Federal Appeals Court Rules In Favor Of Homeowner in Subprime Case

by 14 Aug 2012

We keep saying that courts are finally beginning to wake up and realize that not all lenders and loan servicers were created equally. Recently a federal trial court in Ohio tossed claims against Bank of America and its progeny, Countrywide Home Loans. A husband and wife homeowner sued the lenders for fraud but the trial judge ruled in favor of the bank. The 6th Circuit Court of Appeals, however, reversed the decision and is allowing the case to go before a jury.  Big banks and lenders often do poorly in front of a jury. In this economy, just about everyone knows someone who has been treated unfairly by a lender.

Janet and Raymond Lee were contacted by a mortgage company in 2006 with a promising offer. Refinance their Walbridge, Ohio home, reduce their monthly payment and be able to consolidate about $20,000 in credit card debt. Sounds too good to be true? Read on.

Federal and Ohio law require lenders to make full disclosure of interest rates and payment terms. Those laws insure that borrowers know exactly what they will be paying. In this case, the Lees said that Countrywide conspired with the mortgage broker to conceal what the mortgage broker was being paid; approximately $7,000 in commissions. The exact amount was to be disclosed at closing according to the papers they signed.

In the Lee’s case, the commission is what is referred to in the industry as a yield spread premium. This can be the amount that the lender pays the broker in order to lower the upfront closing costs. The lender, however, then repays that amount over the life of the loan in the form of higher payments. At closing, there was an oblique reference to monies “POC”, industry jargon meaning “paid outside closing.”

Countrywide says it did nothing wrong but the appeals court disagreed. They said that the broker had a fiduciary responsibility to the homeowners (the Lees) and had an obligation to disclose what it was receiving from Countrywide. That obligation wasn’t met by a note on the closing statement. In the words of the court, “Disclosure on the settlement statement at closing, even if clear, was inappropriately ‘after the fact’. Requiring ‘advance full disclosure’ of the yield spread premium recognizes that brokers and lenders have designed the closing to be nothing more than a short meeting where inexperienced buyers are shuttled through the contractual process with assurances that what they are signing are nothing more than mere formalities.”

Many mortgage companies went out of business when the economy soured in 2007 - 2008. Suing the mortgage company simply isn’t possible in most cases. What makes this case unique is that the appeals court refused to let Countrywide and Bank of America out of the case. The court found that if the lenders conspired with the broker to conceal the premiums, they too could be held responsible. That is important for homeowners who often have no recourse against the original mortgage broker who originated the loan.

In the Lee’s case, it appears that the lender instructed the closing agent on how to draft the closing statement. That information could be key to helping them win at trial.

This case doesn’t mean that Bank of America or Countrywide did anything wrong.  They will have to face a jury, however, and answer some tough questions. For homeowners, this case is still a huge victory.

About the author. Brian Mahany is a an attorney that helps homeowners sue banks and loan servicers for fraud and wrongful foreclosures. He is also a frequent contributor to The Niche Report. Brian welcomes comments and questions and can be reached through his blog, Due Diligence at http://www.mahanyertl.com/mahanyertl .


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