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Wholesalers Hit With Giant Judgment

Wholesalers Hit With Giant Judgment$92 million punitive judgment against ResCap

January 9, 2008

By LISA D. BURDEN
WASHINGTON correspondent for MortgageDaily.com

photo of Lisa Burden
A Missouri jury has socked a unit of Residential Capital LLC with $92.0 million in punitive damages over illegal second mortgage fees allegedly collected by the defunct California mortgage broker that sold ResCap the loans. Two other wholesale lenders that also acquired loans from the broker were also hit with punitive and actual damages.Named as defendants in the case were Wachovia Equity Servicing, Residential Funding Co. LLC and Household Finance Corp. III, a unit of HSBC Finance Corp.

While the three companies were collectively hit with $99.0 million in punitive damages, ResCap was ordered to pay the lion’s share of the verdict. The Minneapolis-based company said it will take the matter to a higher court and that it acted in accord with industry standards when it purchased the loans from another broker.

“We are disappointed by the jury’s decision,” GMAC ResCap spokesman Brett J. Weinberg said in a statement e-mailed to MortgageDaily.com. “We plan to appeal because we believe the punitive damage award is unwarranted and out of line considering that our company acted consistent with industry practices in acquiring the loan assignments from the original lender.”

Residential Funding was ordered to pay $4.3 million in actual damages in addition to the $92.0 million in punitive damages. Altogether the jury assessed $5.1 million in actual damages against the three defendants.

“The loans in question were originated by Mortgage Capital Resources and deceptively sold to our company,” Weinberg explained. “Residential Funding Co. promptly severed its relationship with Mortgage Capital Resources in May 2000 after we discovered Mortgage Capital Resources’ deceptive practices.”

Mortgage Capital Resources Corp. is a California mortgage broker that, according to the suit papers, has filed for bankruptcy and whose former chief executive officer reportedly has been sentenced to jail time for mortgage fraud.

Kenneth Christopher Ketner, the former owner and CEO of Newport Beach-based Mortgage Capital, was accused in an indictment of deceiving lenders into wiring loan proceeds to a fraudulent closing agent who was an accomplice to the crimes. The funds were then used for personal expenditures.

Missouri’s Second Mortgage Loans Act prohibits lenders from charging fees such as origination fees, loan discount fees, underwriting, processing and document preparation fees on “high-cost” second mortgages. The statute allows for the award of punitive damages if violated.

In a class action complaint filed in the Circuit Court of Jackson County, attorneys for the borrowers argued that the lenders were liable because they “stepped into the shoes” of Mortgage Capital. The defendants responded that they relied upon the originating lender’s warranties and representations regarding compliance with applicable state and federal laws.

The jury evidently didn’t agree with the lenders as it took only one day of deliberations after a three-week trial to find the defendants guilty and to make the damages awards. A source familiar with the case said the amount awarded stemmed from a calculation of the estimated net worth of each of the three lenders.

Mitchell v. Residential Funding, et al., involves 304 class members and was filed in 2003.

An HSBC spokeswoman said the company does not comment on litigation.

Wachovia could not provide a comment by press time.

Last week’s jury decision is the second time in a month that a lender has been found guilty of violating often stringent state laws on second mortgage lending. Maryland’s highest state court ruled against a Baltimore bank in December that agreed to waive closing costs if consumers did not refinance for three years second home loans made by the bank.

The Maryland Court of Appeals decided that such recapture of closing costs constitutes an illegal prepayment penalty under the state’s Secondary Mortgage Loan Law.


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