CitiMortgage, Inc. v. Chicago Bancorp, Inc.

Filing 203

MEMORANDUM AND ORDER. (see order for details) IT IS HEREBY ORDERED that defendant Chicago Bancorp's motion for partial summary judgment [#50 ] is denied. IT IS FURTHER ORDERED that plaintiff Citimortgage, Inc.'s motion for summary judgment [#97 ] is granted as to the Bennett, Brown, Curtis, Hansen, Maggio, Miller, Perez, Villares, and Wade loans, and is denied as to the Gelatka and McDonald loans. IT IS FINALLY ORDERED that plaintiff's motion to exclude purported expert testimony [#91 ] is denied as moot. Signed by District Judge Catherine D. Perry on 03/31/2014. (CBL)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MISSOURI
EASTERN DIVISION
CITIMORTGAGE, INC.,
Plaintiff,
vs.
CHICAGO BANCORP, INC., et al.,
Defendants.

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Case No. 4:12CV246 CDP

MEMORANDUM AND ORDER
This is a contract dispute between two players in the secondary mortgage
market. In 2004, plaintiff CitiMortgage, Inc. (CMI) and defendant Chicago
Bancorp, Inc. agreed that CMI would, from time to time, buy residential mortgage
loans from Chicago Bancorp. The agreement required Chicago Bancorp to
repurchase its loans if CMI, in its sole discretion, determined the loans violated the
terms of the agreement. CMI determined that the eleven of the loans at issue in
this lawsuit failed to comply with the agreement. CMI demanded Chicago
Bancorp cure or repurchase the loans, which Chicago Bancorp undisputedly did
not do. CMI then sued Chicago Bancorp, alleging that it breached the contract by
failing to repurchase the eleven loans.
Now before me are the parties’ motions for summary judgment. CMI argues
that there are no disputed material facts and it is entitled to judgment as a matter of

law that Chicago Bancorp breached the contract by failing to repurchase the eleven
loans. It seeks damages based on a contractual provision governing the
“repurchase price” for a defective loan, as well as its costs. Chicago Bancorp has
itself moved for partial summary judgment on three of the loans. It contends that
those three loans were not defective (and CMI could not have so determined in
good faith), so Chicago Bancorp was not obligated to repurchase them. 1 It also
argues that material questions of fact remain about the damage claims related to
some of the loans.
I conclude that the undisputed evidence shows that Chicago Bancorp
breached the contract by failing to repurchase nine of the eleven loans, and that
Chicago Bancorp has failed to show that CMI acted in bad faith when it
determined that those nine loans failed to comply with the agreement. As such,
CMI is entitled to summary judgment on those nine loans. I find there are
questions of fact preventing summary judgment on the remaining two loans. I also
find that CMI is entitled to summary judgment on the issue of damages, which
should be determined in accordance with the repurchase price under the parties’
agreement. I will deny Chicago Bancorp’s motion for partial summary judgment,

1

There are three other claims pending, which Citimortgage added when I permitted it to amend
its complaint in July 2013. The motions before me at this time do not relate to those claims.

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as well as CMI’s motion to exclude testimony from John Calk, which is moot in
light of my other rulings.
I.

Background
CMI buys mortgages that have been originated by approved lenders,

including lenders known as “correspondents,” under its Loan Purchasing Program.
Through the Program, CMI functions as an investor in the secondary mortgage
market. CMI in turn resells most of the loans it purchases to the Federal National
Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage
Corporation (Freddie Mac), and other investors in the secondary mortgage market.
CMI uses a standard contract to purchase residential mortgage loans from
loan originators and correspondents. The contract is entitled “Correspondent
Agreement Form 200.” It expressly incorporates a longer document called the
CMI Correspondent Manual, which sets forth more detailed terms and conditions.
(See Agreement, Doc. 99-3, Pl.’s Ex. B, ¶ B (incorporating the Manual); Docs. 994 through 99-10, Pl.’s Ex. C (the Manual).) The Manual, in turn, incorporates
Fannie Mae’s guidelines and the processing requirements for Fannie Mae’s
Desktop Underwriter, “an automated underwriting service designed to help lenders
make credit decisions by analyzing borrower and property data.” (See Doc. 1-1, ¶
2(k); Doc. 99-8, Pl.’s Ex. C, § 2202, pp. 78–80, § 2301, p. 95.) CMI and Chicago
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Bancorp entered into a Correspondent Agreement Form 200 on April 12, 2004.
Later, they also entered a Delegated Underwriting Addendum and a CMI Select
Addendum. These contracts will collectively be referred to as “the Agreement.”
Under the Agreement, Chicago Bancorp was required to deliver certain loan
documentation to CMI for each loan it sold to CMI. The Agreement gave CMI the
right to require Chicago Bancorp to cure or correct any loan that CMI, in its sole
and exclusive discretion, determined was defective in one of a number of ways. If
Chicago Bancorp was unable to do so, CMI could demand repurchase.
Specifically, the “Cure or Repurchase” clause of the Agreement provides, in
relevant part:
CURE OR REPURCHASE
If CMI, in its sole and exclusive discretion, determines any Loan
purchased pursuant to this Agreement:
(i)
was underwritten and/or originated in violation of
any term, condition, requirement or procedure contained
in this Agreement or the CMI Manual in effect as of the
date CMI purchased such Loans;
(ii) was underwritten and/or originated based on any
materially
inaccurate
information
or
material
misrepresentation made by the Loan borrower(s),
Correspondent, Correspondent’s directors, officers,
employees, agents, independent contractors and/or
affiliates, or any other party providing information
relating to said Loan; . . .
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(iv) must be repurchased from any secondary market
investor . . . due to a breach by Correspondent of any
representation, warranty or covenant contained in this
Agreement or the CMI Manual or a failure by
Correspondent to comply in all material respects with the
applicable CMI Manual terms, conditions, requirements
and procedures . . . .
Correspondent will, upon notification by CMI, correct or cure such
defect within the time prescribed by CMI to the full and complete
satisfaction of CMI. If, after receiving such notice from CMI,
Correspondent is unable to correct or cure such defect within the
prescribed time, Correspondent shall, at CMI’s sole discretion, either
(i) repurchase such defective Loan from CMI at the price required by
CMI (“Repurchase Price”) or (ii) agree to such other remedies
(including but not limited to additional indemnification and/or refund
of a portion of the Loan purchase price) as CMI may deem
appropriate . . . .
(Doc. 99-3, Pl.’s Ex. B, ¶ 11.)
II.

Challenged Loans
Since 2004, CMI has purchased more than 4,790 mortgage loans from

Chicago Bancorp under the Agreement. Eleven of those loans are at issue in this
lawsuit. Those loans are identified by the parties using the last names of the
borrowers: Bennett, Brown, Curtis, Gelatka, Hansen, Maggio, McDonald, Miller,
Perez, Villares, and Wade. The sale of these loans was governed by the
Agreement.
After purchasing each of these eleven loans from Chicago Bancorp,
CitiMortgage made a determination that the application package for the loan
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contained material misrepresentations or that the loan was otherwise defective.
Chicago Bancorp contends that most of these determinations were made in bad
faith.
CMI demanded that Chicago Bancorp cure the defects in these loans or
repurchase them. When Chicago Bancorp did not adequately respond to its
demands, CMI filed this case asserting breach of contract. CMI seeks damages in
the amount of the “repurchase price” for these loans as that price is calculated in
the Agreement. Under section 2301 (the glossary) of the CMI Manual, the
Repurchase Price is defined as:
[T]he sum of (i) the current principal balance on the loan as of the
paid-to date; (ii) the accrued interest calculated at the mortgage loan
Note rate from the mortgage loan paid-to date up to and including the
repurchase date; (iii) all unreimbursed advances (including but not
limited to tax and insurance advances, delinquency and/or foreclosure
expenses, etc.) incurred in connection with the servicing of the
mortgage loan; (iv) any price paid in excess of par by CitiMortgage on
the funding date; and (v) any other fees, costs, or expenses charged by
or paid to another investor in connection with the repurchase of the
mortgage loan from such investor but only to the extent such fees,
costs and expenses exceed the total of items (i) through (iv) above.
(Doc. 99-8, Pl.’s Ex. C, p. 97). CMI calculates the total repurchase price of the
eleven loans at issue to be $1,866,530.49. (Doc. 97, Pl.’s Mot. for Summ. J., p. 3.)

