Saturday, August 13, 2011

FYI: Cal App Ct Reverses Dismissal of State-Law Fraud and UDAP Action In Option ARM Case

The California Court of Appeal, Fourth District, recently held that a
borrower sufficiently alleged fraud and other state law violations
stemming from option adjustable rate mortgage loans, and the lender's
alleged failure to disclose clearly and unambiguously that negative
amortization was a certainty if the borrowers made payments according to
the payment schedule provided to them by the lender.

A copy of the opinion is available at:
http://www.courtinfo.ca.gov/opinions/documents/G043716.PDF

Plaintiffs-Appellants ("Borrowers") executed nearly identical loan
documents to obtain "option adjustable rate mortgage loans" ("Option
ARMs") from Defendant-Respondent Home Loan Center, Inc. ("Lender"). The
material feature of the Option ARMs was that the Borrowers were permitted
to make low monthly payments for a certain period of time according to an
introductory "teaser" rate of interest. These low payments, however, were
insufficient to pay off the actual interest accruing on the principal.
The unpaid interest was added to the principal and resulted in "negative
amortization," meaning that as the principal amount increased, the
borrowers owed more to the Lender than they did on the date the loans were
made.

The Borrowers sued the Lender under state law for alleged fraudulent
omissions and alleged violations of California's Business and Professions
Code Section 17200 et seq. ("Section 17200"). In their complaint, the
Borrowers alleged that the Lender's loan documents supposedly failed to
adequately and accurately disclose that negative amortization would
definitely occur if the Borrowers paid only the amount set forth in the
payment schedule provided to them. The Borrowers further alleged that
they supposedly suffered damages for the loss of equity in their homes,
and that had the Lender disclosed the higher payment amounts required to
avoid negative amortization, they supposedly would not have entered into
the loan agreements.

The lower court sustained the Lender's demurrer without leave to amend and
dismissed the case. In the trial court's view, the loan documentation had
adequately described the nature of the Option ARMs and contained detailed,
repeated warnings about the risk of negative amortization. The Court of
Appeal reversed.

The appellate court first examined the loan documents attached to the
complaint: the promissory note; the three-page disclosure document
describing the Option ARM program for the loans; and the federal Truth in
Lending Disclosure Statement (TILDS) containing the payment schedule.

The Court specifically quoted certain provisions and disclosures from
those documents explaining the terms of the loans or indicating that the
loans were subject to negative amortization, including: (1) statements in
the promissory note setting forth the annual interest rate and indicating
that the borrowers would pay both principal and interest by making monthly
payments; (2) a conspicuous disclosure in the note stating that the
interest rate and monthly payment would change and that the "principal
amount to repay could be greater than the amount originally borrowed"; and
(3) disclosures explaining that the Option ARM "allows for negative
amortization," that interest rates have the "potential to increase . . ."
and that "the monthly payments may be insufficient to pay the interest
which is accruing . . . ."

The Borrowers had three payment options. They could choose to pay only
the "Minimum Monthly Payment" or they could make an amortizing payment
that covered all the interest owed for the month plus principal, or a
monthly interest-only payment to cover the full interest cost for the
month. The Court noted that the TILDS supposedly did not explain how the
initial payments in the payment schedule or the subsequent increases in
monthly payments were calculated, but that the amounts could be "reverse
engineered" by reference in part to the principal and interest rate
provisions in the note itself. The Court stated that "it is implicit in
the plaintiffs' payment schedule that negative amortization will occur if
plaintiffs were to remit only the monthly payment amounts set forth in the
payment schedule."

The Court then discussed the federal Truth in Lending Act ("TILA") and its
regulations, because it "provided the context for the disclosures made by
[the Lender]" and because the Lender claimed that its compliance with TILA
provided a complete defense to the Borrowers' state law claims. See 15
U.S.C. §1601 et seq.; 12 C.F.R. §226.1 et seq. (2010). The Court noted
among other things that TILA regulations require disclosures to be in a
"reasonably understandable form" that do not "obscure the relationship of
the terms to each other."

