90 days plus 90 foreclosure law

Q 83. What, in a nutshell, is the new law extending the foreclosure process by 90 days?
A Under the new California Foreclosure Prevention Act, lenders foreclosing on certain loans are prohibited from giving a notice of sale until the lapse of at least 3 months plus 90 days after the filing of the notice of default (see Question 88). A loan servicer can obtain an exemption from this requirement by demonstrating that it has a comprehensive loan modification program (see Questions 89 to 94).
Q 84. What is the purpose of this law?
A The purpose of this law is to try to stem the tide of foreclosures and their adverse consequences by providing additional time for lenders to work out loan modifications with borrowers as well as creating an incentive for lenders to establish comprehensive loan modification programs.
Q 85. When will this law be in effect?
A This bill was enacted into law on February 20, 2009 along with the state budget. Its provisions take effect on or about March 16, 2009.
More specifically, the law states that the appropriate commissioners must adopt regulations to carry out this law within 10 days of its enactment (see Cal. Civil Code § 2923.53(d)), which would be by March 2, 2009. The law also states that it will become operative 14 days after the issuance of such regulations (Cal. Civil Code § 2923.52(d)), which would be on or about March 16, 2009.
This law will stay in effect only until January 1, 2011 at which time it will be repealed, unless it is deleted or extended by statute (Cal. Civil Code § 2923.52(d)).
Q 86. How does this new law affect the foreclosure timeline?
A Under preexisting law, a lender who files a notice of default in the foreclosure process must wait at least 3 months before giving a notice of sale (Cal. Civil Code § 2924). The new law extends that 3-month period by an additional 90 days.
Also under preexisting law, the general rule of thumb is that the entire foreclosure process takes a minimum of 4 months from the filing of a notice of default until the final trustee’s sale. Under the new law, that general rule of thumb is extended by 90 more days for a total of about 7 months, unless the lender is exempt. For more information about the foreclosure process, C.A.R. offers a legal article entitled Foreclosure Timeline.
Q 87. Under the new law, is the minimum time frame from the filing of a notice of default to the notice of sale a total of 6 months or 180 days?
A Neither. The way the law is written, the minimum time frame from the filing of the notice of default to the notice of sale is technically “3 months plus 90 days.”
Q 88. What type of loan falls under the new law extending the foreclosure process by 90 days?
A Unless otherwise exempt, the 90-day extension to the foreclosure process applies to loans that meet all of the following requirements:
The loan was recorded from January 1, 2003 to January 1, 2008, inclusive;

The loan is secured by a first deed of trust for residential real property;

The borrower occupied the property as a principal residence at the time the loan became delinquent; and

A notice of default has been recorded on the property.
(Cal. Civil Code § 2923.52(a).)
Q 89. What are the exceptions to the new law extending the foreclosure process by 90 days?
A Most notably, a loan servicer is exempt from the 90-day extension to the foreclosure process if the loan servicer has obtained an order of exemption based on the implementation of a comprehensive loan modification program (Cal. Civil Code § 2923.53(a)) (see Questions 89 to 94). The order of exemption must be current and valid at the time the notice of sale is given (Cal. Civil Code § 2923.52(b)).
Other exceptions to the 90-day extension include the following:
Certain state or local public housing agency loans (Cal. Civil Code § 2923.52(c)).

When a borrower has surrendered the property as evidenced by a letter confirming the surrender or delivery of the keys to the property to the lender or authorized agent (Cal. Civil Code § 2923.55(a)).

When a borrower has contracted with any person or entity whose primary business is advising people who have decided to leave their homes on how to extend the foreclosure process and avoid their contractual obligations to the lenders (Cal. Civil Code § 2923.55(b)).

When a borrower has filed a bankruptcy case and the court has not entered an order closing or dismissing the case or granting relief from a stay of foreclosure (Cal. Civil Code § 2923.55(c)).
Q 90. What constitutes a comprehensive loan modification program?
A A comprehensive loan modification program that may exempt the loan servicer from the 90-day extension to the foreclosure process includes all of the following features:
The loan modification program is intended to keep borrowers whose principal residences are located in California in those homes when the anticipated recovery under loan modification exceeds the anticipated recovery through foreclosure on a net present value basis (Cal. Civil Code § 2923.53(a)).

It targets a 38 percent or less ratio of the borrower’s housing-related debt to the borrower’s gross income (Cal. Civil Code § 2923.53(a)). Housing-related debt is debt that includes loan principal, interest, property taxes, hazard insurance, flood insurance, mortgage insurance and homeowner association fees (Cal. Civil Code § 2923.53(k)(2)).

It includes some combination of loan modifications terms as specified (Cal. Civil Code § 2923.53(a)) (see Question 91).

The loan servicer seeks long-term sustainability for the borrower (Cal. Civil Code § 2923.53(a)).
Q 91. What are the loan modification terms that must be included in a comprehensive loan modification program?
A A comprehensive loan modification program that may qualify for exemption from the new law extending the foreclosure process by 90 days must include some combination of the following features:
An interest rate reduction, as needed, for a fixed term of at least five years;
An extension of the amortization period for the loan term to no more than 40 years from the original date of the loan;
Deferral of some portion of the unpaid principal balance until loan maturity;
Principal reduction;
Compliance with a federally mandated loan modification program; or
Other factors that the appropriate commissioner determines.
(Cal. Civil Code § 2923.53(a)(3).) See also Question 92.
Q 92. Does a loan servicer have to modify loans to get an exemption from the 90 day extension to the foreclosure process?
A No. A loan servicer is not required to modify a loan for a borrower who is not willing or able to pay under the modification. Furthermore, a loan servicer is not required to violate any contractor agreement for investor-owned loans. (Cal. Civil Code § 2923.53(i).)
Q 93. How does a loan servicer obtain an order of exemption from the new law extending the foreclosure process by 90 days?
A A loan servicer may apply to the appropriate commissioner (see Question 94) for an order exempting loans that it services from the new law extending the foreclosure process by 90 days (Cal. Civil Code § 2923.53(b)(1)). Upon receipt of an initial application for exemption, the commissioner must issue a temporary order exempting the mortgage loan servicer from the 90-day extension to the foreclosure process (Cal. Civil Code § 2923.53(b)(2)). Within 30 days of receipt of the application, the commissioner must make a final determination by issuing a final order exempting the loan servicer or denying the application (Cal. Civil Code § 2923.53(b)(3)). If the application is denied, the temporary order of exemption shall expire 30 days after the date of denial (Cal. Civil Code § 2923.53(b)(1)).
Q 94. To which commissioner does a loan servicer apply for exemption?
A A lender or loan servicer would apply for an exemption to the following commissioner as appropriate:
Commissioner of the Department of Financial Institutions for commercial and industrial banks, savings associations, and credit unions organized in California to service mortgage loans;

Commissioner of the Department of Real Estate for licensed real estate brokers servicing mortgage loans; and

Commissioner of the Department of Corporations for licensed residential mortgage lenders and servicers, licensed finance lenders and brokers, and any other entities servicing mortgage loans not regulated by the Department of Financial Institutions or Department of Real Estate.
(Cal. Civil Code § 2923.53(k)(1).)
Q 95. How does a homeowner ascertain whether his or her loan servicer is exempt from the 90-day extension to the foreclosure process?
A The Secretary of Business, Transportation and Housing must maintain a publicly-available Internet website disclosing the final orders granting exemptions, the date of each order, and a link to Internet websites describing the loan modification programs (Cal. Civil Code § 2923.52(f)) (see also Question 96).
Q 96. Does a loan servicer have to inform the borrower as to whether the loan servicer is exempt from the longer foreclosure timeframe?
A Yes. A notice of sale must include a declaration from the loan servicer stating both of the following:
Whether the loan servicer has obtained a final or temporary order of exemption from the 90-day extension to the foreclosure process that is current and valid on the date the notice of sale is filed; and
Whether the 90-day extension to the foreclosure process under the new law does not apply.
The law requires the loan servicer’s declaration of exemption on the notice of sale, even though it may have been more helpful for the borrower if the declaration was on the notice of default. This requirement will stay in effect only until January 1, 2011 at which time it will be repealed, unless it is deleted or extended by statute. (Cal. Civil Code § 2923.54.)

Q 97. What is the penalty for violating this law?
A Anyone who violates this law shall be deemed to have violated his or her license law as it relates to these provisions (Cal. Civil Code § 2923.53(h)).
Q 98. Where do I find this law?
A This law is set forth at sections 2923.52 to 2923.55 of the California Civil Code. The full text of this law is available at the California Legislative Counsel website at http://www.leginfo.ca.gov.

HOPE NOW: 134,000 Mortgages Modified in February

Carrie Bay | 03.31.09

HOPE NOW announced on Monday that its members and the larger mortgage lending industry modified 134,000 home loans in February that were in danger of foreclosure, a nine percent increase over the number of mortgages modified in January.

The industry alliance also said that modifications last month made up 55 percent of all workout solutions completed, representing the highest modification percentage since HOPE NOW began collecting data – a positive stat, considering HOPE NOW and its members have historically come under fire from consumer advocacy groups for employing primarily repayment plans, which some experts say are more susceptible to re-default.

In addition to the 134,000 modifications, HOPE NOW said 110,000 repayment plans were executed, meaning that last month, HOPE NOW members and the larger mortgage lending industry helped 244,000 at-risk homeowners avoid foreclosure. This is the first time since HOPE NOW began to compile data in July 2007 that the number of foreclosure preventions has exceeded 200,000 for six consecutive months.

According to Faith Schwartz, HOPE NOW’s executive director, the mortgage lending industry is working hard to provide multiple options for borrowers to avoid foreclosure. “We expect the trend to continue as many companies expand their offerings to include the administration’s Making Home Affordable refinance and modification programs,” she said. “The mortgage lending industry is responding to the needs of its customers and offering solutions that are appropriate to the current market and economic conditions,” Schwartz added.

Despite the positive monthly trend in mortgage workouts, HOPE NOW reported that the number of foreclosures started in February increased to 243,000, up from 217,000 in January. Completed foreclosure sales also increased, from 68,000 in January to 87,000 in February.

The HOPE NOW February data does not yet reflect the impact of the Obama administration’s recently announced, but not yet implemented, Homeowner Affordability and Stability Plan.

Schwartz said, “Currently 5.5 percent of the total mortgage market is 60 days or more delinquent. Because of this, HOPE NOW members are working hard to help the administration implement its recently-announced foreclosure prevention initiative as well as working on additional ways we can be more efficient in helping at-risk homeowners.”

California Real esate blogs

California real estate blogs

United First Bankruptcy Stay

On March 9, 2009 an involuntary bankruptcy was filed by some of the victims of the unconscionable contract of United First Inc. While I make no warranty and you should seek the advise of counsel before undertaking this action. The Stay applicable to United First may be applicable to the 2000 plus victims of the United First Inc. there pending cases and pending evictions. See Notice of Stay Form united-first-bankruptcy-notice-of-stay



Banking and Lender Liability – Is the Genie Slipping out of the Bottle?

Title: Banking and Lender Liability – Is the Genie Slipping out of the Bottle?
Date: March 1998
Publication: Commercial Lending UPDATE
Author(s): Kenneth M. Van Deventer
Area(s) of Practice: Financial Services, Litigation

Recent decisions from courts in the State of New Jersey and a new wave of lawsuits against financial institutions – particularly class action lawsuits – may be a signal that this is no time for complacency in banking. Plaintiffs’ lawyers have regrouped and are ready for a creative new wave of attacks on banking practices. The present case law may give the plaintiffs’ lawyers the openings they have been waiting for. A general survey of some of these developments follows:

Sons of Thunder – The Duty of Good Faith and Fair Dealing

In Sons of Thunder, Inc. v. Borden, Inc., the Supreme Court of New Jersey fundamentally altered generally accepted rules of contract construction. Before Sons of Thunder, if a party did not breach its contractual obligations it could not be liable for bad faith. In the banking context, this meant, among other things, that a bank could call a loan, refuse to fund, refuse to roll over a loan, set off accounts, etc., no matter how drastic the foreseeable consequences might be to the borrower/customer, so long as the bank acted within expressly granted rights under the controlling loan documents. That may no longer be the case.