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III.

Summary Judgment Standard
The summary judgment standards do not change when both parties have

moved for summary judgment. See Wermager v. Cormorant Twp. Bd., 716 F.2d
1211, 1214 (8th Cir. 1983). In determining whether to grant either party’s motion,
the court views the facts – and any inferences from those facts – in the light most
favorable to the nonmoving party. Matsushita Elec. Indus. Co., Ltd. v. Zenith
Radio Corp., 475 U.S. 574, 587 (1986). The movant bears the burden of
establishing that (1) it is entitled to judgment as a matter of law and (2) there are no
genuine issues of material fact. Fed. R. Civ. P. 56(a); Celotex Corp. v. Catrett, 477
U.S. 317, 322 (1986). Once the movant has met this burden, however, the nonmoving party may not rest on the allegations in its pleadings but must, by affidavit
and other evidence, set forth specific facts showing that a genuine issue of material
fact exists. Fed. R. Civ. P. 56(e). Where a factual record taken as a whole could
not lead a rational trier of fact to find for the nonmovant, there is no genuine issue
for trial. Matsushita, 475 U.S. at 587.
IV.

The Covenant of Good Faith and Fair Dealing
The Agreement provides that Missouri law applies. Under Missouri law,

CMI can only prevail on its claim for breach of contract if it proves: (1) the
existence of a valid contract between it and Chicago Bancorp; (2) Chicago
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Bancorp’s obligations under the contract; (3) Chicago Bancorp’s breach of that
obligation; and (4) resulting damages. See, e.g., C-H Bldg. Assocs., LLC v. Duffey,
309 S.W. 3d 897, 899 (Mo. Ct. App. 2010). Here, Chicago Bancorp does not
dispute the existence of the Agreement with CMI or that it had obligations under
that Agreement. Instead, Chicago Bancorp disputes that it breached its contractual
obligations by refusing to cure or repurchase the loans when, it contends, CMI’s
determinations that the loans were defective were made in bad faith.
In interpreting a contract under Missouri law, a court’s primary
consideration is “to ascertain the intent of the parties and then give effect to that
intent.” Lueckenotte v. Lueckenotte, 34 S.W.3d 387, 395 (Mo. banc 2001) (internal
citations and quotation marks omitted). If no ambiguities exist in the contract, the
court is to gather the parties’ intent from the contract itself, giving the contract’s
terms their plan and ordinary meaning. Id. Here, no one disputes that the plain
meaning of the Agreement’s Cure or Repurchase provision unambiguously gave
CMI sole and exclusive discretion to determine whether loans were defective for
any of the reasons enumerated in the Agreement.
In cases where a contract gives one party discretion to determine issues
arising under the contract, Missouri law requires that party to exercise its discretion
in good faith, consistent with the covenant of good faith and fair dealing implied in
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every contract. See, e.g., Mo. Consol. Health Care Plan v. Cmty. Health Plan, 81
S.W.3d 34, 48 (Mo. Ct. App. 2002); see also, e.g., Farmers’ Elec. Coop., Inc. v.
Mo. Dep’t of Corr., 977 S.W.2d 266, 271 (Mo. banc 1998). The duty of good faith
encompasses “an obligation imposed by law to prevent opportunistic behavior, that
is, the exploitation of changing economic conditions to ensure gains in excess of
those reasonably expected at the time of contracting.” Schell v. Lifemark Hosps. of
Mo., 92 S.W.3d 222, 230 (Mo. Ct. App. 2002).
But the covenant does not create a general reasonableness requirement in
contracts, and it is not enough “to show that a party invested with discretion made
an erroneous decision.” BJC Health Sys. v. Columbia Cas. Co., 478 F.3d 908, 914
(8th Cir. 2007) (interpreting Missouri law); see also, e.g., Schell, 92 S.W.3d at
230–31 (“Reasonableness does play a role in the good faith analysis – but only as
evidence of subjective intent to undermine fulfillment of the contract.”).
Instead, to establish a breach of the covenant of good faith and fair dealing,
there must be evidence that a party exercised its discretion in such a way so as to
evade the spirit of the transaction or deny the other party the expected benefit of
the contract. See, e.g., BJC, 478 F.3d at 914; see also Cordry v. Vanderbilt Mortg.
& Fin,. Inc., 445 F.3d 1106, 1112 (8th Cir. 2006) (“When a decision is left to the
discretion of one party, the question is not whether the party made an erroneous
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decision but whether the decision was made in bad faith or was arbitrary or
capricious so as to amount to an abuse of discretion.”).
Therefore, under Missouri law, Chicago Bancorp was required to cure or
repurchase the loans at issue as long as CMI made a good-faith determination that
they were defective. Even CMI’s mistaken belief that the loans failed to comply
with the agreement would not be sufficient evidence of bad faith for Chicago
Bancorp to defeat CMI’s motion for summary judgment. See, e.g., Schell, 92
S.W.3d at 230–31 (citing Rigby Corp. v. Boatmen’s Bank & Trust Co., 713 S.W.2d
517, 526 (Mo. Ct. App. 1986) (defendant acted in good faith when “he acted on
what he believed he knows, whether or not what he believed was true or reasonable
to believe”)). In addition, there can be no bad faith if CMI simply performed the
actions expressly granted it by the parties’ agreement, including determining that
loans were defective and needed to be repurchased. See St. Joseph v. Lake
Contrary Sewer Dist., 251 S.W.3d 362, 371 (Mo. Ct. App. 2008); Yarborough v.
DeVilbiss Air Power, Inc., 321 F.3d 728, 733 (8th Cir. 2003) (interpreting
Arkansas law and holding that “in no situation can the implied covenant of good
faith and fair dealing limit the way in which a party exercises its discretion when
the aggrieved party has specifically disavowed any limitations on that discretion,
and the exercise of that discretion (and its consequences) are easily foreseeable”).
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Although it is true that the agreement gave CMI sole discretion to demand
repurchase if it determined the loans were defective, it did not give CMI sole
discretion to demand repurchase for no reason at all. Cf. St. Joseph, 251 S.W.3d at
371–72. Instead, the agreement required CMI to determine first that there was a
defect in the loan. Accordingly, I have reviewed below the evidence with respect
to each of the eleven loans. Contrary to Chicago Bancorp’s repeated assertions, it
is Chicago Bancorp’s burden to present evidence of CMI’s bad faith, not CMI’s
burden to present evidence of its own good faith. See Acetylene Gas Co. v. Oliver,
939 S.W.2d 404, 410 (Mo. Ct. App. 1996); First State Bank of St. Charles, Mo. v.
Frankel, 86 S.W.3d 161, 175 (Mo. Ct. App. 2002) (overruled on unrelated
grounds by Badahman v. Catering St. Louis, 395 S.W.3d 29 (Mo. banc 2013)).
CMI argues that Chicago Bancorp should be precluded from asserting a badfaith defense because Chicago Bancorp itself acted in bad faith. CMI contends that
under the Agreement, Chicago Bancorp expressly warranted that it was solvent and
would immediately notify CMI if it “incurred or is likely to incur a material
adverse change in its . . . financial condition.” (Doc. 99-3, Pl.’s Ex. B, ¶ 2.)
According to CMI, there is “ample evidence” that Chicago Bancorp has breached
these warranties, which conclusively establishes Chicago Bancorp’s bad faith.
Although Chicago Bancorp’s conduct with respect to the Agreement may be
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relevant to its defenses, I will not at this stage bar Chicago Bancorp from
attempting to prove that CMI acted in bad faith when it determined the loans were
defective.
V.

