Regal v. Wells Fargo Corporation
Filing
19
Judge Douglas P. Woodlock: MEMORANDUM AND ORDER entered granting 7 Motion to Dismiss for Failure to State a Claim (Woodlock, Douglas)
UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
FRANCINE REGAL,
)
)
)
)
)
)
)
)
)
)
Plaintiff,
v.
WELLS FARGO BANK, N.A.
Defendant.
CIVIL ACTION NO.
14-12427-DPW
MEMORANDUM AND ORDER
September 7, 2016
This is a civil action between plaintiff Francine Regal and
defendant Wells Fargo Bank, N.A. (apparently misidentified in
the Complaint as Wells Fargo Corporation), in which Regal
alleges that Wells Fargo violated federal and state laws in its
mortgage and subsequent foreclosure of a property she owned.
Wells Fargo has filed a motion to dismiss Regal’s complaint
pursuant to Rule 12(b)(6) for failure to state a claim upon
which relief may be granted.
I. BACKGROUND
A.
Factual Background
Francine Regal is the owner and occupant of a home in
Everett, Massachusetts.
1].
[Regal Complaint, Dkt. No. 1, Exh. 1, ¶
In August of 2004, she borrowed money from Lighthouse
Mortgage secured with an adjustable-rate mortgage on the
1
property.
[Id. ¶ 5].
The terms of this mortgage included a
fixed rate of 4% for one year, followed by an adjustable rate
thereafter.
[Id. ¶ 6].
The plaintiff asserts that the loan
amount of $396,000 exceeded the value of the property, and,
without providing any figures, that the monthly payments
exceeded 50% of her monthly income.
[Id. ¶ 6].
Wells Fargo
contends, however, and the plaintiff does not dispute the
underwriter’s appraisal, that the house was worth $420,000 at
the time of the mortgage, and provides a worksheet with an
estimate to support the contention.
See Wells Fargo Memorandum
in Support of Motion to Dismiss, 203(K) Maximum Mortgage
Worksheet, Dkt. No. 8, Exh. C.1
After the first year, the rate of the mortgage was
adjustable by the mortagee, Lighthouse.
The rate was pegged to
the United States Treasury Securities weekly average yield rate
with a constant maturity of one year.
[Wells Fargo Memorandum
in Support of Motion to Dismiss, Dkt. No. 8, 3].
1
This rate was
Ordinarily, consideration of material such as this would not be
permissible under Rule 12(b)(6). However, the First Circuit has
recognized some exceptions to that rule. These exceptions
include documents “the authenticity of which [is] not disputed
by the parties,” documents that are “central to plaintiffs’
claim,” and “documents sufficiently referred to in the
complaint.” Watterson v. Page, 987 F.2d 1, 3-4 (1st Cir. 1993).
Given that this material has not been disputed and is centrally
relevant to consideration of whether or not the loan in question
may have been predatory, I have chosen to reference it at this
stage in the proceedings.
2
then added to a fixed baseline of 2.25%.
[Id.].
At some point,
Lighthouse Mortgage was acquired by Wells Fargo Bank, N.A., the
defendant in this action, which assumed control over Regal’s
mortgage in the process.
Regal thereafter defaulted on the mortgage. [Id.].
In an
effort to rehabilitate the mortgage, she submitted a Home
Affordable Mortgage Program (“HAMP”) loan modification
application to Wells Fargo on June 20, 2011.
[Id.].
Wells
Fargo denied the HAMP application on February 20, 2012,
providing Regal with nothing by way of explanation.
13].
[Compl. ¶
Wells Fargo did, however, offer a repayment plan for the
loan, an offer that was rejected by Regal. [Id.].
then commenced foreclosure proceedings.
Wells Fargo
On May 8, 2014, Regal
filed the complaint initiating this action in the Middlesex
County Superior Court.
On June 9, 2014, Wells Fargo removed the
case to this Court.
II. ANALYSIS
Regal’s complaint alleges three claims for relief.
The
First Claim for Relief alleges that Wells Fargo violated its
duties under HAMP and its Servicer Participation Agreement with
the United States Department of the Treasury; Regal alleges that
in this connection she was injured as a third-party beneficiary
of the Agreement.
The Second Claim seeks relief under
Massachusetts General Laws Chapter 93A § 9.
3
Regal alleges that
Wells Fargo’s failure to modify her loan under HAMP guidelines
was an unfair and deceptive business practice giving rise to
liability under Chapter 93A.
Regal’s Third Claim for Relief
alleges that Wells Fargo violated Chapter 93A § 2 in offering
the loan originally, because the loan, as structured, was and is
predatory within the meaning of Massachusetts consumer
protection laws.