In Sons of Thunder, one party (“Borden”) to a contract for the supply of clams exercised a termination clause in the contract with the knowledge that the foreseeable consequences of its action would be the demise of the other party (“Sons of Thunder”). The Supreme Court upheld a jury verdict that, even though Borden did not breach express obligations of the contract in terminating the contract, it did breach the implied covenant of good faith and fair dealing and was, therefore, liable to Sons of Thunder for consequential damages, including lost profits.

In other words, the Court found that Borden had breached the implied covenant of good faith in fair dealing in performing its obligations under the contract. Specifically the Court ruled:

Because its conduct destroyed Sons of Thunder’s reasonable expectations and right to receive the fruits of the contract, Borden also breached the implied covenant of good faith found in New Jersey’s common law.

Bankers should not take comfort in the fact that Sons of Thunder involved clams instead of dollars. In Maharaja Travel, Inc. (“Maharaja”) v. Bank of India (“BOI”) a federal judge ruled that, under New York law, a bank could be liable for breach of the implied covenant of good faith of fair dealing even if it performed correctly under the expressed terms of the contract. In Maharaja, BOI entered into a credit facility with Maharaja pursuant to which it would provide letters of credit and other arrangements necessary for Maharaja to operate its travel business. The commitment letter signed by the parties specifically stated that “[t]hese facilities are available at [BOI’s] discretion.” After BOI refused to provide funds to Maharaja, Maharaja’s business failed and the law suit ensued. As in Sons of Thunder, the court found that BOI had not breached its contractual obligations under the credit facility. Nevertheless, the court refused to dismiss Maharaja’s claim for breach of contract because it found that even where a party performs according to the express terms of the contract:

A party’s action implicates the implied covenant of good faith if it acts so directly to impair the value of the contract for another party that it may be assumed that they are inconsistent with the intent of the parties.

Read together, Sons of Thunder and Maharaja signal an erosion, if not an outright end to the general rule of contract construction that a party will not incur liability for simply exercising the rights it contracted for, even if the consequences of that action are harsh on the other party to the contract. Banks in particular will now have to consider both the express terms of its contractual obligations, as well as the consequences of its acts or failure to act. Indeed, banks should assume that in every loan document there is a covenant substantively providing as follows:

Notwithstanding any right granted herein to Bank, nor any obligations undertaken by borrowers/customer, Bank shall be obligated to take such action as necessary to carry out the purposes for which this Agreement was made and to refrain from doing anything that would destroy or injure borrowers/customers’ right to receive the reasonably anticipated benefits of this Agreement.

Fiduciary Duties/Duty to Disclose

Last year, the New Jersey Appellate Division issued two important opinions addressing the legal relationship between a bank and its borrower/customer. In United Jersey Bank, Central v. 914 Westfield Avenue Associates, et al., the borrower claimed that the bank had fraudulently induced him to borrow funds in order to purchase a business that was also a customer of the bank and which t he bank knew was in declining financial condition.

According to the court, the borrower’s contentions raised “novel and far-reaching issues concerning a bank’s relationship with a client/customer and whether such relationship carries some fiduciary obligations.” The court denied summary judgment to the bank on the theory that a duty to disclose may exist even in the absence of a fiduciary relationship. Here, where the allegation was that the bank officers did offer some opinion as to the viability of the business, the allegations were sufficient to state a prima facia case for common law fraud against the bank. United Jersey Bank v. Kensey, et al., the courts were presented with different facts but substantively the same issue. In Kensey, the borrower knew that it was borrowing money to purchase a business and some property from an individual who was also a borrower of the bank, but whose loans were in default and being handled by the work-out department. The bank did not disclose, however, that it had an appraisal in its files indicating that the value of the property/business was less than the purchase price the borrower was paying for the property/business. When the new borrower defaulted and litigation ensued, he claimed that the bank breached a fiduciary duty owed to him to disclose the value in the bank’s own appraisal. Once again, the Appellate Division saw the case as presenting “novel and far-reaching issues concerning a bank’s relationship with its customers.”

The court noted, however, “the growing trend to impose a duty to disclose in many circumstances in which silence historically sufficed.” According to the court, “the common thread running through them is that the lender encouraged the borrower to repose special trust or confidence in its advice, thereby inducing the borrower’s reliance.” Finding that factor to be absent in the case before it, the court reaffirmed the general rule that banks have no duty to disclose information they may have concerning the financial viability of the transactions their borrowers are about to enter into. Accordingly, summary judgment was entered for the bank.

Although Kensey was a win for the bank, it is troubling that the Kensey and 914 Westfield Avenue courts recognized a trend of cases imposing liabilities on banks that historically were only imposed in the context of fiduciary relationships.

Other Banking Litigation Developments

Class Actions. There is a trend, which we predict will grow, for class actions attacking any uniform bank practice. Earlier updates discussed the wave of collateral protection insurance class action lawsuits. Now, the New Jersey Supreme Court in Lemelledo v. Beneficial Management, has ruled that the New Jersey Consumer Fraud Act, which allows treble damages and recovery of attorney’s fees, applies to a financial institution’s sale of insurance in conjunction with loans. Also, in Noel v. Fleet Finance, Inc., a Federal Judge in the Eastern District of Michigan recognized, among other things, the viability of a class action claim against lenders and mortgage brokers under the Truth In Lending Act for failing to disclose the yield spread premium paid by the lender to mortgage brokers. And this year, after the Eleventh Circuit in Culpepper v. Inland Mtge ruled that yield spread premiums were prohibited referral fees under RESPA, plaintiffs instituted a RICO class action based on that practice. Finally, in Cannon v. Nationwide Acceptance Corporation, a Federal Judge in the Northern District of Illinois allowed a RICO class action to be maintained on the basic premise that the lenders’ solicitation of new business induced existing borrowers to refinance existing loans rather than going the cheaper route of just borrowing more funds.

Environmental. In CoreStates/New Jersey National Bank v. D.E.P., a New Jersey Administrative Law Judge ruled that a lender obtaining property through foreclosure may lose the protections otherwise provided to lenders under the Spill Act if, after obtaining the property, it acts negligently in its maintenance of the property.

ECOA. In Machis Savings Bank v. Ramsdell, the Maine Supreme Court ruled that wives who co-signed a series of loans to their husbands’ construction company could defeat summary judgment on a foreclosure action on the basis of the allegation that they had not signed the loan modification agreements and on the affirmative defense of ECOA violations.

Parole Evidence/Statute of Frauds. In Nation Banks of Tennessee v. JDRC Corporation, et al., the Court of Appeals of Tennessee ruled that an internal commercial loan memorandum could satisfy the Statute of Frauds and that such internal bank documents were admissible, notwithstanding the Parole Evidence Rule, to prove an oral modification to written loan documents.

Bankruptcy. In, In re: Shady Grove Tech Center Associates Limited Partnership, a federal bankruptcy court in Maryland found “cause” to lift a stay where the debtor had executed a pre-p etition stay waiver, even though the real estate mortgage lender was adequately protected. The case is particularly interesting for its thorough discussion of the enforceability of pre-petition stay waiver agreements.

Fannie, Freddie Suspend Foreclosures Pending Administration’s Housing Plan

Carrie Bay | 02.13.09

Mortgage giants Fannie Mae and Freddie Mac announced on Friday that they are suspending all foreclosure sales and evictions of occupied properties through March 6th, in anticipation of the Obama Administration’s national foreclosure prevention and loan modification program.

Treasury Secretary Timothy Geithner touched on the idea of a national mortgage relief program when he outlined the new administration’s Financial Stability Plan on Tuesday, but did not divulge any details on the specifics of the program. Geithner promised congressional leaders in a follow-up hearing that the program would be finalized within the next three weeks.

In a concerted effort to offer the full spectrum of assistance to troubled borrowers facing foreclosure, a number of large lenders also committed to a temporary foreclosure moratorium this week – holding out for a March 6th deadline for the government’s housing and mortgage aid initiative.

Fannie and Freddie had previously put in place a suspension of foreclosure sales and evictions through January and extended the eviction freeze through the end of February. In addition, the companies adopted a national Real Estate Owned (REO) Rental Policy that allows renters of foreclosed properties to remain in their homes or receive transitional financial assistance should they choose to seek new housing.

Been Evicted need a stay of execution till Fraud case against lender decided …?

Many a client call me when its toooooo late however sometimes something can be done it would envolve an appeal and this application for a stay. Most likely you will have to pay the reasonable rental value till the case is decidedex-parte-application-for-stay-of-judgment-or-unlawful-detainer2

The Doan deal

California Civil Code 2923.6 enforces and promotes loan modifications to stop foreclosure in the state. California Civil Code 2923.6 (Servicer’s Duty under Pooling Agreements) went into effect on July 8, 2008. It applies to all loans from January 1, 2003, to December 31, 2007 secured by residential real property for owner-occupied residences.

The new law states that servicing agents for loan pools owe a duty to all parties in the pool so that a workout or modification is in the best interests of the parties if the loan is in default or default is reasonably foreseeable, and the recovery on the workout exceeds the anticipated recovery through a California foreclosure based on the current value of the property.

Almost all residential mortgages have Pooling and Servicing Agreements (“PSA”) since they were transferred to various Mortgage Backed Security Trusts after origination. California Civil Code 2823.6 broadens and extends this PSA duty by requiring servicers to accept loan modifications with borrowers.

How does this law apply?

Attorney Michael Doan provides this example of how the new law applies in his article entitled “California Foreclosures: Lenders Must Accept Loan Modifications” on the Mortgage Law Network blog. We removed the borrower’s name from the example for the sake of privacy.

A California borrower’s loan is presently in danger of foreclosure. The house he bought 2 years ago for $800,000 with a $640,000 first and $140,000 second, has now plummeted in value to $375,000. The borrower can no longer afford the $9,000 per month mortgage payment. But, he is willing, able, and ready to execute a modification of his loan on the following terms:

a) New Loan Amount: $330,000.00

b) New Interest Rate: 6% fixed

c) New Loan Length: 30 years

d) New Payment: $1978.52

While this new loan amount of $330,000 is less than the current fair market value, the costs of foreclosure need to be taken into account. Foreclosures typically cost the lender $50,000 per foreclosure. For example, the Joint Economic Committee of Congress estimated in June, 2007, that the average foreclosure results in $77.935.00 in costs to the homeowner, lender, local government, and neighbors. Of the $77,935.00 in foreclosure costs, the Joint Economic Committee of Congress estimates that the lender will suffer $50,000.00 in costs in conducting a non-judicial foreclosure on the property, maintaining, rehabilitating, insuring, and reselling the property to a third party. Freddie Mac places this loss higher at $58,759.00.

Accordingly, the anticipated recovery through foreclosure on a net present value basis is $325,000.00 or less and the recovery under the proposed loan modification at $330,000.00 exceeds the net present recovery through foreclosure of $325,000.00 by over $5,000.00. Thus, California Civil Code 2823.6 would mandate a modification to the new terms.

This new law remains in effect until January 1, 2013. Restructuring your mortgage will stop foreclosure and lower mortgage payments. Depending on your circumstances, you may also be able to lower your interest rate, as well. Visit the “Get Started” page to find out if you can benefit from this new California law and avoid foreclosure.

2923.6 complaint


Firm pursuing foreclosure might not be your lender


Figuring out which company to deal with during a foreclosure can be daunting. Even if the original mortgage was with a company recognized by the borrower, that company may not be the one acting against the borrower in court.

For example: Wells Fargo filed more than 3,600 foreclosure lawsuits in Iowa from January 2005 to February 2008, more than any other company identified in Iowa court data. But the company could be taking legal action because it processed payments for another mortgage company or acted as a trustee for investors – not because it’s the original lender.

Two company names that often appear on Iowa foreclosures – Deutsche Bank and Mortgage Electronic Registration System, or MERS – can be even more puzzling to borrowers.

