the party sued signed the alleged note, prove that the plaintiff is the owner and holder of the alleged note, and prove that certain balance is due and owing on any alleged note. Federal Circuit Courts have ruled that the only way to prove the perfection of any security is by actual possession of the security.

Supporting Case Law

Unequivocally the Court’s rule is that in order to prove the “instrument”, possession is mandatory.

See Matter of Staff Mortgage. & Inv. Corp., 550 F.2d 1228 (9th Cir 1977). “Under the Uniform Commercial Code, the only notice sufficient to inform all interested parties that a security interest in instruments has been perfected is actual possession by the secured party, his agent or bailee.” Bankruptcy Courts have followed the Uniform Commercial Code.

In Re Investors & Lenders, Ltd. 165 B.R. 389 (Bankruptcy.D.N.J.1994), “Under the New Jersey Uniform Commercial Code (NJUCC), promissory note is “instrument,” security interest in which must be perfected by possession.

Find out if you are a Victim of Predatory Lending Practices

Audit your mortgage closing documents to find possible Predatory Lending Practices, mortgage broker fraud and title violations.

Mortgage lenders can trick homeowners into giving up their homes. You may be able to recover TILA violation fines and possibly void the lenders security interest in the property.

In order to find predatory lending violations and lender fraud you will have to gather and assemble your loan and closing documents and put them in order.

Required Documents for your Audit

List of loan paperwork for audit

*anything that was given to you at the time of signing the loan

*Promissory Note (very important)

*Mortgage or Deed of Trust (very important)

*Application for the loan, if available

*Good Faith Estimate (very important)

*Settlement Statement (very important)

*Right to Cancel/Right to Rescission (very important)

Disclosures:

*HUD 1 Statement

*TILA Disclosures (very important)

*RESPA Servicing Disclosures

*Any and all disclosures (very important)

A copy of the current billing statement.

A copy of any notifications from the lender or other party of a change in where the borrower is to send the payments. This may be because the lender sold the note (a new assignee), or sold the rights to collecting the payments (a new servicer).

A copy of any default notices, acceleration papers, or foreclosure paperwork.

A copy of any and all court paperwork if the property is in foreclosure or there is any court process ongoing that involves this property. If you do not have this paperwork, it must be obtained from the court files.

The Audit

What are you looking for?

Now you can audit your closing documents and look for TILA, HOEPA and RESPA violations.

If the answer to any of the following questions is “yes,” You are most likely a victim of predatory lending practices and may be able to void the mortgage and apply 100% of your payments to principal. And, you may also be able to recover money damages.

Such violations can be used as a defense in a mortgage foreclosure.

1. Have you repeatedly refinanced your loan? Was the last refinance within the last 3 years? (A common predatory practice is “flipping,” which involves “repeatedly refinancing a mortgage loan without benefit to the borrower, in order to profit from high origination fees, closing costs, points, prepayment penalties and other charges, steadily eroding the borrower’s equity in his or her home.”).

2. Did you increase rather than lower your rate upon refinancing?

3. Are you paying an interest rate in excess of 9.5%?

4. Was the loan obtained to pay for home improvement work that was not done properly, or even at all?

5. Have you had problems with the mortgage company regarding untimely posting of monthly payments? Sudden increases in payments? Adding amounts to your balance for insurance, “property preservation,” or other “advances”? Does your principal balance never seem to go down?

6. Were you charged high closing costs (points and fees) on the mortgage?

7. Did the terms of the mortgage change to your detriment at the last minute before the closing?

8. Did the lender pay money to your mortgage broker? (Look on your HUD-1 Settlement Statement for a “premium” or yield spread premium “YSP” or Paid outside closing “POC”)

9. If you have an adjustable rate mortgage, were any adjustments done improperly? Can you even tell if the adjustments were correct or not?

10. Does your loan contain a prepayment penalty?

11. Do you believe you were treated unfairly by your mortgage company? Has correspondence with the mortgage company gone unanswered? (Mortgage companies have a statutory obligation to respond to complaints and requests for explanations of accounts. Often, they don’t. Each failure may entitle you to $1,000. If your claim against the mortgage company may exceed the number of monthly payments you allegedly missed, the mortgage company may not be able to prove that you are in default.)

12. Did all collection letters sent to you by debt collectors comply with the Fair Debt Collection Practices Act? (Up to $1,000 more if they did not.)

13. Did you (or anyone else who has an ownership interest in and lives in the house) receive a “notice of right to cancel” that was not completely filled out?

14. Did you receive your copy of the loan documents at the closing (as opposed to being sent to you later)?

15. Did you sign a document at the closing stating that you were not canceling?

16. Did the closing occur by mail, or at your home, or in another city?

The following is an example of some other TILA violations you may find in your closing documents.

Over-escrowing

Junk charges (i.e. yield spread premiums and service release fees)

Payment of compensation to mortgage brokers and originators by lenders

Unauthorized servicing charges (i.e. the imposition of payoff and recording charges)

Improper adjustments of interest on adjustable rate mortgages

Upselling

Overages

Referral fees to mortgage originators. (i.e. a lender who pays a mortgage broker secret compensation may face liability for inducing the broker to breach his fiduciary or contractual duties, fraud, or commercial bribery)

Failure to disclose the circumstances under which private mortgage insurance (”PMI”) may be terminated.

Underdisclosure of the cost of credit

Excessive escrow deposits

Breach of Fiduciary Duty

You may also find breach of contract claims.

Lenders Profit by Foreclosure

There is a common assumption (among judges, borrowers, and the public) that mortgage companies do not desire to foreclose and acquire real estate. This assumption is no longer well founded.

There are an increasing number of “scavengers” that buy bad debts, including mortgages, for a fraction of face value and attempt to enforce them. Such entities profit by foreclosure. “Mortgage sources confide that some unscrupulous lenders are purposely allowing certain borrowers to fall deeper into a financial hole from which they can’t escape. Why? Because it pushes these consumers into foreclosure, whereupon the lender grabs the house and sells it at a profit.

Kenneth M. DeLashmutt “Predatory Lending Defense Specialist”

email: educationcenter2000@cox.net

website: http://www.educationcenter2000.com

You have permission to publish this article electronically or in print, free of charge, as long as the bylines are included. A courtesy copy of your publication would be appreciated.

© Kenneth M DeLashmutt

Mr. Kenneth M. DeLashmutt is a recognized Predatory Lending Defense Specialist and an authority on the subject of predatory lending practices, foreclosure defense, consumer protection and debtor’s rights. He has more than 10 years experience in the area of consumer protection related to predatory mortgage lending practices and debt resolution.

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CURRENT TRENDS IN RESIDENTIAL MORTGAGE LITIGATION

Posted on October 5, 2008. Filed under: Foreclosure Defense, Mortgage Audit, Truth in Lending Act | Tags: , , , , , , , |

BYLINE: Daniel A. Edelman*; *DANIEL A. EDELMAN is the founding partner of Edelman & Combs, of Chicago, Illinois, a firm that represents injured consumers in actions against banks, mortgage companies, finance companies, insurance companies, and automobile dealers. Mr. Edelman or his firm represented the consumer in a number of the cases discussed in this article.

 

 

Borrowers Have Successfully Sued Based on Allegations of Over-escrowing, Unauthorized Charges and Brokers’ Fees, Improper Private Mortgage Insurance Procedures, and Incorrectly Adjusted ARMS. The Author Analyzes Such Lending Practices, and the Litigation They Have Spawned.

BODY:

This article surveys current trends in litigation brought on behalf of residential mortgage borrowers against mortgage originators and servicers. The following types of litigation are discussed:(i) over-escrowing; (ii) junk charges; (iii) payment of compensation to mortgage brokers and originators by lenders; (iv) private mortgage insurance; (v) unauthorized servicing charges; and (vi) improper adjustments of interest on adjustable rate mortgages. We have omitted discussion of abuses relating to high-interest and home improvement loans, a subject that would justify an article in itself.1

OVER-ESCROWING In recent years, more than 100 class actions have been brought against mortgage companies complaining about excessive escrow deposit requirements.

Requirements that borrowers make periodic deposits to cover taxes and insurance first became widespread after the Depression. There were few complaints about them until the late 1960s, probably because until that time many lenders used the ”capitalization” method to handle the borrowers’ funds. Under this method, escrow disbursements were added to the principal balance of the loan and escrow deposits were credited in the same manner as principal payments. The effect of this ”capitalization” method is to pay interest on escrow deposits at the note rate, a result that is fair to the borrower. When borrowers could readily find lenders that used this method, there was little ground for complaint.

The ”capitalization” method was almost entirely replaced by the current system of escrow or impound accounts in the 1960s and 1970s. Under this system, lenders require borrowers to make monthly deposits on which no interest is paid. Lenders use the deposits as the equivalent of capital by placing them in non-interest-bearing accounts at related banks or at banks that give ”fund credits” to the lender in return for custody of the funds.2 Often, surpluses greatly in excess of the amounts actually required to make tax and insurance payments as they came due are required. In effect, borrowers are required to make compulsory, interest-free loans to their mortgage companies.

