PEZZA et al v. WELLS FARGO BANK, N.A. et al
Filing
77
OPINION filed. Signed by Judge Anne E. Thompson on 8/30/2011. (eaj)
NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
Anthony L. PEZZA and Patricia A. PEZZA,
Plaintiffs,
Civ. No. 09-2097
v.
OPINION
WELLS FARGO BANK, N.A., as Trustee, et
al.,
Defendants.
THOMPSON, U.S.D.J.,
I. INTRODUCTION
This matter has come before the Court on the Motion for Summary Judgment [docket #
52] filed by Defendants FGC Commercial Mortgage Finance d/b/a Fremont Mortgage and
Fremont Investment & Loan, Inc. (collectively, “Fremont” or “Fremont Defendants”) and upon
the Motion for Summary Judgment [51] filed by Defendants Litton Loan Servicing LP, Wells
Fargo Bank, N.A., and HSBC Bank, USA, National Association (collectively, “Litton
Defendants”). Plaintiffs Anthony and Patricia Pezza have opposed the Defendants’ motions and
have filed a Cross-Motion for Partial Summary Judgment [65], which both the Fremont and
Litton Defendants have opposed [69, 71]. The Court has decided the motions after considering
the parties’ written submissions, without holding oral argument, pursuant to Fed. R. Civ. P.
78(b). For the reasons given below, the Defendants’ motions are granted in part and denied in
part, and Plaintiffs’ motion is denied.
1
II. BACKGROUND
Plaintiffs Anthony and Patricia Pezza filed this lawsuit seeking rescission of their home
mortgage and damages under the Federal Truth in Lending Act (“TILA”), 15 U.S.C. §§ 1601 et
seq., and damages under the New Jersey Consumer Fraud Act (“CFA”), N.J.S.A. 56:8-1 et seq.
(Second Am. Compl. 4–10) [40]. 1 Plaintiffs claim that their final Federal Truth in Lending
Disclosure Statement (“TILA disclosure”) was “misleading” because the final disclosure, as well
as statements made by the closing agent, indicated a fixed-rate mortgage even though the
mortgage actually had an adjustable interest rate. (Id. at 4.) Plaintiffs also allege consumer fraud
on the grounds that the lenders engaged in unconscionable acts, predatory lending, and breach of
an implied warranty of good faith. (Id. at 7–9.) They bring their claims against the Fremont
Defendants as the lenders in the mortgage transaction and against the Litton Defendants as
assignees and servicers of the mortgage.
In 2006, Plaintiffs were in substantial debt: they owed approximately $80,000 in
delinquent taxes, the IRS and the State of New Jersey had filed tax liens against their property,
and the State of New Jersey had garnished their bank accounts and Patricia Pezza’s wages.
(Fremont Defs.’ Mem. in Supp. Ex. A, Anthony Pezza Dep., 15:18–16:5, 16:23–17:24)
(“Anthony Pezza Dep.”) [50-1]. To pay off this existing debt, Plaintiffs contacted a number of
mortgage brokers to help them find a new loan, and ultimately hired Residential Loan Funding
Corp. (“Residential”) in March 2006. (Id. at 16:11–15); (id. Ex. B, at Wells. 0029, Mortgage
Loan Origination Agreement) [50-2].
Residential provided Plaintiffs with a loan estimate form and a preliminary TILA
disclosure. (Id. Ex. C.) [50-3]. The disclosure statement reveals that the proposed loan would
contain an adjustable interest rate of 12.75% and a principal amount of $270,000. (Id.)
1
The Second Amended Complaint [40] is the operative pleading in this case.
2
Residential then submitted a loan application and supporting documents to the lender, Fremont.
(Id. Ex. D, at Wells. 0189–197, Uniform Residential Loan Application) [50-4].
Based on the application, Fremont qualified Plaintiffs for a loan with a par rate of 11.2%.
Fremont then offered Plaintiffs a loan for $286,500 with an adjustable interest rate of 12.45%,
and Plaintiffs accepted the offer. (See, e.g., id. Ex. E) [50-5]. At the closing on May 5, 2006,
Plaintiffs signed a number of loan documents, including the following: (1) an “Adjustable Rate
Note,” (id. Ex. E, at Wells. 0099–0102) [50-5], (2) an “Adjustable Rate Rider,” (id. Ex. F, at
Wells. 0121–0125) [50-6], (3) an “Adjustable Rate Mortgage Loan Program Disclosure,” (id. Ex.