Evidence on Challenged Loans

Bennett loan
CMI has submitted undisputed evidence showing that it purchased the
Bennett loan from Chicago Bancorp, then resold the loan to Fannie Mae. Fannie
Mae determined that Bennett had misrepresented his income on his loan
application by including a position (and its attendant income) that he in fact did not
hold. (See, e.g., Doc. 99-12, Pl.’s Ex. E1, p. 1.) After removing the offending
income, Bennett’s debt-to-income ratio rose to 91.16%, which exceeded the
allowable ratio under the applicable loan program. (See Docs. 99-16 and 99-18,
Pl.’s Exs. E5, p. 3 and E7, p. 1.) Fannie Mae compelled CMI to repurchase the
loan, which it did. CMI then sent demand letters to Chicago Bancorp, which
refused to repurchase the loan. Summary judgment for CMI is appropriate on the
Bennett loan.
Brown loan
On May 7, 2007, CMI purchased from Chicago Bancorp the Brown loan
through a “stated income” loan program. To be eligible for purchase by CMI
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through a stated income loan program, a loan application package originated by
Chicago Bancorp could not include a third-party verification of income. (See Doc.
99-29, Pl.’s Ex. F5, p. 4 (Program 252 description).) Sometime after purchasing
the loan, CMI determined that the loan application package substantially
misrepresented Brown’s income.2 After substantiating Brown’s actual income,
CMI also determined that the debt-to-income ratio for the Brown loan had
exceeded the limit under the Agreement. (See “Qualifying Ratios,” id., p. 3.)3 In
2010, CMI sent letters to Chicago Bancorp demanding repurchase based on the
misrepresented income and debt-to-income ratio, which Chicago Bancorp resisted.
Chicago Bancorp does not dispute that the loan application misrepresented
Brown’s income. But it argues that the Agreement only requires repurchase for
material misrepresentations, and CMI did not make a good-faith determination that
the misrepresentation of the borrower’s income was material. To support this
contention, Chicago Bancorp points out that under the stated income loan
programs, correspondent banks were prohibited from verifying the borrower’s
stated income. Chicago Bancorp concedes that it may have been “outrageously
2

According to the loan application package and demand letters submitted by CMI and not
refuted by Chicago Bancorp, Brown’s represented gross monthly income was $8,646 at the time
of closing. An audit later showed that Brown’s monthly income was actually only $2,480.10 per
month.
3
The “CMI Manual in effect as of the date CMI purchased” each loan is incorporated under the
Agreement. The Manual excerpts in CMI’s exhibits appear to be the correct versions, and
Chicago Bancorp has not disputed their applicability.

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stupid” to originate or purchase a loan without substantiating the borrower’s
income, but argues that CMI must have considered borrower income immaterial or
it would not have purchased loans at all through a stated income loan program.
Chicago Bancorp also points to deposition testimony from Jeffrey
Polkinghorne, who worked as CMI’s chief credit officer in 2004. Polkinghorne
testified that a study had been done under his direction to determine whether CMI
should initiate “Alt-A” programs,4 which included purchase of stated income loans.
Through the study, CMI concluded that not verifying the income of certain
borrowers did not make a material difference to the performance of their loans, and
the company therefore initiated Alt-A programs. Polkinghorne stated that he was
aware that some borrowers would lie about their income under a stated income
program. He testified that CMI was still “able to manage the risk of [the
borrowers] stating their income without verifying their income . . . .” (Doc. 12947, Def.’s Ex. P, Polkinghorne Dep. 30:13-15.) Further, he stated, sometimes
borrowers misrepresented their income under verified income programs by using

4

Polkinghorne explained that an “Alt-A” program is an alternative lending program for “A”
(prime) borrowers, who have good credit and substantial assets. Alt-A programs include “stated
income, verified assets” (SIVA) loans, “stated income, stated assets” (SISA) loans, and loans
with expanded criteria, such as those permitting a higher-than-usual loan-to-value percentage.

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manufactured pay stubs and tax returns, and CMI also took this into consideration
in deciding to initiate the Alt-A programs.5 (Id. 30:17–23.)
In addition, Chicago Bancorp relies on deposition testimony by its president,
John Calk, who stated that CMI representatives expressly told him “on multiple
occasions that income and sourcing that income was not material to the
performance of the loan so don’t get it in the loan files.” (Doc. 129-53, Def.’s Ex.
T, Calk Dep. 278:5-8.) Calk testified that based on his experience in the home
lending industry, he knows that if a factor is material to a secondary mortgage
investor, it will require that factor to be verified in the underwriting process. (E.g.,
id., 215:15–216:7; 276:5-16.)
Finally, in support of its contention that Brown’s misrepresented income
was not a material misrepresentation, Chicago Bancorp points to the fact that CMI
did not flag Brown’s income as suspect during its pre-purchase review of the
Brown loan – though it did issue a suspense notice that Brown had neglected to
check a box indicating his ethnicity. Chicago Bancorp concedes that, under the
Agreement, “CMI’s review of, or failure to review, all or any portion of the Loan

5

Chicago Bancorp attempted, through discovery, to get the documents and other information
related to the Polkinghorne study and his recommendation to initiate the Alt-A programs, but
CMI’s counsel and corporate representative stated that they were unable to find them. Chicago
Bancorp argues that CMI has not explained the disappearance and has stonewalled its attempts to
get the information it requested. For the reasons stated below, whether or not the study or
information about it was improperly withheld is not relevant.

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documentation shall not affect CMI’s rights to demand repurchase . . . .”
(Agreement, Doc. 99-3, Pl.’s Ex. B, ¶ 1.) But it argues that CMI’s failure to notice
Brown’s stated income was substantially higher than his job would be expected to
generate (based on its title) is “one more piece of evidence that CMI didn’t
consider borrower income to be material to its loan purchase decisions” under the
stated income loan programs.
None of Chicago Bancorp’s evidence is sufficient to defeat CMI’s motion
for summary judgment as to the Brown loan. Chicago Bancorp apparently does
not dispute that the debt-to-income ratio – when calculated based on the
borrower’s actual income – far exceeded the applicable guidelines under the
Agreement. The CMI Manual permitted a debt-to-income ratio up to 45%, but
Brown’s true debt-to-income ratio was 92.32%. The debt-to-income ratio alone
permitted CMI to demand cure or repurchase because the loan violated a
requirement contained in the CMI Manual. (Id. ¶ 12; Doc. 99-29, Manual Sect.
252, Pl.’s Ex. F5, p. 3.) As the Agreement unambiguously provides, CMI was not
required to discover the offending debt-to-income ratio when it conducted its prepurchase review, especially because the violation was not apparent from the face of
the loan application.

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As for the materiality of Brown’s misrepresented income, I agree with prior
decisions in this court that “a borrower’s substantially misrepresented income
constitutes a material misrepresentation as a matter of law.” E.g., CitiMortgage v.
Allied Mortg. Grp., Inc., 2012 WL 5258745, 4:10CV1863 JAR, at *13 (E.D. Mo.
Oct. 24, 2012) (internal quotation marks omitted). Under Missouri law, “a
misrepresentation is deemed material where it is reasonably calculated to affect the
action and conduct of the company in deciding whether or not to accept the risk by
issuing its policy covering the risk.” Cont’l Cas. Co. v. Maxwell, 799 S.W.2d 882,
889 (Mo. Ct. App. 1990) (interpreting insurance policy). Even under CMI’s stated
income loan programs, a borrower must provide his income subject to civil and
criminal penalties. (See, e.g., Doc. 99-2, Pl.’s Ex. A, ¶ 44; Doc. 99-27, Pl.’s Ex.
F3, p. 4.) Income is one of the two factors used to calculate a debt-to-income ratio.
The Manual indicates that CMI will not purchase a loan unless the debt-to-income
ratio falls within a certain limit. Because borrower income is crucial to
determining the debt-to-income ratio, its substantial “misrepresentation is of such a
nature that all minds would agree it is” material. Maxwell, 799 S.W.2d at 889.
Therefore, “the materiality of a misrepresentation is so clear that it should be
declared material as a matter of law.” Id.