One technique used to increase escrow surpluses is ”individual item analysis.” This term describes a wide variety of practices, all of which create a separate hypothetical escrow account for each item payable with escrow funds. If there are multiple items payable from the escrow account, the amount held for item A is ignored when determining whether there are sufficient funds to pay item B, and surpluses are required for each item. Thus, large surpluses can be built up. Individual item analysis is not per se illegal, but can readily lead to excessive balances.3

During the 1970s, a number of lawsuits were filed alleging that banks had a duty to pay interest on escrow deposits or conspired to eliminate the ”capitalization” method.4 Most courts held that, in the absence of a statute to the contrary, there was no obligation to pay interest on escrow deposits.5 The only exception was Washington. Following these decisions, some 14 states enacted statutes requiring the payment of interest, usually at a very low rate.6

Recent attention has focused on excessive escrow deposits. In 1986, the U.S. District Court for the Northern District of Illinois first suggested, in Leff v. Olympic Fed. S & L Assn.,7 that the aggregate balance in the escrow account had to be examined in order to determine if the amount required to be deposited was excessive. The opinion was noted by a number of state attorneys general, who in April 1990 issued a report finding that many large mortgage servicers were requiring escrow deposits that were excessive by this standard.8 The present wave of over-escrowing cases followed.

Theories that have been upheld in actions challenging excessive escrow deposit requirements include breach of contract,9 state consumer fraud statutes,10 RICO,11 restitution,12 and violation of the Truth in Lending Act (”TILA”).13 Claims have also been alleged under section 10 of the Real Estate Settlement Procedures Act (”RESPA”),14 which provides that the maximum permissible surplus is ”one-sixth of the estimated total amount of such taxes, insurance premiums and other charges to be paid on dates . . . during the ensuing twelve-month period.” However, most courts have held that there is no private right of action under section 10 of RESPA.15 Most of the overescrowing lawsuits have been settled. Refunds in these cases have totalled hundreds of millions of dollars.

On May 9, 1995, in response to the litigation and complaints concerning over-escrowing, HUD issued a regulation implementing section 10 of RESPA.16 The HUD regulation: 1. Provides for a maximum two-month cushion, computed on an aggregate basis (i.e., the mortgage servicer can require the borrower to put enough money in the escrow account so that at its lowest point it contains an amount equal to two months’ worth of escrow deposits); 2. Does not displace contracts if they provide for smaller amounts; and 3. Provides for a phase-in period, so that mortgage servicers do not have to fully comply until October 27, 1997.

Meanwhile, beginning in 1990, the industry adopted new forms of notes and mortgages that allow mortgage servicers to require escrow surpluses equal to the maximum two-month surplus permitted by the new regulation. However, loans written on older forms of note and mortgage, providing for either no surplus 17 or a one-month surplus, will remain in effect for many years to come. ”JUNK CHARGES” AND RODASH In recent years, many mortgage originators attempted to increase their profit margins by breaking out overhead expenses and passing them on to the borrower at the closing. Some of these ”junk charges” were genuine but represented part of the expense of conducting a lending business, while others were completely fictional. By breaking out the charges separately and excluding them from the finance charge and annual percentage rate, lenders were able to quote competitive annual percentage rates while increasing their profits.

Most of these charges fit the standard definition of ”finance charge” under TILA.18 A number of pre-1994 judicial and administrative decisions held that various types of these charges, such as tax service fees,19 fees for reviewing loan documents,20 fees relating to the assignment of notes and mortgages,21 fees for the transportation of documents and funds in connection with loan closings,22 fees for closing loans,23 fees relating to the filing and recordation of documents that were not actually paid over to public officials,24 and the intangible tax imposed on the business of lending money by the states of Florida and Georgia,25 had to be disclosed as part of the ”finance charge” under TILA.

The mortgage industry nevertheless professed great surprise at the March 1994 decision of the U.S. Court of Appeals for the Eleventh Circuit in Rodash v. AIB Mtge. Co.,26 holding that a lender’s pass-on of a $ 204 Florida intangible tax and a $ 22 Federal Express fee had to be included in the finance charge, and that Martha Rodash was entitled to rescind her mortgage as a result of the lender’s failure to do so. The court found that ”the plain language of TILA evinces no explicit exclusion of an intangible tax from the finance charge,” and that the intangible tax did not fall under any of the exclusions in regulation Z dealing with security interest charges.27 Claiming that numerous loans were subject to rescission under Rodash, the industry prevailed upon Congress and the Federal Reserve Board to change the law retroactively through a revision to the FRB Staff Commentary on regulation Z28 and the Truth in Lending Act Amendments of 1995, signed into law on September 30, 1995.29 The amendments:

1. Exclude from the finance charge fees imposed by settlement agents, attorneys, escrow companies, title companies, and other third party closing agents, if the creditor neither expressly requires the imposition of the charges nor retains the charges;30 2. Exclude from the finance charge taxes on security instruments and loan documents if the payment of the tax is a condition to recording the instrument and the item is separately itemized and disclosed (i.e., intangible taxes);31 3. Exclude from the finance charge fees for preparation of loan-related documents;32 4. Exclude from the finance charge fees relating to pest and flood inspections conducted prior to closing;33 5. Eliminate liability for overstatement of the annual percentage rate. 6. Increase the tolerance or margin of error;34 7. Provide that mortgage servicers are not to be treated as assignees.35 The constitutionality of the retroactive provisions of the Amendments is presently under consideration.

The FRB Staff Commentary amendments dealt primarily with the question of third-party charges, and provided that they were not finance charges unless the creditor required or retained the charges.36

The 1995 Amendments substantially eliminated the utility of TILA in challenging ”junk charges” imposed by lenders. However, ”junk charges” are also subject to challenge under RESPA, where they are used as devices to funnel kickbacks or referral fees or excessive compensation to mortgage brokers or originators. This issue is discussed below.

”UPSELLING,” ”OVERAGES,” AND REFERRAL FEES TO MORTGAGE ORIGINATORS A growing number of lawsuits have been brought challenging the payment of ”upsells,” ”overages,” ”yield spread premiums,” and other fees by lenders to mortgage brokers and originators.

During the last decade it became fairly common for mortgage lenders to pay money to mortgage brokers retained by prospective borrowers. In some cases, the payments were expressly conditioned on altering the terms of the loan to the borrower’s detriment by increasing the interest rate or ”points.” For example, a lender might offer brokers a payment of 50 basis points (0.5 percent of the principal amount of the loan) for every 25 basis points above the minimum amount (”par”) at which the lender was willing to make the loan. Industry publications expressly acknowledged that these payments were intended to ”compensate[] mortgage brokers for charging fees higher than what the borrower would normally pay.”37 In other instances, brokers were compensated for convincing the prospective borrower to take an adjustable-rate mortgage instead of a fixed-rate mortgage, or for inducing the purchase of credit insurance by the borrower. 38

In the case of some loans, the payments by the lender to the broker were totally undisclosed. In other cases, particularly in connection with loans made after the amendments to regulation X discussed below, there is an obscure reference to the payment on the loan documents, usually in terms incomprehensible to a lay borrower. For example, the HUD-1 form may contain a cryptic reference to a ”yield spread premium” or ”par plus pricing,” often abbreviated like ”YSP broker (POC) $ 1,500.”39

The burden of the increased interest rates and points resulting from these practices is believed to fall disproportionately on minorities and women.40 These practices are subject to legal challenge on a number of grounds.

Breach of Fiduciary Duty Most courts have held that a mortgage broker is a fiduciary. One who undertakes to find and arrange financing or similar products for another becomes the latter’s agent for that purpose, and owes statutory, contractual, and fiduciary duties to act in the interest of the principal and make full disclosure of all material facts. ”A person who undertakes to manage some affair for another, on the authority and for the account of the latter, is an agent.”41

Courts have described a mortgage loan broker as an agent hired by the borrower to obtain a loan.42 As such, a mortgage broker owes a fiduciary duty of the ”highest good faith toward his principal,” the prospective borrower.43 Most fundamentally, a mortgage broker, like any other agent who undertakes to procure a service, has a duty to contact a variety of providers and attempt to obtain the best possible terms.44

Additionally, a mortgage broker ”is ‘charged with the duty of fullest disclosure of all material facts concerning the transaction that might affect the principal’s decision’.”45 The duty to disclose extends to the agent’s compensation. 46 Thus, a broker may not accept secret compensation from adverse parties.47

Furthermore, the duty to disclose is not satisfied by the insertion of cryptic ”disclosures” on documents. The obligation is to ”make a full, fair and understandable explanation” of why the fiduciary is not acting in the interests of the beneficiary and of the reasons that the beneficiary might not want to agree to the fiduciary’s actions.48

The industry has itself recognized these principles. The National Association of Mortgage Brokers has adopted a Code of Ethics which requires, among other things, that the broker’s duty to the client be paramount. Paragraph 3 of the Code of Ethics states:

In accepting employment as an agent, the mortgage broker pledges himself to protect and promote the interest of the client. The obligation of absolute fidelity to the client’s interest is primary.

Thus, a lender who pays a mortgage broker secret compensation may face

liability for inducing the broker to breach his fiduciary or contractual duties, fraud, or commercial bribery.

Mail/Fraud/ Wire Fraud/ RICO The payment of compensation by a lender to a mortgage broker without full disclosure is also likely to result in liability under the federal mail and wire fraud statutes and RICO. It is well established that a scheme to corrupt a fiduciary or agent violates the mail or wire fraud statute if the mails or interstate wires are used in furtherance of the scheme.49

Real Estate Settlement Procedures Act Irrespective of whether the broker or other originator of a mortgage is a fiduciary, lender payments to such a person may result in liability under section 8 of RESPA,50 which prohibits payments or fee splitting for business referrals, if the payments are either not fully disclosed or exceed reasonable compensation for the services actually performed by the originator.