G, at Wells. 0007–0008) [50-7], and (4) a final “Federal Truth in Lending Disclosure Statement,”
(id. Ex. H, at Wells. 0378) [50-8].
Plaintiffs admit that they did not read some of these documents at the closing and still had
not read them by the time of their depositions. 2 They also concede that their “main concern at
the time” they signed the papers was paying off their existing debt. (Anthony Pezza Dep. 45:5–
8.) Nevertheless, Plaintiffs claim that the last document listed—the final TILA disclosure
statement—was misleading because it was inconsistent with the other loan documents and with
information provided orally at the closing by the closing agent. Specifically, Plaintiffs claim
that, even though the final TILA disclosure states that “Your loan contains a Variable Rate
Feature,” they were misled into believing the loan was for a fixed interest rate because the
payment schedule lists 360 payments at $2,855.18 and because the closing agent pointed to the
$2,855.18 figure and said, “This is your mortgage payment.” (Pls.’ Br. 24) [63]. Plaintiffs state
2
The following questions and answers occurred at Mr. Pezza’s deposition: “Q: Did you read through the Adjustable
Rate Rider during the loan closing? A: No. . . . Q: To this date, did you read through the Adjustable Rate Rider?
A: No. . . . Q: Did you read the [Adjustable Rate Mortgage Loan] program disclosure when you signed the
document? A: No. Have you read it up through today? A: No.” (Anthony Pezza Dep., 44:14–24, 45:14–46:14.)
3
that the closing agent also “point[ed] out that there’s 360 payments at [$]2,855.18.” (Anthony
Pezza Dep. 47:16–19.)
After the closing, Fremont disbursed the loan proceeds and Plaintiffs provided Fremont
with a mortgage on their property. (See Fremont Defs.’ Mem. in Supp. Ex. I, at Wells. 0105–
0120, Mortgage) [50-9]. The broker received various fees on the transaction: $1,500 as a
“broker discount point,” a $350 “application fee,” and $5,400 as a “yield spread premium.” (Id.
Ex. J, at Wells. 0336, Settlement Statement) [50-10].
For the next three years, Plaintiffs made monthly payments on their mortgage. (See Pls.’
Br. Ex. E, Loan History) [63-7]. Some of these payments were late, but Plaintiffs state that they
eventually made all payments owed. (Anthony Pezza Dep. 53:21–54:3.) Fremont served as the
servicer of the loan from May 2006 until it assigned the loan to HSBC Bank USA, as Trustee, in
September 2006. HSBC serviced the loan from then on.
On April 30, 2009, nearly three years into the loan, Plaintiffs sent a letter to the
Defendants, demanding that the mortgage loan be rescinded due to TILA violations. (Fremont
Defs.’ Mem. in Supp. Ex. L, T.I.L.A. Rescission Notice 1–4) [50-12]. When Defendants took no
steps to rescind the mortgage, Plaintiffs filed this lawsuit on May 4, 2009. They subsequently
amended their Complaint to add CFA claims to the TILA claims. (Second Am. Compl. 8–10)
[40]. The basis for the CFA claims is that Fremont engaged in the following unconscionable
acts: (1) offering Plaintiffs a 12.45% interest rate even though they qualified for a rate of 11.2%,
(2) increasing the rate from 11.2% to 12.45% even though Plaintiffs paid “broker discount
points,” and (3) providing Plaintiffs with a loan Fremont knew they could not afford. (Pl.’s Br.
1–2.)
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In August 2009, Plaintiffs sold their property and relocated to Florida. (Anthony Pezza
Dep. 56:8–19.) They sold the property “under protest” to preserve their rights in this lawsuit.
(Pls. Br. 9.) With the proceeds from the sale, Plaintiffs paid off the mortgage in full. (Id.) Still,
they maintain this action seeking a refund of the interest and closing costs on the mortgage as
well as statutory damages under TILA, 15 U.S.C. § 1640, and damages under the CFA, N.J.S.A.
56:8-1 et seq.
Both the Fremont and Litton Defendants have now moved for summary judgment on all
claims. Plaintiffs have cross-moved for summary judgment on their TILA claim.
