Predatory Lending and Unfair Trade Practices in Mortgage Loans: A Legal Analysis, Slides of Civil Law

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Litigating Claims Under the Unfair Trade

Practice’s Act and Common Law Claims

Introduction

• Predatory Lending: the practice of a lender deceptively convincing borrowers to agree to unfair and abusive loan terms, or systematically violating those terms in ways that make it difficult for the borrower to defend against.
• Subprime Lending: lending at a higher rate than the prime rate. “Subprime loans” refers to loans that do not meet Fannie Mae or Freddie Mac guidelines. It may or may not reflect credit status of the borrower as being less than ideal and may not even reflect the interest rate on the loan itself.
• Car loans, payday loans, credit cards, mortgage loans

Warning Signs of a Predatory Loan

• Steering to subprime high rate lenders
• Door-to-door solicitation of home improvement or financing arranged by contractor
• Large fees or kickbacks promised to the mortgage broker
• Making loans to non-English speaking homeowners
• Paying off low-rate mortgages
• Shifting unsecured debt into mortgages
• Loans in excess of 100% loan-to-value (LTV)
• Foreclosure Rescue Scams
• Inflated income reported on loan application
• Adjustable rate mortgage that adjusts to over 12%
• Balloon notes
• 80/20 loans
• Home Equity Line of Credit (HELOC) loan
• Inflated Appraisal
• Terms at closing different from what borrower promised

Maine Law Claims and Defenses to Predatory

Mortgage Loans

• Maine Unfair Trade Practices Act: 5 M.R.S.A. §§ 206-
  • Prohibits unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce
  • Consumer remedy against Unfair and Deceptive trade practices by a business
  • Consumer has private right of action
  • Attorney General Can also bring action to enforce UTPA

WHEN

• Statue of Limitations:

• Private (not state) action must be commenced

within 6 years of the UTPA violation

• Can argue that period begins when reasonable

person would have been put on notice concerning

the unfair or deceptive act

What Consumers Must Prove and Do

o Consumer must show:

o Loss of money or property

o Transaction involved primarily personal, family, or

household purpose

o Business benefited from violation when seeking

restitution

• Must send demand letter for relief 30 days prior to

filing an action for damages. (See Kilroy v. Northeast Sunspaces

Inc., et al. , 2007 ME 119, 930 A.2d 1060.)

• What Consumers can Receive
  • Damages or
  • Equitable Relief (Rescission, Void Contract)
  • Injunction
  • Restitution
    • Must show loss of money or property and benefit on violator
  • Attorneys fees (!) (But see Kilroy , 2007 ME 119, ¶15, 930 A.2d at 1064.(denial of fees possible remedy for failure to send demand notice.))

• What constitutes an unfair trade practice
  • Act or practice is a violation of established policy
  • Act or practice substantially injured the consumer
  • Act or practice is immoral, unethical, oppressive,

or unscrupulous

(FTC v. Sperry & Hutchinson Co_._ , 405 U.S. 233 (1972))

State of Maine v. Weinschenk, 868 A.2d 200 (2005):

“[t]o justify a finding of unfairness, the act or practice:

(1) must cause, or be likely to cause, substantial injury to consumers;

(2) that is not reasonably avoidable by consumers; and

(3) that is not outweighed by any countervailing benefits to consumers or competition.”

• Commonwealth v. Fremont Investment and Loan, 897 N.E. 2d 548 (MA Dec. 2008)
• Lender’s combination of four loan characteristics into single loan package was considered presumptively unfair (1) the loans were ARM loans with an introductory rate period of three years or less; (2) they featured an introductory rate for the initial period that was at least three per cent below the fully indexed rate; (3) they were made to borrowers for whom the debt-to-income ratio would have exceeded fifty per cent had Fremont measured the borrower's debt by the monthly payments that would be due at the fully indexed rate rather than under the introductory rate; and (4) the loan-to-value ratio was one hundred per cent, or the loan featured a substantial prepayment penalty (defined by the judge as greater than the “conventional prepayment penalty” defined in G.L. c. 183C, § 2) or a prepayment penalty that extended beyond the introductory rate period.

• Examples:
• Not providing material information (failing to state

material fact)

• Making false advertising claims
• Use of high pressure sales tactics
• Deprivation of various post-purchase remedies (American Financial Services v. FTC, 767 F.2d 957, 979 (1985))

• Violation must be substantial
• Must not outweigh any countervailing benefits to

consumers or competition that the practice

produces

• Must be an injury that consumers themselves

could not have avoided

(Suminski v. Maine Appliance Warehouse Inc., 602 A.2d 1173 (Me. 1992); State of

Maine v. Weinschenk et al., 2005 ME 28, 868 A.2d 200 )

• What is a deceptive trade practice?
  • Misrepresentation, omission, or other practice the

misleads consumer to consumer’s detriment Lack

of necessary qualifications of representations

• Inconspicuous representations or qualifications

(ie: too small print, confusing terms not explained)

(FTC)

• An act or practice is deceptive if it is a material

representation, omission, act or practice that

is likely to mislead consumers acting

reasonably under the circumstances.