Deutsche Bank, a global financial services firm with headquarters in Germany, may be listed as a loan’s owner of record, but it likely doesn’t have an actual stake in foreclosure proceedings. The firm acts as a trustee for investors holding mortgage-backed securities.

A loan winds up in a mortgage- backed security after it is sold by the company that originated the note. An investment bank pools that loan with others. It then sells securities, which represent a portion of the total principal and interest payments on the loans, to investors such as mutual funds, pension funds and insurance companies.

MERS, meanwhile, is neither the servicer nor the lender. Companies pay the firm to represent them and track loans as they change hands.

So while MERS should be able to point borrowers to the appropriate contact in a foreclosure proceeding, Deutsche Bank urges borrowers to contact loan servicers instead.

A tip for borrowers facing a foreclosure action: Make sure the company bringing the foreclosure action has the legal right to do so.

University of Iowa law professor Katherine Porter led a national study of 1,733 foreclosures and found that 40 percent of the creditors filing the lawsuits did not show proof of ownership. The study will be published later this year.

Companies, she said, have been “putting the burden on the consumer – who is bankrupt – to try to decide whether it’s worth it to press the issue.”

Max Gardner III, a bankruptcy attorney in North Carolina and a national foreclosure expert, said the trend is spreading to other states. “You have to prove in North Carolina that you have the original note,” he said. “Judges have not (asked for) that very often, until the last five or six months.”

MERS and Deutsche Bank faced court challenges last year over whether they had legal standing to bring a foreclosure action, with mixed results.

A federal judge in Florida ruled in favor of MERS, dismissing a class-action lawsuit that claimed the company did not have the right to initiate foreclosures. But a federal judge in Ohio ruled against Deutsche Bank, dismissing 14 foreclosure lawsuits after Deutsche Bank couldn’t provide proof of ownership. The Ohio attorney general has not been successful in getting state judges to follow suit.

In Iowa, attorneys and lending experts say they haven’t seen similar rulings against Deutsche Bank

Unlawful detainer law and forclosure law colide

The Lender has already foreclosed on your house at the time they bring a Unlawful Detainer action against you. The Unlawful Detainer is just an eviction and not a foreclosure proceeding. If you want to stop the eviction, you have to claim that they have no right to evict because of a defective deed due to fact that they are not true lender, etc.

A qualified exception to the rule that title cannot be tried in an unlawful detainer proceeding [see Evid Code § 624; 5.45[1][c]] is contained in CCP § 1161a. By extending the summary eviction remedy beyond the conventional landlord-tenant relationship to include purchasers of the occupied property, the statute provides for a narrow and sharply focused examination of title.

A purchaser of the property as described in the statute, who starts an unlawful detainer proceeding to evict an occupant in possession,must show that he or she acquired the property at a regularly conducted sale and thereafter “duly perfected” the title [CCP § 1161a; Vella v. Hudgins (1977) 20 C3d 251, 255, 142 CR 414, 572 P2d 28 ]. To this limited extent, as provided by the statute, title
may be litigated in the unlawful detainer proceeding [ Cheney v. Trauzettel (1937) 9 C2d 158, 159, 69 P2d 832 ].

CCP § 1161
1. In General; Words and Phrases
Term “duly” implies that all of those elements necessary to valid sale exist. Kessler v. Bridge (1958, Cal App Dep’t Super Ct) 161 Cal App 2d Supp 837, 327 P2d 241, 1958 Cal App LEXIS 1814.
Title that is “duly perfected” includes good record title, but is not limited to good record title. Kessler v. Bridge (1958, Cal App Dep’t Super Ct) 161 Cal App 2d Supp 837, 327 P2d 241, 1958 Cal App LEXIS 1814.

Title is “duly perfected” when all steps have been taken to make it perfect, that is, to convey to purchaser that which he has purchased, valid and good beyond all reasonable doubt. Kessler v. Bridge (1958, Cal App Dep’t Super Ct) 161 Cal App 2d Supp 837, 327 P2d 241, 1958 Cal App LEXIS 1814.
The purpose of CCP 1161a, providing for the removal of a person holding over after a notice to quit, is to make clear that one acquiring ownership of real property through foreclosure can evict by a summary procedure. The policy behind the statute is to provide a summary method of ouster where an occupant holds over possession after sale of the property. Gross v. Superior Court (1985, Cal App 1st Dist) 171 Cal App 3d265, 217 Cal Rptr 284, 1985 Cal App LEXIS 2408.


What Is Predatory Lending?

Predatory Lending are abusive practices used in the mortgage industry that strip borrowers of home equity and threaten families with bankruptcy and foreclosure.

Predatory Lending can be broken down into three categories: Mortgage Origination, Mortgage Servicing; and Mortgage Collection and Foreclosure.

Mortgage Origination is the process by which you obtain your home loan from a mortgage broker or a bank.

Predatory lending practices in Mortgage Origination include:
# Excessive points;
# Charging fees not allowed or for services not delivered;
# Charging more than once for the same fee
# Providing a low teaser rate that adjusts to a rate you cannot afford;
# Successively refinancing your loan of “flipping;”
# “Steering” you into a loan that is more profitable to the Mortgage Originator;
# Changing the loan terms at closing or “bait & switch;”
# Closing in a location where you cannot adequately review the documents;
# Serving alcohol prior to closing;
# Coaching you to put minimum income or assets on you loan so that you will qualify for a certain amount;
# Securing an inflated appraisal;
# Receiving a kickback in money or favors from a particular escrow, title, appraiser or other service provider;
# Promising they will refinance your mortgage before your payment resets to a higher amount;
# Having you sign blank documents;
# Forging documents and signatures;
# Changing documents after you have signed them; and
# Loans with prepayment penalties or balloon payments.

Mortgage Servicing is the process of collecting loan payments and credit your loan.

Predatory lending practices in Mortgage Servicing include:
# Not applying payments on time;
# Applying payments to “Suspense;”
# “Jamming” illegal or improper fees;
# Creating an escrow or impounds account not allowed by the documents;
# Force placing insurance when you have adequate coverage;
# Improperly reporting negative credit history;
# Failing to provide you a detailed loan history; and
# Refusing to return your calls or letters.

Mortgage Collection & Foreclosure is the process Lenders use when you pay off your loan or when you house is repossessed for non-payment

Predatory lending practices in Mortgage Collection & Foreclosure include:
# Producing a payoff statement that includes improper charges & fees;
# Foreclosing in the name of an entity that is not the true owner of the mortgage;
# Failing to provide Default Loan Servicing required by all Fannie Mae mortgages;
# Failing to follow due process in foreclosure;
# Fraud on the court;
# Failing to provide copies of all documents and assignments; and
# Refusing to adequately communicate with you.

CTX Mortgage Company, LLC / CTX Mortgage / Centex HomesCTX Mortgage Company / Centex Homes Predatory Lending Bait and Switch? Maitland Central Florida

September 2005, we signed a purchase contract and made a $12,000 deposit for a Centex Town Home in Oviedo, Florida. The builder’s mortgage company, CTX Mortgage, offered $3,000 in incententives so we decided to use them. We were given a Good Faith Estimate and interest rate of 6.25% but were told we could not lock in because it was too far off from the closing.

By late November 2005, we had heard nothing from CTX, so we contacted them to lock in a rate. We were again told that we needed to wait until the closing date was determined. We were given three new Good Faith Estimates with rates between 6.840% – 7.090% and were told they were the best CTX could offer, but we were approved for all three scenarios. We decided to shop around and received a Good Faith Estimate with a rate of 6.625% from Wells Fargo. A few days later, Centex contacted us to schedule the closing. We told them we were going to use Wells Fargo but were told that we could not change lenders after the completion of the framing inspection, which took place on October 21, 2005. We reviewed the contract and found a page this to be true. So we agreed to proceed with CTX but complained about the rate increases on the good faith estimates. Our file was transferred to a new loan officer, Jennifer Powell. According to her, our original loan officer had never ran our credit and we were not approved for any of the good faith estimates she provided to us.

Our closing was scheduled for Dec 28, 2005. Between December 8th and December 27th, we received five different good faith estimates from Jennifer (6.75% on December 8th, 7.75% on December 20th, 7.99% on December 21st, 9.125% on December 22th, and 9.375% on December 28th). Jennifer said my ‘low income’ made me high risk, which caused the rates to jump. We told Jennifer that the significant rate increase made the mortgage payments completely unaffordable for us and pleaded with her to either allow us to seek other financing or cancel the contract. She said either take the rate they gave us or lose our deposit of $12,000. We did not want to close on the property, but were not prepared to walk away empty-handed, so we asked for a loan program that would allow us to refinance without penalty. This is what made the rates jump up to 9.375% and 13.550% (an 80/20 loan).

The closing documents were not made available to us until 6:30 p.m. the night before our closing. We stayed in their office to review everything and noticed that my income on the application that CTX had prepeared was double my true income. We asked Jennifer why this was and she told us that in order to get approval, my income had to be ?stated?, meaning my income would not be verified by the lender. Please note in the above paragraph that we were told the rates were high because of my ‘low income’. After the closing, CTX immediately sold our loans, even before the first payment was due. There is only one reason why they offer mortgages and that is to rip people off!!!!

We have struggled for the past year and now have two liens against our property and our credit is ruined! We believe that what CTX Mortgage did is termed Predatory Lending. They tricked us, showing us good rates until it was too late for us to change lenders. We have two young daughters, a 5 year-old and a 3 month-old, and we are in jeopardy of losing our home. We are going to file a complaint with any and all agencies we can but would really like to hear from anyone else who has had this problem. I don’t know how these people sleep at night!

Oviedo, Florida

Click here to read other Rip Off Reports on CENTEX (CAVCO HOMES)

Forbearance ageement in writing

LOAN MODIFICATION: Because a note and deed of trust come within the statute of frauds, a Forbearance Agreement also comes within the statute of frauds pursuant to Civil Code section 1698. Making the downpayment required by the Forbearance Agreement was not sufficient part performance to estop Defendants from asserting the statute of frauds because payment of money alone is not enough as a matter of law to take an agreement out of the statute, and the Plaintiffs have legal means to recover the downpayment if they are entitled to its return. In addition to part performance, the party seeking to enforce the contract must have changed position in reliance on the oral contract to such an extent that application of the statute of frauds would result in an unjust or unconscionable loss, amounting in effect to a fraud.secrest_v_securitynationalmortgage

2008 Foreclosures Up 81%

Austin Kilgore | 01.15.09

Foreclosure filings were up 81 percent in 2008, according to RealtyTrac’s 2008 U.S. Foreclosure Market Report.

There were 3,157,806 foreclosure filings — default notices, auction sale notices, and bank repossessions — reported on 2,330,483 U.S. properties during the year, an 81 percent increase in total properties from 2007 and a 225 percent increase in total properties from 2006, the report said.

The huge increase means one in 54 homes received at least one foreclosure filing during the year.

December 2008’s foreclosure filings were up 17 percent from November 2008, and up more than 40 percent from December 2007. Despite the December spike, foreclosure activity in the fourth quarter of 2008 was down 4 percent from the third quarter, but still up 40 percent from the fourth quarter of 2007.

“State legislation that slowed down the onset of new foreclosure activity clearly had an effect on fourth quarter numbers overall, but that effect appears to have worn off by December,” RealtyTrac CEO James Saccacio said. “The big jump in December foreclosure activity was somewhat surprising given the moratoria enacted by both Freddie Mac and Fannie Mae, along with programs from some of the major lenders and loan servicers aimed at delaying foreclosure actions against distressed homeowners.”

Saccacio believes new legislation that prolongs the foreclosure process hasn’t done anything to prevent foreclosure filings, it’s only delayed them.

A new California law requires lenders to provide written notice of their intent to initiate foreclosure proceedings 30 days prior to issuing a notice of default (NOD). After the law was enacted, NOD filings dropped more than 50 percent from 44,278 in August to 21,665 in September. But just three months later, the number of filings jumped 122 percent, to more than 42,000 in December.

