The Fourth District Court of Appeal in Santa Ana has published a new case allowing homeowners who obtained “Option ARM” adjustable rate loans, which had negative amortization, to sue the lender for misrepresentations and failures to adequately disclose that negative amortization would occur if the borrowers only made the minimum payments. In the case of Boschma et. al. vs. Home Loan Center, Inc., which was filed as a class action, the loan documents contained various disclosures about the adjustable rate and possible negative amortization, but did borrowers only made the minimum payments allowed, that negative amortization would definitely occur. Although plaintiffs alleged that they had suffered damages in the form of lost equity due to the negative amortization, the court noted that it may be difficult for them to prove they could not have avoided the negative amortization simply by paying more each month after they discovered that the minimum payment resulted in negative amortization. There are many similar class action lawsuits filed against similar lenders across the nation.
A federal district court in Chicago has given the green light to clients of JPMorgan Chase Bank to proceed with a consolidated suit alleging that their equity lines were yanked or reduced illegally, costing them billions of dollars in lost borrowing power. Judge Rebecca Pallmeyer rejected the bank’s motion to dismiss the case, clearing the way for a possible giant class action.
The litigation pulls together eight separate suits seeking class certification filed by homeowners in California, Minnesota, Illinois, Texas, Arizona and Ohio. It is considered a bellwether test of the rights homeowners enjoy under the Truth in Lending Act and state consumer protection statutes when they take out equity lines of credit.
But it also shines light on the controversial computerized tools many lenders use to make quick, inexpensive assessments of property values in lieu of more costly professional appraisals. Suits on similar grounds are pending against other major lenders, including Wells Fargo & Co., GMAC Mortgage and Citibank, according to attorneys.
The plaintiffs’ lawyers not only are challenging JPMorgan Chase’s legal right to rescind or limit credit lines without adequate documentation that property values have dropped “significantly” — as required by the truth in lending law — but are also mounting a side attack against automated valuation models that they contend are frequently inaccurate and unreliable.
The computer valuations used by JPMorgan Chase were found to be “grossly in error,” based on subsequent physical appraisals, said Steven Lezell Woodrow, a partner with Edelson McGuire, the Chicago law firm representing the plaintiffs.
As another major victory for REALTORS®, the Federal Trade Commission (FTC) announced today that it will generally not enforce the Mortgage Assistance Relief Services (MARS) Rule against real estate brokers and agents engaged in short sales. Real estate professionals must nevertheless comply with MARS prohibitions against misrepresentations and other laws prohibiting unfair and deceptive acts. Also, FTC’s forbearance of enforcement is limited to real estate licensees in good standing and acting in compliance with state laws, who assist consumers in negotiating, obtaining, or arranging short sales in the course of securing the sale of the consumer’s home.
In its announcement today, the FTC acknowledged “it is especially important that the Rule not inadvertently discourage real estate professionals from helping consumers” with short sales. The FTC will, however, continue to enforce the MARS Rule as to all other providers of mortgage assistance relief services, and also as against real estate professionals doing loan modifications or other types of mortgage assistance relief services.
Next week, on July 21, 2011, the FTC’s rulemaking authority for MARS will be transferred to the new Consumer Financial Protection Bureau (CFPB), but the FTC will continue to enforce the Rule. The CFPB will have the authority to determine whether to change the MARS Rule as it applies to real estate professionals conducting short sales.
The FTC’s News Release is available at http://www.ftc.gov/opa/2011/07/mars.shtm