Prior to 1992, the significance of section 8 of RESPA was minimized by restrictive interpretations. The Sixth Circuit Court of Appeals held that the origination of a mortgage was not a ”settlement service” subject to section 8.51 In addition, cases construing the pre-1992 version of implementing HUD regulation X required a splitting of fees paid to a single person.52 Finally, the payment of compensation in secondary market transactions was excluded from RESPA, and there was no distinction made between genuine secondary market transactions and ”table funded” transactions, where a mortgage company originates a loan in its own name, but using funds supplied by a lender, and promptly thereafter assigns the loan to the lender.53

In 1992, RESPA and regulation X were amended to close each of these loopholes. The amendments did not have practical effect until August 9, 1994, the effective date of the new regulation X.54

First, RESPA was amended to provide expressly that the origination of a loan was a ”settlement service.” P.L. 102-550 altered the definition of ”settlement service” in Section 2602(3) to include ”the origination of a federally related mortgage loan (including, but not limited to, the taking of loan applications, loan processing, and the underwriting and funding of loans).” This change and a corresponding change in regulation X were expressly intended to disapprove the Sixth Circuit’s decision in United States v. Graham

Mtge. Corp.55

Second, regulation X was amended to exclude table funded transactions from the definition of ”secondary market transactions.” Regulation X addresses ”table funding” in sections 3500.2 and 3500.7. Section 3500.2 provides that ”table funding means a settlement at which a loan is funded by a contemporaneous advance of loan funds and an assignment of the loan to the person advancing the funds. A table-funded transaction is not a secondary market transaction (see Section 3500.5(b)(7)).” Section 3500.5(b)(7) exempts from regulation by RESPA fees and charges paid in connection with legitimate ”secondary market transactions,” but excludes table funded transactions from the scope of legitimate secondary market transactions. Under the current regulation X, RESPA clearly applies to table funded transactions.56 Amounts paid by the first assignee of a loan to a ”table funding” broker for ”rights” to the loan — i.e., for the transfer of the loan by the broker to the lender — are now subject to examination under RESPA.57

Third, any sort of payment to a broker or originator that does not represent reasonable compensation for services actually provided is prohibited. 58

Whatever the payment to the originator or broker is called, it must be reasonable. Another mortgage industry publication states: [A]ny amounts paid under these headings [servicing release premiums or yield spread premiums] must be lumped together with any other origination fees paid to the broker and be subjected to the referral fee/ market value test in Section 8 of RESPA and Section 3500.14 of Regulation X. If the total of this compensation exceeds the market value of the services performed by the broker (excluding the value of the referral), then the compensation does not pass the test, and both the broker and the lender could be subject to the civil and criminal penalties contained in RESPA.59

Normal compensation for a mortgage broker is about one percent of the principal amount of the loan. Where the broker ”table funds” the loan and originates it in its name, an extra .5 percent or one percent may be appropriate.60 This level of reasonableness is recognized by agency regulations. For example, on February 28, 1996, in response to allegations of gouging by brokers on refinancing VA loans, the VA promulgated new regulations prohibiting mortgage lenders from charging more than two points in refinanced transactions.61

The amended regulation makes clear that a payment to a broker for influencing the borrower in any manner is illegal. ”Referral” is defined in Section 3500.14(f)(1) to include ”any oral or written action directed to a person which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service or business incident to or part of a settlement service when such person will pay for such settlement service or business incident thereto or pay a charge attributable in whole or in part to such settlement service or business. . . .” The amended regulation also cannot be evaded by having the borrower pay the originator. An August 14, 1992 letter from Frank Keating, HUD’s General Counsel, states unequivocally: ”We read ‘imposed upon borrowers’ to include all charges which the borrower is directly or indirectly funding as a condition of obtaining the mortgage loan. We find no distinction between whether the payment is paid directly or indirectly by the borrower, at closing or outside the closing. . . . I hereby restate my opinion that RESPA requires the disclosures of mortgage broker fees, however denominated, whether paid for directly or indirectly by the borrower or by the lender.”

Thus, ”yield spread premiums,” ”service release fees,” and similar payments for the referral of business are no longer permitted. The new regulation was specifically intended to outlaw the payment of compensation for the referral of business by mortgage brokers, either directly or through the imposition of ”junk charges.” Thus, it provides that payments may not be made ”for the referral of settlement service business” (Section 3500.14(b)).

The mortgage industry has recognized that types of fees that were once viewed as permissible in the past are now ”prohibited and illegal.” The legal counsel for the National Second Mortgage Association acknowledged: ”Even where the amount of the fee is reasonable, the more persuasive conclusion is that RESPA does not permit service release fees.” ”Also, if . . . the lender is ‘table funding’ the loan, he is violating RESPA’s Section 8 anti-kickback provisions.”62

In the first case decided under the new regulation, Briggs v. Countrywide Funding Corp.,63 the U. S. District Court for the Middle District of Alabama denied a motion to dismiss a complaint alleging the payment of a ”yield spread premium” by a lender to a broker in connection with a table funded transaction. Plaintiffs alleged that the payment violated RESPA as well as several state law doctrines. The court acknowledged that RESPA applied to the table funded transactions and noted that whether or not disclosed, the fees could be considered illegal.

Truth in Lending Act Implications Many of the pending cases challenging the payment of ”yield spread premiums” and ”upselling” allege that the payment of compensation to an agent of the lender is a TILA ”finance charge.” The basis of the TILA claims is that the commission a borrower pays to his ”broker” is a finance charge because the ”broker” is really functioning as the agent of the lender. The claim is not that the ”upsell” payment made by the lender to the borrower’s broker is a finance charge.

Decisions under usury statutes uniformly hold that a fee charged to the borrower by the lender’s agent is interest or points.64 The concept of the ”finance charge” under TILA is broader than, but inclusive of, the concept of ”interest” and ”points” at common law and under usury statutes. Regulation Z specifically provides that the ”finance charge” includes any ”interest” and ”points” charged in connection with a transaction.65 Therefore, if the intermediary is in fact acting on behalf of the lender, as is the case where the intermediary accepts secret compensation from the lender or acts in the lender’s interest to increase the amount paid by the borrower, all compensation received by the intermediary, including broker’s fees charged to the borrower, are finance charges.

Unfair and Deceptive Acts and Practices The pending ”upselling” cases also generally allege that the payment of compensation to the mortgage broker violates the general prohibitions of most state ”unfair and deceptive acts and practices” (”UDAP”) statutes. The violations of public policy codified by the federal consumer protection laws create corresponding state consumer protection law claims.66

Civil Rights and Fair Housing Laws The Department of Justice brought two cases in late 1995 alleging that the disproportionate impact of ”overages” and ”upselling” on minorities violated the Fair Housing Act67 and Equal Credit Opportunity Act.68 Both cases alleged disparate pricing of loans according to the borrower’s race and were promptly settled.69 Other investigations are reported to be pending.70 The principal focus of enforcement agencies appears to be on the civil rights implications of overages.71

It is likely that such a practice would also violate 42 U.S.C. Section 1981.While Section 1981 requires intentional discrimination, a lender that decides to take advantage of the fact that other lenders discriminate by making loans to minorities at higher rates is also engaging in intentional discrimination. In Clark v. Universal Builders,72 the Seventh Circuit held that one who exploits and preys on the discriminatory hardship of minorities does not occupy a more protected status than the one who created the hardship in the first instance; that is, a defendant cannot escape liability under the Civil Rights Act by asserting it merely ”exploited a situation crated by socioeconomic forces tainted by racial discrimination.”73

PRIVATE MORTGAGE INSURANCE LITIGATION Another group of pending lawsuits is based on claims of misrepresentation of or failure to disclose the circumstances under which private mortgage insurance (”PMI”) may be terminated. PMI insures the lender against the borrower’s default — the borrower derives no benefit from PMI. It is generally required under a conventional mortgage if the loan to value ratio exceeds about 80 percent.74 Approximately 17.4 percent of all mortgages have PMI.75

Standard form conventional mortgages provide that if PMI is required it maybe terminated as provided by agreement. Most servicers and investors have policies for terminating PMI. However, the borrower is often not told what the policy is, either at the inception of the mortgage or at any later time. As a result, people pay PMI premiums unnecessarily. Since there is about $ 460 billion in PMI in force,76 this is a substantial problem. The failure accurately and clearly to disclose the circumstances under which PMI may be terminated has been challenged under RICO and state consumer fraud statutes.

UNAUTHORIZED SERVICING CHARGES Another fertile ground of litigation concerns the imposition of charges that are not authorized by law or the instruments being serviced. The collection of modest charges is a key component of servicing income.77 For example, many mortgage servicers impose charges in connection with the payoff or satisfaction of mortgages when the instruments either do not authorize the charge or affirmatively prohibit it.