I will address all three claims, although in
the opposition memo, plaintiff’s counsel only presses the first.
I take a comprehensive approach not only in the interests of
completeness, but also specifically because the disbarment of
plaintiff’s attorney for misconduct in other mortgage
foreclosure matters, see Note 4 infra, raises the specter of
inadequate assistance of counsel in this case and consequently
more judicial attentiveness appears warranted.
A.
Legal Standard
In order to survive a motion to dismiss pursuant to
Fed.R.Civ.P. 12(b)(6), “a complaint must contain sufficient
factual matter, accepted as true, to state a claim to relief
that is plausible on its face.”
Ashcroft v. Iqbal, 556 U.S.
662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (citation and
internal quotation marks omitted).
“[W]here the well-pleaded
facts do not permit the court to infer more than the mere
possibility of misconduct, the complaint has alleged — but it
has not ‘show[n]’ — ‘that the pleader is entitled to relief.’”
4
Maldonado v. Fontanes, 568 F.3d 263, 269 (1st Cir. 2009)
(quoting Iqbal, 129 S.Ct. at 1949).
I “must accept all well-
pleaded facts alleged in the Complaint as true and draw all
reasonable inferences in favor of the plaintiff.”
Page, 987 F.2d 1, 3 (1st Cir. 1993).
Watterson v.
While I am “generally
limited to considering facts and documents that are part of or
incorporated into the complaint,” I “may also consider documents
incorporated by reference in the [complaint], matters of public
record, and other matters susceptible to judicial notice.”
Giragosian v. Ryan, 547 F.3d 59, 65 (1st Cir. 2008) (citation
and internal quotation marks omitted) (alteration in original);
see also Note 1 supra.
B.
Third-Party HAMP Claim
In her First Claim for Relief, Regal asserts that she is an
intended third-party beneficiary of the Service Participation
Agreement Wells Fargo signed to recognize its undertaking with
Treasury to abide by HAMP guidelines in restructuring eligible
loans.
She argues that, because she met the requirements for
eligibility under HAMP, Wells Fargo’s refusal to modify her loan
constitutes a violation of HAMP and a breach of the SPA.
Attendant on this argument is the proposition that, if the
denial of refinancing is indeed a violation, then, as an
intended third party beneficiary of the SPA, Regal is entitled
to damages as a result of Wells Fargo’s purported breach.
5
In order to analyze Regal’s claim, it will be useful first
to examine the history of HAMP and its related programs.
HAMP
is a subpart of the Making Home Affordable Program, enacted in
February 2009 as part of the government’s response to the
financial crisis.
“The goal of HAMP is to provide relief to
borrowers who have defaulted on their mortgage payments or who
are likely to default”; this is to be done by reducing mortgage
payments to sustainable levels, without discharging any of the
underlying debt.”
Bosque v. Wells Fargo Bank, N.A., 762 F.
Supp. 2d 342 (D. Mass. Jan. 26, 2011).
Many banks that owned or serviced home mortgages (including
Wells Fargo) agreed to modify terms of eligible mortgages in
exchange for billions of dollars from the United States
government through the Trouble Asset Relief Program (“TARP”).
In order to qualify to participate in the program for loans not
owned, securitized or guaranteed by Fannie Mae or Freddie Mac
(i.e. owned, securitized, or serviced by financial institutions
that are not government-sponsored enterprises (“GSEs”) like
Fannie Mae and Freddie Mac), these banks were required to sign
Servicer Participation Agreements (“SPAs”) that committed the
banks to certain standards with respect to refinancing of
eligible loans in exchange for incentive payments for successful
refinancings.
The SPAs are contracts between each bank and the
Department of the Treasury, which promulgates rules under HAMP
6
as to how banks should refinance home mortgages so as to avoid
unnecessary foreclosures.
The banks solicit refinancing
applications from potentially-eligible individual mortgagors,
and make a determination as to whether or not to offer them
refinancing.
The question of what rights HAMP gave individual homeowners
was, at the outset, not well understood.
At least one
Massachusetts Superior Court Judge concluded that homeowners
seeking to refinance their mortgages under HAMP guidelines were
intended third-party beneficiaries to SPAs between Treasury and
banks.
See Parker v. Bank of Am., N.A., No. 11-1838, 2011 WL
6413615 (Mass. Super. Ct. Dec. 16, 2011).
However, that
interpretation, as recognized by the Superior Court judge in
Parker, id. at 7, stands contrary to the consensus among courts
in this District and elsewhere that Congress never intended to
give homeowners a private right of action under HAMP or any of
its related programs.
“Although HAMP was generally designed to
benefit homeowners, it does not follow necessarily that
homeowners like the plaintiff[] are intended third-party
beneficiaries of the contracts between servicers and the
government.”
