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Pezza v. Wells Fargo Bank, N.A.

2011 WL 3847248 (U.S. Dist. Ct. D. N.J. 2011) (Unpublished)

LOANS — Even though a loan may have been affordable, this does not mean that a loan is predatory because the question is not only if the loan was affordable, but whether the borrower’s underlying needs were met.

Borrowers sued their lender and their mortgage broker, seeking rescission of their home mortgage as well as damages under the Federal Truth in Lending Act (TILA) and under New Jersey’s Consumer Fraud Act (CFA). The borrowers had substantial debts at the time they applied for the mortgage. They were qualified for a loan, at par, at a fixed interest rate of 11.2%. However, their mortgage broker offered them an adjustable rate loan, with the initial interest rate set at 12.75%. For three years after the closing, the homeowners made the monthly payments, but then demanded that the mortgage be rescinded due to TILA violations for failure to disclose material terms of their loan. When the lender refused, the borrowers sued, alleging violations of the TILA and the CFA. The lender and broker each moved for summary judgment. In response, the Court granted summary judgment on the TILA claims, but not on the borrowers’ CFA claim against the mortgage broker.

Under the TILA, a borrower has three-days to rescind a loan secured by a mortgage on his principal residence, but the period can be extended to three years if the lender did not provide the borrower with material disclosures or if the disclosures were inaccurate. In this case, the borrowers claimed that the final truth-in-lending disclosure statement violated the TILA because it differed from information previously provided to them as well as with information provided orally by the closing agent. They argued that the disclosures misled them into believing the loan was at a fixed interest rate because it listed the same 360 monthly payment throughout the term of the loan. The Court disagreed, finding that under TILA’s Regulation Z, the disclosures for variable rate loans are based on the initial rate and the lender did not have to assume the rate would increase. The Court also rejected the borrowers’ claim that the closing agent misled them when stating, at the closing, that the payment listed was their monthly mortgage payment. Essentially, they argued that the closing agent’s statement was inconsistent with the mortgage documents and had led them to believe that they were getting a fixed rate loan and not an adjustable rate loan. The Court, however found that the statement was not necessarily inconsistent. The statement was truthful because it showed the payment for the first two years of the loan. Further, the closing agent never stated that the loan was a fixed rate loan. In addition, even if the closing agent’s statements were misleading, the closing agent was not an employee or agent of the lender, and therefore his conduct could not lead to a TILA violation by the lender.

The Court also rejected the borrowers’ CFA claim. In order to prevail on a CFA claim, one must show: (a) unlawful conduct; (b) an ascertainable loss; and (c) a causal relationship between the unlawful conduct and the loss. Here, the borrowers claimed that the mortgage broker had engaged in unconscionable business practices by offering them an adjustable rate loan when a lower, fixed rate, loan was available. They claimed that the broker increased the rate so that it could be paid a fee at closing in the form of a yield spread premium. The Court, however, disagreed. It found that the yield spread premium was disclosed on the closing statement and that the borrowers were advised that if the lender paid such a premium, the interest rate would increase.

The borrowers also claimed that the lender engaged in predatory lending practices by providing them with a loan the lender knew they could not afford. A loan may be deemed predatory if a lender induces a borrower to take on a “bad loan.” A loan may be deemed a “bad loan” if it is overpriced, if there is no net economic benefit to the borrower, or if the borrower cannot afford the payment so the lender is relying on the borrower’s equity in the real property. The borrowers argued that the loan was predatory because: (a) the monthly payment was $500 greater than the payment due under their prior loan; (b) they had made several late payments; and (c) the borrowers’ experts believed the loan was unaffordable based on the borrower’s debt and income levels. The borrowers claimed it was inevitable that they would default on the loans and that the lender should have know it. The lender argued that the loan was not predatory because the borrowers had conceded that the loan was affordable. However, the Court found that just because the loan may have been affordable, that did not mean that the loan was not predatory. The question is not only if a loan was affordable, but whether the borrower’s underlying needs were met. That requires a factual determination as to whether the loan terms were so disadvantageous to the borrower that there was little likelihood that the borrower could repay the loan.

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