The imposition of payoff and recording charges has been challenged as a breach of contract, as a deceptive trade practice, as a violation of RICO, and as a violation of the Fair Debt Collection Practices Act (”FDCPA”).78 In Sandlin v. State Street Bank,79 the U. S. District Court for the Middle District of Florida held that the imposition of a payoff statement fee is a violation of the standard form ”uniform instrument” issued by the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, and when imposed by someone who qualifies as a ”debt collector” under the FDCPA,80 violates that statute as well.81 However, attempts to challenge such charges under RESPA have been unsuccessful, with courts holding that a charge imposed subsequent to the closing is not covered by RESPA.82

ADJUSTABLE RATE MORTGAGES Adjustable rate mortgages (”ARMs”) were first proposed by the Federal Home Loan Bank Board in the 1970s. They first became widespread in the early 1980s. At the present time, about 25 to 30 percent of all residential mortgages are adjustable rate mortgages (”ARMs”).83

The ARM adjustment practices of the mortgage banking industry have been severely criticized because of widespread errors.84 Published reports beginning in 1990 indicate that 25 to 50 percent of all ARMs may have been adjusted incorrectly at least once.85 The pattern of misadjustments is not random: approximately two-thirds of the inaccuracies favor the mortgage company.86

Grounds for legal challenges to improper ARM adjustments include breach of contract, TILA,87 the Uniform Consumer Credit Code,88 RICO,89 state unfair and deceptive practices statutes,90 failure to properly respond to a ”qualified written request” under section 6(e) of RESPA,and usury.91

Substantial settlements of ARM claims have been made by Citicorp Mortgage,92 First Nationwide Bank,93 and Banc One.94 On the other hand, several cases have rejected borrower claims that particular ARM adjustment actions violated the terms of the instruments. For example, a Connecticut case held that a mortgage that provided for an interest rate tied to the bank’s current ”market rate” was not violated when the bank failed to take into account the rate that could be obtained through the payment of a ”buydown.”95 A Pennsylvania case held that the substitution of one index for another that had been discontinued was consistent with the terms of the note and mortgage.96

A major issue in ARM litigation is whether what the industry erroneously terms ”undercharges” — the failure of the servicer to charge the maximum amount permitted under the terms of the instrument — can be ”netted” or offset against overcharges — the collection of interest in excess of that permitted under the terms of the instrument. Fannie Mae has taken the position that ”netting” is appropriate.97

The validity of this conclusion is questionable. First, nothing requires a financial institution to adjust interest rates upward to the maximum permitted, and there are in fact often sound business reasons for not doing so. On the other hand, the borrower has an absolute right not to pay more than the instrument authorizes. Thus, what the industry terms an ”undercharge” is simply not the same thing as an ”overcharge.”

Second, the upward adjustment of interest rates must be done in compliance with TILA. An Ohio court held that failure to comply made the adjustment unenforceable.98 ”Where a bank violates the Truth-in-Lending Act by insufficient disclosure of a variable interest rate, the court may grant actual damages. . . . If the actual damage is the excess interest charge over the original contract term, the court may order the mortgage to be recalculated at its original terms, and refuse to enforce the variable interest rate provisions.”99

Third, if the borrower is behind in his payments, ”netting” may violate state law requiring the lender to proceed against the collateral before undertaking other collection efforts. A decision of the California intermediate appellate court concluded that the state’s ”one-action rule” had been violated when a lender obtained an offset of interest overcharges against amounts owed by the borrower under an ARM.100

1. E.g., G. Marsh, Lender Liability for Consumer Fraud Practices of Retail

Dealers and Home Improvement Contractors, 45 Ala. L. Rev. 1 (1993); D. Edelman, Second Mortgage Frauds, Nat’l Consumer Rights Litigation Conference 67 (Oct. 19-20, 1992).

2. The lender would deposit the escrow funds in a non-interest-bearing account at a bank which made loans to the lender. The lender would receive a ”funds credit” against the interest payable on its borrowings based on the value of the escrow funds deposited at the bank.

3. Aitken v. Fleet Mtge. Corp., 1991 U.S.Dist. LEXIS 10420 (ND Ill., July 30,1991), and 1992 U.S.Dist. LEXIS 1687 (ND Ill., Feb. 12, 1992); Attorney General v. Michigan Nat’l Bank, 414 Mich. 948, 325 N.W.2d 777 (1982); Burkhardt v. City Nat’l Bank, 57 Mich.App. 649, 226 N.W.2d 678 (1975).

4. See generally, Class Actions Under Anti-Trust Laws on Account of Escrow and Similar Practices, 11 Real Prop., Probate & Trust Journal 352 (Summer 1976).

5. Buchanan v. Century Fed. S. & L. Ass’n, 306 Pa. Super. 253, 452 A.2d 540(1982), later opinion, 374 Pa. Super. 1, 542 A.2d 117 (1986); Carpenter v. Suffolk Franklin Savs. Bank, 370 Mass. 314, 346 N.E.2d 892 (1976); Brooks v. Valley Nat’l Bank, 113 Ariz. 169, 548 P.2d 1166 (1976); Petherbridge v. Prudential S. & L. Ass’n, 79 Cal.App.3d 509, 145 Cal.Rptr. 87 (1978); Marsh v. Home Fed. S. & L. Ass’n, 66 Cal.App.3d 674, 136 Cal.Rptr. 180 (1977); LaThrop v. Bell Fed. S. & L. Ass’n, 68 Ill.2d 375, 370 N.E.2d 188 (1977); Sears v. First Fed. S. & L. Ass’n, 1 Ill.App.3d 621, 275 N.E.2d 300 (1st Dist. 1973); Durkee v. Franklin Savings Ass’n, 17 Ill.App.3d 978, 309 N.E.2d 118 (2d Dist. 1974); Zelickman v. Bell Fed. S. & L. Ass’n, 13 Ill.App.3d 578, 301 N.E.2d 47 (1st Dist. 1973); Yudkin v. Avery Fed. S. & L. Ass’n, 507 S.W.2d 689 (Ky. 1974); First Fed. S. & L. Ass’n of Lincoln v. Board of Equalization of Lancaster County, 182 Neb. 25, 152 N.W.2d 8 (1967); Kronisch v. Howard Savings Institution, 161 N.J.Super. 592, 392 A.2d 178 (1978); Surrey Strathmore Corp. v. Dollar Savings Bank of New York, 36 N.Y.2d 173, 366 N.Y.S.2d 107, 325 N.E.2d 527 (1975); Tierney v. Whitestone S. & L. Ass’n, 83 Misc.2d 855, 373 N.Y.S.2d 724 (1975); Cale v. American Nat’l Bank, 37 Ohio Misc. 56, 66 Ohio Ops.2d 122 (1973); Richman v. Security S. & L. Ass’n, 57 Wis.2d 358, 204 N.W.2d 511 (1973); In re Mortgage Escrow Deposit Litigation, 1995 U.S.Dist. LEXIS 1555 (ND Ill. Feb. 8, 1995).

6. National Mortgage News, Nov. 11, 1991, p. 2.

7. Leff v. Olympic Fed. S & L Ass’n, 1986 WL 10636 (ND Ill 1986).

8. Overcharging on Mortgages: Violations of Escrow Account Limits by the Mortgage Lending Industry: Report by the Attorneys General of California, Florida, Iowa, Massachusetts, Minnesota, New York & Texas (24 Apr 1990).

9. Leff v. Olympic Fed. S. & L. Ass’n, n. 7 supra; Aitken v. Fleet Mtge.Corp., 1992 U.S.Dist. LEXIS 1687 (ND Ill., Feb. 12, 1992); Weinberger v. Bell Federal, 262 Ill.App.3d 1047, 635 N.E.2d 647 (1st Dist. 1994); Poindexter v. National Mtge. Corp., 1995 U.S.Dist. LEXIS 5396 (ND Ill., April, 24, 1995); Markowitz v. Ryland Mtge. Co., 1995 U.S.Dist. LEXIS 11323 (ND Ill. Aug. 8, 1995); Sanders v. Lincoln Service Corp., 1993 U.S.Dist. LEXIS 4454 (ND Ill. Apr. 9, 1993); Cairns v. Ohio Sav. Bank, 1996 Ohio App. LEXIS 637 (Feb. 22, 1996). See generally, GMAC Mtge. Corp. v. Stapleton, 236 Ill.App.3d 486, 603 N.E.2d 767 (1st Dist. 1992), leave to appeal denied, 248 Ill.2d 641, 610 N.E.2d 1262 (1993).

10. Leff v. Olympic Fed. S. & L. Ass’n, n. 7 supra; Aitken v. Fleet Mtge. Corp., n.9 supra; Poindexter v. National Mtge. Corp., n.9 supra; Sanders v. Lincoln Service Corp., n. 9 supra.

11. Leff v. Olympic Fed. S. & L. Ass’n, Aitken v. Fleet Mtge. Corp., n.9 supra; Robinson v. Empire of America Realty Credit Corp., 1991 U.S.Dist. LEXIS 2084 (ND Ill., Feb. 20, 1991); Poindexter v. National Mtge. Corp., n. 9 supra. 12. Poindexter v. National Mtge. Corp., n. 9 supra.

13. Martinez v. Weyerhaeuser Mtge. Co., 1995 U.S.Dist. LEXIS 11367 (ND Ill. Aug. 8, 1995). The theory is that the excessive portion of the escrow deposit is a finance charge.

14. 12 U.S.C. Section 2609.

15. State of Louisiana v. Litton Mtge. Co., 50 F.3d 1298 (5th Cir. 1995); Allison v. Liberty Savings, 695 F.2d 1086, 1091 (7th Cir. 1982); Herrman v. Meridian Mtge. Corp., 901 F.Supp. 915 (ED Pa. 1995); Campbell v. Machias Savings Bank, 865 F.Supp. 26, 31 (D.Me. 1994); Michels v. Resolution Trust Corp., 1994 U.S.Dist. LEXIS 6563 (D.Minn. Apr. 13, 1994); Bergkamp v. New York Guardian Mortgagee Corp., 667 F.Supp. 719, 723 (D.Mont. 1987). Contra, Vega v. First Fed. S. & L. Ass’n, 622 F.2d 918, 925 (6th Cir. 1980).

16. 24 C.F.R. 3400.17, issued at 60 FR 24734.17. The pre-1990 ”uniform instrument” issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation did not provide for any surplus. The pre-1990 FHA form and the VA form provided for a one-month surplus.

