My law firm recently defended a title company and its settlement agent in a case involving allegations of predatory lending. It emphasized a few important points. First, written contracts matter. Second, they matter perhaps far more than individuals understand. Third, written contracts can matter more than the discussions among the parties. Finally, the discussions of predatory lending and litigation surrounding those issues may fall apart when challenged in courts that adhere to conservative judicial approaches.
In our case, a married couple with an adjustable-rate mortgage (ARM) was having difficulties making payments. They discussed the matter with a mortgage broker, who quoted ARM amounts from the Bank of America that would allegedly save them money. The mortgage broker allegedly wrote out a table showing reduced loan payments over time.
The couple alleged that they never filled out a mortgage application until they were at the settlement table. They further alleged that, when they showed up at the settlement, they were offered a Countrywide mortgage product. They alleged that the mortgage broker told them the Countrywide adjustable mortgage was “just as good” as the original Bank of America product. They signed all the documents and moved forward to settlement.
The actual signed loan documents provided for an initial introductory rate for a month. Then the rate adjusted on the second payment. The loan permitted flexibility to the debtors in terms of how much they paid. They could pay an amount that covered interest and principal, an amount that was interest only, or a reduced “minimum payment” amount that did not even cover interest. Shortfalls associated with minimum payments were added to the principal balance. Despite bills that described these options, the couple claimed they did not understand the terms. They paid only minimum amounts, which resulted in the principal increasing, thus increasing the amount owed. They eventually faced a foreclosure on their property and filed suit alleging misrepresentation, fraud, constructive fraud, violation of federal truth in lending act and violation of the federal and state settlement practices acts.
The settlement package, including the loan documents that the plaintiffs had signed, included a truth-in-lending statement that reflected 9 percent interest. There were written disclosures of the adjustable rate, its timing for reset, and the basis for calculating the ARM rate. All of the written documentation from the settlement appeared to accurately reflect the terms of the deal.
The case was originally filed in state court. Because of the federal statutory claims, the defendants were able to remove the case to United States District Court for the Eastern District of Virginia. This court is known for rapid analysis and resolution of cases and also for extremely detailed review of pleadings and documents. This court is also relatively conservative in terms of judicial philosophy and enforcement of contracts.
All the defendants filed motions to dismiss. The plaintiffs agreed to drop our clients, the title company and settlement agent, from the case. The lender and mortgage broker remained in the case. In review of the various motions to dismiss, the court ruled that the written documents controlled. Because the written documents from settlement accurately reflected the deal, the court found that there was no fraud. The court further found that the change of loan product, allegedly at the settlement table, was admittedly to a new lender. As such, the court ruled the prior oral representations regarding the old loan product were not relevant, and there was no fraud or misrepresentation as a matter of law. The court granted the motions to dismiss.
In this case, we see the importance of written contracts and documents. Just as in the world of construction contracts, the written terms of the deal can be very difficult to overcome. It is easier for courts to review and apply written contracts than to delve into murky factual disputes.
This case highlights the uphill battle facing predatory lending claims generally. The extensive level of required documentation presents a mountain of paper to sign. The debtor who signs everything, reads little and understands nothing may evoke sympathy from a jury but may get less emotional mileage from a judge.
Finally, the case offers a window into distinctions from jurisdiction to jurisdiction, court to court, and judge to judge. Facing a judge in California, where consumer rights have more traction, might have been more successful than facing a federal judge in Virginia. Knowing your forum and the judges is important to evaluating the merits and risks of any case.
This article is not intended to provide specific legal advice but instead is general commentary regarding legal matters. You should consult with an attorney regarding your legal issues, as the advice you may receive will depend upon your facts and the laws of your jurisdiction.
HUGHES is the principal of the Northern Virginia law firm of Hughes & Associates, P.L.L.C. He specializes in construction litigation, corporate and business-related representation, and complex civil litigation. He may be reached at email@example.com or 703.671.8200.