The Court found persuasive the reasoning in a number of federal court
decisions that addressed TILA and Option ARM forms and disclosures similar
to those in this case. Quoting Velasquez v. GMAC Mortgage Corporation,
605 F. Supp. 2d 1049, 1065, 1067 (C.D. Cal. 2008), the Court noted that
while the disclosures may be "literally accurate . . . [the Borrowers] may
be able to show that, when taken in conjunction with the disclosure in the
Note and the TILDS, [the program disclosure] is not clear and conspicuous
as required by TILA." In light of these decisions, the appellate court
concluded that it would be inappropriate to dismiss an action brought
under TILA at this stage of the proceedings, and rejected the Lender's
argument that "strict compliance with TILA provides a safe-harbor from
[the Borrowers'] claims," because the Lender may not have complied with
TILA.

The Court noted that a number of federal district courts that had
permitted similar TILA claims involving Option ARMs to proceed beyond the
motion to dismiss stage had also denied motions to dismiss state law fraud
and unfair business practices claims based on the same facts. The Court
explained that the Borrowers had satisfied the pleading requirements for
fraud by pleading each element with sufficient specificity.

With regard to the Borrowers' Section 17200 cause of action, the Court
noted that Section 17200 prohibits business practices that are "unlawful,"
"unfair," or "fraudulent" and that based on the Court's analysis of the
fraud claim, the Section 17200 claim had been adequately pleaded under the
"unlawful" and "fraudulent" prongs.

The Court also concluded that the Borrowers had sufficiently alleged
"unfair" business practices, as the payment schedule did not clearly
indicate that it was based on the low teaser rate. The Court further
observed that, although it may be difficult for the Borrowers to prove
they could not have avoided negative amortization completely, the
Borrowers "may show that they were unable to avoid some substantial
negative amortization" under their loans.

The Court also noted that to the extent that the "unfair" claim must be
tied to a specific statutory or regulatory provision, TILA and its
regulations provide "an adequate tether even though plaintiffs are not
directly relying on federal law . . . ." Finally, the Court also rejected
the Lender's argument that the Borrowers failed to adequately allege
standing and concluded that the Borrowers had met their burden by alleging
economic injury.


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
Email: RWutscher@mtwllp.com


NOTICE: We do not send unsolicited emails. If you received this email in
error, or if you wish to be removed from our update distribution list,
please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
http://updates.kw-llp.com
CONFIDENTIALITY NOTICE: This communication (including any related attachments) is intended only for the person/s to whom it is addressed, and may contain confidential and/or privileged material. Any unauthorized disclosure or use is prohibited. If you received this communication in error, please contact the sender immediately, and permanently delete the communication (including any related attachments) and permanently destroy any copies.

IRS CIRCULAR 230 NOTICE: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by law.

Wednesday, August 10, 2011

FYI: Mass AG Settles with Sand Canyon (Option One) in Exchange for Loan Mods and Other Relief Valued at $125MM

Massachusetts Attorney General Martha Coakely announced a settlement
valued at nearly $125MM with Sand Canyon (formerly known as Option One),
under which the company will modify thousands of Massachusetts homeowners'
loans and pay $9.8MM to the Commonwealth.

A copy of the fact sheet providing an overview of the terms of the
settlement is available at:
http://www.mass.gov/Cago/docs/press/option-one-settlement-fact-sheet.pdf

The settlement requires Sand Canyon to pay $9.8 million to the
Commonwealth, and to direct the current servicer of approximately 5,500
Option One originated loans in Massachusetts to institute an aggressive
loan modification program that will provide an estimated $115 million in
additional relief.

Under the terms of the settlement, distressed Option One borrowers will be
eligible for loan modifications that include significant write-downs of
principal balances and reduction of interest rates, depending on the
prevalence of certain risk features in the loan.