18. The finance charge includes ”any charge, payable directly or indirectly by the consumer, imposed directly or indirectly by the creditor, as an incident to or a condition of the extension of credit.” regulation Z, 12 C.F.R. 226.4(a). The definition is all-inclusive: any charge that meets this definition is a finance charge unless it is specifically excluded by TILA or regulation Z. R. Rohner, The Law of Truth in Lending, section 3.02 (1984). There are exclusions from the finance charge which apply only in mortgage transactions. 12 C.F.R. 226.4(c)(7). However, the exclusions require that the charges be bona fide and reasonable in amount, id., and the exclusions are narrowly construed to protect consumers from underdisclosure of the cost of credit. Equity Plus Consumer Fin. & Mtge. Co. v. Howes, 861 P.2d 214, 217 (NM 1993). See also In re Celona, 90 B.R. 104 (Bankr.ED Pa. 1988), aff’d 98 B.R. 705 (Bankr. ED Pa. 1989). ”Only those charges specifically exempted from inclusion in the ‘finance charge’ by statute or regulation may be excluded from it.” Buford v. American Fin. Co., 333 F.Supp. 1243, 1247 (ND Ga. 1971). 19. In re Souders, 1992 U.S.Comp.Gen. LEXIS 1075 (Sept. 29, 1992); In re Barry, 1981 U.S.Comp.Gen. LEXIS 1262 (April 16, 1981); In re Bayer, 1977 U.S.Comp.Gen. LEXIS 2116 (Sept. 19, 1977); In re Wahl, 1974 U.S.Comp.Gen. LEXIS 1610 (Oct. 1, 1974); In re Ray, 1973 U.S.Comp.Gen. LEXIS 1960 (March 13, 1973). A tax service fee represents the purported cost of having someone check the real estate records annually to make sure that the taxes on the property securing the loan are shown as having been paid.

20. In re Celona, 90 B.R. 104, 110-12 (Bankr. E.D.Pa. 1988), aff’d, 98 B.R. 705 (ED Pa. 1989) (lender violated TILA by passing on $ 200 fee charged by attorney to review certain documents without including fee in ”finance charge”); Abel v. Knickerbocker Realty Co., 846 F.Supp. 445 (D.Md. 1994) (lender violated TILA because ”origination fee” of $ 290 excluded from ”finance charge”); Brodo v. Bankers Trust Co., 847 F.Supp. 353 (ED Pa. 1994) (lender violated TILA by imposing charge for preparing TILA disclosure documents without including them in the ”finance charge”).

21. Cheshire Mtge. Service, Inc. v. Montes, 223 Conn. 80, 612 A.2d 1130 (1992) (lender violated TILA by imposing fee for assigning the mortgage when it was sold on the secondary market without including it in the ”finance charge”); In re Brown, 106 B.R. 852 (Bankr. E.D.Pa. 1989) (same); Mayo v. Key Fin. Serv., Inc., 92-6441-D (Mass.Super.Ct., June 22, 1994) (same).

22. In re Anibal L. Toboas, 1985 U.S.Comp.Gen. LEXIS 854 (July 19, 1985) (”The relevant part of Regulation Z expressly categorizes service charges and loan fees as part of the finance charge when they are imposed directly or indirectly on the consumer incident to or as a condition of the extension of credit. The finance charge, therefore, is not limited to interest expenses but includes charges which are imposed to defray a lender’s administrative costs. [citation] A messenger service charge paid to the mortgage lender may not be reimbursed because it is part of the lender’s overhead, a charge for which is considered part of the finance charge under Regulation Z.”); In re Schwartz, 1989 U.S. Comp. Gen. LEXIS 55 (Jan. 19, 1989) (”a messenger service charge or fee is part of the lender’s overhead, a charge which is deemed to be a finance charge and not reimbursable”).

23. Decision of the Comptroller General No. B-181037, 1974 U.S.Comp.Gen. LEXIS 1847 (July 16, 1974) (loan closing fee was part of the finance charge under TILA); Decision of the Comptroller General, No. B-189295 1977, U.S. Comp.Gen. LEXIS 2230 (Aug. 16, 1977) (same); In the Matter of Real Estate Expenses — Finance Charges, No. B-179659, 54 Comp. Gen. 827, 1975 U.S.Comp.Gen. LEXIS 180 (April 4, 1975) (same).

24. Abbey v. Columbus Dodge, 607 F.2d 85 (5th Cir. 1979) (purported $ 37.50 ”filing fee” that creditor pocketed was a finance charge); Therrien v. Resource Finan. Group. Inc., 704 F.Supp. 322, 327 (DNH 1989) (double-charging for recording and discharge fee and title insurance premium constituted undisclosed finance charges).

25. Decision of the Comptroller General, B-174030, 1971 U.S. Comp. Gen. LEXIS 1963 (Nov. 11, 1971).

26. 16 F.3d 1142 (11th Cir. 1994).

27. Id. at 1149.

28. 60 FR 16771, April 3, 1995.

29. See Jean M. Shioji, Truth in Lending Act Reform Amendments of 1995, Rev. of Bank. and Finan. Serv., Dec. 13, 1995, Vol. 11, No. 21; at 235. 30. P.L. 104-29, sections 2(a), (c), (d), and (e), to be codified at 15 U.S.C. 1605(a), (c), (d) and (e).

31. P.L. 104-29, section 2(b), to be codified at 15 U.S.C. 1605(a)(6). 32. The amendment broadened the language in 15 U.S.C. 1605(e)(2), which previously excluded ”fees for preparation of a deed, settlement statement, or other documents.”

33. P.L. 104-29, sections 2(a), (c), (d), and (e), to be codified at 15 U.S.C. 1605(a), (c), (d) and (e).

34. P.L. 104-29, section 3(a), to be codified at 15 U.S.C. 1605(f)(2); P.L. 104-29, section 4(a), to be codified at 15 U.S.C. 1649(a)(3); P.L. 104-29, section 8, to be codified at 15 U.S.C. 1635(i)(2); 15 U.S.C. 1606(c). 35. P.L. 104-29, section 7(b), to be codified at 15 U.S.C. 1641(f). The apparent purpose of this provision was to alter the result in Myers v. Citicorp Mortgage, 1995 U.S.Dist. LEXIS 3356 (MD Ala., March 14, 1995). 36. The amendments were applied to existing transactions in Hickey v. Great W. Mtge. Corp., 158 F.R.D. 603 (ND Ill. 1994), later opinion, 1995 U.S. Dist. LEXIS 405 (ND Ill., Jan. 3, 1995), later opinion, 1995 U.S. Dist. LEXIS 3357 (ND Ill., Mar. 15, 1995), later opinion, 1995 U.S. Dist. LEXIS 4495 (ND Ill., Apr. 4, 1995), later opinion, 1995 U.S. Dist. LEXIS 6989 (ND Ill., May 1, 1995); and Cowen v. Bank United, 1995 U.S.Dist. LEXIS 4495, 1995 WL 38978 (ND Ill., Jan. 25, 1995), aff’d, 70 F.3d 937 (7th Cir. 1995).

37. Jonathan S. Hornblass, Fleet Unit Discontinues Overages on Loans to the Credit-Impaired, American Banker, June 9, 1995, p. 8. See also, Kenneth R. Harney, Loan Firm to Refund $ 2 Million in ‘Overage’ Fees, Los Angeles Times, Nov. 6, 1994, part K, p. 4, col. 1 (”Yield spread premiums” or ”overages” are paid ”to brokers when borrowers lock in or sign contracts at rates or terms that exceed what the lender would otherwise be willing to deliver”); Ruth Hepner, Risk-based loan rates may rate a look, Washington Times, Nov. 4, 1994, p. F1 (such fees are paid to mortgage brokers ”to bring in borrowers at higher-than-market rates and fees”); Jonathan S. Hornblass, Focus on Overages Putting Home Lenders in Legal Hot Seat, American Banker, May 24, 1995, p. 10 (giving examples of how the fees affect the borrower).

38. The extra fees — known in the trade as overages or yield-spread premiums — typically are paid to local mortgage brokers by large lenders who purchase their home loans. The concept is straightforward: If a mortgage company can deliver a loan at higher than the going rate, or with higher fees, the loan is worth more to the large lender who buys it. For every rate notch above ”par” — the lender’s standard rate — the lender will pay a local originator a bonus. Kenneth R. Harney, Suit Targets Extra Fees Paid When Mortgage Rate Inflated, Sacramento Bee, Aug. 13, 1995, p. J1.

39. Prior to 1993, according to industry experts, back-end compensation of this type rarely was disclosed to consumers. More recently, however, some brokers and lenders have sharply limited the size of the fees and disclosed them. They often appear as one or more line items on the standard HUD-1 settlement sheets used for closings nationwide. Id.

40. Jonathan S. Hornblass, Focus on Overages Putting Home Lenders In Legal Hot Seat, American Banker, May 24, 1995, p. 10; K. Harney, U. S. Probes Higher Fees for Women, Minorities, Los Angeles Times, Sept. 24, 1995, p. K4. 41. In re Estate of Morys, 17 Ill.App.3d 6, 9, 307 N.E.2d 669 (1st Dist. 1973).

