|North Carolina’s top court has decided against hearing a lawsuit brought by a couple who claim they were victims of predatory lending. In a narrowly decided opinion, the court ruled it does not have jurisdiction over the out-of-state trust holding the couple’s second mortgage.“We were shocked by that decision,” said Carlene McNulty, a lawyer with the N.C. Justice Center said in a telephone interview with MortgageDaily.com. The Raleigh-based nonprofit filed a legal brief in the case.
“More and more loans are being held by an out-of-state trust; and, if you can’t bring claims against the owner of a mortgage for the prior predatory lending practices that occurred with that loan, then it renders the protections under North Carolina law essentially meaningless,” McNulty continued.
The court’s decision stemmed from the couple’s belief that they were the victims of predatory lending.
Gary and Judy Skinner got a second mortgage of $45,000 from Preferred Credit Corp. in 1997. The interest rate on the 15-year loan was 14.75 percent. The Skinners were charged $5,225.70 in closing costs — including an origination fee of $3,600.
Shortly after closing, Preferred sold the loans to Credit Suisse First Boston Mortgage Securities Corp. with the plan to set up a trust for the deposit of the loans. Under a pooling and servicing agreement, the 1997-1 trust was formed. North Carolina notes made up 3 percent — 114 — of the 3,537 loans held by the trust.
According to court documents, the 1997-1 trust was formed to hold mortgage loans, receive income from the servicer and issue certificates. The 1997 trust has no office other than the corporate offices of its trustees in California and New York. It has no employees. Neither employees nor agents of the trust traveled to North Carolina nor did it engage in or transact any business in the state. It did not solicit or enter into mortgage loan agreements in North Carolina.
Chase Manhattan Mortgage Corp. eventually became the servicer of the loans. Chase services the loans from its California offices. After collecting payments, Chase deducts its servicing fee and then sends the balance collected on the loans held by the 1997-1 trust to its New York trustee.
The Skinners filed a class action lawsuit claiming they were charged excessive loan origination fees and a usurious interest rate. The trial court dismissed the Skinners’ claims, citing a lack of personal jurisdiction and expiration of the statute of limitations.
In a divided opinion, the appellate court affirmed. When the case came before the North Carolina Supreme Court, it decided it didn’t have the legal right to hear the case.
North Carolina law grants personal jurisdiction to nonresident defendants if they engage in substantial activity within the state. The court said the plain language of North Carolina law requires that some sort of activity be conducted in the state — a requirement lacking in this instance. The court pointed out that the trust was created out of state and after loan closing as a “passive depository” for holding notes.
The only local activities that linked the plaintiffs to the trust were the loans and the loan payments, the court said.
The court also noted that because the mortgage was a deed of trust, the 1997-1 Trust did not even hold title to property in the state.
“Our cases analyzing minimum contacts rarely have dealt with so ‘passive’ a defendant,” the court declared in the 34-page opinion.
But the majority’s decision has its detractors within the court.
Three justices disagreed.
Justice Patricia Timmons-Goodson wrote in the dissent that the legal precedent “effectively undermines the right of unwitting victims of predatory lending practices in the second mortgage industry to sue the holders of their second mortgage loans in the state.” She noted the state has a “strong interest” in hearing such disputes.
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