In addition, the settlement includes $8 million in consumer relief, $1
million for fees and costs, and $800,000 in exchange for a release of
civil penalties. The $8M in "consumer relief" will reportedly be used to
"rectify the negative impact of mortgage foreclosures and predatory and
discriminatory lending practices, including providing direct restitution
to Option One borrowers and implementing programs to mitigate the impact
of the foreclosure crisis in Massachusetts." For example, the settlement
provides the Attorney General with discretion to address public/community
harm through grants, including to community-based groups in the nine
cities with larger numbers of Option One loans.

As you may recall, the Attorney General's lawsuit alleged that Option One
loans that combined so-called "risk features" (e.g., high DTI ratios, high
LTV ratios, "stated income," underwriting of ARMs not with respect to the
fully-indexed rate) were "unfair" because they allegedly posed an
excessive risk of default and foreclosure. The lawsuit also asserted that
Option One knew that loans with such risk characteristics were doomed to
fail.

In addition, the AG asserted that Option One "discriminated against
African-American and Latino borrowers," through discretionary pricing
policies that allegedly caused Black and Latino borrowers to be charged
higher rates and fees.


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
Email: RWutscher@mtwllp.com


NOTICE: We do not send unsolicited emails. If you received this email in
error, or if you wish to be removed from our update distribution list,
please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
http://updates.kw-llp.com
CONFIDENTIALITY NOTICE: This communication (including any related attachments) is intended only for the person/s to whom it is addressed, and may contain confidential and/or privileged material. Any unauthorized disclosure or use is prohibited. If you received this communication in error, please contact the sender immediately, and permanently delete the communication (including any related attachments) and permanently destroy any copies.

IRS CIRCULAR 230 NOTICE: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by law.

Tuesday, August 9, 2011

FYI: IL Regulator Fines Mortgage Servicer $290k for Improper Foreclosure Affidavit Practices

The Illinois Department of Financial and Professional Regulation (IDFPR)
recently fined a mortgage servicer $290,000 for alleged improper
foreclosure affidavit practices.

A copy of the Order Assessing Fine is available at:
http://www.idfpr.com/NEWSRLS/2011/PHHOrder06232011.pdf

The IDFPR fined PHH Mortgage Corporation (PHH) $290,000 for signing
foreclosure affidavits that the company allegedly knew would later be
altered by its attorneys, and for allegedly submitting affidavits signed
by a person other than the affiant. The violations were found during an
ongoing special investigation of 20 Illinois licensed mortgage servicing
companies.

Specifically, the IDFPR alleged that in at least 19 files, PHH failed to
re-execute affidavits after they had been altered by the company's
foreclosure attorneys. The IDFPR alleged that PHH knew of and conspired
with this alleged misconduct because the original affidavits were
allegedly incomplete and contained notations such as "will add" when they
were tendered to the law firm of Fisher and Shapiro.

The IDFPR also alleged that 16 affidavits were represented as having all
been signed and attested to by the same PHH employee in his or her
official capacity, but allegedly no less than five distinctly different
signatures were attributed to this same PHH employee.

The IDFPR also alleged that, although PHH had a written policy regarding
the execution of foreclosure affidavits, PHH allegedly failed to ensure
that its employees complied with this written policy and allegedly failed
to conduct necessary internal and external quality control reviews.


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
Email: RWutscher@mtwllp.com


NOTICE: We do not send unsolicited emails. If you received this email in
error, or if you wish to be removed from our update distribution list,
please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
http://updates.kw-llp.com
CONFIDENTIALITY NOTICE: This communication (including any related attachments) is intended only for the person/s to whom it is addressed, and may contain confidential and/or privileged material. Any unauthorized disclosure or use is prohibited. If you received this communication in error, please contact the sender immediately, and permanently delete the communication (including any related attachments) and permanently destroy any copies.

IRS CIRCULAR 230 NOTICE: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by law.