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All of Chicago Bancorp’s evidence relating to the materiality of borrower
income actually goes to whether third-party verification of a borrower’s income
was material to CMI’s decision to purchase stated income loans. None of the
evidence tends to show that Brown’s income itself was immaterial to CMI’s
decision to purchase the Brown loan. Instead, as CMI points out, the borrower’s
represented income was simply “the means by which the borrower’s income is
determined in a Stated Income Loan.” (Doc. 141, Pl.’s Reply in Support of Mot.
for Summ. J., p. 4.)
Whether it was smart or reasonable to rely on the loan application package
alone, without separately documenting a borrower’s income, does not evidence
CMI’s bad faith in later determining that the Brown loan contained a material
misrepresentation. Although the reasonableness of a party’s conduct can be
relevant to a determination of good faith, the demands of reasonableness are
limited by the parties’ “purposes in contracting.” Schell, 92 S.W.3d at 231
(emphasis in original). As such, the reasonableness of CMI’s conduct – in not
verifying borrower income before purchase – must be taken in light of the whole
Agreement. The Agreement gave CMI sole and exclusive discretion to require
repurchase for material misrepresentations and thereby protected it, in large part,
from the risk of purchasing a stated income loan where the borrower inflated his
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income and then defaulted as a result. Though Chicago Bancorp has amply
documented how this arrangement left an originating bank vulnerable to this same
risk, it has not provided any evidence that CMI’s conduct somehow denied
Chicago Bancorp the expected benefit of the contract. Instead, all the admissible
evidence provided by Chicago Bancorp shows that CMI acted precisely in
accordance with the Agreement. See St. Joseph, 251 S.W.3d at 371.
John Calk’s testimony does not support Chicago Bancorp’s argument that
Brown’s misrepresented income was not material to CMI. Like the other evidence,
the conversations Calk reported between himself and CMI representatives tend to
show CMI did not consider verification of borrower income, rather than the
income itself, to be material.
Calk also testified, based on his experience in the home lending industry,
that borrower income could not be material to CMI because CMI had not insisted
upon its verification by a third party. Missouri law defining materiality does not
support Calk’s opinion that a representation is only material if it is verified by a
third party. For example, an insurer is entitled to rely upon a representation made
by an applicant and is not estopped from denying coverage if it later discovers a
falsehood. Moreland v. State Farm Fire & Cas. Co., 662 S.W.2d 556, 566 (Mo.
Ct. App. 1983) (“We are mindful that where answers in an application for
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insurance are complete on their face, the insurer is not obliged to make further
inquiry, and absent knowledge of the true facts is not estopped to avoid the
policy.”). Precedent finding various misrepresentations were material does not
mention third-party substantiation as a factor, even in cases where such verification
would have been easy to obtain. See, e.g., Central Bank of Lake of the Ozarks v.
First Marine Ins. Co., 975 S.W.2d 222, 224 (Mo. Ct. App. 1998). Instead, under
Missouri law, the test of materiality is whether the answer, if truthful, might
reasonably have influenced an insurer (or in this case, an investor) to reject a risk
or charge a higher premium (or interest rate). Coots v. United Empl’rs Fed’n, 865
F. Supp. 596, 603 (E.D. Mo. 1994) (citations omitted). Brown’s truthful answer
would have rendered his debt-to-income ratio ineligibly high under CMI’s
guidelines. Compare Central Bank, 975 S.W.2d at 224 (man’s failure to disclose
that his son was part-owner of a boat, where son’s driving record made him
ineligible for boat insurance under insurer’s guidelines, was material
misrepresentation as a matter of law). In light of Brown’s unacceptably high debtto-income ratio, Calk’s testimony is not sufficient evidence of CMI’s bad faith to
preclude summary judgment on the Brown loan.

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Curtis loan
After purchasing the Curtis loan from Chicago Bancorp, CMI found out that
the borrower had not been working at her reported place of employment when she
closed on the loan or for more than a year afterward. When CMI calculated the
borrower’s debt-to-income ratio using solely her alternate income, without taking
into account the falsely reported employment income, it increased from 64.44% to
174.84%. In addition, the borrower relied in part on her child support income in
making the loan. CMI found that the loan file did not contain documentation
verifying three months of child support had been received, as required. CMI
demanded Chicago Bancorp repurchase the loan, which it has not done.
Chicago Bancorp does not dispute that the Curtis loan application
misrepresented the borrower’s place of employment and income, and as a result,
her debt-to-income ratio exceeded the allowed limit. Instead, it argues that as of
May 4, 2007, it discontinued underwriting the loans it originated for sale to CMI.
From that date on, it paid an underwriting fee to CMI, which hired a contract
agency to underwrite the loans. Chicago Bancorp contends that verifying Curtis’
employment and income was the underwriter’s responsibility, not the
responsibility of Chicago Bancorp as originator. It considers CMI responsible for
the contract underwriter’s failure to catch the income misrepresentation, and it
– 21 –

points to Missouri law holding that a contract will not be construed to indemnify a
party for damages resulting from its own negligent acts unless the contract is “clear
and unequivocal.”
In this case, however, the contract is clear and unequivocal. It provides for
cure or repurchase if CMI, “in its sole and exclusive discretion, determines that any
Loan purchased pursuant to this Agreement: . . . was underwritten and/or
originated based on any materially inaccurate information or material
misrepresentation.” (Doc. 99-3, Pl.’s Ex. B, ¶ 11(i) (emphasis added).) Chicago
Bancorp does not dispute that it originated the Curtis loan based on materially
inaccurate information. CMI is entitled to summary judgment on the Curtis loan.
Gelatka loan
CMI purchased the Gelatka loan from Chicago Bancorp, then resold the loan
to Fannie Mae. After Fannie Mae sustained a loss on the loan, it demanded
repurchase from CMI. Although CMI initially protested, it ultimately repurchased
the loan from Fannie Mae. It then demanded Chicago Bancorp repurchase the
Gelatka loan. Fannie Mae and CMI both determined the loan was defective
because the borrower’s income was inadequately documented. Specifically, the
borrower had been employed for only three months at the time he filled out his

– 22 –

loan application; his income was $3,750 per month. During the two years before
that, the borrower had worked at other jobs, been unemployed, and been in school.
In a demand letter to Chicago Bancorp, a CMI employee wrote that under
Fannie Mae guidelines, incorporated into the Agreement, a borrower must have a
two-year employment history and a reasonable expectation that income will
continue for at least three years. The employee continued, “In this case, the
lender’s verbal verification of employment did not indicate the probability of
continued employment with current employer. Furthermore, the borrower did not
have a documented two-year employment history . . . [which] rendered the subject
mortgage ineligible for delivery to Fannie Mae.” (Doc. 99-53, Pl.’s Ex. H7, p. 1.)
But the applicable Fannie Mae guidelines – at least, those that have been
provided to this court – are ambiguous. The guidelines do state that Fannie Mae
“require[s] the lender to obtain two years of documentation for a borrower’s
employment and income history.” But two paragraphs before that, the guidelines
also state:
We have no minimum history for a borrower’s receipt of income–as
long as the lender can determine that the borrower’s income is stable,
predictable, and likely to continue. In general, unless there is
evidence that the income will no longer be received, the lender should
assume that it will continue.