Teixeira v. Fed. Nat’l Mortg. Ass’n, No. 10-cv-
11649, 2011 WL 3101811, at *2 (D. Mass. July 18, 2011) (citing
Klamath Water Users Protective Ass’n v. Patterson, 204 F.3d
1206, 1212 (9th Cir. 1999)).
7
The First Circuit adopted this consensus approach in
MacKenzie v. Flagstar Bank, FSB, 738 F.3d 486 (1st Cir. 2013),
where the MacKenzies, commenced an action against Flagstar Bank
after the bank initiated foreclosure proceedings against them.
The First Circuit concluded that HAMP did not provide a
private right of action to aggrieved borrowers.
The court
decided that the standard HAMP SPAs do “‘not give any indication
that the parties intended to grant qualified borrowers the right
to enforce the contract.’”
MacKenzie, 738 F.3d at 492 (1st Cir.
2013) (quoting Teixeira, 2011 WL 3101811, at *2).
This approach aligns with the general presumption that
government contracts ordinarily do not give private citizens the
right to sue as third-party beneficiaries.
As a result, “it
would be unreasonable for a borrower to rely on the HAMP
guidelines as evidence of intent to extend a right of
enforcement to third-party beneficiaries. . . .”
Markle v. HSBC
Mortg. Corp. (USA), 844 F. Supp. 2d 172, 182 (D. Mass. July 12,
2011).
If homeowners “were third-party beneficiaries, every
homeowner-borrower in the United States who has defaulted on
mortgage payments or is at risk of default could become a
potential plaintiff.”
Id.
This case is no exception.
The SPA Wells Fargo signed with
Treasury, Fannie Mae and Freddie Mac, included a provision
identifying those to whom the agreement applies.
8
The SPA here
was expressly intended to “inure to the benefit of and be
binding upon the parties to the Agreement and their permitted
successors-in-interest.”
Nothing in the contract at issue, and
nothing in HAMP more generally, provides a basis for concluding
that servicers, banks or the government intended that homeowners
like Regal were entitled to sue under HAMP or the SPAs.
Regal
may have sought to benefit from the contract between Treasury
and Wells Fargo, but there is nothing to indicate that she was
an intended beneficiary, with an interest cognizable in
litigation.
Therefore, to the extent that she relies on HAMP
directly for any particular federal cause of action, such a
claim fails, and must be dismissed.
The question whether violations of HAMP guidelines can
serve as part of the underlying basis for a separate state law
claim, however, is a distinct matter to which I now turn.
C.
Massachusetts General Laws Chapter 93A Claim
In her complaint, Regal asserts two separate claims – (1) a
HAMP violation and (2) a predatory loan violation – under
Chapter 93A of the Massachusetts General Laws.
Overall, Chapter
93A is a consumer protection law that prohibits “unfair or
deceptive acts or practices in the conduct of any trade or
commerce.”
Mass. Gen. L. c. 93A § 2.
The statute provides a
private right of action for individuals to assert claims if they
believe they have been wronged by such a deceptive practice.
9
Id. at § 9.
“Chapter 93A is ‘a statute of broad impact which
creates new substantive rights and provides new procedural
devices for the enforcement of those rights.’”
Kattar v.
Demoulas, 433 Mass. 1, 12, (2000) (quoting Slaney v. Westwood
Auto, Inc., 366 Mass. 688, 693 (1975).
What is unfair or
deceptive requires careful analysis; “Massachusetts courts
evaluate unfair and deceptive trade practice claims based on the
circumstances of each case.”
Massachusetts Eye and Ear
Infirmary v. QLT Phototherapeutics, Inc., 552 F.3d 47, 69 (1st
Cir. 2009) (citing Kattar, 433 Mass. at 12).
1.
HAMP Violations and Chapter 93A
In proving a violation of Chapter 93A, “it is neither
necessary nor sufficient that a particular act or practice
violate common or statutory law.”
Id.
Accordingly, “a
violation of HAMP that is deceptive or unfair could create a
viable claim for relief under Chapter 93A.”
Morris v. BAC Home
Loans Servicing, L.P., 775 F. Supp. 2d 255, 259 (D. Mass. 2011)
(emphasis added).
But when a statute, like HAMP, “does not
provide a private means of recovery, for a cause of action
pursuant to chapter 93A to proceed, the violation must be
determined to be unfair or deceptive in and of itself.”
Ording
v. BAC Home Loans Servicing, LP, No. 10-cv-10670-MBB, 2011 WL
99016 (D. Mass. 2011).