III. ANALYSIS
A. Legal Standard
Summary judgment is proper when “the pleadings, the discovery and disclosure
materials, and any affidavits show that there is no genuine issue as to any material fact and that
the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c). The Court will
“view the inferences to be drawn from the underlying facts in the light most favorable to the
party opposing the motion.” Id.; Curley v. Klem, 298 F.3d 271, 276–77 (3d Cir. 2002). In
resolving a motion for summary judgment, the Court must determine “whether the evidence
presents a sufficient disagreement to require submission to a jury or whether it is so one-sided
that one party must prevail as a matter of law.” Anderson v. Liberty Lobby, 477 U.S. 242, 251–
52 (1986). More specifically, the Court must grant summary judgment against any party “who
fails to make a showing sufficient to establish the existence of an element essential to that party’s
case, and on which that party will bear the burden of proof at trial.” Celotex Corp. v. Catrett,
477 U.S. 317, 322 (1986). If the movant’s motion is supported by facts, the party opposing
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summary judgment “may not rely merely on allegations or denials in its own pleading; rather, its
response must . . . set out specific facts showing a genuine issue for trial.” Fed. R. Civ. P.
56(e)(2). More than a mere “scintilla of evidence” supporting the non-moving party is required.
Anderson, 477 U.S. at 252. Properly applied, Rule 56 will “isolate and dispose of factually
unsupported claims or defenses” before those issues come to trial. Celotex, 477 U.S. at 323–24.
B. Plaintiff’s TILA Claims
Plaintiffs claim that the final TILA disclosure statement violated the requirements of the
Truth in Lending Act because it was inconsistent with the preliminary TILA disclosures and the
information provided orally by the closing agent. Because we find that Plaintiffs have failed to
make an adequate showing that the final TILA disclosure was misleading, inconsistent, or
otherwise in violation of TILA, we will grant summary judgment in favor of the Defendants on
these claims.
1. Legal Framework for TILA Rescission Claim
Congress enacted TILA to promote consumers’ “informed use of credit” by requiring
creditors to provide “meaningful disclosure of credit terms,” 15 U.S.C. § 1601(a); Williams v.
Wells Fargo Home Mortg., Inc., 410 F. App’x 495, 498 (3d Cir. 2011). To that end, TILA and
its implementing regulations—“Regulation Z” or “Reg. Z”—provide that, for transactions “in
which a security interest is or will be retained or acquired in a consumer’s principal dwelling,” a
borrower has a “right to rescind the transaction” for up to three days. 15 U.S.C. § 1635(a); see
also 12 C.F.R. § 226.23(a)(1) (“Regulation Z”). This three-day right to rescind is extended to
three years, however, if the creditor fails to provide the borrower with the material disclosures or
if the disclosures are inaccurate. Beach v. Ocwen Fed. Bank, 523 U.S. 410, 411 (1998) (citing 15
U.S.C. § 1635); Williams, 410 F. App’x at 498 (citing 12 C.F.R. § 226.23(a)(3) and 15 U.S.C. §
6
1635(f)). Because Plaintiffs waited almost three years before filing this lawsuit, their right to
rescind the mortgage has already expired unless they can prove that Defendants failed to provide
the material disclosures or that the disclosures were inaccurate.
Among the required Reg. Z disclosures, a lender must disclose if an interest rate is
variable. See, e.g., 12 C.F.R. § 226.19(b)(2)(i) (lender must disclose “[t]he fact that the interest
rate, payment, or term of the loan can change”); 12 C.F.R. § 226.18(f)(2) (“If the annual
percentage rate may increase after consummation in a transaction secured by the consumer’s
principal dwelling with a term greater than one year,” lender must disclose: “(i) The fact that the
transaction contains a variable-rate feature . . . .”). Furthering TILA’s purpose “to assure a
meaningful disclosure of credit terms so that the consumer will be able to compare more readily
the various credit terms available to him and avoid the uninformed use of credit,” creditors must
disclose all material information “clearly and conspicuously.” 15 U.S.C. § 1601(a). The clear
and conspicuous standard requires that the “disclosures be in a reasonably understandable form.”
12 C.F.R. § 226.17(a)(1), Commentary ¶ 1 (available at http://www.fdic.gov/regulations/laws/
rules/6500-2300.html). The Third Circuit has stated that “the requirement that disclosures be
‘reasonably understandable’ does not require that they be understandable by the average
consumer . . . [but] must be reasonably understandable ‘in light of the inherent difficulty or
complexity of the’ information disclosed.” Rossman v. Fleet Bank (R.I.) Nat. Ass’n, 280 F.3d
384, 394 n.9 (3d Cir. 2002) (citations and quotations omitted); see also Melfi v. WMC Mortg.
