Monday, July 11, 2011

FYI: 1st Cir Reverses MSJ Ruling in Favor of Lender Under MGL 93A, Even Where Borrower Lied on Mortgage Loan Application

The U.S. Court of Appeals for the First Circuit recently reversed an order
granting summary judgment in favor of a mortgage lender in a "predatory
lending" lawsuit, because the borrower managed to raise factual issues
regarding whether the lender allegedly knew that information on two loan
applications was false and allegedly intended for the borrower to default.

A copy of the opinion is available at:

Plaintiff-borrower ("borrower") entered into two home loans with defendant
Countrywide Home Loans, Inc. ("Countrywide"). The borrower's applications
for these loans each overstated his income. The applications also recited
that the signer had read the documents, and that the information set forth
was correct.

After the borrower defaulted, Countrywide initiated foreclosure
proceedings. The borrower sued Countrywide, alleging a violation of Mass.
Gen. Laws ch. 93A ("Ch. 93A") in addition to numerous other causes of

All of the borrower's causes of action were based on the allegation that
Countrywide fraudulently inflated his income on the loan applications, and
therefore knew that the borrower could not afford the loans and would
eventually default. The district court granted Countrywide's motion for
summary judgment, on the grounds that borrower did not produce any
evidence that Countrywide knew or intended that borrower would default.
The borrower appealed.

As you may recall, Ch. 93A has been interpreted by the Massachusetts
Supreme Judicial Court to hold that a lender who makes a loan knowing that
the borrower is not likely to be able to pay it back may be engaging in an
"unfair or deceptive" practice, which gives borrowers a cause of action.
Commonwealth v. Fremont Inv. & Loan, 897 N.E. 2d 548 (Mass. 2008).

Countrywide argued that it had no reason to know that the borrower would
default, because the terms of the refinanced loan required similar
payments as the borrower's previous loan. In addition, the borrower
testified that his default was due to a job change and the rising
incidental expenses, which Countrywide argued it could not have foreseen.

The appellate court found neither argument convincing. It noted that the
borrower argued that his circumstances were different when he applied for
the refinance loan, in that his previous mortgage listed two borrowers
(borrower and borrower's ex-wife) whereas for the refinance he was the
sole borrower.

Further, the First Circuit reasoned that although the changes in
borrower's financial condition might not have been foreseeable by
Countrywide, this did not preclude the possibility that Countrywide
nevertheless should have known that the borrower was likely to default.
If Countrywide knew the borrower's actual income, for example, then it
also knew that the mortgage would require him to pay "about half of his
income to Countrywide alone."

Although the borrower did sign both applications, thereby verifying their
content, the Court noted that Massachusetts does not always find
signatories responsible for the contents of documents they sign, "at least
where deliberate fraud by the other side confronts mere negligence by the

Therefore, the First Circuit held that whether the borrower or Countrywide
was responsible for the inaccurate figures on the borrower's loan
applications was a question of fact suitable for trial.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874

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