State of Maine v. Weinschenk, 868 A.2d 200 (2005)

• Darling, v. Western Thrift & Loan, 600

F.Supp.2d 189 (Feb. 2009): a genuine issue of

fact exists with regard to whether the Darlings

were misinformed about the existence or

nature of the YSP and that such

misinformation would be material.

• MacCormack v. Brower, 2008 ME 86: “[t]he

definitions of ‘unfair’ and ‘deceptive’ are questions

of fact, and whether a particular act or practice is

‘unfair’ or ‘deceptive’ is determined on a case-by-

case basis.”

• Potential UTPA claims for predatory lending cases:
  • Failure to disclose disadvantageous terms, costs, fees, and the nature of the loan
  • Failure to disclose to consumer any fact relating to the loan transaction, disclosure of which may have influenced consumer not to enter into the transaction
  • Inflating income to qualify buyer
  • Inflating appraisal value to qualify for loan
  • Failure to disclosure changes in terms of loan: Bait and switch
  • Failure to consider consumer’s ability to repay the loan
  • Intentionally and knowingly placing consumer in a loan product that consumer could not afford
  • Misrepresentations and non-disclosures of material facts.

• §208(1) provides: Nothing in this chapter

shall apply to transactions or actions

otherwise permitted under laws as

administered by any regulatory board or

officer acting under statutory authority of the

State or of the United States.

• Previous Line of Cases:

• Maine Commodities v. Dube, 534 A.2d 1298 (1987): exclusive listing agreements between licensed brokers and vendors of real estate are controlled by state Real Estate Commission and thus, activities fell outside scope of Unfair Trade Practices Act and Solicitation Sales Act.

• Keatinge v. Biddle , 2000 WL 761015 (D.Me.) : Lawyers are not subject to the Act because they are already extensively regulated under Maine law

• Wyman v. Prime Discount Sec. , 819 F.Supp. 79 (1993) :securities transactions exempt from coverage under Act because, in Maine, the sale of securities must be licensed and is permitted only under the authority of the Revised Maine Securities Act and under the rules and regulations promulgated pursuant to the Securities Exchange Act of

• But see:

• Good v. Altria Group, Inc. 502 F.3d 29 (1 st^ Cir.2007) : regarding cigarette manufacturer's liability under UTPA: “conduct is exempt from the [Maine] Unfair Trade Practices Act where it is subject to specific standards left to the enforcement of an administrative agency, not merely those circumstances in which the agency's regulatory scheme is generally extensive' or detailed.”

 Provencher v. T&M Mortgage Solutions 2008 WL 2447472 (DCt. Me. June 18, 2008) : discussed Good v. Altria Group, Inc. and indicated that Good required the District Court to construe First of Maine Commodities differently than it had in Keatinge v. Biddle and Wyman v. Prime Discount Sec. (“Good has interpreted the Maine [UTPA] statute [contrary to the way the District Court did in Keatinge and Wyman so it is no longer appropriate to apply section 208(1) of the UTPA to entire industries or professions]”)

• Where consumer did not seek to hold the defendants liable under the Unfair Trade Practices Act for complying with a specific regulatory standard, the defendants would not be exempt from the Act

WHERE

• Consumers can bring action in:
  • Small Claims Court ($4500 or less)
  • District Court
  • Superior Court
  • Combined with Federal Claims, in Federal District Court or Bankruptcy Court

• Effective Jan. 1, 2008: Maine Public Law, Chapter 273, “An Act to Protect Maine Homeowners from Predatory Lending.”
• Public Law, Chapter 471, “An Act Relating to Mortgage Lending and Credit Availability.” Applies retroactively to January 1, 2008 and clarifies questions regarding the intent of PL 2007, Chapter 273
• Maine's homestead exemption, effective July 18,
  2008. For a single homeowner: $47,500 (up from $35,000) and for joint owners: $95,000. Individuals over the age of 60, or who are disabled, or who have disabled or elderly dependents can also claim an exemption of $95,000 per person for a maximum exemption of $190,000 per couple.

COMMON LAW CLAIMS

• Unconscionability
  • Court is empowered to void contracts that are

procedurally and substantively unconscionable,

i.e., that could lead to unfair surprise and that

are oppressive to the disadvantaged parties.

( See Barrett v. McDonald Investment Inc., et al. 2005 ME 43, ¶¶ 32-36, 870 A.2d 146 (J. Alexander concurring)) See also Maine Consumer Credit Code Title 9-A §9-402

• Facts/Claims:
  • Disparity in bargaining power: borrowers unsophisticated with regard to financial matters, creditor sophisticated and experienced entities, which sought to profit directly from the evident disparity in bargaining power.
  • Borrower had no reasonable opportunity to understand terms of contract: limited English, education, etc.
  • Terms of the loans so oppressive and unreasonably favorable to creditor.
  • Terms of loan changed at last minute.
  • Creditor induced borrower into loan knew, or reasonably should have known, that the borrowers were incapable of repaying, with total disregard of their ability to pay and without regard for the consequences to them of entering into the loan.
  • Absence of meaningful choice for borrower.