Therefore, as succinctly outlined by
Magistrate Judge Bowler in Ording and adopted by Judge Saris in
10
Morris, the relevant interplay between HAMP and Chapter 93A
focuses on three factors:
(1) have plaintiffs adequately plead that defendant
violated HAMP; (2) are those violations of the type that
would be independently actionable conduct under chapter
93A even absent the violation of a statutory provision
(i.e. are the violations unfair or deceptive); and (3)
if the conduct is actionable, is recovery pursuant to
chapter 93A compatible with the “objectives and
enforcement mechanisms” of HAMP?
Ording, 2011 WL 99016, at *7.
a.
Has Plaintiff Adequately Pled that Defendant
Violated HAMP?
The alleged injury that is said to give rise to Chapter 93A
liability is failure by Wells Fargo to offer Regal a loan
modification offer (or give her a reason for the rejection of
her request) even though she qualified under HAMP.
The
requirements for HAMP eligibility are as follows: the mortgage
must be a first lien mortgage that originated on or before
January 1, 2009, the mortgage must be delinquent or default
reasonably foreseeable, the current unpaid principal balance
must be less than a certain amount of money for a given type of
property, the required monthly payments on the mortgage must
exceed 31% of the homeowner’s monthly income, and the property
must not be condemned.
See Home Affordable Modification Program
Guidelines, United States Department of the Treasury (Aug. 30,
2016 3:48 PM), available at https://www.treasury.gov/presscenter/pressreleases/Documents/modification_program_guidelines
11
.pdf.
If the servicer determines that the borrower’s mortgage
meets those criteria, the servicer must also subject each
applicant’s information to “Net Present Value (NPV) Testing”.
Making Home Affordable Handbook v 5.1, Home Affordable
Modification Program (Aug. 30, 2016 3:52 PM), 84-85, available
at https://www.hmpadmin.com/portal/programs/guidane.jsp#
archive4, 2-4.
Essentially, this test determines whether or not
the loan modification would be an economically efficient and
desirable transaction.
If the borrower is determined to be ineligible, or if the
NPV calculation is not “net-positive”, the servicer must attempt
to provide other refinancing options.
If those fail, the
servicer may commence foreclosure proceedings.
Affordable Handbook v 3.3 at 62, 85.
Making Home
If servicers reject a
borrower’s request and find her ineligible, they must send the
borrower a Borrower Notice.
See Supplemental Directive 09-08:
Borrower Notices, Home Affordable Modification Program (Aug. 30,
2016, 4:01 PM), available at
https://www.hmpadmin.com/portal/programs/docs/hamp_servicer/sd09
08.pdf.
These Notices are required to contain certain points of
information, most relevantly the reasoning behind the servicer’s
denial of the HAMP loan modification.
This anticipates an
explanation of why or how the borrower does not pass the
complicated Net Present Value Test.
12
Regal’s complaint contains sufficient allegations to form
the basis for a claim that Wells Fargo violated the Borrower
Notice requirement of HAMP’s supplemental directives.
While
Wells Fargo did attempt to negotiate a different kind of
repayment plan with Regal, it was also obligated to provide her
with a detailed explanation of why it denied her original HAMP
application and that it allegedly did not do.
b.
Would Treating Departures from HAMP Requirements as
Actionable Chapter 93A Claims Be Compatible with the
Objectives of HAMP?
Before analyzing whether or not an inadequate notice
departure from HAMP directives is sufficiently deceptive or
unfair to merit consideration as a violation of Chapter 93A, I
must first consider whether giving borrowers private rights of
action under Chapter 93A would as a general proposition
frustrate or conflict with the purpose of HAMP.
“The goal of
HAMP is to provide relief to borrowers who have defaulted on
their mortgage payments or who are likely to default by reducing
mortgage payments to sustainable levels, without discharging any
of the underlying debt.”
Bosque, 762 F. Supp. 2d at 347.
This
entails, predominantly, the payment incentive program on which
HAMP depends, providing incentive payments to servicers for
refinancing eligible loans.
HAMP is a kind of consumer protection program, and
compliance with consumer protection laws would seem to further
13
the goal of protecting vulnerable borrowers.
And, although
Fannie Mae and Freddie Mac are technically responsible for
oversight and enforcement of the program, it could not be said
that encouraging compliance with such laws through state private
rights of action would frustrate the purpose of HAMP or inhibit
the ability of the responsible entities separately to enforce
its provisions against participating financial institutions.
In
Wells Fargo’s SPA, the bank itself covenanted that it would
“develop and implement an internal control program to monitor
and detect loan modification fraud and to monitor compliance
with applicable consumer protection and fair lending laws. . .
.”