42. Wyatt v Union Mtge. Co., 24 Cal.3d 773, 782, 157 Cal.Rptr. 392, 397, 598 P.2d 45 (1979); accord: Pierce v. Hom, 178 Cal. Rptr. 553, 558 (Ct. App. 1981) (mortgage broker has duty to use his expertise in real estate financing for the benefit of the borrower); Allabastro v. Cummins, 90 Ill.App.3d 394, 413 N.E.2d 86, 82 (1st Dist. 1980); Armstrong v. Republic Rlty. Mgt. Corp., 631 F.2d 1344 (8th Cir. 1980); In re Dukes, 24 B.R. 404, 411-12 (Bankr. ED Mich. 1982) (”the fiduciary, Salem Mortgage Company, failed to provide the borrower-principal with any sort of estimate as to the ultimate charges until a matter of minutes before the borrower was to enter into the loan agreement”); Community Fed. Savings v. Reynolds, 1989 U.S. Dist. LEXIS 10115 (N.D.Ill., Aug. 18, 1989); Langer v. Haber Mortgages, Ltd., New York Law Journal, August 2, 1995, p. 21 (N.Y. Sup.Ct.). See also, Tomaszewski v. McKeon Ford, Inc., 240 N.J.Super. 404, 573 A.2d 101 (1990) Browder v, Hanley Dawson Cadillac Co., 62 Ill.App.3d 623, 379 N.E.2d 1206 (1st Dist. 1978) Fox v. Industrial Cas. Co., 98 Ill.App.3d 543, 424 N.E.2d 839 (1st Dist. 1981); Hlavaty v. Kribs Ford Inc., 622 S.W.2d 28 (Mo.App. 1981), and Spears v. Colonial Bank, 514 So.2d 814 (Ala. 1987) (Jones, J., concurring), dealing with the duty of a seller of goods or services who undertakes to procure insurance for the purchaser. See generally 12 Am Jur 2d, Brokers, Section 84.

43. Wyatt v. Union Mtge. Co., 24 Cal.3d 773, 782, 157 Cal.Rptr. 392, 397, 598 P.2d 45 (1979).

44. Brink v. Da Lesio, 496 F.Supp. 1350 (D.Md. 1980), modified, 667 F.2d 420 (4th Cir. 1981)

45. Wyatt v Union Mtge. Co., 24 Cal.3d 773, 782, 157 Cal.Rptr. 392, 397, 598 P.2d 45 (1979).

46. Martin v. Heinold Commodities, Inc. 139 Ill.App.3d 1049, 487 N.E.2d 1098. 1102-03 (1st Dist. 1985), aff’d in part and rev’d in part, 117 Ill.2d 67, 510 N.E.2d 840 (1987), appeal after remand, 240 Ill.App.3d 536, 608 N.E.2d 449 (1st Dist. 1992), aff’d in part and rev’d in part, 163 Ill.2d 33, 643 N.E.2d 734 (1994).

47. An agreement between a seller and an agent for a purchaser whereby an increase in the purchase price was to go to the agent unbeknownst to the purchaser, constitutes fraud. Kuntz v. Tonnele, 80 N.J.Eq. 372, 84 A. 624, 626 (Ch. 1912). The buyer may sue both his agent and the seller. Id. 48. Starr v. International Realty, Ltd., 271 Or. 296, 533 P.2d 165, 167-8 (1975).

49. Bunker Ramo Corp. v. United Business Forms, Inc., 713 F.2d 1272 (7th Cir. 1983); Hellenic Lines, Ltd. v. O’Hearn, 523 F.Supp. 244 (SDNY 1981); CNBC, Inc. v. Alvarado, 1994 U.S.Dist. LEXIS 11505 (SDNY 1994). Shushan v. United States, 117 F.2d 110, 115 (5th Cir. 1941), United States v. George, 477 F.2d 508, 513 (7th Cir. 1973); Formax, Inc. v. Hostert, 841 F.2d 388, 390-91 (Fed. Cir. 1988); United States v. Shamy, 656 F.2d 951, 957 (4th Cir. 1981); United States v. Bruno, 809 F.2d 1097, 1104 (5th Cir. 1987); United States v. Isaacs, 493 F.2d 1124, 1150 (7th Cir. 1974); United States v. Mandel, 591 F.2d 1347, 1362 (4th Cir. 1979); United States v. Keane, 522 F.2d 534, 546 (7th Cir. 1975); United States v. Barrett, 505 F.2d 1091, 1104 (7th Cir. 1974); GLM Corp. v. Klein, 684 F.Supp. 1242, 1245 (SDNY 1988); United States v. Procter & Gamble Co., 47 F.Supp. 676, 678-79 (D.Mass. 1942); United States v. Aloi, 449 F.Supp. 698, 718 (EDNY 1977); United States v. Fineman, 434 F.Supp. 189, 195 (EDPa. 1977). 50. U.S.C. Section 2607.

51. United States v. Graham Mtge. Corp., 740 F.2d 414 (6th Cir. 1984). 52. Durr v. Intercounty Title Co., 826 F.Supp. 259, 262 (ND Ill. 1993), aff’d, 14 F.3d 1183 (7th Cir. 1994); Campbell v. Machias Savings Bank, 865 F.Supp. 26, 31 n. 5 (D.Me. 1994); Mercado v. Calumet Fed. S. & L. Ass’n, 763 F.2d 269, 270 (7th Cir. 1985); Family Fed. S. & L. Ass’n v. Davis, 172 B.R. 437, 466 (Bankr. DDC 1994); Adamson v. Alliance Mtge. Co., 677 F.Supp. 871 (ED Va. 1987), aff’d, 861 F.2d 63 (4th Cir. 1988); Duggan v. Independent Mtge. Corp., 670 F.Supp. 652, 653 (ED Va. 1987).

53. The Alabama Supreme Court described the ”table funding” relationship as

follows: Under this arrangement, the mortgage broker or correspondent lender performs all of the originating functions and closes the loan in the name of the mortgage broker with funds supplied by the mortgage lender. The mortgage broker depends upon ”table funding,” the simultaneous advance of the loan funds from the mortgage lender to the mortgage broker. Once the loan is closed, the mortgage broker immediately assigns the mortgage to the mortgage lender. The essence of the table funding relationship is that the mortgage broker identifies itself as the creditor on the loan documents even though the mortgage broker is

not the source of the funds. (Emphasis added). Smith v. First Family Financial Services Inc., 626 So.2d 1266, 1269 (Ala. 1993). 54. 57 FR 49607, Nov. 2, 1992; 57 FR 56857, Dec. 1, 1992; 59 FR 6515, Feb. 10, 1994.

55. N. 51 supra. In conjunction with amending regulation X, the Department of Housing and Urban Development made the following statement regarding the Sixth

Circuit’s interpretation of RESPA and regulation X: HUD has consistently taken the position that the prohibitions of Section 8 of RESPA (12 U.S.C. 2607) extended to loan referrals. Although the making of a loan is not delineated as a ”settlement service” in Section 3(3) of RESPA (12 U.S.C. 2602(3)), it has always been HUD’s position, based on the statutory language and the legislative history, that the section 3(3) list was not an inclusive list of all settlement services and that the origination, processing and funding of a mortgage loan was

a settlement service. In U.S. v. Graham Mortgage Corp., 740 F.2d 414 (6th Cir. 1984), the Sixth Circuit Court of Appeals stated that HUD’s interpretation that the making of a mortgage loan was a part of the settlement business was unclear for purposes of criminal prosecution, and based and the rule of lenity, overturned a previous conviction. In response to the Graham case, HUD decided to amend its regulations to state clear and specifically that the making and

processing of a mortgage loan was a settlement service. Accordingly, HUD restates its position unequivocally that the originating, processing, or funding

of a mortgage loan is a settlement service in this rule. 57 F.R. 49600(Nov. 2, 1992).

56. Table Funding Rebuffed Again, National Mortgage News, Feb. 21, 1994, p. 6; HUD May Grant Home Equity Reprieve, Thomson’s International Bank Accountant, Dec. 13, 1993, p. 4; HUD Wants Expansion of Mortgage Broker Fee Disclosure, National Mortgage News, p. 25 (Sept. 14, 1992).

57. Table Funding, Fee Rulings Near, Banking Attorney, Dec. 13, 1993, vol. 3, no. 47, p. 5; Table Funding to Be Disclosed, International Bank Accountant, Dec. 13, 1993, vol. 93, no. 47, p. 4.

58. The current version of regulation X, 24 C.F.R. Section 3500.14, provides,

in part, as follows: Prohibition against kickbacks and unearned fees. (a)Section 8 violation. Any violation of this section is a violation of section 8 of RESPA (12 U.S.C. Section 2607) and is subject to enforcement as such under

Section 3500.19(b). . . (b) No referral fees. No person shall give and no person shall accept any fee, kickback, or other thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a settlement service involving a federal-related mortgage loan shall be

referred to any person. (c) No split of charges except for actual services performed. No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a settlement service in connection with a transaction involving a federally-related mortgage loan other than for services actually performed. A charge by a person for which no or nominal services are performed or for which duplicative fees are charged is an unearned fee and violates this section. The source of the payment does not determine whether or not a service is compensable. Nor may the prohibitions of this Part be avoided by creating an arrangement wherein the purchaser of services splits the fee. (Emphasis added)

59. Robert P. Chamness, Compliance Alert: What Changed the Face of the Mortgage Lending Industry Overnight?, ABA Bank Compliance, Spring 1993, p. 23. Accord, Heather Timmons, U.S. Said to Plan Crackdown on Referral Fees, American Banker, Dec. 20, 1995, p. 10. (”Section 8 [of RESPA] has prompted close scrutiny of back-end points, mortgage fees paid to a broker by the lender after closing. Federal attorneys are concerned that some lenders are improperly hiding referral fees in the rates charged to consumers . . . .”); HEL Lenders May Be Sued on Broker Referrals, National Mortgage News, April 3, 1995, p. 11 supra, (”there no longer is any possible justification for paying back-end points . . . [because] the very essence is that the compensation is paid for referral”).

60. Mary Sit, Mortgage Brokers Can Help Borrowers. Boston Globe, Oct. 3, 1993, p. A13; Jeremiah S. Buckley and Joseph M. Kolar, What RESPA has Wrought: Real Estate Settlement Procedures, Savings & Community Banker, Feb. 1993, vol. 2, no. 2, p. 32.