Corp., 568 F.3d 309, 312 (1st Cir. 2009) (“Our test is whether any reasonable person, in reading
the [disclosure] form provided . . . , would so understand it.”). In Rossman, however, the court
stated “there is nothing complex about annual fees, so the intended audience is the ordinary
consumer[,]” and the court then used the ordinary consumer standard in measuring the
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disclosures at issue in that case. Id. Similarly, we find nothing complex about the difference
between a variable rate and a fixed rate, so we will use the ordinary consumer standard as our
guide.
2. Plaintiffs’ Claim that the Final TILA Disclosure Form was Misleading
Using the ordinary consumer standard, we now turn to the alleged TILA violations
Plaintiff asserts. First, Plaintiff states that the Final TILA disclosure was itself misleading, or at
least misleading when compared to prior TILA disclosures, because it lists 360 monthly
payments at $2,855.18, and does not show that the payment could change if the interest rate
varied. In contrast, two preliminary TILA disclosures contain estimated payment schedules that
showed varying monthly payments based on speculative changes to the interest rate. Plaintiffs
argue that an average consumer could be misled to believe that the interest rate was fixed based
on the payment schedule in the final disclosure compared to the previous two. We find this
argument unavailing. To begin with, Defendants correctly point out that the commentary to Reg.
Z states that, for variable-rate transactions, “[c]reditors should base the disclosures only on the
initial rate and should not assume that this rate will increase.” 12 C.F.R. § 226.17(c)(1),
Commentary ¶ 8 (available at http://www.fdic.gov/regulations/laws/rules/6500-2300.html). It
would thus appear that, for the final TILA disclosure, any payment schedule that showed
estimated changes in payments over time would run afoul of Reg. Z. Even assuming, however,
that an ordinary consumer could be misled by looking at the payment schedule in isolation, it is
clear that no ordinary consumer would be misled when looking at the TILA disclosure form as a
whole. Directly below the allegedly misleading payment schedule is a line reading, “Your loan
contains a Variable Rate Feature. Disclosures about the Variable Rate Feature have been
provided to you earlier,” and the box below that is marked “Yes.” (Pls.’ Br. Ex. H) [63-10].
8
And even if an ordinary consumer could harbor any lingering doubt after reading the complete
form, such doubt would be quickly dispelled by reading any one of the other closing documents
indicating an adjustable rate mortgage, including: (1) the “Adjustable Rate Note,” (Fremont
Defs.’ Br. in Supp. Ex. E, at Wells. 0099–0102) [50-5], (2) the “Adjustable Rate Rider,” (id. Ex.
F, at Wells. 0121–0125) [50-6], and (3) the “Adjustable Rate Mortgage Loan Program
Disclosure,” (id. Ex. G, at Wells. 0007–0008) [50-7]. See Roberts v. Fleet Bank (R.I.) Nat.
Ass’n, 342 F.3d 260, 268 (3d Cir. 2003) (concluding “that the TILA permits us to consider
materials outside of the [disclosure form] in determining whether the credit issuer disclosed the
required information clearly and conspicuously”). In the face of this overwhelming evidence
that the interest rate was variable, we find that Plaintiff has failed to raise a genuine question
about whether the final TILA disclosure was misleading in itself. It clearly was not.
3. Plaintiffs’ Claim of Misleading Oral Information
Plaintiffs’ second alleged TILA violation is that the final TILA disclosure was misleading
in light of the statements made by the closing agent at the closing, including pointing to the
$2,855.18 figure and saying, “This is your mortgage payment,” and “point[ing] out that there’s
360 payments at [$]2,855.18.” (Anthony Pezza Dep. 41:13–18, 47:16–19.) Plaintiffs’ position
is that these inconsistent oral statements made the TILA disclosure misleading even if the form
was not misleading in itself. (Pls.’ Br. 22.) True, a lender’s oral statements inconsistent with the
written disclosure can create TILA liability. See, e.g., Ramanujam v. Reunion Mortg., Inc., Civ.