Wells Fargo Service Participation Agreement, United States
Department of the Treasury (Aug. 30, 2016, 6:42 PM), B-4,
available at https://www.treasury.gov/ initiatives/financialstability/TARP-Programs/housing/mha/
Documents_Contracts_Agreements/wellsfargobankna_Redacted.pdf.
There is no basis to conclude that Treasury believes that
compliance with non-HAMP consumer protection laws is an obstacle
to or in frustration of the goals of HAMP.
Consequently, I am
satisfied that enforcement of at least some HAMP obligations
through consumer protection laws such as Chapter 93A would not
necessarily frustrate the purpose of HAMP.
14
c.
Is the Departure from HAMP Directives Alleged Here
Independently Actionable?
Turning to application of Chapter 93A to the HAMP directive
at issue here, I begin by observing that the violation of HAMP
must be a deceptive or unfair practice leading to remedies under
Chapter 93A in its own right, not just as a violation of HAMP.
In other words, I address the question whether simply because
Wells Fargo did not fully comply with some requirements of
Treasury with regard to HAMP compliance regarding notice to
borrowers necessarily means that the conduct violates Chapter
93A’s consumer protection provisions.
To do so, the conduct
must be independently deceptive or unfair under the standard
established for Chapter 93A for such practices.
The standard for violations of Chapter 93A is not readily
apparent from the statutory language.
However, courts have
decided that
In determining whether a practice violates Chapter 93A,
we look to ‘(1) whether the practice . . . is within at
least the penumbra of some common-law, statutory, or
other established concept of unfairness; (2) whether it
is immoral, unethical, oppressive, or unscrupulous;
[and] (3) whether it causes substantial injury to
consumers (or competitors or other businessmen).
Massachusetts Eye and Ear, 412 F.3d at 243 (quoting PMP Assocs.,
Inc. v. Globe Newspaper Co., 366 Mass. 593, 596 (1975)).
Courts
may also take into account “[w]hat a defendant knew or should
have known” and a plaintiff’s “conduct, his knowledge, and what
15
he reasonably should have known.”
Swanson v. Bankers Life Co.,
389 Mass. 345, 349 (1983).
The only violation of HAMP or the SPA alleged by Regal is
the failure to send her Notice to explain the reasoning behind
the denial of her HAMP modification.
She has not alleged
sufficiently that she qualified for a HAMP modification because
nowhere does she indicate that her NPV calculation would have
been “net positive”.
I note that presenting this information is
not a particular hardship; calculating the NPV of a modification
for HAMP purposes is made simple online, and she herself
possesses all the necessary information inputs.
See Net Present
Value Calculator, Making Home Affordable (Jan. 15, 2016, 12:38
PM), https://www.makinghomeaffordable.gov/get-answers/pages/getanswers-tools-NPV.aspx.
Thus, the only question presented here for determination
that could lead to Chapter 93A liability for a HAMP violation by
Wells Fargo is whether the bank’s failure to send a Borrower’s
Notice to Regal constitutes a departure from HAMP rules
sufficient to reach the level of “unfair” or “deceptive” conduct
to violate Chapter 93A.
The first factor of the test found in PMP Assocs. is at
least facially satisfied.
HAMP regulations and directives take
into account concepts of fairness with regard to borrower loan
modification.
However, the allegation fails with respect to the
16
second and third factors.
There is nothing inherently “immoral,
unethical, oppressive, or unscrupulous” about failing to send a
notice that a borrower was denied a modification under a
particular statutory regime.
The lack of notice was not part of
some artifice designed to get the better of the consumer.
more akin to a simple remedial error.
the third prong of the test.
It is
The allegation also fails
Perhaps, if Regal had sufficiently
alleged that she was qualified for and entitled to a
modification, she could allege some sort of injury (i.e. the
denial of a modification to which she was entitled).
However,
she has not done so, and the only injury she alleges is a formal
failure to send a Borrower’s Notice.
As important as Borrower’s Notices are to the necessary
task of keeping borrowers well-informed as to their rights under
HAMP, I cannot say that a bank’s failure to send one is somehow
sufficiently unfair or deceptive as to give rise to Chapter 93A
liability.
Enforcement of such an oversight is best left to the
government entities overseeing HAMP, not individuals bringing
consumer protection suits in the absence of meaningful injury.
I conclude that Regal’s Second Claim for Relief, the
Chapter 93A claim predicated on a violation of HAMP guidelines,
should be dismissed.
17
2.
Chapter 93A Prohibition of Predatory Loans
Regal’s Third Claim for relief rests on the prohibition
against predatory loans in Chapter 93A’s case law.
She alleges
that the loan’s original structure, when offered by Lighthouse
in 2004, was predatory in nature.