“Clearly the foreclosure prevention programs implemented to-date have not had any real success in slowing down this foreclosure tsunami,” Saccacio said. “And the recent California law, much like its predecessors in Massachusetts and Maryland, appears to have done little more than delay the inevitable foreclosure proceedings for thousands of homeowners.”

The states with the top ten foreclosure rates in 2008 were Nevada, Florida, Arizona, California, Colorado, Michigan, Ohio, Georgia, Illinois, and New Jersey.

California had the greatest number of foreclosure filings, up 110 percent from 2007. Florida, Arizona, Ohio, Michigan, Illinois, Texas, Georgia, Nevada and New Jersey filled out the rest of the top ten in total foreclosures.
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Countrywide RICO Lawsuit Claims Price Gouging

Countrywide RICO Lawsuit Claims Price Gouging
Austin Kilgore | 01.14.09

Countrywide required customers to hire one of its subsidiary companies to obtain appraisals without providing the proper disclosure forms, and overcharged them for the appraisals, according to allegations in a Racketeering Influenced and Corrupt Practices Act (RICO)-based class-action lawsuit filed in U.S. District Court in Seattle this week.

The suit, filed by a group of homeowners in Washington state, alleges Countrywide forced homeowners to use its subsidiary company LandSafe to obtain appraisals without providing an affiliated business arrangement disclosure that notifies customers that Countrywide owned the appraisal company, as is required by the Real Estate Settlement Procedures Act (RESPA).

“As we investigated Countrywide for our clients, it was immediately obvious that Countrywide is a well-oiled operation,” said Steve Berman, managing partner and lead attorney at Hagens Berman Sobol Shapiro, the law firm that filed the lawsuit. “Unfortunately, the company’s efficiencies are focused on soaking every penny from consumers and independent appraisers in ways we believe violate the law.”

The suit further alleges LandSafe would outsource the appraisals for as little as $140, but then charge customers like Washington residents Carol and Gregory Clark, plaintiffs in the case, as much as $410 for the service.

In 2007, The Clarks refinanced their mortgage with Countrywide, the nation’s largest mortgage company, and now, a subsidiary of Bank of America. The suit represents them and seeks to represent all homeowners that purchased new or refinance mortgages through Countrywide and LandSafe.

Because of its dominance in the market and ownership of LandSafe, Countrywide, the suit claims, had excessive influence on the appraisal process that took away from the independent verification of properties’ value, and that hundreds of thousands of homeowners are victims of this scheme.

The suit also said Countrywide blacklisted appraisers that refused to work for the fee schedule set by LandSafe, putting them on its “Field Review List,” a database of appraisers Countrywide refused to use unless the mortgage broker also submits a report from a second appraiser.

“When you control the entire appraisal process, including your hands around the necks of appraisers financially speaking, you have a lot of influence,” Berman said.

A spokesperson for Bank of America said the company had not been served with a copy of the lawsuit, but that the company thinks the suit has no merit.
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Cramdown’s A’Comin’ Mid 2009

First lien residential mortgage loan cramdowns will soon be coming to a bankruptcy court near you. Although we haven’t seen the bill yet, Dick Durbin’s office announced today that he, Chuck (“Bank Run”) Schumer and Chris Dodd, had cut a deal with Citigroup on a bill that would permit such cramdowns in Chapter 13 bankruptcy proceedings. According to The Wall Street Journal, which broke the story, this “marks a surprising change of direction by the financial-services industry.”

Banks have consistently fought such legislation, saying cramdowns would raise borrowing costs for all home buyers and jam courts with homeowners who wouldn’t otherwise declare bankruptcy.

“This is the breakthrough we’ve been waiting for, to have a major financial institution support this legislation will create an incentive for others to come our way,” Sen. Durbin said in an interview. “I want to congratulate Citi for being open-minded about this [and] playing a major leadership role.”

The WSJ also reports other “open-minded” financial institutions support the bill, but did not identify them.

Frankly, as described by the WSJ, the bill doesn’t sound as bad as many might have feared, even though it goes beyond what the banking industry has been willing to support in the past.

The Democrats’ proposal allows judges to force major reductions in home loans, after homeowners certify that they have attempted to contact their lenders about a mortgage reduction before bankruptcy proceedings begin. They do not however have to have engaged in negotiations with their banks.

The cramdown bill would apply to all mortgage loans, including but not limited to subprime loans, written any time prior to the bill’s date of enactment. It allows judges the ability to lower principal or interest rate, extend the term of the loan, or any combination of the three. “Cramdown” refers to the ability of judges to lower a mortgage principal so that it is equivalent to the current market value of a home.

In a concession to lenders, if a lender is found to have violated the Truth in Lending Act during bankruptcy proceedings, the institution would be subject to fines, but would not have to forgive the loan, as is the case currently. Major violations would still be subject to full sanctions under the law. The TILA provisions would pre-empt any state lending laws.

I’m certain that many bankers who do not have the heft of major Mastodons like Citi and BofA will be critical. I can admit to a bit of mystification myself as to the fact that the cramdown right will apply only to loans made prior to the date of passage of the legislation. I thought the argument for extending cramdowns to first mortgage loans was to deal with those awful subprime and “exotic” loans made when real estate values were as high as the lenders and borrowers who based their lending decisions upon those values ever rising. Why not single out specific types of loans? Also, why not pick an effective date that is at least no later than mid-2008? Good arguments can be made that an even earlier date should be selected. You’re going to effectively “rewrite” some conventional home mortgage loans that were initially prudently underwritten, to the disadvantage of the lender. That’s done with second loans, auto loans, and commercial loans, but the lenders of those types of loans set pricing based upon the knowledge that there’s the risk that cramdown could occur. That’s not the case for first mortgage loans. Is that “fair,” in light of the fact that the Democrats who support this bill are all about “fairness”?

We’ll be interested to see the effect of this legislation on pricing of loans and loan servicing on pre-effective date mortgage loans. I wonder if prospective purchasers will drive harder bargains on bulk purchases of such loans from the FDIC due to this risk? You think?

At least the cramdown will not apply first loans going forward. Of course, any lender with a brain in his head has to assume that if Congress did it once, Congress could very well do it again, and price the risk accordingly. Moreover, this is likely not only to make first mortgage loans more expensive, but add even more impetus to restrictive underwriting standards. While many people believe that’s not a bad effect, let’s ask them again in a few years. As I observed when Durbin first started this push, the same folks who scream for cramdowns will be some of the first complaining that lenders aren’t making enough loans to those with poor credit, who will likely be members of various classes of the perpetually aggrieved, and supporters of Senator Durbin and the rest of the Gang of Three.

California Cramdowns Coming 2009!

There were only 800,000 bankruptcy filings in the United States in 2007, according to the National Bankruptcy Research Center.

And while there is little hard data as to how many of these involve homeowners, some evidence suggests that about half the cases do. In one metro area, Riverside, Calif., 62% of 2007 bankruptcies involved home owners with outstanding balances. And not all of these would qualify for cram downs.

“These bills have means tests,” Harnick said. “If you can afford to pay your mortgage, you don’t qualify. If you can’t afford to pay even after the mortgage balance is reduced, you’re not eligible.”

And Adam Levitin, a law professor at Georgetown University contends that cram-downs would add little to the costs of new mortgages.

He examined historical mortgage rates during periods when judges were allowed to reduce mortgage balances, and concluded that the impact on interest rates would probably come to less than 15 basis points – 0.15 of a percentage point.

“The MBA numbers are just baloney,” said Levitin.

However, even though the direct impact on borrowers would be limited, permitting cram-downs could indirectly give borrowers more leverage in dealing with lenders, according to Bruce Marks, founder and CEO of the Neighborhood Assistance Corporation of America (NACA).

Mortgage borrowers could force lenders to negotiate loan restructurings by threatening to file for bankruptcy and have the judges do it for them.

Some people with credit-card debt already win concessions from credit card lenders by threatening bankruptcy, where the debt may be discharged.

“I consider this one of the most important pieces of legislation before Congress right now,” said Marks.

Will it become law?

As to the previous attempt to pass cramdown legislation the conventional wisdom was “We believe it will be very difficult to stop this legislation and we put the initial odds of enactment at 60%,” said Jaret Seiberg of the Stanford Group, a policy research company, in a press release assessing the new bills.

Now that it is being reintroduced in a “New Congress” and “New President” I believe Cramdowns will become law.

This will allow borrowers the leverage they need to negotiate with their own predator.

The Cramdown legislation was reintroduced in Congress on monday Jan 5,2009

“California Cramdown” California Civil Code Section 2923.6

(a) The Legislature finds and declares that any duty
servicers may have to maximize net present value under their pooling
and servicing agreements is owed to all parties in a loan pool, not
to any particular parties, and that a servicer acts in the best
interests of all parties if it agrees to or implements a loan
modification or workout plan for which both of the following apply:
(1) The loan is in payment default, or payment default is
reasonably foreseeable.
(2) Anticipated recovery under the loan modification or workout
plan exceeds the anticipated recovery through foreclosure on a net
present value basis.
(b) It is the intent of the Legislature that the mortgagee,
beneficiary, or authorized agent offer the borrower a loan
modification or workout plan if such a modification or plan is
consistent with its contractual or other authority.
(c) This section shall remain in effect only until January 1, 2013,
and as of that date is repealed, unless a later enacted statute,
that is enacted before January 1, 2013, deletes or extends that date.

Citi Supports Cramdowns

Cram downs are the legal tern to force the lender to accept the loan back at the present value of the house thus selling the house back to the homeowner at the present market value.

Congressmen want cramdown legislation included in recovery package

January 8, 2009

By MortgageDaily.com staff

Senate Democrats have found an ally in Citigroup Inc. for their proposed legislation to allow bankruptcy judges to modify mortgages. Citi’s endorsement follows an endorsement by U.S. homebuilders — though it is in opposition to the position taken by the country’s mortgage bankers.

Citi has agreed to support the cramdown legislation, according to an announcement from U.S. Rep. John Conyers (D-Mich.) and U.S. Senators Dick Durbin (D-Ill.), Chris Dodd (D-Conn.) and Chuck Schumer (D-N.Y.) The legislators said Citi’s support of the bill increases the chance it will be included in the economic recovery package currently being drafted by Congress.

In the press release, Dodd — who is Chairman of the Senate Banking Committee — vowed to support the bill’s inclusion in the recovery package.

The bill, originally introduced by Conyers in 2007, was reintroduced on Tuesday. Changes to the original legislation include only allowing existing mortgages, making borrowers prove that they attempted to contact their servicers before filing bankruptcy, and limiting the invalidation of claims only to major violations of the Truth in Lending Act.

“I have been working on this matter ever since the mortgage crisis began in 2007 and am pleased that we have been able to reach agreement today,” Conyers stated.

The announcement indicated that more than 8 million borrowers are currently at risk of foreclosure.

The move by Citi is a departure from the position usually taken by mortgage bankers.

“We were surprised by the suddenness of the announcement,” the Mortgage Bankers Association said in its own statement. “We remain opposed to bankruptcy cramdown legislation because of the destabilizing effect it will have on an already turbulent mortgage market.”

In October 2007, MBA Chairman David G. Kittle testified before the House Judiciary Committee’s Subcommittee on Commercial and Administrative Law that cramdowns could increase mortgage rates by as much as 2 percent.

The trade group went on to say in today’s statement that Citi’s agreement does nothing to protect FHA and VA guarantee programs. MBA also wants the bill to have a sunset date, be run through the normal legislative process and be applicable only to subprime loans.

As it sought a massive government financing package, Citi originally approached Schumer last month about endorsing the legislation. Other financial institutions already have quietly offered their support to Schumer for the legislation, the statement said.

“The support of one of the county’s biggest lenders will hopefully spur other lenders to act,” Durbin said in the statement.

In addition, the National Association of Home builders has reportedly thrown its support behind bankruptcy cramdowns.

“We now have a real chance to pass this legislation quickly,” Schumer added.

Countrywide settles but what abouts the rest of thier loans?