No. 09-3030, 2011 WL 446047, at *3 (N.D. Cal., Feb. 3, 2011) (“When a consumer has
received inaccurate information from the lender . . . , the provision of a compliant TILA form
may not always be sufficient to counteract clearly and conspicuously the misinformation . . . .”);
Jenkins v. Landmark Mortg. Corp. of Va., 696 F. Supp. 1089, 1094 (W.D. Va. 1988) (extending
9
rescission period where “oral representations . . . were erroneous and misled plaintiff”).
However, Plaintiffs’ argument fails for two reasons.
First, the closing agent’s statements are not necessarily inconsistent. The statement,
“This is your mortgage payment,” is truthful: $2,855.18 was Plaintiff’s initial monthly payment
and the guaranteed payment for the first two years of the loan. And, as it turned out, the interest
rate never changed for the entire time Plaintiffs held the loan. (Anthony Pezza Dep. 56:3–7.)
What is more, the closing agent never said that the loan contained a fixed rate. Plaintiffs would
have us find, nevertheless, that the closing agent’s statements were misleading because “[s]he
never once mentioned an adjustable rate.” (Pls.’ Br. 24) (emphasis in original). But it is
unimaginable that an ordinary consumer—signing multiple documents clearly indicating an
adjustable rate—would be misled simply because the closing agent never reiterated what the
disclosures already made plain. Moreover, if the Reg. Z commentary mandates that the written
disclosures be based “only on the initial rate and should not assume that this rate will increase[,]”
12 C.F.R. § 226.17(c)(1), Commentary ¶ 8, then we see no reason why a closing agent would
speculate about theoretical future payments.
Second, even if we believed that the closing agent’s oral statements could be misleading,
the Defendants are not liable for the actions of a closing agent who is neither their employee nor
their agent. As we said, case law does support finding a TILA violation where borrowers were
provided inconsistent oral information, but the misleading oral information must be provided by
the lender or an agent of the lender. See Rivers v. Credit Suisse Boston Fin. Corp., Civ. No. 056011, 2007 WL 1038567, at *6 (D.N.J. Mar. 30, 2007) (finding that closing agent was agent of
borrower and his actions could not be attributed to lender); In re Bumpers, Civ. No. 03-111, 2003
WL 22119929, at *8 (N.D. Ill. Sept. 3, 2003) (finding lender not responsible for inaccurate
10
disclosure statement provided by mortgage broker because Plaintiff “was unable to produce any
evidence of an agency relationship between” lender and broker).
In this case, Plaintiffs have provided no evidence that would demonstrate an agency
relationship between the Defendants and the closing agent, Kathleen Young. Instead, it appears
that Ms. Young was the Vice President of All-Pro Title, (Fremont Defs.’ Reply Br. Ex. 4,
Patricia Pezza Dep., 11:3–17) [70-4], and that All-Pro Title was retained by another third party,
Stewart Title Company, whose services were paid for by the Plaintiffs themselves, (Id. Ex. 5, at
Wells. 0328) [70-5]. For Plaintiffs to succeed on this claim, they would need to show that an
agency relationship existed between Ms. Young and the Defendants. There is simply no
evidence of that in the record.
For all the reasons discussed above, we find that Plaintiffs have not presented sufficient
evidence that an ordinary consumer would be misled. Therefore, no triable issue of fact exists on
Plaintiffs’ TILA claims and the Defendants are entitled to summary judgment.
C. Plaintiffs’ New Jersey Consumer Fraud Act Claims
New Jersey’s Consumer Fraud Act (“CFA”) states that it is unlawful for any person to
use or employ: “any unconscionable commercial practice, deception, fraud, false pretense, false
promise, misrepresentation, or the knowing[ ] concealment, suppression, or omission of any
material fact with intent that others rely upon such concealment, suppression or omission, in
connection with the sale or advertisement of any merchandise or real estate, or with the
subsequent performance of such person as aforesaid . . . .” N.J.S.A 56:8–2. “[L]ike most
remedial legislation, the [CFA] should be construed liberally in favor of consumers.” Cox v.
Sears Roebuck & Co., 647 A.2d 454, 461 (N.J. 1994). To state a claim under the CFA, a
plaintiff must show: “(1) unlawful conduct by defendant; (2) an ascertainable loss by plaintiff;
11
and (3) a causal relationship between the unlawful conduct and the ascertainable loss.”