61. 61 F.R. 7414 (February 28, 1996). See also Kenneth Harney, Nation’s Housing: VA Eyes Home-Loan Abuses, Newsday p. D02 (Mar. 15, 1996). See also See Leonard A. Bernstein, RESPA Invades Secondary Mortgage Financing, New Jersey Lawyer, Aug. 1, 1994. HUD Stepping Up RESPA Inspections, American Banker Washington Watch, May 3, 1993.

62. HEL Lenders May Be Sued on Broker Referrals, National Mortgage News, April 3, 1995, p. 11.

63. 95-D-859-N (MD Ala., Mar. 8, 1996),

64. Fowler v. Equitable Trust Co., 141 U.S. 384 (1891); In re West Counties Construction Co., 182 F.2d 729, 731 (7th Cir. 1950) (”Calling the $ 1,000 payment to Walker a commission did not change the fact that it was an additional charge for making the loan”); Union Nat’l Bank v. Louisville, N. A & C. R. Co., 145 Ill. 208, 223, 34 N.E. 135 (1893) (”There can be no doubt that this payment, though attempted to be disguised under the name of ‘commission, was in legal effect an agreement to pay a sum additional to the [lawful rate of interest], as the consideration or compensation for the use of the money borrowed, and is to be regarded as, to all intents and purposes, an agreement for the payment of additional interest”); North Am. Investors v. Cape San Blas Joint Venture, 378 So.2d 287 (Fla. 1978); Feemster v. Schurkman, 291 So.2d 622 (Fla.App. 1974); Howes v. Curtis, 104 Idaho 563, 661 P.2d 729 (1983); Duckworth v. Bernstein, 55 Md.App. 710, 466 A.2d 517 (1983); Coner v Morris S. Berman, Unltd., 65 Md.App. 514, 501 A.2d 458 (1985) (violation of state secondary mortgage and finders’ fees laws); Julian v Burrus, 600 S.W.2d 133 (Mo.App. 1980); DeLee v. Hicks, 96 Nev. 462, 611 P.2d 211(1980); United Mtge. Co. v. Hilldreth, 93 Nev. 79, 559 P.2d 1186 (1977); O’Connor v Lamb, 593 S.W.2d 385 (Tex.Civ.App. 1979) (purported broker was the actual lender); Terry v. Teachworth, 431 S.W.2d 918 (Tex.Civ.App. 1968); Durias v. Boswell, 58 Wash.App. 100, 791 P.2d 282 (1990) (broker’s fee is interest where broker is agent of lender; factors relevant to determining agency include lender’s reliance on broker for information concerning creditworthiness of borrower, preparation of documents necessary to close and adequately secure the loan, and performing record keeping functions; not relevant whether lender knew of broker’s fee, as Washington law provides that where broker acts as agent for both borrower and lender, it is deemed lender’s agent for purposes of usury statute); Sparkman & McLean Income Fund v. Wald, 10 Wash.App. 765, 520 P.2d 173 (1974); Payne v Newcomb, 100 Ill. 611, 616-17 (1881) (where intermediary was agent of lender, fees exacted by the intermediary on borrowers made loans usurious); Meers v. Stevens, 106 Ill. 549, 552 (1883) (borrower approaches A for loan, A directs borrower to B, a relative, who makes the loan in the name of A and charges a ”commission” for procuring it; court held transaction was an ”arrangement to charge usury, and cover it up under the claim of commissions); Farrell v. Lincoln Nat’l Bank, 24 Ill.App.3d 142, 146, 320 N.E.2d 208 (1st Dist. 1974) (”if a fee is paid to a lender’s agent for making the loan, with the lender’s knowledge, the amount of the fee is treated as interest for the purposes of determining usury”).

65. 12 C.F.R. Section 226.4(b)(1), (3).

66. FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 244-45 (1972); Cheshire Mtge. Service, Inc. v. Montes, 223 Conn. 80, 107, 612 A.2d 1130 (1992) (court found a TILA violation to violate the Connecticut Unfair Trade Practices Act because the violation of TILA was contrary to its public policy of accurate loan disclosure).

67. 42 U.S.C. Section 3601 et seq.

68. 15 U.S.C. Section 1691 et seq.

69. Consent decree, United States v. Security State Bank of Pecos, WD Tex., filed Oct. 18, 1995; consent decree, United States v. Huntington Mortgage Co., ND Ohio, filed Oct. 18, 1995.

70. Bank Said to Face Justice Enforcement Action, Mortgage Marketplace, Mar. 25, 1996, v. 6, no. 12, p. 5.

71. M. Hill, Banks Revise Overage Lending Policies, Cleveland Plain Dealer, July 14, 1994, p. 1C; Jonathan S. Hornblass, Focus on Overages Putting Home Lenders in Legal Hot Seat, American Banker, May 24, 1995, p. 10; John Schmeltzer, Lending investigation expands; U.S. wants to know if minorities are paying higher fees, Chicago Tribune, May 19, 1995, Business section, p. 1. 72. 501 F.2d 324, 330-31 (7th Cir. 1974).

73. See also DuFlambeau v. Stop Treaty Abuse-Wisconsin, Inc., 41 F.3d 1190, 1194 (7th Cir. 1994). See Mescall v. Burrus, 603 F.2d 1266 (7th Cir. 1979); Ortega v. Merit Insurance Co., 433 F.Supp. 135 (ND Ill. 1977) (plaintiff’s allegations that a de facto system of discriminatory credit insurance pricing exists, and that defendant is exploiting this system is sufficient to withstand the defendant’s motion to dismiss); Stackhouse v. DeSitter, 566 F.Supp. 856, 859 (N.D.Ill. 1983) (”Charging a black buyer an unreasonably high price for a home where a dual housing market exists due to racial segregation also violates this section . . .”).

74. John D’Antona Jr., Lenders requiring more mortgage insurance, Pittsburgh Post-Gazette, Feb. 18, 1996, p. J1.

75. Duff & Phelps Credit Rating Co. report on the private mortgage insurance industry, Dec. 7, 1995. The figure is for 1994.

76. No Bump in December MI Numbers, National Mortgage News, Feb. 5, 1996, p. 2. The figure is as of the end of 1995.

77. Charting the Two Paths to Profitability, American Banker, September 13, 1994, p. 11; Tallying Up Servicing Performance in 1993, Mortgage Banking, June 1994, p. 12.

78. 15 U.S.C. Section 1692 et seq.

79. 1996 U.S.Dist.LEXIS 3430 (MD Fla., Feb. 23, 1996). 80. One who regularly acquires and attempts to enforce consumer obligations that are delinquent at the time of acquisition qualifies as an FDCPA ”debt collector” with respect to such obligations. Kimber v. Federal Fin. Corp., 668 F.Supp. 1480, 1485 (M.D.Ala. 1987); Cirkot v. Diversified Systems, 839 F.Supp. 941 (D.Conn. 1993); Coppola v. Connecticut Student Loan Foundation, 1989 U.S.Dist. LEXIS 3415 (D.Conn. 1989); Commercial Service of Perry v. Fitzgerald, 856 P.2d 58 (Colo.App. 1993).

81. The FDCPA defines as a ”deceptive” practice — (2) The false representation of — (A) the character, amount, or legal status of any debt; or 15 U.S.C. Section 1692e. The FDCPA also prohibits as an ”unfair” practice the collection or attempted collection of ”any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.” 15 U.S.C. Section 1692f(1).

82. Bloom v. Martin, 865 F.Supp. 1377 (ND Cal. 1994), aff’d, 77 F.31 318 (9th Cir., 1996). See also, Siegel v. American S. & L. Ass’n, 210 Cal.App.3d 953, 258 Cal.Rptr. 746 (1989); and Goodman v. Advance Mtge. Corp., 34 Ill.App.3d 307, 339 N.E.2d 257 (1st Dist. 1981) (state statute construed to permit charge for recording release, at least where mortgage is silent).

83. John Lee, John Mancuso and James Walter, Survey: Housing Finance: Major Developments in 1990,” 46 Business Lawyer 1149 (May 1991).84. Nelson and Whitman, Real Estate Finance Law, Section 11.4 at 816.

85. Thrifts Paying Big Bucks for ARM Errors, American Banker — Bond Buyer, May 23, 1994, p. 8; J. Shiver, Adjustable-Rate Mortgage Mistakes Add Up, Los Angeles Times, Sept. 22, 1991, p. D3.

86. A Call To Arms on ARMs, Business Week, Sept. 6, 1993, p. 72. 87. Hubbard v. Fidelity Fed. Bank, 824 F.Supp. 909 (CD Cal. 1993). 88. The UCCC has been enacted in Colorado, Idaho, Iowa, Kansas, Maine, Oklahoma, Utah and Wyoming. It imposes the same disclosure obligations as TILA, but does not cap class wide statutory damages at the lesser of 1 percent of the net worth of the creditor or $ 500,000.

89. Michaels Building Co. v. Ameritrust Co., N.A., 848 F.2d 674 (6th Cir. 1988); Haroco, Inc. v. American Nat’l Bank & Trust Co., 747 F.2d 384 (7th Cir. 1984); Morosani v. First Nat’l Bank of Atlanta, 703 F.2d 1220 (11th Cir. 1983). 90. Systematic overcharging of consumers in and of itself constitutes an unfair practice violative of state UDAP statutes. Leff v. Olympic Federal, n. 7 supra (overescrowing); People ex rel. Hartigan v. Stianos, 131 Ill.App.3d 575, 475 N.E.2d 1024 (1985) (retailer’s practice of charging consumers sales tax in an amount greater than that authorized by law was UDAP violation); Orkin Exterminating Co., 108 F.T.C. 263 (1986), aff’d, 849 F.2d 1354 (11th Cir. 1988) (Orkin entered into form contracts with thousands of consumers to conduct annual pest inspections for a fixed fee and, without authority in the contracts, raised the fees an average of $ 40).