– 23 –

(Doc. 99-50, Pl.’s Ex. H4, p. 10.) Though it eventually acquiesced, CMI initially
protested Fannie Mae’s decision to require repurchase, which Chicago Bancorp
argues is evidence that its determination that the loan was defective was not made
in good faith. (See Doc. 129-73, Def.’s Ex. MM, p. 1.)6
I conclude that this evidence raises a genuine dispute of material fact
precluding summary judgment. CMI contends that it is entitled to summary
judgment on the Gelatka loan because the loan is defective in multiple ways:
inadequate income documentation, a debt-to-income ratio that exceeded applicable
guidelines, and because it was required to repurchase the loan from Fannie Mae.
However, under the terms of the Agreement, CMI could only compel Chicago
Bancorp to repurchase a loan sent back from Fannie Mae if the defect was “due to
a breach by Correspondent of any representation, warranty or covenant contained
in this Agreement or the CMI Manual or a failure by Correspondent to comply in
all material respects with the applicable CMI Manual terms, conditions,
requirements and procedures.” (Doc. 99-3, Pl.’s Ex. B, ¶ 11(iv).) Therefore, to
require repurchase under this provision of the Agreement, CMI must have

6

In relevant part, CMI wrote to Fannie Mae: “CMI has reviewed Fannie Mae’s request for
repurchase due to the income being inadequately documented and disagree with Fannie Mae.
[Desktop Underwriter] condition # 14 required a pay stub dated within 30 days and a w2 from
the prior year. The DU required documentation was provided to satisfy the condition. In
addition, the borrower provided a letter of explanation regarding their prior job history in which
it evidences the borrower did have a 24-month job employment history in [the same field].”

– 24 –

determined in good faith that Chicago Bancorp had not complied with the
Agreement or the Manual. Under the ambiguous requirements of the Fannie Mae
guidelines, which I must construe against CMI, see Triarch Indus., Inc. v.
Crabtree, 158 S.W.3d 772, 776 (Mo. banc 2005), I cannot find as a matter of law
that Chicago Bancorp inadequately documented Gelatka’s income.
Further, factual disputes remain regarding whether Gelatka’s debt-to-income
ratio exceeded the guidelines. The CMI Manual provides that, to be eligible under
the “My Community Mortgage” program, a borrower may have a “Total
Obligations Ratio” of up to 43% “or as approved using [Desktop Underwriter].”7
(Id.) The Manual goes on, “[t]his ratio may be exceeded on a case-by-case basis
provided the proposed housing expense is equal to or less than what the borrower
had been paying and they were able to maintain a good credit history while paying
a similar amount for housing in the past.” (Id.) In addition, the Manual provides
that the ratio is “not applicable for loans run through DU that receive an
Approve/Eligible, EAI/Eligible or EAII/Eligible finding as long as the loan meets
all other eligibility criteria.” (Id.) CMI has stated that Gelatka’s debt-to-income
ratio was too high, but it has not produced evidence of what that ratio was, or that

7

Although neither party states expressly that the Gelatka loan was underwritten using Desktop
Underwriter, references to “DU” make clear that it was. (See, e.g., Doc. 129-73, Def.’s Ex.
MM.)

– 25 –

it failed to meet the alternative measures listed in the Manual. I will deny
summary judgment with regard to this loan.
Hansen loan
The Hansen borrowers filled out their loan application on November 27,
2006, asserting (truthfully) that Mr. Hansen worked as a network engineer at a tech
company and earned $7,750 per month. Two weeks later, Mr. Hansen accepted a
similar position with a different company, where he would earn approximately the
same amount of money. His last day at the old company was Friday, December
22, 2006, though – because of a payment arrangement with the company – he was
paid for a week after that. The following Monday, December 26, 2006, the Hansen
borrowers closed on their loan, signing the application without changing the
information about Mr. Hansen’s salary or employer. On December 28, 2006, Mr.
Hansen received his last paycheck from the old company; on January 2, 2006, he
started at the new company. He apparently worked at the new company for 45
days, then stopped working for two months before beginning work elsewhere.
(See Doc. 141-5, Pl.’s Ex. 5 to Reply, Hansen Dep. 32:12-21.) Mr. Hansen
testified in a deposition that he had defaulted on his mortgage loan in part because
of this two-month period of unemployment, which depleted his family’s savings.
(Id. 36:5-18.)
– 26 –

CMI purchased the Hansen loan from Chicago Bancorp at closing. When
the loan later went into default, CMI demanded Chicago Bancorp repurchase the
loan based on Mr. Hansen’s December 26 misrepresentation that he was still
employed at the old company, making his old salary.
Chicago Bancorp argues that the misrepresentation was not “material” under
its agreement with CMI because Mr. Hansen continued – throughout 2007 and
2008 – to earn approximately the same salary. Chicago Bancorp contends that
CMI could not have determined in good faith that the representation was material
because it was in regular contact with the Hansens after closing and could have
asked Mr. Hansen if he was still employed.
Although a substantial misrepresentation of a borrower’s income is material
as a matter of law, materiality is generally a question of fact. Continental Cas.
Co., 799 S.W.2d at 889. But even if a genuine factual dispute remains regarding
whether the Hansen misrepresentation was material, CMI has presented
uncontroverted evidence that it determined that the Hansen misrepresentation was
material. CMI’s apparent failure to ask Mr. Hansen for updated employment
information during and after default could have had no bearing on the materiality
of his misrepresentation at the time of closing. See Weekly v. Mo. Prop. Ins.
Placement Facility, 538 S.W.2d 375, 378 (Mo. Ct. App. 1976) (“That the fact
– 27 –

misrepresented has no subsequent relation to the manner in which the event
insured against occurred, does not make it any the less material to the risk.”).
Because Chicago Bancorp has not provided any evidence of CMI’s bad faith, CMI
is entitled to summary judgment on the Hansen loan.
Maggio loan
CMI purchased the Maggio loan from Chicago Bancorp and later
determined that the loan application substantially misrepresented Maggio’s
income. The borrower stated that she made $8,291 per month when she actually
earned $4,005 per month.8 Under the applicable guideline in the CMI Manual,
Maggio was eligible for a loan if she had a debt-to-income ratio under either 45%
or 50% (depending on whether it was a fixed- or adjustable-rate mortgage). When
CMI recalculated Maggio’s debt-to-income ratio using the correct income, it rose
to 89%. Because the loan violated the debt-to-income ratio requirement contained
in the CMI Manual and contained a material misrepresentation (namely, the
substantial inflation of the borrower’s income), the undisputed evidence shows that
the loan was defective under the Agreement.

8

Although CMI represented that this was the borrower’s verified income in its demand letters to
Chicago Bancorp, the written verification statement gives inconsistent amounts for Maggio’s
2007 annual salary and her gross biweekly salary. (See Doc. 99-73, Pl.’s Ex. J4.) It may be that
her income increased in 2008, after she closed on her mortgage loan. Regardless of which figure
is used, Maggio’s true income was substantially less than what she represented.