Countrywide Financial Corp. has agreed to make loan modifications for about 395,000 U.S. mortgage holders and pay $150 million into a foreclosure relief fund to settle predatory lending complaints filed by various states, including Kentucky.

About 2,500 Kentucky borrowers will be offered loan restructuring under the settlement, Kentucky Attorney General Jack Conway’s office said in a news release.

The subprime lender, which was bought last year by Bank of America, has agreed to restructure more than $252 million of outstanding debt owed by Kentuckians, Conway’s office said in the release.

“This mandatory loan modification program will provide immediate relief to Kentucky borrowers who are facing foreclosure,” Conway said in the release. “The goal is to help these borrowers remain in their homes into the future with an affordable mortgage loan.”

Kentucky will receive about $1.6 million of the $150 million of the foreclosure relief funding, Conway’s office said in the release.

The settlement resolves allegations that Countrywide used “unfair and deceptive practices” in its loan origination and servicing business, Conway’s office said in the release. It added that many Kentucky borrowers were sold mortgage loans that were unaffordable, leading to increased defaults and foreclosures.

Countrywide settled the case without admitting any wrongdoing. It denied all allegations.

The restructuring program will cover borrowers with subprime loans, including adjustable rate loans with initial “fixed” rates and pay-option adjustable rate mortgages.

Eligible mortgage holders will receive a letter from Conway’s office and Bank of America.

To be eligible, a customer must:

• Hold a Countrywide-originated mortgage, secured by owner-occupied property;

• The first payment must have been due between Dec. 21, 2004, and Dec. 31, 2007;

• The loan has to have been foreclosed or more than 120 days delinquent on Oct. 8, 2008; and

• Six or fewer payments must have been made during the life of the loan.

As a part of the settlement, Countrywide and Bank of America Monday filed an Assurance of Voluntary Compliance with Franklin Circuit Court in Frankfort, Ky.

Under the voluntary “best practices” agreement, Countrywide agreed to suspend foreclosure sales on loans likely to qualify for the program. It also agreed to establish an early identification and contact program for borrowers who have trouble making monthly payments and discontinue offering pay option adjustable rate mortgages.

In addition to those practices, Countrywide will waive loan modification fees and drop prepayment penalties on subprime and pay option ARM loans. It also will set up a fund to assist borrowers who do not qualify for loan modification.

Countrywide agreed to set aside $8.5 million to establish a separate fund to help borrowers who lost their homes through foreclosure in which the borrower was sold a subprime or pay option ARM loan and the borrower defaulted within six months after closing or at the time the interest rate reset.

Bankruptcy Judges to modify mortgages!! This is what we have been waiting for!!

Bill Would Allow Judges to Modify Mortgages
Austin Kilgore | 01.07.09

Illinois Sen. Dick Durbin introduced legislation Monday that would give bankruptcy judges the authority to modify mortgages on a debtor’s primary residence to help curb foreclosures.

The bill would prevent millions of foreclosures, Durbin, the second-ranking Democrat in the U.S. Senate, said in a statement.

“For nearly two years, we’ve heard dire predictions about the housing crisis and its effects on the economy. Sadly, they have not only come true, but have been far worse than anyone imagined,” Durbin’s statement said. “The question that faces us now is this: after committing over one trillion dollars in taxpayer money to address the financial crisis, why don’t we take a step that would indisputably reduce foreclosures and that would cost taxpayers nothing?”

As written, the “Helping Families Save Their Homes in Bankruptcy” act would allow judges to:

– Extend the length of repayment to lower monthly payments
– Replace variable interest rates with fixed rates
– Waive the bankruptcy counseling requirement for homeowners facing foreclosure to get homeowners in court faster
– Allow judges to waive prepayment penalties
– Maintain debtors’ legal claims against predatory lenders while in bankruptcy

Durbin first introduced the bill in fall of 2007, but it failed under opposition from President George W. Bush and Republican lawmakers.

In his statement, Durbin said his plan will not cost taxpayers anything, and the resulting fewer foreclosures would help municipalities maintain property tax revenue and reduce demand on law enforcement departments that execute foreclosures and are responsible for patrolling neighborhoods with abandoned properties.

The proposed bill would let bankruptcy judges rewrite home loans the same way they do other debt, including vacation and farm homes, but critics are concerned changes to the bankruptcy laws would hurt the availability of credit.

“The bills will increase the cost of borrowing for a home, at the exact moment we need home sales to restart,” Steve Bartlett, president of the Financial Services Roundtable, told Reuters.

Michigan Democrat John Conyers introduced a similar bill in the House of Representatives this week, and Durbin is also working to get the bill’s language included in the upcoming economic stimulus package.
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Eviction and Due Process

I. Jurisdiction: State of California
II. Elements of Due Process.
Section 6(k) of the United States Housing Act of 1937 (42U.S.C. 1437d(k), as amended by section 503(a) of the NationalAffordable Housing Act of 1990, Pub. L. 101-625, approvedNovember 28, 1990),provides that:
For any grievance concerning an eviction or termination of tenancy that involves any criminal activity that threatens the health, safety, or right to peaceful enjoyment of the premises of other tenants or employeesof the public housing agency or any drug-related criminal activity on or near such premises, the agency may . . . exclude from its grievance procedure any such grievance, in any jurisdiction which requires that prior to eviction, a tenant be given a hearing in court
which the Secretary determines provides the basic elements of due process . . . .

The statutory phrase, “elements of due process,” is defined by HUD at 24 CFR 966.53(c) as:
. . . an eviction action or a termination of tenancy in a State or local court in which the following procedural safeguards are required:
(1) Adequate notice to the tenant of the grounds for terminating the tenancy and for eviction;
(2) Right of the tenant to be represented by counsel
(3) Opportunity for the tenant to refute the evidence presented by the public housing agency (PHA) including
the right to confront and cross-examine witnesses and CALIFORNIA DUE PROCESS DETERMINATION
to present any affirmative legal or equitable defense which the tenant may have; and
(4) A decision on the merits.

HUD’s determination that a State’s eviction procedures satisfy this regulatory definition is called a “due process determination.” The present due process determination is based upon HUD’s analysis of the laws of the State of California to determine if an eviction action for unlawful detainer under those laws require a hearing which comports with all of the regulatory “elements of due process,” as defined in 966.53(c).

HUD finds that the requirements of California law governing an action for unlawful detainer in the superior, municipal and justice courts include all of the elements of basic due process,as defined in 24 CFR 966.53(c). This conclusion is based upon requirements contained in the California Civil Procedure Code (CCP), the California Civil Code (CC), case law and court rules.

III. Overview of California Eviction Procedures.
CCP 1161 defines unlawful detainer to include evictions because of (1) termination of tenancy at will; (2) possession after default in rent; (3) failure to perform conditions of lease; (4) subletting, waste, nuisance and unlawful use; and (5) failure to quit after notice. This determination will focus on the use of an unlawful detainer action for those evictions which may be excluded from a PHA’s grievance procedure pursuant to a HUD due process determination (i.e., evictions for drug-related criminal activity or criminal activity that threatens a tenant’sor a PHA employee’s health or safety). Thus, the analysis will consider unlawful detainer evictions because of failure to perform conditions of the lease or because of unlawful use.
The California Constitution, Art. 6, Section 10, provides, inter alia: “Superior Courts have original jurisdiction in all causes except those given by statute to other trial courts.”
California statute gives such original jurisdiction to municipal and justice courts in most residential eviction cases. CCP 86 provides:
(a) Each municipal and justice court has original
jurisdiction of civil cases and proceedings as follows . . .
i n all proceedings in forcible entry or forcible or
unlawful detainer where the whole amount of damages claimed
is twenty-five thousand dollars ($25,000) or less . . . .
Owners, including PHA’s, may bring unlawful detainer actions
in municipal or justice court, or if recovery of over $25,000 is
being sought, superior court. Actions in these courts are
subject to the requirements of the CCP.
IV. Analysis of California Eviction Procedures for Each of the
Regulatory Due Process Elements.
A. Adequate notice to the tenant of the grounds for
terminating the tenancy and for eviction
(24 CFR 966.53(c)(l)).
As the first step in an eviction for breach of a lease
covenant or condition other than rent, or for violation of a
covenant or condition prohibiting use of the premises for an
unlawful purpose (CCP Section 161(2)(3)(4)), the landlord must
give three days’ notice of the termination of tenancy to the
tenant. After this notice, a verified complaint is filed
pursuant to CCP Section 1166. The complaint:
must set forth the facts on which (the plaintiff) seeks
to recover, and describe the premises with reasonable
certainty, and may set forth therein any circumstances
of fraud, force, or violence which may have accompanied
the alleged forcible entry or forcible or unlawful
detainer . . . . Upon filing the complaint, a summons
must be issued thereon.
Pursuant to CCP Section 1167, the summons and complaint in
an action for unlawful detainer are issued and served and
returned in the same manner as a summons in a civil action
“except that when the defendant is served, the defendant’s
response shall be filed within five days after the complaint is
served upon him or her, instead of the usual 30 days . . . .”
The shorter response period is required because unlawful detainer
actions are summary proceedings and has been held not to deny due
process in Deal v. Municipal Court (Tilbury), 204 Cal. Rptr. 79
(157 Cal. App. 3rd 991)(1984).
Procedures for service are prescribed by CCP 1162. The
complaints and summons required by CCP 1162 may be served by
(a) delivering a copy to the tenant personally; (b) leaving a
copy with a person of suitable age and discretion at either the
place of residence or usual place of business; (c) or by posting.
In addition to the above notice requirements, California
Health and Safety Code, Section 34331, in the Housing Authorities
Law, provides that:
In the operation or management of housing projects, an
authority shall not do any of the following: (a) Evict
any tenant without reasonable cause unless the tenant
has been given a written statement of such cause . . . .
B. Right to be represented by counsel
(24 CFR 966.53(c)(2)).
Statutes and court rules governing actions in superior,
municipal and justice courts include references to counsel, and
assume the right to be represented by counsel, e.g., California
Court Rule 376 (motion to be relieved as counsel), CCP 284
(change of attorney), CCP 283 (authority: attorneys and
counselors at law). CCP 1014 provides that “a defendant
appears in an action when he answers, demurs . . . or when an
attorney gives notice of appearance for him.”
C. Opportunity for the tenant to refute the evidence
presented by the PHA, including the right to confront
and cross-examine witnesses (24 CFR 966.53(c)(3)).
Under CCP 2002 the testimony of witnesses is taken in
three modes: (1) affidavit, (2) deposition and (3) oral
examination. Oral examination is defined under CCP 2005 as an
“examination in the presence of the jury or tribunal which is to
decide the fact or act upon it, the testimony being heard by the
jury or tribunal from the lips of the witness.” Section 773 of
the California Evidence Code provides that a witness examined by
one party may be cross-examined upon any matter within the scope
of the direct examination by each other party to the action in
such order as the court directs.
D. Opportunity to present any affirmative legal or
equitable defense which the tenant may have
(24 CFR 966.53(c)(3)).
CCP 1170 provides that “on or before the day fixed for his
appearance the defendant may appear and answer or demur.”
CCP 431.30(b) provides that “the answer to a complaint shall
contain: (1) the general or specific denial of the material
allegation of the complaint . . . (2) a statement of any new
matter constituting a defense.”
In summary the rule:
. . . is that a defense normally permitted because it
arises out of the subject matter of the original suit
is generally excluded in an unlawful detainer action if
such defense is extrinsic to the narrow issue of
possession, which the unlawful detainer procedure seeks
speedily to resolve. Fn. omitted. ‘ No . . .
California decision, however, prohibits a tenant from
interposing a defense which does directly relate to the
issue of possession and which, if established, would
result in the tenant’s retention of the premises.
(emphasis added) Fn. omitted (Green v. Superior
Court (1974) 10 Cal. 3d 616, 632-633, 111 Cal. Rptr.
704, 517 P. 2d 1168).
Deal v. Municipal Court (Tilbury), 204 Cal. Rptr. 79 (157
Cal. App. 3rd 991)(1984) noted that under the California Rules of
Court, the mandatory form of answer “contains the affirmative
defenses now recognized in California.” Deal was cited with
approval in Lynch & Freytaq v. Cooper, 267 Cal. Rptr. 189, 192
(1990): “. . . the constitutionality of these summary procedures
is based on their limitation to the single issue of right to
possession and incidental damages.”
E. A decision on the merits (24 CFR 966.53(c)(4)).
Section 632 of the CCP provides for courts in non-jury
trials to “issue a statement of decision explaining the factual
and legal basis for its decision as to each of the principal
controverted issues at trial upon the request of any party
appearing at the trial . . . .” In jury trials the jury’s
verdict must be made on the basis of the facts and the law.
CCP 592 states that ” i n actions for the recovery of . . .
real property . . . with or without damages . . . an issue of
fact must be tried by a jury unless a jury trial is waived.”
Where issues of law and fact both exist, the former must be
disposed of first by the court.
V. Conclusion.
California law governing an unlawful detainer action in the
superior, municipal and justice courts requires that the tenant
have the opportunity for a pre-eviction hearing in court which
provides the basic elements of due process as defined in 24 CFR
966.53(c) of the HUD regulations.
By virtue of this determination under section 6(k) of the
U.S. Housing Act of 1937, a PHA in California may evict a tenant
pursuant to a superior, municipal or justice court decision. For
such evictions, the PHA is not required to first afford the
tenant the opportunity for an administrative hearing on an
unlawful detainer action that involves any criminal activity that
threatens the health, safety, or right to peaceful enjoyment of
the premises of other tenants or employees of the PHA or any
drug-related criminal activity on or near such premises.