91. The usury claim is that charging interest at a rate in excess of that agreed upon by the parties is usury. See Howes v. Donart, 104 Idaho 563, 661 P.2d 729 (1983); Garrison v. First Fed. S. & L. Ass’n of South Carolina, 241 Va. 335, 402 S.E.2d 25 (1991). Each of these decisions arose in a state which had ”deregulated” interest rates with respect to some or all loans. There was no statutory limit on the rate of interest the parties could agree upon. However, in each case the court held that a lender that charged more interest than the parties had agreed to violated the usury laws.

92. Barbara Ballman, Citibank mortgage customers due refunds on rate ”maladjustments,” Capital District Business Review, Apr. 5, 1993, p. 2 ($ 3.27 million); Israel v. Citibank, N.A. and Citicorp Mortgage, Inc., No. 629470 (St. Louis County (Mo.) Circuit Court); Englard v. Citibank, N.A., Index No. 459/90 (N.Y.C.S.C. 1991).

93. Whitford v. First Nationwide Bank, 147 F.R.D. 135 (W.D.Ky. 1992). 94. ”A call to arms on ARMs,” Business Week, Sept. 6, 1993, p. 72. 95. Crowley v. Banking Center, 1994 Conn. Super. LEXIS 3026 (Nov. 29, 1994). 96. LeBourgeois v. Firstrust Savings Bank, 27 Phila. 42, 1994 Phila. Cty. Rptr. 15 (CP 1994).

97. Jacob C. Gaffey, Managing the risk of ARM errors, Mortgage Banking, Apr. 1995, p. 73.

98. Preston v. First Bank of Marietta, 16 Ohio App. 3d 4, 473 N.E.2d 1210, 1215 (1983).

99. Baxter v. First Bank of Marietta, 1992 Ohio App. LEXIS 5956 (Nov. 6, 1992).

100. Froland v. Northeast Savings, reported in Lender Liability News, Feb.20, 1996, and American Banker, Jan. 4, 1996, p. 11.

 

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Bear Stearns and EMC Mortgage Settle Charges

Posted on September 12, 2008. Filed under: Housing, Mortgage Audit, Mortgage Fraud, Truth in Lending Act | Tags: , , , , , |

WASHINGTON, D.C. – The Bear Stearns Companies, LLC and its subsidiary, EMC Mortgage Corporation, have agreed to pay $28 million to settle Federal Trade Commission charges that they engaged in unlawful practices in servicing consumers’ home mortgage loans.

The companies allegedly misrepresented the amounts borrowers owed, charged unauthorized fees, such as late fees, property inspection fees, and loan modification fees, and engaged in unlawful and abusive collection practices. Under the proposed settlement they will stop the alleged illegal practices and institute a data integrity program to ensure the accuracy and completeness of consumers’ loan information.

“Like other companies that send a bill, mortgage servicers must make sure that the amount they say is due really is the amount due,” said Lydia B. Parnes, Director of the FTC’s Bureau of Consumer Protection. “Consumers have the right to expect accuracy from the company that collects their mortgage payments.”

As stated in the FTC’s complaint, Bear Stearns and EMC have played a prominent role in the secondary market for residential mortgage loans. During the explosive growth of the mortgage industry in recent years, they acquired and securitized loans at a rapid pace, but they allegedly paid inadequate attention to the integrity of consumers’ loan information and to sound servicing practices. As a result, in servicing consumers’ loans, they neglected to obtain timely and accurate information on consumers’ loans, made inaccurate claims to consumers, and engaged in unlawful collection and servicing practices. These practices occurred prior to JP Morgan Chase & Co.’s acquisition of Bear Stearns, which became effective on May 30, 2008.

According to the complaint, EMC is the mortgage servicer for many of the loans Bear Stearns and EMC acquired. Many of these loans are subprime or “Alt-A” (less than prime) loans, including nontraditional mortgages such as pay option adjustable rate mortgages (“pick-a-payment” loans), interest-only mortgages, negative amortization loans, and loans made with little or no income or asset documentation. EMC’s loan servicing portfolio has grown significantly in recent years; as of September 2007, it serviced more than 475,000 mortgage loans with a total unpaid balance of about $80 billion.

THE FTC COMPLAINT

The complaint charges Bear Stearns and EMC with violating the FTC Act, the Fair Debt Collection Practices Act (FDCPA), the Fair Credit Reporting Act (FCRA), and the Truth in Lending Act’s (TILA) Regulation Z.

FTC Act Violations: The defendants are charged with unfair and deceptive loan servicing practices in violation of the FTC Act. They allegedly misrepresented the amounts consumers owed; assessed and collected unauthorized fees, such as late fees, property inspection fees, and loan modification fees; and misrepresented that they possessed and relied upon a reasonable basis for their representations about consumers’ loans.

Fair Debt Collection Practices Act Violations: The defendants allegedly violated several provisions of the FDCPA in collecting loans that were in default when they obtained them. They also allegedly made harassing collection calls; falsely represented the character, amount, or legal status of consumers’ debts; and failed to communicate that debts were disputed. In addition, they allegedly used false representations or deceptive means to collect, and failed to send consumers a validation notice containing the amount of the debt and the consumer’s right to dispute the debt and obtain verification of the debt.

Fair Credit Reporting Act Violations: The FTC alleges that the defendants furnished information about consumers’ payment status to credit reporting agencies (CRAs). When consumers informed the defendants that they disputed the completeness or accuracy of the reported information, the defendants failed to report the dispute to the CRAs as required by the FCRA.

Truth in Lending Act’s Regulation Z Violations: The complaint also states that the defendants charged borrowers a loan modification fee, typically $500, and automatically added the fee to the modified loan’s principal balance. In doing so, the defendants failed to provide the borrowers with required TILA disclosures.

THE SETTLEMENT

The proposed settlement requires Bear Stearns and EMC to pay $28 million to redress consumers who have been injured by the illegal practices alleged in the complaint. In addition, the settlement bars the defendants from future law violations and imposes new restrictions and requirements on their business practices. Specifically, the settlement:

bars the defendants from misrepresenting amounts due and any other loan terms;
requires them to possess and rely upon competent and reliable evidence to support claims made to consumers about their loans;
bars them from charging unauthorized fees, and places specific limits on property inspection fees even if they are authorized by the contract;
prohibits them from initiating a foreclosure action, or charging any foreclosure fees, unless they have reviewed all available records to verify that the consumer is in material default, confirmed that the defendants have not subjected the consumer to any illegal practices, and investigated and resolved any consumer disputes; and
prohibits the defendants from violating the FDCPA, FCRA, and TILA.
The proposed settlement further requires Bear Stearns and EMC to establish and maintain a comprehensive data integrity program to ensure the accuracy and completeness of data and other information that they obtain about consumers’ loan accounts, before servicing those accounts. The defendants must obtain an assessment from a qualified, independent, third-party professional within six months and then every two years, for the next eight years, to assure that their data integrity program meets the standards of the order.

The proposed settlement also contains record-keeping and reporting provisions to allow the FTC to monitor compliance with the order.

The Commission vote to authorize staff to file the complaint and proposed stipulated final order was 4-0. The documents were filed in the U.S. District Court for the Eastern District of Texas.

Including this case, the Commission has brought 23 actions in the past decade alleging deceptive or unfair practices by mortgage brokers, lenders, and servicers. Several of these landmark cases have resulted in large monetary judgments that have returned more than $320 million to consumers.

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FORENSIC LOAN DOCUMENT AUDIT

Posted on September 10, 2008. Filed under: Foreclosure Defense, Mortgage Audit, Truth in Lending Act | Tags: , , , , , |

 

 

Complete client interview and all applicable parties

Complete loan document and disclosure audit

Truth in Lending Act (TILA) and Real Estate Settlement & Procedures Act (RESPA)

Reverse engineering of your loan terms and Annual Percentage Rate (APR) for possible TILA violations

Complete report with all violations and findings

CONSTRUCTIVE FRAUD

Material facts include the terms of the loan, whether there is a prepayment penalty, or any other information which a reasonable borrower would want to know before accepting the loan. Did the broker or loan officer or anyone working for the broker or loan officer fail to disclose any material facts to the borrower?

FRAUD AND NEGLIGENT MISREPRESENTATION

Were any representations, statements, or comments, written or oral made by the loan officer, broker, notary or anyone else, which contradicted the terms of the documents?

NEGLIGENT MISREPRESENTATION

When a mortgage professional makes errors which a reasonably diligent mortgage professional would not have made, he or she may have made a negligent misrepresentation.

BREACH OF CONTRACT

The note and its attachments are a contract. The broker must follow all the terms of the contract such as the way the interest is calculated, and the penalties it assesses. Were there any terms in the contract which the lender failed to follow?

LOAN AUDIT REPORT

Results report of all factual findings of the forensic audit

Any and all applicable federal law violations

The real terms of your loan

Outline of hidden fees and/or commission earned by your broker or lender

A complete assessment so you can pursue possible legal claims against your broker and/or lender

FORENSIC LOAN DOCUMENT REVIEW FEE SCHEDULE

$495 for one loan

$250 for a second loan

Volume discounts available for law firms and brokers

Tel: 1-800-564-2764

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How to prevent foreclosure using the Truth In Lending Act (“TILA”).

Posted on August 17, 2008. Filed under: Truth in Lending Act | Tags: , , , , , , , , , , , , , , , , , |

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