– 28 –

In support of its position that it was not required to repurchase the Maggio
loan, Chicago Bancorp advances the same arguments as it did for the Brown and
Curtis loans. For the reasons stated above, those arguments must fail. Summary
judgment for CMI is appropriate on the Maggio loan.
McDonald loan
After purchasing the McDonald loan from Chicago Bancorp, CMI
determined that the loan package was defective in two respects: (1) it did not
contain required information verifying the borrowers’ employment, income, and
assets and (2) the borrowers had not chipped in at least $500 of their own money
when closing on the loan. Under the CMI Manual guidelines, an applicant for this
type of loan – the Fannie Mae DU Expanded Approval loan – was required to
“contribute a minimum of 3% of his/her own funds toward the down payment and
closing costs” unless the loan met certain conditions. If the loan received a certain
type of recommendation from the Desktop Underwriter and carried a certain loanto-value ratio, a borrower could put in $500 of his or her own funds instead of
meeting the 3% threshold. (See Doc. 99-84, Pl.’s Ex. K5, p. 4.) The Fannie Mae
guidelines provide further:
The deposit on the sales contract for the purchase of the security
property is an acceptable source of funds for both the down payment
and the closing costs. When the deposit is used to make any portion
of the borrower’s down payment that must come from his or her own
– 29 –

funds, the source of funds for the deposit must be verified. The
receipt of the deposit generally should be verified by a photocopy of
the borrower’s canceled check, although a written statement from the
holder of the deposit is acceptable.
(Id., p. 7.)
Both CMI and Chicago Bancorp have moved for summary judgment on this
loan. Chicago Bancorp contends that the loan file contained the verifications
required under the Agreement, including a canceled personal check substantiating
the McDonalds’ required contribution, and has submitted an affidavit from its
former president, John Calk, to this effect. (See Doc. 61-4, Def.’s Ex. A, ¶ 5.) It
has also provided copies of the documents themselves. Finally, Chicago Bancorp
points out that CMI did not issue a suspense notice about the missing
documentation when it conducted its pre-purchase review, which it contends is
evidence that the documents were actually there.
Because Chicago Bancorp and CMI agree on what was required to document
the borrowers’ income, but dispute whether those documents were present in the
loan file, there are issues of fact preventing summary judgment for either party. A
jury could view Chicago Bancorp’s evidence as supporting a finding of bad faith.
CMI argues that Chicago Bancorp is precluded from raising a bad-faith
defense as to the McDonald loan because it ignored demand letters from CMI,
which gave Chicago Bancorp an opportunity to provide the substantiating
– 30 –

documents before now. CMI cites no law in support of this contention, which does
not seem to have any basis in the Agreement between the parties. Although
Chicago Bancorp’s failure to respond to the letters may be relevant to the fact issue
of whether CMI acted in bad faith, it does not bar Chicago Bancorp from using a
bad-faith defense.
CMI also argues that the McDonald loan suffered from an additional defect:
CMI was required to repurchase the loan from Fannie Mae, the secondary investor
to which CMI had sold the loan. This is a derivative defect; it only requires
repurchase by Chicago Bancorp if Fannie Mae’s rejection of the loan was caused
by Chicago Bancorp. The parties agree that Fannie Mae dropped the loan because
it lost its insurance coverage and that the insurer rescinded coverage because of the
supposedly missing documents. It remains a question of fact whether the
documents were missing because Chicago Bancorp never provided them or
because CMI lost them. Neither party is entitled to summary judgment as to this
loan.
Miller loan
CMI purchased the Miller loan from Chicago Bancorp and resold it to
Fannie Mae, which determined that the sellers had made excessive contributions to
the buyers at closing in violation of Fannie Mae guidelines. The evidence
– 31 –

submitted by CMI suggests that no more than 3% of the loan’s total value could be
funded by the sellers. (See Doc. 99-96, Pl.’s Ex. L6 (Miller loan was second home
with CLTV of 95%); Doc. 99-95, Pl.’s Ex. L5 (CMI Manual guidelines providing
that sellers’ maximum contribution for second homes with CLTVs of greater than
90% is 3%)). CMI sent multiple letters to Chicago Bancorp demanding
repurchase. (See Docs. 99-91, 99-92, and 99-98, Pl.’s Exs. L1, L2, and L8.)
Chicago Bancorp has not repurchased the Miller loan and does not dispute CMI’s
finding of excessive seller contributions. Therefore, CMI is entitled to summary
judgment on the Miller loan.
Perez loan
CMI purchased the Perez mortgage loan from Chicago Bancorp, then sold it
to Fannie Mae. Perez had closed on his loan on November 18, 2006, without
disclosing the fact that he had two additional mortgages to pay monthly. In 2010,
Fannie Mae discovered the extra mortgages when it obtained Perez’s credit report.
It demanded repurchase from CMI, stating that the “undisclosed mortgages
resulted in a misrepresentation of the borrower’s financial condition and
unacceptable additional layering of risk.” (Doc. 99-109, Pl.’s Ex. M6.) When
Perez’s debt-to-income ratio was recalculated including the mortgages, it rose from
49.55% to 67.78%. (Doc. 99-110, Pl.’s Ex. M7.) CMI eventually complied with
– 32 –

Fannie Mae’s repurchase demand, then sent demand letters of its own to Chicago
Bancorp based on the same defects.
CMI argues that Chicago Bancorp was obligated under the Agreement to
repurchase the loan because: (1) the missing mortgages amounted to a material
misrepresentation; (2) the properly calculated debt-to-income ratio exceeded
applicable guidelines incorporated into the Agreement; and (3) Fannie Mae
compelled CMI to repurchase the loan because of the other two defects.
First, the record contains insufficient evidence for me to determine whether
the new debt-to-income ratio was excessive for this type of loan. Perez’s mortgage
was a cash-out refinance called an “Agency SISA” loan. The relevant portion of
the CMI Manual provides that “[t]he debt ratio is determined by DU.” (See Doc.
99-108, Pl.’s Ex. M5, pp. 3, 4.) The DU (Desktop Underwriter) guidelines in turn
refer to require a lender to resubmit a loan to DU if the lender discovers the
borrower failed to disclose a debt “if the monthly payment will increase the total
expense ratio by more than 2 percentage points.” (Id., pp. 7–8.) But CMI has not
provided any evidence showing whether the lender9 complied with this
requirement and whether DU re-approved the loan at the higher debt-to-income
ratio.
9

Whether “lender” refers to Chicago Bancorp or CMI is unclear. The portion of the DU
guidelines provided to the court do not define the term “lender.”

– 33 –

However, Perez’s omission of the two additional mortgages could violate the
Agreement even if their inclusion did not lead to an excessive debt-to-income ratio.
Whether they did depends on whether Perez’s misrepresentation of his debts was
“material” to CMI’s decision to purchase the loan. Chicago Bancorp argues that it
was not a material misrepresentation because Perez successfully made payments
on the subject loan until after he had sold and paid off the undisclosed mortgages.
As evidence that CMI agrees, it has submitted a letter from CMI to Fannie Mae,
protesting Fannie Mae’s decision to require CMI to repurchase the Perez loan. In
the letter, a CMI employee writes:
After a detailed review [of] the documentation provided and the loan
file, it is concluded that this claim is immaterial and has no material
adverse [e]ffect to the subject loan. Fannie Mae’s updated credit
report reflects the additional mortgages are paid off with satisfactory
payment history. The borrower was able to maintain both payments
and pay the subject loan in a timely manner. . . . The undisclosed
liabilities had no impact on the borrower’s ability to pay back the
subject loan.
(Doc. 129-71, Def.’s Ex. KK.)
I conclude that, like a substantial misrepresentation of a borrower’s income,
a substantial misrepresentation of a borrower’s debt is material as a matter of law.
In this case, the undisclosed mortgages alone represented almost one-fifth of

– 34 –

Perez’s monthly income, which is a significant amount.10 Although Chicago
Bancorp argues that the successful payoff of the undisclosed loans renders the
misrepresentation immaterial, I disagree. What matters is whether the
misrepresentation was material at the time of purchase, not whether it actually
turned out to increase CMI’s risk later. See Galvan v. Cameron Mut. Ins., 733
S.W.2d 771, 773 (Mo. Ct. App. 1987); Haynes v. Mo. Prop. Ins. Placement
Facility, 641 S.W.2d 497, 499 (Mo. Ct. App. 1982); Weekly, 538 S.W.2d at 378.
Because Chicago Bancorp originated the loan based on materially inaccurate
information, CMI was entitled to demand repurchase. CMI is entitled to summary
judgment that Chicago Bancorp breached the Agreement by failing to repurchase
the Perez loan.
Villares loan
Villares, a surgeon in Arizona, closed on a mortgage loan on June 18, 2007.
He represented that he was employed as a “cardiologist/general surgeon” and his
employer was Sunwest Employer Services. CMI bought the loan from Chicago
Bancorp. Fannie Mae, which later purchased the Villares loan from CMI,
discovered that Villares actually owned a medical practice called Minimally
10

Chicago Bancorp appears to argue that the additional mortgages were from properties Perez
rented to others, and that the rental income he received from these properties – also undisclosed
– assuaged Perez’s monthly mortgage debt. Though it is theoretically possible that a borrower’s
rental income and mortgages might cancel each other out, Chicago Bancorp has not documented
the amount of rental income Perez allegedly received.