Under Chapter 93A, a loan
will be regarded as predatory if it meets the standard
articulated in Commonwealth v. Fremont Investment & Loan, 452
Mass. 733 (2008).
In Fremont, the Attorney General of Massachusetts pursued
an action on behalf of the state and its citizens against a bank
that had been offering subprime loans to homeowners.
Fremont
was accused of extending high adjustable rate loans to high-risk
homeowners under terms it knew would all but ensure that the
homeowner could not pay the loan back.
Fremont would then sell
the payment rights on these loans in the secondary market, to be
bundled into securities packages.
At least 20% of the mortgages
originated by Fremont had defaulted.
The Attorney General
alleged that the bank’s loan practice was unfair and deceptive
under the meaning of Chapter 93A, and successfully sought a
preliminary injunction from Justice Gants then sitting in
Superior Court to forestall any pending foreclosure proceedings
without the consent of the Attorney General.
The Supreme Judicial Court on appeal adopted the factors
that Justice Gants used to define a predatory or unfair loan
18
under Chapter 93A.
In Fremont, Justice Gants articulated a set
of definable criteria that the Supreme Judicial Court accepted
as appropriate indicia of a predatory loan in violation of
Chapter 93A.
These factors “operate in concert essentially to
guarantee that the borrower would be unable to pay and default
would follow unless residential real estate values continued to
rise indefinitely – an assumption that . . . logic and
experience had already shown . . . to be unreasonable.”
Fremont, 452 Mass. At 743.
Under these criteria, loans are predatory and
“presumptively unfair” if they contain some “combination of the
following four characteristics”:
(1) the loans were A[djustable] R[ate] M[ortgage] loans
with an introductory rate period of three years or less;
(2) they featured an introductory rate for the initial
period that was at least three per cent below the fully
indexed rate; (3) they were made to borrowers for whom
the debt-to-income ratio would have exceeded fifty per
cent had [the lender] measured the borrower’s debt by
the monthly payments that would be due at the fully
indexed rate rather than under the introductory rate;
and (4) the loan-to-value ratio was one hundred per cent,
or the loan featured a substantial prepayment penalty .
. . or a prepayment penalty that extended beyond the
introductory rate period.
Id. at 739.
Of course, even if a loan falls into Chapter 93A’s
definition of a predatory loan, a plaintiff’s claim is still
limited by Chapter 93A’s general four-year statute of
limitations.
See Mass. Gen. Laws ch. 260, § 5A.
19
“A cause of
action generally accrues at the time of the plaintiff’s injury.
. . .”
Salois v. Dime Sav. Bank of New York, FSB, 128 F.3d 20,
25 (1st Cir. 1997).
This statute of limitations may be tolled
in fraudulent concealment situations where “a plaintiff has been
injured by fraud and remains in ignorance of it without any
fault or want of diligence or care on his part.”
omitted).
Id. (citations
However, this tolling option is not available to
plaintiffs for whom sufficient facts “were available to place
plaintiffs on inquiry notice of fraudulent conduct.”
Id. at 26.
Again, in the interests of completeness, I will analyze
whether the plaintiff here has adequately alleged a predatory
loan claim in Section II.C.a before addressing the statute of
limitations claim in Section II.C.b.
a.
Has Plaintiff Adequately Pled a Predatory Loan Under
Fremont
In addressing this question, I must carefully analyze the
terms of the loan as offered to Regal by Lighthouse.
Regal
entered into the loan agreement on August 27th, 2004.
[Complaint, Ex. A, 1].
The original rate of the loan was 4%.
Commencing on October 1, 2005, every year on that date,
Lighthouse or, later, Wells Fargo, could adjust the interest
rate based on an index.
That index took a baseline rate of
2.25% of the unpaid principal, and added the weekly average
yield on U.S. Treasury Securities at a maturity of one year,
20
then rounded to the nearest .125%.
The new rate would be
applied to the outstanding principal, with the resulting number
divided into as many monthly payments remaining between the
adjustment date and the maturity date.
This change could not
exceed a total adjustment of 1% for any given year, and was not
to exceed a 5% change in total above or below the original 4%
rate.
The original loan was for $396,500 on a property valued
at $420,000 at the time of origination. [Complaint, at 18;
Defendant Memo at 3, n. 4].
Regal has not provided any
information with regard to her own finances, except to assert
(without factual allegations concerning a matter over which she
plainly has complete access) that the monthly payments at times
exceeded her monthly income. [Complaint ¶ 31].
The pleadings do
not provide any information as to whether or not the rate was
actually adjusted and, if so, to and from what.
The first sign of an unfair loan is one in which the rate
is adjustable with an introductory rate period of three years or
less.
Here, this sign was a clearly visible.