wamu predatory lender WWW.wamufraud.com

Washington Mutual Bank (WAMU) has now been added to the list of possible predatory lending practices. If you were to look back at what unhappy customers had to say about Washington Mutual you might be alarmed. For years now this lending institutions appears to be getting away with breaking several laws and no one has done anything about it. JP Morgan is the current owner of WAMU and who knows why they would bail out a bank that takes advantage of people in all walks of life, even the elderly.

Here are some disturbing things about WAMU:

It appears Washington Mutual commits Fraud by:
1) Non-Disclosure and False Disclosure,
2) violating RESPA by never answering letters of dispute (qualified written requests),
3) violating CA Civil Code 2943 by not supplying a Payoff Demand Statement requested by mail,
3) illegal accounting that doesn’t follow Generally Accepted Accounting Principles
4) Predatory Practices, such as forced escrows, & logging payments weeks after receipt,
5) Giving primarily “Liar’s Loans” (no document loans), where they know most people can’t qualify otherwise,
6) Refusing to do Loan Workouts, & failing to contact HUD for client help & signoffs,
7) often combining all of the above to foreclose on whole neighborhoods nationwide.

Washington Mutual appears to have explicitly broken 4 Federal Laws:
1) 15 USC § 1601 et seq.: Truth in Lending requires that banks disclose all details of the transaction
2) 12 USC § 1831n(2)(A): Requires banks to follow “Uniform accounting principles consistent with GAAP”
3) 12 USC § 2605 RESPA: requires that banks acknowledge & respond to a “qualified written request”.
4) 15 USC § 1611 Whoever willfully and knowingly (1) gives false or inaccurate information or fails to provide information which he is required to disclose under the provisions of this subchapter or any regulation.

Source: http://wamufraud.com/ – find many complaints and more at this site.

Recent article as to lender liability litigation

Current Trends in Residential Mortgage Litigation

BYLINE: Daniel A. Edelman*; *DANIEL A. EDELMAN is the founding partner of Edelman & Combs, of Chicago, Illinois, a firm that represents injured consumers in actions against banks, mortgage companies, finance companies, insurance companies, and automobile dealers. Mr. Edelman or his firm represented the consumer in a number of the cases discussed in this article.


Borrowers Have Successfully Sued Based on Allegations of Over-escrowing, Unauthorized Charges and Brokers’ Fees, Improper Private Mortgage Insurance Procedures, and Incorrectly Adjusted ARMS. The Author Analyzes Such Lending Practices, and the Litigation They Have Spawned.


This article surveys current trends in litigation brought on behalf of residential mortgage borrowers against mortgage originators and servicers. The following types of litigation are discussed:(i) over-escrowing; (ii) junk charges; (iii) payment of compensation to mortgage brokers and originators by lenders; (iv) private mortgage insurance; (v) unauthorized servicing charges; and (vi) improper adjustments of interest on adjustable rate mortgages. We have omitted discussion of abuses relating to high-interest and home improvement loans, a subject that would justify an article in itself.1

OVER-ESCROWING In recent years, more than 100 class actions have been brought against mortgage companies complaining about excessive escrow deposit requirements.

Requirements that borrowers make periodic deposits to cover taxes and insurance first became widespread after the Depression. There were few complaints about them until the late 1960s, probably because until that time many lenders used the ”capitalization” method to handle the borrowers’ funds. Under this method, escrow disbursements were added to the principal balance of the loan and escrow deposits were credited in the same manner as principal payments. The effect of this ”capitalization” method is to pay interest on escrow deposits at the note rate, a result that is fair to the borrower. When borrowers could readily find lenders that used this method, there was little ground for complaint.

The ”capitalization” method was almost entirely replaced by the current system of escrow or impound accounts in the 1960s and 1970s. Under this system, lenders require borrowers to make monthly deposits on which no interest is paid. Lenders use the deposits as the equivalent of capital by placing them in non-interest-bearing accounts at related banks or at banks that give ”fund credits” to the lender in return for custody of the funds.2 Often, surpluses greatly in excess of the amounts actually required to make tax and insurance payments as they came due are required. In effect, borrowers are required to make compulsory, interest-free loans to their mortgage companies.

One technique used to increase escrow surpluses is ”individual item analysis.” This term describes a wide variety of practices, all of which create a separate hypothetical escrow account for each item payable with escrow funds. If there are multiple items payable from the escrow account, the amount held for item A is ignored when determining whether there are sufficient funds to pay item B, and surpluses are required for each item. Thus, large surpluses can be built up. Individual item analysis is not per se illegal, but can readily lead to excessive balances.3

During the 1970s, a number of lawsuits were filed alleging that banks had a duty to pay interest on escrow deposits or conspired to eliminate the ”capitalization” method.4 Most courts held that, in the absence of a statute to the contrary, there was no obligation to pay interest on escrow deposits.5 The only exception was Washington. Following these decisions, some 14 states enacted statutes requiring the payment of interest, usually at a very low rate.6

Recent attention has focused on excessive escrow deposits. In 1986, the U.S. District Court for the Northern District of Illinois first suggested, in Leff v. Olympic Fed. S & L Assn.,7 that the aggregate balance in the escrow account had to be examined in order to determine if the amount required to be deposited was excessive. The opinion was noted by a number of state attorneys general, who in April 1990 issued a report finding that many large mortgage servicers were requiring escrow deposits that were excessive by this standard.8 The present wave of over-escrowing cases followed.

Theories that have been upheld in actions challenging excessive escrow deposit requirements include breach of contract,9 state consumer fraud statutes,10 RICO,11 restitution,12 and violation of the Truth in Lending Act (”TILA”).13 Claims have also been alleged under section 10 of the Real Estate Settlement Procedures Act (”RESPA”),14 which provides that the maximum permissible surplus is ”one-sixth of the estimated total amount of such taxes, insurance premiums and other charges to be paid on dates . . . during the ensuing twelve-month period.” However, most courts have held that there is no private right of action under section 10 of RESPA.15 Most of the overescrowing lawsuits have been settled. Refunds in these cases have totalled hundreds of millions of dollars.

On May 9, 1995, in response to the litigation and complaints concerning over-escrowing, HUD issued a regulation implementing section 10 of RESPA.16 The HUD regulation: 1. Provides for a maximum two-month cushion, computed on an aggregate basis (i.e., the mortgage servicer can require the borrower to put enough money in the escrow account so that at its lowest point it contains an amount equal to two months’ worth of escrow deposits); 2. Does not displace contracts if they provide for smaller amounts; and 3. Provides for a phase-in period, so that mortgage servicers do not have to fully comply until October 27, 1997.

Meanwhile, beginning in 1990, the industry adopted new forms of notes and mortgages that allow mortgage servicers to require escrow surpluses equal to the maximum two-month surplus permitted by the new regulation. However, loans written on older forms of note and mortgage, providing for either no surplus 17 or a one-month surplus, will remain in effect for many years to come. ”JUNK CHARGES” AND RODASH In recent years, many mortgage originators attempted to increase their profit margins by breaking out overhead expenses and passing them on to the borrower at the closing. Some of these ”junk charges” were genuine but represented part of the expense of conducting a lending business, while others were completely fictional. By breaking out the charges separately and excluding them from the finance charge and annual percentage rate, lenders were able to quote competitive annual percentage rates while increasing their profits.

Most of these charges fit the standard definition of ”finance charge” under TILA.18 A number of pre-1994 judicial and administrative decisions held that various types of these charges, such as tax service fees,19 fees for reviewing loan documents,20 fees relating to the assignment of notes and mortgages,21 fees for the transportation of documents and funds in connection with loan closings,22 fees for closing loans,23 fees relating to the filing and recordation of documents that were not actually paid over to public officials,24 and the intangible tax imposed on the business of lending money by the states of Florida and Georgia,25 had to be disclosed as part of the ”finance charge” under TILA.

The mortgage industry nevertheless professed great surprise at the March 1994 decision of the U.S. Court of Appeals for the Eleventh Circuit in Rodash v. AIB Mtge. Co.,26 holding that a lender’s pass-on of a $ 204 Florida intangible tax and a $ 22 Federal Express fee had to be included in the finance charge, and that Martha Rodash was entitled to rescind her mortgage as a result of the lender’s failure to do so. The court found that ”the plain language of TILA evinces no explicit exclusion of an intangible tax from the finance charge,” and that the intangible tax did not fall under any of the exclusions in regulation Z dealing with security interest charges.27 Claiming that numerous loans were subject to rescission under Rodash, the industry prevailed upon Congress and the Federal Reserve Board to change the law retroactively through a revision to the FRB Staff Commentary on regulation Z28 and the Truth in Lending Act Amendments of 1995, signed into law on September 30, 1995.29 The amendments:

1. Exclude from the finance charge fees imposed by settlement agents, attorneys, escrow companies, title companies, and other third party closing agents, if the creditor neither expressly requires the imposition of the charges nor retains the charges;30 2. Exclude from the finance charge taxes on security instruments and loan documents if the payment of the tax is a condition to recording the instrument and the item is separately itemized and disclosed (i.e., intangible taxes);31 3. Exclude from the finance charge fees for preparation of loan-related documents;32 4. Exclude from the finance charge fees relating to pest and flood inspections conducted prior to closing;33 5. Eliminate liability for overstatement of the annual percentage rate. 6. Increase the tolerance or margin of error;34 7. Provide that mortgage servicers are not to be treated as assignees.35 The constitutionality of the retroactive provisions of the Amendments is presently under consideration.

The FRB Staff Commentary amendments dealt primarily with the question of third-party charges, and provided that they were not finance charges unless the creditor required or retained the charges.36

The 1995 Amendments substantially eliminated the utility of TILA in challenging ”junk charges” imposed by lenders. However, ”junk charges” are also subject to challenge under RESPA, where they are used as devices to funnel kickbacks or referral fees or excessive compensation to mortgage brokers or originators. This issue is discussed below.

”UPSELLING,” ”OVERAGES,” AND REFERRAL FEES TO MORTGAGE ORIGINATORS A growing number of lawsuits have been brought challenging the payment of ”upsells,” ”overages,” ”yield spread premiums,” and other fees by lenders to mortgage brokers and originators.