Bonnieview Homeowners Ass’n v. Woodmont Builders, 655 F. Supp. 2d 473, 503 (D.N.J. 2010)
(quoting Bosland v. Warnock Dodge, Inc., 964 A.2d 741, 749 (N.J. 2009).
Plaintiffs allege three separate “unconscionable practices” engaged in by the Fremont
Defendants: (1) offering Plaintiffs a 12.45% interest rate even though they qualified for a par rate
of 11.2%, (2) increasing the rate from 11.2% to 12.45% even though Plaintiffs paid “discount
points,” and (3) providing Plaintiffs with a loan Fremont knew they could not afford. (Pl.’s Br.
1–2.) Plaintiffs add that these unconscionable practices also violated an implied covenant of
good faith and constituted predatory lending. (Id.) We address each alleged unlawful act
separately, and conclude that a genuine issue of material fact exists as to the second and third
claims. Therefore, we will deny summary judgment on these claims.
1. Charging a Rate Above the Par Rate
Plaintiffs’ first allegation is that Fremont initially qualified Plaintiffs for an 11.2%
interest rate, but at closing, offered Plaintiffs an interest rate of 12.45%. According to Plaintiffs,
the only reason for the 1.25% increase was that the broker wanted more money. (Pls.’ Br. 13.)
They point out a handwritten note in Fremont’s file stating, “12.45 wants 2 ysp,” which they
understand to mean that the rate was increased because the mortgage broker wanted a “yield
spread premium” fee of $5,400. (Pls.’ Br. 13 (citing id. Ex A, at Wells 0072) [63-3].) Plaintiffs
characterize this as “gouging.” (Id.)
Defendants counter that there is nothing unconscionable about including a yield spread
premium in the offered rate. (Fremont Defs.’ Reply Br. 7.) A “yield spread premium” is:
a bonus paid to a broker when it originates a loan at an interest rate higher than the
minimum interest rate approved by the lender for a particular loan. The lender then
rewards the broker by paying it a percentage of the “yield spread” (i.e., the difference
12
between the interest rate specified by the lender and the actual interest rate set by the
broker at the time of origination) multiplied by the amount of the loan.
Rivers, 2007 WL 1038567, at *2 n.2 (quoting In re Bell, 309 B.R. 139, 153 (Bankr. E.D. Pa.
2004)).
In this case, the minimum interest rate Plaintiffs qualified for—the “par rate”—was
11.2%. Plaintiffs would have us believe that it was unconscionable for Fremont to offer
Plaintiffs anything other than that par rate. But they have presented no authority to support this
proposition. Defendants, on the other hand, cite numerous cases upholding the inclusion of a
yield spread premium where it was properly listed on the HUD Settlement Statement. (Fremont
Defs.’ Reply Br. 7–9); see, e.g. Nelson v. Maverick Funding Corp., Civ. No. 08-6390, 2011 WL
1045117, at *4 (D.N.J. Jan. 6, 2011) (“Courts in this district have found that YSPs are not illegal
if they are ‘earned’ in accordance with § 8(c) [of RESPA].”) 3; Warburton v. Foxtons, Inc., Civ.
No. 04-2474, 2005 WL 1398512, at *5 (D.N.J. Jan. 13, 2005) (same); Rivers, 2007 WL
1038567, at *5 (finding yield spread premium was not required material disclosure of TILA
finance charge). Here, the existence of the yield spread premium was clearly disclosed to the
Plaintiffs on the Settlement Statement, (Femont Defs.’ Mem. in Supp. Ex J) [50-10], and
Plaintiffs were expressly advised that “if the lender pays your broker a yield spread premium,
your interest rate will be higher than the base interest rate for which you would otherwise
qualify.” (Fremont Defs.’ Reply Br. Ex. 2) [70-2]. Plaintiffs have not presented, and we could
not find, any other reason why the inclusion of the yield spread premium here would be
unconscionable. Thus, we will grant summary judgment to the Fremont Defendants on this
claim.
3
We do not address whether the fee was “earned” under § 8(c) of the Real Estate Settlement Procedures Act
(“RESPA”) because the Complaint fails to allege a RESPA claim.
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2. Broker Discount Points
The second fraud allegation concerns what is known as a “broker discount point.”