The loan rate
switched from the introductory rate to the adjustable, indexed
rate just over a year after the origination of the loan, a
change that signifies a predatory loan.
Analysis of the second factor is more complicated.
At
first blush, it appears that there is no prohibition in the loan
terms to the rate exceeding 3% of the original rate.
21
The only
protection in that regard is that the loan was not to exceed 5%
above the original rate.
Regal has provided no allegation as to
what the rate ended up being during any potential adjustment
period.
However, one can calculate the upper limits of what the
rate could have been during the loan period to determine whether
or not a potential rate adjustment could have met the conditions
required under the second prong of the Fremont test.
baseline rate is 2.25%.
The
But the amount above that baseline
could fluctuate significantly (with Treasury bond rates) if
Wells Fargo decided to adjust the rate in October of every year,
as was its right under the terms of the mortgage.
In order for
the mortgage to run afoul of Fremont and be considered
predatory, the mortgage rate must have had the potential, at
some point, to climb above 7% (3% above the original rate of
4%).
Regal conclusorily alleges that it rose to 9%, but
provides no plausible basis to support such an allegation (other
than the idea that this is, conceivably, as high as the terms of
the mortgage would have allowed the rate to rise).
But it is
the potential at the time the mortgage was executed for the rate
to reach the designated cap or fully indexed rate of 9% that
governs.
Nevertheless, I observe by way of illustrating the lack of
actual damages, that to reach the potential would have required
that the average yield of a treasury bond with a one-year
22
maturation period at some point be 6.75%.
Treasury bond yields
never rose to this level during the period following execution
of the mortgage.
The highest rate that could have been used as an adjustment
figure above the baseline rate (the “most recent Index figure
available 30 days before the Change Date” of October 1; i.e. the
Treasury rate on September 1) was 4.99% on September 1, 2006,
the second year the mortgage could be adjusted to the new index
rate.
The rate at that time the year before was 3.66%.
This
means that, using index calculations as specified in the
mortgage contract, the rate could have been adjusted to 5.875%
(rounding to the nearest .125%).
However, the mortgage terms
contain a 1% annual change cap, meaning that the rate could only
be adjusted to 5% that year, well within the 3% above 4%
required for a loan to be considered presumptively predatory
under this prong.
The next year, the Treasury rate was even
higher, but, again, the rate could only have gone up to 6%
because of the cap.
In 2007, the relevant rate to be used for
the adjustment was 4.19%.
This number would have allowed an
adjustment to 6.5%, still below the 7% required to meet the
Fremont test.
The next year, 2008, the rate plunged to 2.12%.
In 2009, the September 1 rate was .43%; in 2010, .25%; in 2011,
.1; in 2012, .16%; in 2013, 13%; in 2014, .09%; in 2015, .39%;
and in 2016, .60%.
This is all to show that, unless Wells Fargo
23
violated the terms of the mortgage itself in its rate
calculations (something Regal does not allege), there is no
mathematical way in which it could have raised the rate above
the 7% required for the loan to be considered unfair under
Fremont.2
The third Fremont characteristic is that the loan was made
to a borrower for whom the debt-to-income ratio would have
exceeded fifty percent as measured by the fully-indexed rate.
Here, Regal alleges that this has occurred.
However, she only
alleges conclusorily that, at a certain point, she had to pay
approximately 75% of her monthly income to Wells Fargo on the
loan.
She provides no information to support either the
contention that the rate and principal were such that she had to
pay the alleged $3,186 per month, nor does she provide any
evidence that her income was indeed $4,000 at the time of the
2
I emphasize, however, that just because the rate for this
particular mortgage did not climb above the boundary demarcating
predatory rates does not mean that it was not structured in a
predatory fashion. As it happens, the housing crisis and the
corresponding plunging Treasury bond rates are what prevented
this loan from reaching predatory interest rates. For example,
had rates reached as high in September, 2008 (when the rate
could have been adjusted) as they did in the early months of
2007 (when they reached 5.1%) the rate would have crossed the
boundary between an acceptable loan and a predatory one, and
nothing about the structure of the loan would have stopped it
from doing so. Thus, although the mortgage rate never reached
predatory heights in this case, when executed, it had the
potential to do so and that potential is the focus of the second
Fremont factor.
24
loan’s origination.
It may be that the fully-indexed rate
created the kind of situation that would satisfy the third prong
of Fremont.
But the allegations contained in Regal’s complaint
are just the kind of conclusory allegations that do not pass
12(b)(6) muster.
As a result, I must conclude that nothing in
the complaint supports the contention that, at any point, Regal
paid more than 50% of her monthly income on the mortgage.
