N.Y. Court Blocks Foreclosure And Allows Borrower To Recover Damages and Attorneys' Fees From Lender

In a previous post (here), we analyzed the decision of a Massachusetts court that enjoined Fremont Investment and Loan from foreclosing on any subprime loans in Massachusetts without the approval of the Massachusetts Attorney General or the court. In another opinion that may have significant impact on the mortgage lenders seeking to foreclose on homeowners with subprime loans, a trial court in New York recently not only dismissed a mortgage foreclosure action by a lender, but also granted the homeowner summary judgment on his claim that the lender violated predatory lending laws. The court wrote that the homeowner "may be entitled to damages to include the voiding of the mortgage and loan, along with the return of all mortgage payments, the expenses of obtaining the loans and attorney fees" and set a hearing on those damages and fees. LaSalle Bank, N.A. v. Shearon, No. 100255/2007, 2008 WL 268449 (N.Y. Sup. Jan. 28, 2008).

In this case, Karen and David Shearon bought a home in Staten Island, New York in January 2006. They utilized the services of a mortgage broker to assist them in obtaining financing for the home purchase, which was their first. The Shearon's were not subprime borrowers. They had good credit scores -- David's was 696 and Karen's was 760 -- but only had an annual income of around $30,000. However, the court determined that the mortgage broker and lender convinced the Shearon's to have only David on the papers for the purchase of the home and placed Shearon with a subprime loan package. For example, Shearon bought a house that was listed for $335,000, but financed the entire purchase price and the loan points, broker fees and closing costs. Thus, at the time of closing, Shearon was left with negative equity. Shearon also financed the purchase by obtaining two loans -- a primary adjustable rate mortgage and a much smaller secondary loan that was fixed at 10.75%. A company called WMC Mortgage Corporation was the originator of the loan. LaSalle was not involved in any of the alleged predatory conduct in connection with the original loan. Rather, LaSalle was a trustee and successor to WMC (it is unclear whether LaSalle purchased WMC or bought the loan in the secondary market).

The court found that WMC had violated at least three provisions of New York's banking law regulating "High Cost Home Loans" (New York Banking Law Sec. 6-L, et seq.): (1) the amount of points and closing costs financed exceeded 3% of the principal amount of the loan; (2) WMC failed to conduct proper due diligence of Shearon's ability to repay the loan; and (3) Shearon was not provided adequate information regarding the terms and repercussions of the financing he was being provided.

As with the Massachusetts case, the Shearon decision is a significant one for the mortgage lending industry. First, it may provide a blueprint for other borrowers facing foreclosure in New York or elsewhere to turn the tables on the lender through evidence that the lender and mortgage broker violated anti-predatory lending laws. Second, and more importantly, the case extended predatory lending liability to LaSalle, which was only involved as a trustee and successor to the original lender, WMC, and was not involved in any of the misconduct in the original mortgage transaction. Since the primary fuel to the explosion of subprime lending was the securitization process, under Shearon, the final holder of the loan will held responsible for the predatory lending practices of the originator (as well as being unable to foreclose on defaulting borrower).

Comments

[Wally Kalbacken]

What did Shearon report as his/her/their income? Did they sign an affidavit at closing confirming the application data? Methinks if he was the sole applicant/signatory to the application and had an IQ over 70 (thus knew the principal balance was in excess of 10x his supposed annual income) there may be an unclean hands problem here. My experience with mortgage fraud cases and foreclosure in the Atlanta area in the past 10 years practicing there was eye-opening. The amount of mortgage fraud there is staggering. In these facts I'm not excusing the originator, but it seems that LaSalle was getting an unfair result.