Plaintiffs paid $1,500 in broker discount points at closing. They argue that, by definition, the
payment of a broker discount point should have reduced—“discounted”—the interest rate;
instead, Fremont unconscionably raised the interest rate. (Pls.’ Br. 14.) The Fremont
Defendants counter that New Jersey has created a statutory distinction between a “broker
discount fee” and a “broker discount point”: the former may require a reduction of the interest
rate but the latter is simply another type of fee that a mortgage broker may charge for its
services. (Fremont Defs.’ Reply Br. 14.)
Plaintiffs’ position is primarily based on a similar case out of state court in Michigan,
Vandenbroeck v. CommonPoint Mortg. Co., No. 236642, 2004 WL 1778933 (Mich. Ct. App.
Aug. 10, 2004). In the mortgage transaction at issue in Vandenbroeck, the lender had charged
the borrowers a fee for a “loan discount.” The borrowers argued that this contract term “required
a discounted interest rate in exchange for the fee.” Vandenbroeck, 2004 WL 1778933, at *1.
The lenders argued, instead, that the term “should be defined as a fee paid simply to increase the
lender’s yield.” Id. at *3. The Michigan Court of Appeals held “that the contract term ‘loan
discount fee’ is subject to only one reasonable interpretation. It cannot be construed as anything
other than a fee paid to reduce the interest rate on the loan.” Id. at * 2. The Court found that this
reading of the contract language “comport[ed] with the common mortgage trade or industry
meaning of loan discount point or fee” as a “premium paid for obtaining a lower mortgage rate.”
Id.
Defendants counter that Vandenbroeck is not applicable to this case because it did not
deal with a New Jersey mortgage loan. Defendants argue that, in New Jersey, a “broker discount
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point” is different from a “discount fee” or any other type of discount that would reduce the
mortgage interest rate. They base this argument on two grounds. First, Defendants point out that
under N.J.S.A. 17:11C-74, “a residential mortgage broker, incidental to the brokering of any
mortgage loan transaction, shall have the right to charge only the following fees: (1) application
fee; and (2) discount points.” N.J.S.A. 17:11C-74(b). Defendants contend that, because the
“discount point” is a fee “incidental to the brokering of any mortgage loan transaction,” it is not
tied in any way to the interest rate of the loan. (Fremont Defs.’ Reply Br. 12.)
Second, Defendants argue that, under federal regulations, if the “discount point” defined
in N.J.S.A. 17:11C-74b provided for a reduction of the mortgage rate, then Plaintiffs’ payment of
the discount points would have been recorded on Line 802 of the Settlement Statement required
by the Department of Housing and Urban Development (“HUD”). Under the federal regulations
in place at the time of this mortgage, “Line 802 [of the HUD Settlement Statement] is used to
record the loan discount or ‘points’ charged by the lender . . . .” 14 C.F.R. 3500, App. A (2006).
And “discount points” are defined as “a one-time charge imposed by the lender or broker to
lower the rate at which the lender or broker would otherwise offer the loan to [the borrower].”
(See Fremont Defs.’ Reply Br. 13 (quoting HUD booklet made available to borrowers pursuant
to 24 C.F.R. § 3500.6).) The $1,500 Plaintiffs paid in broker discount points was not listed on
Line 802. Instead, it is listed under Line 807 as “Broker Discount Point to: Residential Home
Funding.” (Pls.’ Br. Ex. M.) Accordingly, Plaintiffs argue that it could not be a discount that
would reduce the interest rate.
We conclude, however, that there is a genuine issue of material fact as to the meaning of
“broker discount point” in this New Jersey mortgage loan. The New Jersey statute does not
define the term, and the parties experts have come to opposite conclusions about its meaning in
15
the New Jersey mortgage industry. In light of the competing evidence, the Court is not in a
position to rule as a matter of law on the meaning of the term in this transaction, and accordingly,
we will deny summary judgment on this claim.
3. Affordability of the Loan
Finally, Plaintiffs argue that Fremont engaged in predatory lending practices, which they
claim constitute an unconscionable act under the CFA. Plaintiffs believe the “Pezza loan was
inherently ‘predatory’, simply because it was unaffordable.” (Pls.’ Br. 14.) New Jersey courts
have described “predatory lending” as:
a mismatch between the needs and capacity of the borrower . . . In essence, the loan does
not fit the borrower, either because the borrower’s underlying needs for the loan are not
being met or the terms of the loan are so disadvantageous to that particular borrower that
there is little likelihood that the borrower has the capability to repay the loan.
Nowosleska v. Steele, 946 A.2d 1097, 1101 (N.J. Super. Ct. App. Div. 2008) (quoting Assocs.
