The opinion of the court was delivered by: Joseph J. Maltese, J.
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the printed Official Reports.
The plaintiff, LaSalle Bank, NA ("LaSalle") has been granted reargument of this court's decision and order dated January 28, 2008 that denied its motion for summary judgment on a mortgage foreclosure. After reconsideration this court has made other findings of fact to supplant its original findings, but still denies plaintiff's motion for summary judgment and awards summary judgment in favor of the defendant - borrower, David Shearon.
On January 28, 2008 this court rendered a decision denying the summary judgment motion of LaSalle Bank, the trustee and successor to the original lender WMC, to foreclose on real property owned by Shearon located at 33 Westport Lane, Staten Island, New York. In that same decision this court awarded summary judgment in favor of Shearon on his first counterclaim. In doing so, this court found as a matter of law that the lender violated New York Banking Law § 6-l, which prohibits predatory lending.
In determining Plaintiff's motion for summary judgment this court finds that during the summer of 2005, David Shearon and his wife, Karen Shearon, who resided in a rental home decided to purchase their first house. Through the use of a real estate agent from Coldwell Banker, the Shearons agreed to purchase a house for $335,000. They then contacted Glen DeLuca and Michael Farber, two mortgage brokers associated with Liberty Capital Mortgage, on Staten Island, New York.*fn1 to provide them with all necessary financial information and potential lenders in order to obtain financing for the purchase. At the time the Shearons applied for financing in connection with the purchase of the house, David Shearon had a credit score of 696 and his wife Karen Shearon had a credit score of 760 on a scale where 800 was the maximum score. During August and September 2005, Michael Farber advised the Shearons that he was "shopping around for the best rates" and they would qualify for traditional loan products with fixed interest rates.
However, on October 17, 2005, the Shearons entered into a contract to purchase the $335,000 house, but the written contract listed a purchase price of $355,100 with a "Seller's Concession" of $20,100. At the execution of the contract, the Shearons placed a deposit of $5,000 with the seller's attorneys. Therefore, the new balance due and owing on the contract should have reflected $350,100. Instead the financing documents reflected the full $355,100, implying that it would be a "no money down" purchase, when in reality there was a $5,000 deposit.
From the time of the contract execution until closing of title on January 27, 2006, Michael Farber, the mortgage broker, advised the Shearons that WMC Mortgage Corp. ("WMC") would finance the entire purchase price with two loans. Since these mortgages were immediately sold in the secondary mortgage market, the mortgage brokers on behalf of WMC prepared these loans to appear to comply with rules established by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). In order to package this loan for sale in the secondary mortgage market, the lenders must comply with the 80-20 Rule, where the first mortgage can be no greater than 80% of the sales price and where the purchasers are to provide the other 20% by way of a deposit and additional funds . But the purchasers did not have $67,000 (20% of the $335,000 sales price) as additional funds. They only had $5,000 as a deposit. Therefore, the mortgage brokers advised the purchasers that they could finance the other 20% plus their real estate fees or closing costs by taking a second mortgage. But to accomplish that and still be in compliance with the 80%-20% rule, they increased or "bumped up" the sales price by $20,100 to $355,100. Accordingly, the first mortgage was for $284,000 (79.97% of $355,100, the increased sales price) and the second mortgage was for $71,000 (19.99% of $355,100, the increased sales price). Yet, the true sales price was still $335,000 that should have made the first mortgage of $284,000 - 84.78% of the true sales price, which would have violated the 80-20 rule. The second mortgage of $71,000 was 21.19% of the $335,000 sales price. While both Mr. and Mrs. Shearon signed the mortgage application and the contract, somehow at the time of the closing, the closing documents, to include the deed, promissory notes and mortgages, listed only David Shearon as the sole purchaser - borrower.
In his answer to the plaintiff's complaint to foreclose the mortgage for non-payment Shearon alleges that he is the victim of "predatory lending" practices by the mortgage brokers and the lender regarding the financing of his home. The defendant - borower alleged the following six separate and distinct acts to justify his claim of predatory lending:
1) Excessive financing was approved and extended to 106% of the purchase price, which permitted him to finance the points, broker fees, and other costs of the closing;
2) Improper, inadequate or nonexistent "due diligence" regarding the Shearons' ability to repay the high cost home loan given;
3) The intentional and improper placement of the Shearons into "subprime loan" products with excessively high interest rates, longer loan terms and impaired refinancing flexibility to the sole benefit of the lender;
4) Absent or inadequate state and federally mandated truth-in-lending act (TILA) disclosures regarding material elements of the financing being obtained, including without limitation, matters relating to closing costs and fees, counseling services, loan terms, amortization schedules and balloon payment requirements;
5) Forgeries of numerous loan related documents, including without limitation (i) the residential loan application, dated November 7, 2005; (ii) the undated "Addendum to Contract of Sale"; and (iii) the "Request for Verification of Rent," dated January 3, 2006 (purportedly signed by Jennifer Ogman, the Shearons' then landlord) reflecting inaccurate information used to underwrite the loans; and
6) The employment of repeated and continuous coercive and concerted tactics by plaintiff and other nonparties who stood to benefit from the loan process, which successfully targeted and forced Shearon to close on the loans and the property or face significant and dire financial consequences to include losing the down payment/deposit, defaulting under the purchase contract and losing the loan commitment.
Upon reviewing these facts, this court denied plaintiff's motion and found that the lender violated Banking Law § 6-l. This court found that the lender extended the borrower a "high cost loan." Plaintiff now moves for reargument contending that this court's misapprehended the facts and law when it found that the loan between WMC and the borrower was "high cost." In opposing, the plaintiff's motion to reargue, Shearon's attorney argues that the court employed sound reasoning when it found that the loans between WMC and Shearon was a "high cost loan."
The court heard oral argument on the motion and granted the plaintiff's application for reargument and will now turn its attention to the merits of the arguments by both the plaintiff and defendant.
Two Loans to Complete One Transaction
Where purchasers had deposits of less than 20% of the purchase price, private mortgage insurance (PMI)*fn2 was taken out, which made up for the inadequate deposit. However, PMI payments are not deductible on personal income taxes. But eureka!..interest on a second mortgage was deductible. Consequently, the bank gave the purchaser a second mortgage for the difference between the 80% first mortgage and the 20% deposit money and the real estate expenses to close the two loans. The bank and the mortgage brokers "discovered the gold" in financing a second mortgage loan at more lucrative rates than the first mortgage. To accomplish this goal the mortgage brokers used the guise that the borrowers could pay off the second mortgage earlier than the first mortgage; or the mortgage brokers would find the homeowners a better mortgage later so they could refinance their home with, yet more closing expenses in a year or so.
It is undisputed that the money obtained from both loans were necessary to: 1) complete the real estate transaction, 2) satisfy the 80% first mortgage requirement of Fannie Mae and Freddie Mac and 3) avoid the requirements associated with "high cost loans," in excess of $300,000.
Making two loans creates an added windfall that cuts in favor of the lender. While the borrower saves on private mortgage insurance payments, the lenders are able to generate additional closing fees. Moreover, the second loan was at a higher potential rate of interest than the primary loan because it is a riskier loan, which allows the lender to earn additional income based on a higher interest rate.
The contract of sale included a mortgage contingency clause located at paragraph 8 that required the Shearons to obtain a mortgage in the amount of $335,000, which is 100% of the purchase price going to the seller.
The plaintiff vigorously argues that each loan is separate and distinct. The plaintiff argues that the letter of the law must be followed, even though it is clear that one conventional loan at a fixed rate of interest could have completed the transaction. While this court does not condone this form of real estate financing for a multitude of ...