– 35 –

Invasive Surgical Consultants. Under Fannie Mae’s guidelines, a borrower “who
has a 25 percent or greater ownership interest in a business” is self-employed. (See
Doc. 99-123, Pl.’s Ex. N7, p. 6.) Self-employed borrowers are subject to more
stringent employment and income verifications than borrowers who are not selfemployed. (See id.) Because those verifications were not part of Villares’ loan
application file, Fannie Mae compelled CMI to repurchase the loan. In turn, CMI
demanded Chicago Bancorp repurchase the loan, which it has not done.
Both CMI and Chicago Bancorp have moved for summary judgment on the
Villares loan. CMI argues the Villares loan was defective because it
misrepresented the borrower’s employment and because CMI was required to
repurchase it from Fannie Mae.11 Further, when the offending income was
removed, the loan failed to meet the applicable debt-to-income ratio limit.
For its part, Chicago Bancorp argues first that any defects were an
“underwriting deficiency” and because it was no longer underwriting loans it sold
to CMI by this time, it did not breach the Agreement by failing to repurchase the
loan. For the same reasons I stated earlier with regard to the Curtis loan, Chicago

11

As I have stated before, the fact that CMI was compelled to repurchase a loan from a
secondary investor is a derivative defect. Repurchase alone does not require Chicago Bancorp to
take the loan back. Rather, only repurchase due to Chicago Bancorp’s breach of the Agreement
or the CMI Manual warrants repurchase under the Agreement.

– 36 –

Bancorp was subject to the “Cure and Repurchase” provision of the Agreement
even though it did not underwrite the Villares loan, so this argument has no merit.
Chicago Bancorp next argues that it promulgated a request for admission on
CMI that read: “Admit that you do not know the percentage of ownership of
Minimally Invasive Surgical Consultants, PLC that [borrower] Villares held at the
time of the application for, or at the time of the closing of, the Villares Loan, or at
the time you purchased the Villares Loan.” CMI objected to the request for
admission for various reasons, then stated:
Subject to and without waiving its objections, CMI states that, after
reasonable inquiry, it is unaware of facts that would establish the
assumption that “[borrower] Villares held” a “percentage of
ownership of Minimally Invasive Consultants, PLC . . . at the time of
the application for, or at the time of the closing of, the Villares Loan,
or at the time you purchased the Villares Loan” on which this Request
is premised and has no basis on which to conclude that such
assumption is accurate; therefore, CMI is unable to admit or deny the
Request.
(Doc. 61-36, Def.’s Ex. U, pp. 19–20.) According to Chicago Bancorp, this is
conclusive evidence of CMI’s bad faith in demanding repurchase.
Although CMI’s response to the RFA was evasive,12 it does not constitute an
admission that CMI had no basis for a good-faith belief that Villares was self-

12

Under Fed. R. Civ. P. 26(g), a party’s attorney must certify that an objection or discovery
response is “complete and correct as of the time it is made,” among other things. The record
makes clear that CMI does know that Villares owned a percentage of Minimally Invasive

– 37 –

employed. In fact, CMI did not admit anything at all. The uncontroverted
evidence, including Villares’ bankruptcy petition (Doc. 99-122, Pl.’S Ex. N6, pp.
4, 23), demonstrates that under Fannie Mae’s expansive definition of selfemployment, Villares was self-employed at the time he closed on his mortgage
loan. Chicago Bancorp has not submitted evidence of CMI’s bad faith in so
concluding.
But in order to prevail on summary judgment, CMI must show not only that
Villares was self-employed but that it determined “in its sole and exclusive
discretion” that the loan somehow failed to comply with the Agreement. CMI does
not clearly identify which of the “Cure or Repurchase” provisions the Villares loan
fails to meet. At one point, it argues that Villares’s representation of his employer
as Sunwest Employer Services was a material misrepresentation. Under Arizona
law, Sunwest is considered a co-employer, see Ariz. Rev. Stat. § 23-561, so it is
not clear that Villares made a misrepresentation at all, much less a material one.
CMI does not provide any evidence that Villares was required to provide the
names of both his employers on his application.
CMI also argues that a loan to a self-employed borrower is subject to more
rigorous income verification requirements under Fannie Mae guidelines, and the
Consultants, which is the very reason CMI had demanded repurchase. Its response to Chicago
Bancorp’s request for admission was nonsensical.

– 38 –

uncontroverted evidence it submits shows this is true. (Doc. 99-123, Pl.’s Ex. N7,
p. 6.) Chicago Bancorp’s failure to include the appropriate documents verifying
Villares’ income could require repurchase if the loan “was underwritten and/or
originated in violation of any term, condition, requirement or procedure contained
in this Agreement or the CMI Manual.” CMI has not precisely identified what
verification the loan package failed to include. In its final demand letter to
Chicago Bancorp, CMI indicated that “Fannie Mae’s guidelines require a
minimum of two year history of self employment and should be documented with
two years’ personal tax returns.” (Doc. 99-118, Pl.’s Ex. N2, p. 1.) But the
guidelines themselves, also submitted by CMI, belie this conclusion. They provide
only that: “Because income from self-employment may be unpredictable and the
business owner often is personally liable for the business debt, self-employed
borrowers tend to default at a much higher rate than other borrowers. For this
reason, we usually require the lender to obtain a two-year history of the borrower’s
prior earnings . . . . However, a person who has a shorter history of selfemployment––12 to 24 months––may be considered” under certain circumstances.
(Doc. 99-123, Pl.’s Ex. N7, p. 6 (emphasis added)).
As noted, the Fannie Mae guidelines, incorporated into the Agreement, are
not a picture of clarity. Despite their ambiguity, I find that CMI is entitled to
– 39 –

summary judgment on the Villares loan because Chicago Bancorp has not provided
any evidence of bad faith. CMI did not have to be correct in its determination that
the Chicago Bancorp breached the Agreement. It only needed to base that
determination on what it knew. The uncontroverted evidence shows that it did that
much, so it is entitled to summary judgment on this loan.
Wade loan
Both parties have moved for summary judgment on the Wade loan, which
CMI purchased from Chicago Bancorp, then resold to Fannie Mae. Eventually –
like for the McDonald loan – the mortgage insurer rescinded coverage because it
found the Wade borrower had not contributed at least $500 of his own funds to the
transaction. Because mortgage insurance is a Fannie Mae requirement and the loan
had lost coverage, Fannie Mae compelled CMI to repurchase the loan. In turn,
CMI demanded that Chicago Bancorp repurchase the loan, which it has not done.
Chicago Bancorp argues that Wade had, in fact, contributed $500 of his own
funds to the transaction. As evidence, it offers the HUD-1 settlement statement, its
own calculations, and an affidavit from Chicago Bancorp president John Calk
explaining why Wade’s contributions add up to more than $500. CMI counters
that Wade did not contribute at least $500, and even if he did, that his contribution
was not verified in the loan file in the required way.
– 40 –

The evidence suggests that the Wade loan had a 100% loan-to-value ratio
(see Doc. 99-137, Pl.’s Ex. O8). Because the loan was sold to CMI under the
Fannie Mae Flexible Mortgage 97/100 program, Wade could make a 3%
contribution or had “the option of contributing $500 from [his] own funds to the
transaction.” As set out above with regard to the McDonald loan, the Fannie Mae
guideline required that there be proof that the funds actually came from the
borrower. Chicago Bancorp contends that Wade’s $2,000 earnest money payment
should suffice under the guideline and has produced a copy of his check. But the
earnest money payment was made by cashier’s check. The check was purchased
by Wade (see Doc. 115-3), but it does not identify Wade’s bank account or other
assets as the source of funds.13 Although Chicago Bancorp has also produced a
receipt from the realty company to which Wade paid the earnest money, it does not
constitute a letter from the holder of the deposit attesting that it came from Wade’s
own funds and is therefore not an adequate alternative under the guideline.
Chicago Bancorp argues that these are two separate theories of recovery: (1)
whether Wade’s loan file contained an acceptable verification of the source of
funds for his contribution at closing and (2) whether Wade made a $500
contribution at all, based on the HUD-1 settlement statement. Chicago Bancorp

13

In contrast, the McDonalds’ canceled check was drawn on their personal bank account.