Home Equity Servs., Inc. v. Troup, 778 A.2d 529, 536–37 (N.J. Super. Ct. App. Div. 2001)).
“Predatory lending often involves circumstances in which the lender engages in fraudulent
activity in order to induce borrowers to take on ‘bad loans,’ including ‘loans that are overpriced,
loans where there is no net economic benefit to the borrower, loans where the borrower cannot
afford the payment so the lender is relying on the borrower’s equity for payment, and loans with
other exploitative terms not understood by the borrower.” Fin. Freedom Senior Funding Corp.
v. Fischer, No. L-5900-08, 2011 WL 1161123, at *6 (N.J. Super. Ct. App. Div. Mar. 31, 2011)
(citing Nowosleska, 946 A.2d at 1101 n.3) (internal quotation marks omitted).
Plaintiffs give several reasons why the loan was unaffordable: (1) the Fremont mortgage
had a monthly payment that was more than $500 greater than their prior mortgage; (2) Plaintiffs
made several late payments on the mortgage; and (3) Plaintiffs’ expert believes the loan was
unaffordable based on her calculation of the Plaintiffs’ debt and income levels. (Pls.’ Br. 14–
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15.) For these reasons, Plaintiffs argue that it was inevitable that they would default on their
mortgage and Defendants knew or should have known this.
Defendants argue, however, that there is no issue of material fact because Plaintiffs have
essentially conceded that the loan was affordable to them. (Fremont Defs.’ Reply Br. 6.) First,
Plaintiffs knew that the mortgage payment would be $2,855.18 when they signed the loan
documents. (Anthony Pezza Dep. 17:14–17 (“Q. And did you feel at the time that you signed the
loan papers with Fremont that you could afford to pay $2,855.18 per month? A. Yes.”)) [50-15].
Second, this amount never changed over the entire time the Plaintiffs held the loan. (Id. at
93:12–15 (“Q. Did your principal and interest payment ever change between the time that you
signed this document and the time that you sold the property? A. No.”)) [50-1]. Third, Plaintiffs
made all loan payments. (Id. at 53:21–23 (“Q. Did there come a time when you stopped making
your mortgage payments? A: No.”).) And finally, Plaintiffs sold the property for reasons
unrelated to the affordability of the loan. (Id. at 56:8-19 (“Q: What was the reason that you sold
the property? A. What was the reason? The reason was my last we had four kids; three went
through college . . . . The house was too big; we wanted to downsize. We wanted to buy a little
something in Florida . . . .”).) Defendants argue that the Court should not accept the testimony of
Plaintiffs’ expert that the loan was unaffordable when it is clear that Plaintiffs themselves
believed the loan was affordable.
Although we give strong weight to the deposition testimony in which Plaintiffs
essentially admit that the loan was affordable, we cannot say as a matter of law that the loan “fit
the borrower.” Nowosleska, 946 A.2d at 1101. Instead, there is a genuine issue of material fact
as to whether “the borrower’s underlying needs for the loan [were] not being met or the terms of
the loan [were] so disadvantageous to that particular borrower that there is little likelihood that
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the borrower [had] the capability to repay the loan.” Id. Plaintiffs have procured the testimony
of an expert who concludes based on her analysis that the loan was unaffordable. Defendants’
expert disagrees. It is not our role, however, to weigh the credibility of the experts at this stage
of the litigation. Accordingly, we deny summary judgment as to this claim as well.
IV. CONCLUSION
For the reasons given above, we will grant summary judgment in favor of all Defendants
on Plaintiffs’ TILA claims. We will deny summary judgment on Plaintiffs’ claims that the
Fremont Defendants engaged in unconscionable business practices that violate the CFA by
charging a broker discount point without reducing the mortgage interest rate and by providing
Plaintiffs with a possibly unaffordable loan. The CFA claims were not asserted against the
Litton Defendants, so these parties will be dismissed. Also, in light of this Opinion, we will
dismiss the Plaintiffs’ pending motion for reconsideration [72] as moot. The parties are directed
to confer with one another to reach an agreement about what materials are an appropriate part of
the record going forward. Any disputes will be resolved at a later time. An appropriate order
will follow this opinion.
DATE: August 30, 2011
/s/ Anne E. Thompson
ANNE E. THOMPSON, U.S.D.J.
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