Finally, under Fremont, a loan may be considered predatory
if the original loan amount was for 100% of the value of the
property being mortgaged or if the loan terms contain a
prepayment penalty.
Nowhere do the loan terms contain a
prepayment penalty, and undisputed documentation established
that the original loan sum of $396,500 was not 100% of the
$420,000 at which the property was valued.
accompanying text.
See Note 1 supra and
The value of the loan was apparently
approximately 94.4% of the value of the property.
As the
Supreme Judicial Court recognized in Fremont, whereas the first
three characteristics indicate a loan that is “doomed to
foreclosure”, this fourth factor is designed to expose loans the
terms of which make it “essentially impossible for subprime
borrowers to refinance unless housing prices increase[]” because
the borrower likely will not have built up enough equity in the
property to refinance the mortgage when necessary.
Mass. at 740.
Fremont, 452
Given the terms of the loan and its high initial
25
debt-to-value ratio, Regal would have had enough equity in the
underlying property under the equations embedded in Fremont
credibly to seek a refinancing at a later point.
After analyzing these factors, I find that Regal has not
adequately pled that Wells Fargo’s loan was predatory under the
Fremont gloss to Chapter 93A.
b.
Would a Predatory Loan Claim be Time-Barred Under
Chapter 93A?
I have analyzed the factors in depth to determine both the
plausibility of the predatory loan claim and also to determine
what Regal would have known when the loan originated.3
Having
done so, I conclude that even if I found the loan to be unfair
under Chapter 93A as predatory, Regal’s claims based on such a
finding would be time-barred.
Regal had all of the information
she needed to allege an unfair loan claim when the loan was
originated in 2004.
Nothing changed with respect to the terms
of original loan since 2004.
Whether calculated as of the date
this litigation was initiated in 2014 or when Fremont
crystallized the law of predatory loans in 2008, any alleged
injury that occurred was well before the 4-year limitations
period prescribed for allegations of Chapter 93A injuries.
3
I note that the alleged HAMP violation, if adequately made out
— which I conclude she has not — would not be time barred
because the 2011 failure to explain the HAMP rejection occurred
less than four years before the commencement of this action.
26
I must also observe that, even if this claim had been
brought within the window provided by the statute of
limitations, Regal has failed to allege that she has suffered
any cognizable injury, as required by Ch. 93A.
The invasion of a consumer’s legal right . . . without
more, may be a violation of G.L. c. 93A, § 2 . . . but
the fact that there is such a violation does not
necessarily mean the consumer has suffered an injury
or a loss entitling her to at least nominal damages
and attorney’s fees; instead, the violation of the
legal right that has created the unfair or deceptive
act or practice must cause the consumer some kind of
separate, identifiable harm arising from the violation
itself.
Tyler v. Michaels Stores, Inc., 464 Mass. 492, 503 (2013).
Normally, “injury under chapter 93A means economic injury in the
traditional sense.”
Rule v. Fort Dodge Animal Health, Inc., 607
F.3d 250, 255 (1st Cir. 2010).
Simply because the loan that she took out with Wells Fargo
might be characterized as predatory does not mean that Regal is
relieved of the obligation of alleging measurable financial
harm.
III. CONCLUSION
For the foregoing reasons, I hereby GRANT Wells Fargo’s
Motion to Dismiss.
dismissal.
The Clerk shall enter a judgment of
The Clerk is further directed to send a copy of this
27
Memorandum and the resulting Judgment to plaintiff herself in
light of the disbarment of plaintiff’s counsel during the course
of this litigation.4
/s/ Douglas P. Woodlock______
DOUGLAS P. WOODLOCK
UNITED STATES DISTRICT JUDGE
4
Although plaintiff’s counsel neglected to meet his duty of
candor to the court by providing timely notice of challenges to
his professional integrity, it has come to my attention that
following a judgment entered against him arising out of
improprieties in connection with foreclosure-related and
mortgage assistance services, see Commonwealth v. Zak, Suffolk
Superior Court Civil Action No. 2011-624H (July 14, 2015), he
was disbarred. See In re: David Zak, Supreme Judicial Court for
Suffolk County No. BD-2015-080 (March 4, 2016). See also In re:
David Zak, No. 16-mc-91116-PBS (D. Mass. June 7, 2016) (Judgment
of Disbarment as reciprocal discipline based on Commonwealth of
Massachusetts disbarment). Although plaintiff’s counsel as
directed by the Judgment of Disbarment, ¶ 2.a), filed (albeit
not necessarily in a timely fashion) notices of withdrawal in
other cases pending in this Court, he did not file such a notice
in this case. Under the circumstances, prudence suggests that
the dispositive papers in this case be sent directly by the
Clerk to plaintiff herself.
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