During the last decade it became fairly common for mortgage lenders to pay money to mortgage brokers retained by prospective borrowers. In some cases, the payments were expressly conditioned on altering the terms of the loan to the borrower’s detriment by increasing the interest rate or ”points.” For example, a lender might offer brokers a payment of 50 basis points (0.5 percent of the principal amount of the loan) for every 25 basis points above the minimum amount (”par”) at which the lender was willing to make the loan. Industry publications expressly acknowledged that these payments were intended to ”compensate[] mortgage brokers for charging fees higher than what the borrower would normally pay.”37 In other instances, brokers were compensated for convincing the prospective borrower to take an adjustable-rate mortgage instead of a fixed-rate mortgage, or for inducing the purchase of credit insurance by the borrower. 38

In the case of some loans, the payments by the lender to the broker were totally undisclosed. In other cases, particularly in connection with loans made after the amendments to regulation X discussed below, there is an obscure reference to the payment on the loan documents, usually in terms incomprehensible to a lay borrower. For example, the HUD-1 form may contain a cryptic reference to a ”yield spread premium” or ”par plus pricing,” often abbreviated like ”YSP broker (POC) $ 1,500.”39

The burden of the increased interest rates and points resulting from these practices is believed to fall disproportionately on minorities and women.40 These practices are subject to legal challenge on a number of grounds.

Breach of Fiduciary Duty Most courts have held that a mortgage broker is a fiduciary. One who undertakes to find and arrange financing or similar products for another becomes the latter’s agent for that purpose, and owes statutory, contractual, and fiduciary duties to act in the interest of the principal and make full disclosure of all material facts. ”A person who undertakes to manage some affair for another, on the authority and for the account of the latter, is an agent.”41

Courts have described a mortgage loan broker as an agent hired by the borrower to obtain a loan.42 As such, a mortgage broker owes a fiduciary duty of the ”highest good faith toward his principal,” the prospective borrower.43 Most fundamentally, a mortgage broker, like any other agent who undertakes to procure a service, has a duty to contact a variety of providers and attempt to obtain the best possible terms.44

Additionally, a mortgage broker ”is ‘charged with the duty of fullest disclosure of all material facts concerning the transaction that might affect the principal’s decision’.”45 The duty to disclose extends to the agent’s compensation. 46 Thus, a broker may not accept secret compensation from adverse parties.47

Furthermore, the duty to disclose is not satisfied by the insertion of cryptic ”disclosures” on documents. The obligation is to ”make a full, fair and understandable explanation” of why the fiduciary is not acting in the interests of the beneficiary and of the reasons that the beneficiary might not want to agree to the fiduciary’s actions.48

The industry has itself recognized these principles. The National Association of Mortgage Brokers has adopted a Code of Ethics which requires, among other things, that the broker’s duty to the client be paramount. Paragraph 3 of the Code of Ethics states:

In accepting employment as an agent, the mortgage broker pledges himself to protect and promote the interest of the client. The obligation of absolute fidelity to the client’s interest is primary.

Thus, a lender who pays a mortgage broker secret compensation may face

liability for inducing the broker to breach his fiduciary or contractual duties, fraud, or commercial bribery.

Mail/Fraud/ Wire Fraud/ RICO The payment of compensation by a lender to a mortgage broker without full disclosure is also likely to result in liability under the federal mail and wire fraud statutes and RICO. It is well established that a scheme to corrupt a fiduciary or agent violates the mail or wire fraud statute if the mails or interstate wires are used in furtherance of the scheme.49

Real Estate Settlement Procedures Act Irrespective of whether the broker or other originator of a mortgage is a fiduciary, lender payments to such a person may result in liability under section 8 of RESPA,50 which prohibits payments or fee splitting for business referrals, if the payments are either not fully disclosed or exceed reasonable compensation for the services actually performed by the originator.

Prior to 1992, the significance of section 8 of RESPA was minimized by restrictive interpretations. The Sixth Circuit Court of Appeals held that the origination of a mortgage was not a ‘’settlement service” subject to section 8.51 In addition, cases construing the pre-1992 version of implementing HUD regulation X required a splitting of fees paid to a single person.52 Finally, the payment of compensation in secondary market transactions was excluded from RESPA, and there was no distinction made between genuine secondary market transactions and ”table funded” transactions, where a mortgage company originates a loan in its own name, but using funds supplied by a lender, and promptly thereafter assigns the loan to the lender.53

In 1992, RESPA and regulation X were amended to close each of these loopholes. The amendments did not have practical effect until August 9, 1994, the effective date of the new regulation X.54

First, RESPA was amended to provide expressly that the origination of a loan was a ‘’settlement service.” P.L. 102-550 altered the definition of ‘’settlement service” in Section 2602(3) to include ”the origination of a federally related mortgage loan (including, but not limited to, the taking of loan applications, loan processing, and the underwriting and funding of loans).” This change and a corresponding change in regulation X were expressly intended to disapprove the Sixth Circuit’s decision in United States v. Graham

Mtge. Corp.55

Second, regulation X was amended to exclude table funded transactions from the definition of ‘’secondary market transactions.” Regulation X addresses ”table funding” in sections 3500.2 and 3500.7. Section 3500.2 provides that ”table funding means a settlement at which a loan is funded by a contemporaneous advance of loan funds and an assignment of the loan to the person advancing the funds. A table-funded transaction is not a secondary market transaction (see Section 3500.5(b)(7)).” Section 3500.5(b)(7) exempts from regulation by RESPA fees and charges paid in connection with legitimate ‘’secondary market transactions,” but excludes table funded transactions from the scope of legitimate secondary market transactions. Under the current regulation X, RESPA clearly applies to table funded transactions.56 Amounts paid by the first assignee of a loan to a ”table funding” broker for ”rights” to the loan — i.e., for the transfer of the loan by the broker to the lender — are now subject to examination under RESPA.57

Third, any sort of payment to a broker or originator that does not represent reasonable compensation for services actually provided is prohibited. 58

Whatever the payment to the originator or broker is called, it must be reasonable. Another mortgage industry publication states: [A]ny amounts paid under these headings [servicing release premiums or yield spread premiums] must be lumped together with any other origination fees paid to the broker and be subjected to the referral fee/ market value test in Section 8 of RESPA and Section 3500.14 of Regulation X. If the total of this compensation exceeds the market value of the services performed by the broker (excluding the value of the referral), then the compensation does not pass the test, and both the broker and the lender could be subject to the civil and criminal penalties contained in RESPA.59

Normal compensation for a mortgage broker is about one percent of the principal amount of the loan. Where the broker ”table funds” the loan and originates it in its name, an extra .5 percent or one percent may be appropriate.60 This level of reasonableness is recognized by agency regulations. For example, on February 28, 1996, in response to allegations of gouging by brokers on refinancing VA loans, the VA promulgated new regulations prohibiting mortgage lenders from charging more than two points in refinanced transactions.61

The amended regulation makes clear that a payment to a broker for influencing the borrower in any manner is illegal. ”Referral” is defined in Section 3500.14(f)(1) to include ”any oral or written action directed to a person which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service or business incident to or part of a settlement service when such person will pay for such settlement service or business incident thereto or pay a charge attributable in whole or in part to such settlement service or business. . . .” The amended regulation also cannot be evaded by having the borrower pay the originator. An August 14, 1992 letter from Frank Keating, HUD’s General Counsel, states unequivocally: ”We read ‘imposed upon borrowers’ to include all charges which the borrower is directly or indirectly funding as a condition of obtaining the mortgage loan. We find no distinction between whether the payment is paid directly or indirectly by the borrower, at closing or outside the closing. . . . I hereby restate my opinion that RESPA requires the disclosures of mortgage broker fees, however denominated, whether paid for directly or indirectly by the borrower or by the lender.”

Thus, ”yield spread premiums,” ‘’service release fees,” and similar payments for the referral of business are no longer permitted. The new regulation was specifically intended to outlaw the payment of compensation for the referral of business by mortgage brokers, either directly or through the imposition of ”junk charges.” Thus, it provides that payments may not be made ”for the referral of settlement service business” (Section 3500.14(b)).

The mortgage industry has recognized that types of fees that were once viewed as permissible in the past are now ”prohibited and illegal.” The legal counsel for the National Second Mortgage Association acknowledged: ”Even where the amount of the fee is reasonable, the more persuasive conclusion is that RESPA does not permit service release fees.” ”Also, if . . . the lender is ‘table funding’ the loan, he is violating RESPA’s Section 8 anti-kickback provisions.”62

In the first case decided under the new regulation, Briggs v. Countrywide Funding Corp.,63 the U. S. District Court for the Middle District of Alabama denied a motion to dismiss a complaint alleging the payment of a ”yield spread premium” by a lender to a broker in connection with a table funded transaction. Plaintiffs alleged that the payment violated RESPA as well as several state law doctrines. The court acknowledged that RESPA applied to the table funded transactions and noted that whether or not disclosed, the fees could be considered illegal.

Truth in Lending Act Implications Many of the pending cases challenging the payment of ”yield spread premiums” and ”upselling” allege that the payment of compensation to an agent of the lender is a TILA ”finance charge.” The basis of the TILA claims is that the commission a borrower pays to his ”broker” is a finance charge because the ”broker” is really functioning as the agent of the lender. The claim is not that the ”upsell” payment made by the lender to the borrower’s broker is a finance charge.

Decisions under usury statutes uniformly hold that a fee charged to the borrower by the lender’s agent is interest or points.64 The concept of the ”finance charge” under TILA is broader than, but inclusive of, the concept of ”interest” and ”points” at common law and under usury statutes. Regulation Z specifically provides that the ”finance charge” includes any ”interest” and ”points” charged in connection with a transaction.65 Therefore, if the intermediary is in fact acting on behalf of the lender, as is the case where the intermediary accepts secret compensation from the lender or acts in the lender’s interest to increase the amount paid by the borrower, all compensation received by the intermediary, including broker’s fees charged to the borrower, are finance charges.

Unfair and Deceptive Acts and Practices The pending ”upselling” cases also generally allege that the payment of compensation to the mortgage broker violates the general prohibitions of most state ”unfair and deceptive acts and practices” (”UDAP”) statutes. The violations of public policy codified by the federal consumer protection laws create corresponding state consumer protection law claims.66

Civil Rights and Fair Housing Laws The Department of Justice brought two cases in late 1995 alleging that the disproportionate impact of ”overages” and ”upselling” on minorities violated the Fair Housing Act67 and Equal Credit Opportunity Act.68 Both cases alleged disparate pricing of loans according to the borrower’s race and were promptly settled.69 Other investigations are reported to be pending.70 The principal focus of enforcement agencies appears to be on the civil rights implications of overages.71

It is likely that such a practice would also violate 42 U.S.C. Section 1981.While Section 1981 requires intentional discrimination, a lender that decides to take advantage of the fact that other lenders discriminate by making loans to minorities at higher rates is also engaging in intentional discrimination. In Clark v. Universal Builders,72 the Seventh Circuit held that one who exploits and preys on the discriminatory hardship of minorities does not occupy a more protected status than the one who created the hardship in the first instance; that is, a defendant cannot escape liability under the Civil Rights Act by asserting it merely ”exploited a situation crated by socioeconomic forces tainted by racial discrimination.”73

PRIVATE MORTGAGE INSURANCE LITIGATION Another group of pending lawsuits is based on claims of misrepresentation of or failure to disclose the circumstances under which private mortgage insurance (”PMI”) may be terminated. PMI insures the lender against the borrower’s default — the borrower derives no benefit from PMI. It is generally required under a conventional mortgage if the loan to value ratio exceeds about 80 percent.74 Approximately 17.4 percent of all mortgages have PMI.75

Standard form conventional mortgages provide that if PMI is required it maybe terminated as provided by agreement. Most servicers and investors have policies for terminating PMI. However, the borrower is often not told what the policy is, either at the inception of the mortgage or at any later time. As a result, people pay PMI premiums unnecessarily. Since there is about $ 460 billion in PMI in force,76 this is a substantial problem. The failure accurately and clearly to disclose the circumstances under which PMI may be terminated has been challenged under RICO and state consumer fraud statutes.

