Case Law Summaries

Associates Home Equity Services, Inc. v. Troup

• Opinion Date: July 25, 2001
• Real Property Law
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MORTGAGES; FORECLOSURE—Even though a mortgagee’s claim may be barred by the statute of limitations, it may be entitled to equitable recoupment, and therefore may raise violations of the federal Fair Housing Act and of the New Jersey Law Against Discrimination in pursuing its claims.

An African-American homeowner, living in a predominantly African-American area, was solicited by telephone by a home improvement contractor. Following the conversation, the homeowner entered into a contract for home repairs for a fee of $38,500, subsequently increased to $50,000. The contract provided that payments would be made to an entity owned by the contractor until permanent financing could be obtained. Thereafter, the contractor arranged for the homeowner to obtain financing through a mortgage lender. The lender agreed to provide financing at an annual interest rate of 11.65 percent, adjustable after six months. The loan was a balloon-type with repayment of the balance on the fifteenth anniversary of the note. The homeowner was also charged four points to close the loan. Sometime thereafter, the mortgage company assigned the loan to another mortgage company. The homeowner eventually stopped making payments and the assignee filed a foreclosure complaint. In its answer and counterclaim, the homeowner charged the lender with unconscionable and deceptive conduct in violation of the Consumer Fraud Act, violations of the Truth in Lending Act, and predatory lending practices in violation of the Fair Housing Act. The lower court dismissed all of the homeowner’s claims and entered a judgment of foreclosure in the mortgage company’s favor concluding that the terms of the mortgage loan were not “unconscionable when looked at in its entirety given the fact that, although a 6.6 percent rate was available to prime borrowers, the homeowner did not appear to be AAA rating.” The homeowner appealed, arguing that the court erred in dismissing its claim of predatory and discriminatory lending practices, claiming the existence of genuine issues of material fact which preclude summary judgment. In particular, the homeowner contended that the lender was guilty of “reverse redlining.” The term “redlining” has been used to describe the practice of denying credit to specific geographic areas due to income, race or ethnicity of its residents. The term is derived from the actual practice of lenders drawing red lines on maps to designate geographic areas in which the lender will make no loans. The term “reverse redlining” is the practice of extending credit on unfair terms in those same communities. The Appellate Division began by examining the law of predatory lending. It recognized that predatory lending is “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.” The Appellate Division also recognized that reverse redlining has been held to violate the Fair Housing Act and the Civil Rights Act. The Court then explained that a “a plaintiff may establish a colorable claim of reverse redlining by demonstrating that defendants’ lending practices and loan terms were unfair and predatory and that the defendants either intentionally targeted on the basis of race, or that there is a disparate impact on the basis of race.” Here, the homeowner’s predatory lending claim was dismissed without permitting the homeowner to conduct meaningful discovery on the issue. Further, the homeowner had established the groundwork for a predatory lending claim by showing that he was an African-American in a predominantly African-American community, and that the lender had charged a higher than common interest rate. On these bases, the Court concurred with the homeowner that it should have been entitled to additional discovery. It also held that, although the applicable statute of limitations had run for the homeowner to seek damages on its affirmative claims, the claims were cognizable under a theory of equitable recoupment. The doctrine of equitable recoupment acts to reduce the amount that a plaintiff can recover on the claim for a debt when the counterclaim arises from the same transaction. On this basis, the Court reversed the summary judgment order dismissing the homeowner’s claims against the lender and directed additional discovery.

The homeowner also appealed on the basis that the lower court erred by dismissing its claim that the lending practice violated the Holder Rule, 16 C.F.R. 433.2. The Holder Rule, provides that, in connection with any sale of goods or services to consumers affecting commerce, it is an unfair or deceptive act or practice for a seller to accept, as full or partial payment for the services rendered, the proceeds of any purchase money loan unless any consumer credit contract made in connection with that loan contains the following statement in bold face type: “Any holder of this consumer credit contract is subject to all claims and defenses which the debtor could assert against the seller of goods or services obtained withe the proceeds hereof. Recovery hereunder by the debtor shall not exceed amounts paid by the debtor hereunder.” Here, the Court recognized that the requisite statement was not printed on the contract and that the Holder Rule “notifies all potential holders that, if they accept an assignment of the contract, they will be stepping into the seller’s shoes. Thus, the creditor-assignee becomes subject to any claims or defenses the debtor can assert against the seller.” For these reasons, the Court reversed the lower court’s ruling that had dismissed the homeowner’s Holder Rule argument. Lastly, the homeowner appealed the dismissal of its Consumer Fraud Act claims against the lender and contractor. The Court recognized that loans are included in the definition of “advertisement” as used in the Act, and the definition of “merchandise” has been held to include “the offering, sale, or provision of consumer credit.” Considering that the homeowner spoke with nobody at the lender’s office until the date of closing, and that the homeowner was told “not to worry” after he expressed that he was confused because of the complexity of the loan documents, the Court concluded that a reasonable jury could conclude that the lender engaged in an unconscionable business practice in violation of the Consumer Fraud Act.

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