– 41 –

contends that CMI should not be permitted to recover under the first theory when
its letters of demand only referenced the second theory. But both theories of
recovery are well within the scope of CMI’s original complaint, in which CMI pled
that the Wade loan “was underwritten in violation of program requirements.”
(Doc. 1, ¶ 43.)
Because the Wade loan was originated in violation of the Fannie Mae
guideline, which was incorporated into the Agreement, CMI was permitted to
demand repurchase. It is undisputed that Chicago Bancorp has failed to repurchase
the loan. Therefore, CMI is entitled to summary judgment on the Wade loan.
VI.

Damages
The Agreement provided that upon notification from CMI that a loan was

defective, Chicago Bancorp would “correct or cure” the defect within the time
prescribed by CMI and to CMI’s “full and complete satisfaction.” (Doc. 99-3,
Pl.’s Ex. B, ¶ 11.) Under the Agreement, if Chicago Bancorp was unable to correct
or cure the defect within the prescribed time, it would:
at CMI's sole discretion, either (i) repurchase such defective Loan
from CMI at the price required by CMI (“Repurchase Price”) or (ii)
agree to such other remedies (including but not limited to additional
indemnification and/or refund of a portion of the Loan purchase price)
as CMI may deem appropriate.

– 42 –

(Id.) CMI has demanded that Chicago Bancorp pay the Repurchase Price for each
of the defective loans.
The CMI Manual defines the Repurchase Price as the sum of:
(i) the current principal balance on the loan as of the paid-to date;
(ii) the accrued interest calculated at the mortgage loan Note rate from
the mortgage loan paid-to date up to and including the repurchase
date;
(iii) all unreimbursed advances (including but not limited to tax and
insurance advances, delinquency and/or foreclosure expenses, etc.)
incurred in connection with the servicing of the mortgage loan;
(iv) any price paid in excess of par by CitiMortgage on the funding
date[;] and
(v) any other fees, costs, or expenses charged by or paid to another
investor in connection with the repurchase of the mortgage loan from
such investor but only to the extent such fees, costs and expenses
exceed the total of items (i) through (iv) above.
(Doc. 99-8, Pl.’s Ex. C, p. 97.)
Chicago Bancorp does not appear to dispute CMI’s calculation of the
Repurchase Price for each loan. But for five of the loans – Bennett, Brown,
Gelatka, McDonald, and Miller – Chicago Bancorp contends that the Repurchase
Price is only a “starting point” for determining the appropriate measure of
damages. For these five loans, argues Chicago Bancorp, CMI either still owns the
properties, waited too long sell them off, or refused to accept deeds-in-lieu-offoreclosures that would have slowed the decline in the properties’ value. Chicago
Bancorp argues that CMI’s handling of the loans in such a manner was not
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“reasonably foreseeable” at the time it signed the Agreement, so it cannot be liable
for damages resulting from CMI’s actions. Furthermore, according to Chicago
Bancorp, some of CMI’s actions amounted to a failure to mitigate damages.
None of Chicago Bancorp’s arguments can succeed. The Agreement
represents an arm’s length accord between two sophisticated commercial entities,
under which Chicago Bancorp agreed to pay the Repurchase Price for defective
loans it could not cure. Although CMI’s feet-dragging may have led to increased
damages under the Repurchase Price, CMI had already contracted to avoid this
risk, and Chicago Bancorp had contracted to assume it. There may be other ways
to calculate the damages CMI incurred because of Chicago Bancorp’s breach of
the Agreement, but this is the measure the parties agreed to. The damages incurred
by CMI were not unforeseeable; rather, they were explicitly bargained for. See
CitiMortgage, Inc. v. Allied Mortgage Grp., Inc., 4:10CV1863 JAR, 2012 WL
5258745, at *13 (E.D. Mo. Oct. 24, 2012); CitiMortgage, Inc. v. Reunion Mortg.,
Inc., 4:10CV1632 RWS, 2012 WL 5471165, at *13 (E.D. Mo. Nov. 9, 2012). As
such, CMI is entitled summary judgment in the amount of the Repurchase Price for
the Bennett, Brown, Curtis, Hansen, Maggio, Miller, Perez, Villares, and Wade
loans. This amounts to $1,595,208.63. CMI still owns two of the properties
securing the mortgage loans at issue: the Brown and Wade properties. In
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accordance with Section 11 of the Agreement, CMI must release to Chicago
Bancorp its interest in those properties upon receipt of the Repurchase Price.
VII. Motion to Exclude Expert Testimony
CMI has moved to exclude testimony from Chicago Bancorp president John
Calk, whom Chicago Bancorp has designated as an expert. In addition to his
testimony as a fact witness, Calk is expected to testify as an expert that: (1)
because CMI did not require third-party verification of borrower income, income
was not material to CMI’s loan purchasing decisions, and (2) industry custom and
practice is to give credit at closing toward a borrower’s minimum required
contribution for the seller’s share of prorated property taxes when the taxes are
paid in arrears.
In light of my holdings in this Memorandum and Order, I will deny as moot
CMI’s motion to exclude. Neither of these topics is related to the remaining loans
at issue. Although Chicago Bancorp argued that, for the McDonald loan, the
borrowers’ tax payments should count toward the $500 required contributions,
whether the borrowers provided $500 at closing is not the dispositive issue.
Rather, it is whether the McDonald loan file contained a canceled check (or
acceptable alternative under the applicable guideline) showing that the contribution
came from the borrowers’ own funds. If Calk has personal knowledge of the
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contents of the McDonald loan file, he remains free to testify about that as a fact
witness, but none of his proffered expert testimony is relevant to any issues
remaining for trial.
VIII. Conclusion
There are no genuine issues of material fact and CMI is entitled to judgment
as a matter of law that Chicago Bancorp breached the Agreement by failing to
repurchase the Bennett, Brown, Curtis, Hansen, Maggio, Miller, Perez, Villares,
and Wade loans. As for the two remaining loans, Gelatka and McDonald, Chicago
Bancorp has submitted sufficient evidence to create a triable issue of fact about
CMI’s bad faith in determining that the loans were defective for one of the reasons
enumerated in the Agreement.
Accordingly,
IT IS HEREBY ORDERED that defendant Chicago Bancorp’s motion for
partial summary judgment [#50] is denied.
IT IS FURTHER ORDERED that plaintiff Citimortgage, Inc.’s motion for
summary judgment [#97] is granted as to the Bennett, Brown, Curtis, Hansen,
Maggio, Miller, Perez, Villares, and Wade loans, and is denied as to the Gelatka
and McDonald loans.

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IT IS FINALLY ORDERED that plaintiff’s motion to exclude purported
expert testimony [#91] is denied as moot.

CATHERINE D. PERRY
UNITED STATES DISTRICT JUDGE
Dated this 31st day of March, 2014.

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