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Lenders Losing Lawsuits

Lenders Losing LawsuitsMortgage litigation update

January 7, 2008

By LISA D. BURDEN
WASHINGTON correspondent for MortgageDaily.com

photo of Lisa Burden
Borrowers appear to be winning a number of lawsuits filed against mortgage companies, an analysis of previously covered litigation by MortgageDaily.com indicated. Two of the cases are seeking to stave off foreclosures while another is targeting fees charged by state regulated lenders in Maryland. One lawsuit accuses several lenders of steering black borrowers into higher cost loans.Maryland’s top state court has ruled against a Baltimore bank that agreed to waive closing costs on home equity lines-of-credit if the loans were held by the bank for three years.

The Maryland Court of Appeals decided in December that the waiver of fees was an illegal prepayment penalty because it was contingent on the loan being paid off early.

While Maryland law allows prepayment penalties on first mortgage loans, the state’s Secondary Mortgage Loan Law places stringent limitations on home equity loans and HELOCs.

The Maryland Bankers’ Association said the court ruling will make it more expensive for consumers to obtain second mortgages.

“Recapturing closing costs that have been waived for the borrower at the time of closing is a common practice in the banking industry — one that directly benefits the consumer,” a spokeswoman for the state association said in a statement e-mailed to MortgageDaily.com. “Our members do not feel that the recent decision by the Maryland Court of Appeals in the case of Bednar v. Provident Bank is in the consumer’s best interest and that it could result in increased out-of-pocket expenses for future borrowers.”

She noted the ruling unfairly creates an advantage for federally chartered banks over state chartered.

“We are actively working with our members, the Maryland Commissioner of Financial Regulation and the association’s legal counsel to determine the course of action that will best serve the interests of Maryland consumers and the entire banking industry,” she continued.

“Provident is disappointed in the Court of Appeals ruling. Every federal as well as state regulatory agency that has looked at this type of practice not just in Maryland but nationwide has concluded that the product is a benefit to the consumer and compliant with the law,” Provident spokeswoman Vicki Cox told MortgageDaily.com. “Our Court of Appeals has decided to take a different path. It was always our belief that this product benefited the borrower because the bank paid the closing costs to outside vendors for appraisals and other services.”

The bank was sued by a borrower who claimed that he and many others were victims of the bank’s alleged predatory lending practices.

The borrower, Andrew Bednar, claimed the bank’s inducement for him to hold on to his home equity loan — that the $680 of closing costs on the $17,000 loan would be waived if he kept the loan for three years — was moot because Maryland’s lending laws forbid prepayment penalties on second mortgages.

When Bednar refinanced the loan after two years and the bank requested $680 for the closing costs, he sued. The Baltimore City circuit court ruled in the bank’s favor, deciding that the recaptured closing costs were not a prohibited prepayment penalty. But the state’s highest court saw it differently and ruled against the bank.

The NAACP has amended the class action lawsuit that it filed this summer in California’s federal court against a dozen subprime lenders accusing them of steering black borrowers into predatory loans.

In December, the advocacy organization added CitiMortgage, SunTrust Mortgage, GMAC ResCap, JP Morgan, National City and First Horizon to NAACP v. Ameriquest Mortgage Company, et al. Ameriquest, Citigroup, HSBC and Washington Mutual were among the lenders first named in the lawsuit.

The lenders made high-cost subprime loans in violation of federal law to African-American borrowers in numbers that far exceed those given to Caucasian borrowers, the civil rights group charged in court papers.

“Our company also has played a leadership role within the mortgage industry in assisting its own customers, as well as those whose mortgages are serviced by other mortgage companies, in avoiding foreclosure,” GMAC ResCap said in a statement e-mailed to MortgageDaily.com, adding that it “is committed to fair lending, and we believe we act responsibly in our lending practices and we comply with the law.”

An Ohio court has once again delayed a foreclosure by ruling that a bank did not prove that it owned the mortgage. In the latest legal decision, a Hamilton County Common Pleas court held that Wells Fargo Bank couldn’t foreclose on a home because it did not prove that it had owned the mortgage.

It’s an issue gaining traction as a means to stop foreclosures as other courts in Ohio are also tossing out foreclosure cases, contending that lenders and investors need to document a chain of ownership of loans being foreclosed.

The question of ownership was also argued in federal trial court in Norfolk, Virginia in December.

In the Norfolk case, attorney Tanya Bullock told the court that homeowners who fall prey to rent/buyback schemes did not transfer title of their homes. In Angela Clemmons v. Home Savers LLC, Bullock argued that, in spite of Home Savers claim that Clemmons lacked legal and equitable title to the house, Clemmons is the owner of the property and Home Savers only has a deed of trust.

Pennsylvania borrowers with $100 million in mortgages who say they were victimized by a now defunct Pennsylvania company that engaged in creative refinancing have been granted a reprieve from their lenders.

Personal Financial Management and Image Masters Inc., also known as OPFM Inc., had promoted a scheme where 800 borrowers were promised that by getting home equity loans and giving the proceeds to OPFM to invest, their loan balances would pay down faster. The company also took over making the payments on the new mortgage.

But when the company declared bankruptcy in September, borrowers learned that their mortgage balances were far higher than they had been led to believe.

In a letter to its clients announcing the bankruptcy filing, OPFM informed them that they would probably have to make significantly higher mortgage payments than what they had been making in the past.

A civil lawsuit initiated by the borrowers, Jones v. ABN AMRO Mortgage Group, Inc., et al., has been transferred from state court to the U.S. District Court for the Eastern District of Pennsylvania.

All of the servicers currently holding the loans, which include units of Citigroup, Countrywide Home Loans Inc.and GMAC Mortgage Corp., have agreed to hold off on foreclosure and collection activities against the borrowers through the end of January and many lenders have indicated they are willing to extend the foreclosure moratorium until May. Other companies named as defendants include IndyMac Financial Services Corp., National City Mortgage Inc., Provident Funding Group Inc., SunTrust Mortgage Inc., Wachovia Mortgage Corp., Washington Mutual and Wells Fargo Home Mortgage Inc.

OPFM owner Wesley A. Snyder pleaded guilty to one charge of mail fraud in November, according to a press release issued by the U.S. Department of Justice. The agreement requires Snyder to cooperate with the government and to make court-ordered restitution to his victims. The charge carries a potential penalty of 30 years imprisonment and $1,000,000 fine. Snyder is scheduled to be sentenced in March.

Plaintiff’s attorney, Frank Farina, said in a telephone interview that hundreds of OPFM’s former clients showed up at OPFM’s meeting of creditors where they barraged the bankruptcy trustee with questions. Farina said Snyder did not attend that meeting.

Fieldstone Mortgage won a legal victory late last year when the U.S. District Court for the District of Maryland ruled that its insurer, Zurich American Insurance Company, American Zurich Insurance Company and American Guarantee & Liability Insurance Co. had to defend it against alleged violations of the Fair Credit Reporting Act.

In Zurich v. American Insurance Company, et al, the dispute arose from a lawsuit filed in federal court in Illinois’ federal court by a man who claimed that Fieldstone violated the FCRA by using his and others’ credit information to contact him with pre-screened offers. In Rhodes v. Fieldstone Mortgage Co., Jeff A. Rhodes alleged that Fieldstone improperly accessed and used his and others’ credit information, violating the FCRA’s requirement that access be either consented to or for a permissible purpose.

Zurich argued that it didn’t have to provide a legal defense because language in the insurance policy over coverage for “advertising injury” did not include alleged FCRA violations.

Columbia, Md.-based Fieldstone is presently operating under bankruptcy protection.


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