Among recent decisions in mortgage compliance actions, a California state appellate court decided in favor of the borrowers in a case involving missing disclosures, yield spread premiums and an inflated appraisal on a subprime mortgage. A federal court on the East Coast recently ruled that another couple failed to exhaust their administrative remedies under what some have termed an obscure federal law now finding use in mortgage compliance lawsuits.
In Fuller v. First Franklin Financial Corp., a California appellate court on May 1 reversed a lower court decision in favor of a lender on a statute of limitations basis.
The court said a mortgage broker had a fiduciary duty to a couple who were first-time homebuyers that included disclosing yield spread premium and that the couple could obtain a loan on better terms than was offered. The court also said in the opinion that the appraiser significantly inflated the value of the house.
The court said about the broker that he “did not inform them of this in order to receive a hidden kickback from First Franklin as part of the closing costs of the loan.” Or, as the court put it at one point in the opinion, “In connection with plaintiffs’ purchase of their home in June 2006, SFM, acting at the direction of First Franklin, procured an artificially inflated appraisal that used stale sales of properties that were not truly comparable.
Neither SFM nor First Franklin disclosed this fact to plaintiffs. Although plaintiffs thus lacked any true equity in their home even at the time of purchase, SFM represented that plaintiffs would be able to refinance their mortgage terms if they had difficulties making payments in the future, which would not in fact be true unless the actual value of the residence increased enough to exceed the outstanding principal on the mortgage. SMF also falsely represented to plaintiffs that the loans it offered to them were the only ones for which they could qualify, and falsely concealed other more favorable loans for which plaintiffs in fact qualified.”
“Although ordinarily a party to a contract cannot justifiably claim unawareness of the express provisions of the contract, this is not the basis of plaintiffs’ causes of action. It is the failure of SMF, a mortgage broker which owed them a fiduciary duty, to explain the possibility that the terms of the loans might increase the risk of foreclosure. The same is true of the appraisal,” the court said.
“Finally, SMF and First Franklin simply overlook the failure to disclose a hidden kickback in the closing costs that increased plaintiffs’ payment, let alone explain why it was unreasonable as a matter of law for plaintiffs to fail to uncover this extraction from them,” the court said.
“But the allegations establish with adequate specificity nondisclosures and misrepresentations from a broker (acting as First Franklin’s agent in this respect), and the absence of any circumstances to trigger plaintiffs’ reasonable inquiry into available facts revealing the true nature of the loans. We therefore conclude defendants have failed to establish the expiration of the limitations period on the face of the pleading, and we cannot sustain the demurrer on this basis as a result,” the court said.
The plaintiffs were successful in arguing that they had sufficiently alleged delayed discovery of facts that the defendants had purposely withheld from them in order to induce them to enter into the now defaulted loans.
An order granting defendant OneWest Bank’s motion for the return of $10,000 deposited into the registry of the court was entered on March 20 in Tellado v. IndyMac Mortgage Services. The case involves a Spanish-speaking couple that claimed their mortgage loan was void under Pennsylvania’s Unfair Trade Practices and Consumer Protection Law because all of the mortgage documents they received, including the notice of the right to cancel, were in English, while the arrangements had been made in Spanish. The court ruled that they hadn’t exhausted their administrative remedies under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.
An attorney for Wells Fargo Bank, N.A., in a lawsuit filed by the U.S. Department of Justice filed a letter with the court on May 10 in response to U.S. District Judge Rakoff’s May 8 order in United States ex rel. O’Donnell v. Countywide Fin. Corp. In the two-page letter, the attorneys said that until the judge issues his memorandum explaining the order, there is no way of knowing whether his ruling supports the FIRREA legal theory advanced by the United States against Wells Fargo.
According to a report in Reuters, the Justice Department promptly capitalized on a court victory to bolster a case before another federal judge, citing a ruling that endorsed the agency’s use of a little known financial fraud law to prosecute bank actions during the financial crisis.
In Strickler v. First Ohio Banc & Lending, Inc., an appellate court recently affirmed a decision by the Lorain County Court of Common Pleas Ohio state court decision granting the plaintiffs’ motion for class certification.
A pretrial conference is scheduled for June 25 in U.S. v. Golden First Mortgage Corp et al. Golden First Mortgage was accused of fraud in the lawsuit brought by the U.S. Department of Justice. The company is accused of falsely certifying that about $707 million worth of loans since 2002 conformed to Federal Housing Administration lending standards.
An order issued on April 23 in Wallace v. Midwest Financial & Mortgage Services Inc. affirmed summary judgment in favor of MortgageIT on the state law claims made in the lawsuit. The court also ordered that the district court’s granting of summary judgment for the defendants based on lack of proximate cause should be reversed and remanded the case for further legal proceedings.
Wallace is a subprime mortgage case brought by the borrower, Harold Wallace, against the lender, MortgageIT Inc.; the mortgage broker, Midwest Financial & Mortgage Services Inc.; the broker’s two principals, David Schlueter and Bryan Bates; and several other now-dismissed parties. Wallace alleges that the defendants fraudulently inflated an appraisal of his home as part of a scheme to push him into a high-cost, adjustable-rate mortgage.
In May, the judge in U.S. v. Countrywide Financial Corp. narrowed the lawsuit brought by the United States against Bank of America Corp. over mortgages the bank and its Countrywide unit sold to Fannie Mae and Freddie Mac, according to Bloomberg news. The U.S. claimed Bank of America and Countrywide, which it acquired in 2008, sold thousands of defective loans, from 2007 to 2009, to Fannie Mae and Freddie Mac. U.S. District Judge Jed Rakoff in Manhattan dismissed claims against Bank of America filed under the federal False Claims Act. He allowed the case to go forward under FIRREA.