UNAUTHORIZED SERVICING CHARGES Another fertile ground of litigation concerns the imposition of charges that are not authorized by law or the instruments being serviced. The collection of modest charges is a key component of servicing income.77 For example, many mortgage servicers impose charges in connection with the payoff or satisfaction of mortgages when the instruments either do not authorize the charge or affirmatively prohibit it.

The imposition of payoff and recording charges has been challenged as a breach of contract, as a deceptive trade practice, as a violation of RICO, and as a violation of the Fair Debt Collection Practices Act (”FDCPA”).78 In Sandlin v. State Street Bank,79 the U. S. District Court for the Middle District of Florida held that the imposition of a payoff statement fee is a violation of the standard form ”uniform instrument” issued by the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, and when imposed by someone who qualifies as a ”debt collector” under the FDCPA,80 violates that statute as well.81 However, attempts to challenge such charges under RESPA have been unsuccessful, with courts holding that a charge imposed subsequent to the closing is not covered by RESPA.82

ADJUSTABLE RATE MORTGAGES Adjustable rate mortgages (”ARMs”) were first proposed by the Federal Home Loan Bank Board in the 1970s. They first became widespread in the early 1980s. At the present time, about 25 to 30 percent of all residential mortgages are adjustable rate mortgages (”ARMs”).83

The ARM adjustment practices of the mortgage banking industry have been severely criticized because of widespread errors.84 Published reports beginning in 1990 indicate that 25 to 50 percent of all ARMs may have been adjusted incorrectly at least once.85 The pattern of misadjustments is not random: approximately two-thirds of the inaccuracies favor the mortgage company.86

Grounds for legal challenges to improper ARM adjustments include breach of contract, TILA,87 the Uniform Consumer Credit Code,88 RICO,89 state unfair and deceptive practices statutes,90 failure to properly respond to a ”qualified written request” under section 6(e) of RESPA,and usury.91

Substantial settlements of ARM claims have been made by Citicorp Mortgage,92 First Nationwide Bank,93 and Banc One.94 On the other hand, several cases have rejected borrower claims that particular ARM adjustment actions violated the terms of the instruments. For example, a Connecticut case held that a mortgage that provided for an interest rate tied to the bank’s current ”market rate” was not violated when the bank failed to take into account the rate that could be obtained through the payment of a ”buydown.”95 A Pennsylvania case held that the substitution of one index for another that had been discontinued was consistent with the terms of the note and mortgage.96

A major issue in ARM litigation is whether what the industry erroneously terms ”undercharges” — the failure of the servicer to charge the maximum amount permitted under the terms of the instrument — can be ”netted” or offset against overcharges — the collection of interest in excess of that permitted under the terms of the instrument. Fannie Mae has taken the position that ”netting” is appropriate.97

The validity of this conclusion is questionable. First, nothing requires a financial institution to adjust interest rates upward to the maximum permitted, and there are in fact often sound business reasons for not doing so. On the other hand, the borrower has an absolute right not to pay more than the instrument authorizes. Thus, what the industry terms an ”undercharge” is simply not the same thing as an ”overcharge.”

Second, the upward adjustment of interest rates must be done in compliance with TILA. An Ohio court held that failure to comply made the adjustment unenforceable.98 ”Where a bank violates the Truth-in-Lending Act by insufficient disclosure of a variable interest rate, the court may grant actual damages. . . . If the actual damage is the excess interest charge over the original contract term, the court may order the mortgage to be recalculated at its original terms, and refuse to enforce the variable interest rate provisions.”99

Third, if the borrower is behind in his payments, ”netting” may violate state law requiring the lender to proceed against the collateral before undertaking other collection efforts. A decision of the California intermediate appellate court concluded that the state’s ”one-action rule” had been violated when a lender obtained an offset of interest overcharges against amounts owed by the borrower under an ARM.100

1. E.g., G. Marsh, Lender Liability for Consumer Fraud Practices of Retail

Dealers and Home Improvement Contractors, 45 Ala. L. Rev. 1 (1993); D. Edelman, Second Mortgage Frauds, Nat’l Consumer Rights Litigation Conference 67 (Oct. 19-20, 1992).

2. The lender would deposit the escrow funds in a non-interest-bearing account at a bank which made loans to the lender. The lender would receive a ”funds credit” against the interest payable on its borrowings based on the value of the escrow funds deposited at the bank.

3. Aitken v. Fleet Mtge. Corp., 1991 U.S.Dist. LEXIS 10420 (ND Ill., July 30,1991), and 1992 U.S.Dist. LEXIS 1687 (ND Ill., Feb. 12, 1992); Attorney General v. Michigan Nat’l Bank, 414 Mich. 948, 325 N.W.2d 777 (1982); Burkhardt v. City Nat’l Bank, 57 Mich.App. 649, 226 N.W.2d 678 (1975).

4. See generally, Class Actions Under Anti-Trust Laws on Account of Escrow and Similar Practices, 11 Real Prop., Probate & Trust Journal 352 (Summer 1976).

5. Buchanan v. Century Fed. S. & L. Ass’n, 306 Pa. Super. 253, 452 A.2d 540(1982), later opinion, 374 Pa. Super. 1, 542 A.2d 117 (1986); Carpenter v. Suffolk Franklin Savs. Bank, 370 Mass. 314, 346 N.E.2d 892 (1976); Brooks v. Valley Nat’l Bank, 113 Ariz. 169, 548 P.2d 1166 (1976); Petherbridge v. Prudential S. & L. Ass’n, 79 Cal.App.3d 509, 145 Cal.Rptr. 87 (1978); Marsh v. Home Fed. S. & L. Ass’n, 66 Cal.App.3d 674, 136 Cal.Rptr. 180 (1977); LaThrop v. Bell Fed. S. & L. Ass’n, 68 Ill.2d 375, 370 N.E.2d 188 (1977); Sears v. First Fed. S. & L. Ass’n, 1 Ill.App.3d 621, 275 N.E.2d 300 (1st Dist. 1973); Durkee v. Franklin Savings Ass’n, 17 Ill.App.3d 978, 309 N.E.2d 118 (2d Dist. 1974); Zelickman v. Bell Fed. S. & L. Ass’n, 13 Ill.App.3d 578, 301 N.E.2d 47 (1st Dist. 1973); Yudkin v. Avery Fed. S. & L. Ass’n, 507 S.W.2d 689 (Ky. 1974); First Fed. S. & L. Ass’n of Lincoln v. Board of Equalization of Lancaster County, 182 Neb. 25, 152 N.W.2d 8 (1967); Kronisch v. Howard Savings Institution, 161 N.J.Super. 592, 392 A.2d 178 (1978); Surrey Strathmore Corp. v. Dollar Savings Bank of New York, 36 N.Y.2d 173, 366 N.Y.S.2d 107, 325 N.E.2d 527 (1975); Tierney v. Whitestone S. & L. Ass’n, 83 Misc.2d 855, 373 N.Y.S.2d 724 (1975); Cale v. American Nat’l Bank, 37 Ohio Misc. 56, 66 Ohio Ops.2d 122 (1973); Richman v. Security S. & L. Ass’n, 57 Wis.2d 358, 204 N.W.2d 511 (1973); In re Mortgage Escrow Deposit Litigation, 1995 U.S.Dist. LEXIS 1555 (ND Ill. Feb. 8, 1995).

6. National Mortgage News, Nov. 11, 1991, p. 2.

7. Leff v. Olympic Fed. S & L Ass’n, 1986 WL 10636 (ND Ill 1986).

8. Overcharging on Mortgages: Violations of Escrow Account Limits by the Mortgage Lending Industry: Report by the Attorneys General of California, Florida, Iowa, Massachusetts, Minnesota, New York & Texas (24 Apr 1990).

9. Leff v. Olympic Fed. S. & L. Ass’n, n. 7 supra; Aitken v. Fleet Mtge.Corp., 1992 U.S.Dist. LEXIS 1687 (ND Ill., Feb. 12, 1992); Weinberger v. Bell Federal, 262 Ill.App.3d 1047, 635 N.E.2d 647 (1st Dist. 1994); Poindexter v. National Mtge. Corp., 1995 U.S.Dist. LEXIS 5396 (ND Ill., April, 24, 1995); Markowitz v. Ryland Mtge. Co., 1995 U.S.Dist. LEXIS 11323 (ND Ill. Aug. 8, 1995); Sanders v. Lincoln Service Corp., 1993 U.S.Dist. LEXIS 4454 (ND Ill. Apr. 9, 1993); Cairns v. Ohio Sav. Bank, 1996 Ohio App. LEXIS 637 (Feb. 22, 1996). See generally, GMAC Mtge. Corp. v. Stapleton, 236 Ill.App.3d 486, 603 N.E.2d 767 (1st Dist. 1992), leave to appeal denied, 248 Ill.2d 641, 610 N.E.2d 1262 (1993).

10. Leff v. Olympic Fed. S. & L. Ass’n, n. 7 supra; Aitken v. Fleet Mtge. Corp., n.9 supra; Poindexter v. National Mtge. Corp., n.9 supra; Sanders v. Lincoln Service Corp., n. 9 supra.

11. Leff v. Olympic Fed. S. & L. Ass’n, Aitken v. Fleet Mtge. Corp., n.9 supra; Robinson v. Empire of America Realty Credit Corp., 1991 U.S.Dist. LEXIS 2084 (ND Ill., Feb. 20, 1991); Poindexter v. National Mtge. Corp., n. 9 supra. 12. Poindexter v. National Mtge. Corp., n. 9 supra.

13. Martinez v. Weyerhaeuser Mtge. Co., 1995 U.S.Dist. LEXIS 11367 (ND Ill. Aug. 8, 1995). The theory is that the excessive portion of the escrow deposit is a finance charge.

14. 12 U.S.C. Section 2609.

15. State of Louisiana v. Litton Mtge. Co., 50 F.3d 1298 (5th Cir. 1995); Allison v. Liberty Savings, 695 F.2d 1086, 1091 (7th Cir. 1982); Herrman v. Meridian Mtge. Corp., 901 F.Supp. 915 (ED Pa. 1995); Campbell v. Machias Savings Bank, 865 F.Supp. 26, 31 (D.Me. 1994); Michels v. Resolution Trust Corp., 1994 U.S.Dist. LEXIS 6563 (D.Minn. Apr. 13, 1994); Bergkamp v. New York Guardian Mortgagee Corp., 667 F.Supp. 719, 723 (D.Mont. 1987). Contra, Vega v. First Fed. S. & L. Ass’n, 622 F.2d 918, 925 (6th Cir. 1980).

16. 24 C.F.R. 3400.17, issued at 60 FR 24734.17. The pre-1990 ”uniform instrument” issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation did not provide for any surplus. The pre-1990 FHA form and the VA form provided for a one-month surplus.

18. The finance charge includes ”any charge, payable directly or indirectly by the consumer, imposed directly or indirectly by the creditor, as an incident to or a condition of the extension of credit.” regulation Z, 12 C.F.R. 226.4(a). The definition is all-inclusive: any charge that meets this definition is a finance charge unless it is specifically excluded by TILA or regulation Z. R. Rohner, The Law of Truth in Lending, section 3.02 (1984). There are exclusions from the finance charge which apply only in mortgage transactions. 12 C.F.R. 226.4(c)(7). However, the exclusions require that the charges be bona fide and reasonable in amount, id., and the exclusions are narrowly construed to protect consumers from underdisclosure of the cost of credit. Equity Plus Consumer Fin. & Mtge. Co. v. Howes, 861 P.2d 214, 217 (NM 1993). See also In re Celona, 90 B.R. 104 (Bankr.ED Pa. 1988), aff’d 98 B.R. 705 (Bankr. ED Pa. 1989). ”[O]nly those charges specifically exempted from inclusion in the ‘finance charge’ by statute or regulation may be excluded from it.” Buford v. American Fin. Co., 333 F.Supp. 1243, 1247 (ND Ga. 1971). 19. In re Souders, 1992 U.S.Comp.Gen. LEXIS 1075 (Sept. 29, 1992); In re Barry, 1981 U.S.Comp.Gen. LEXIS 1262 (April 16, 1981); In re Bayer, 1977 U.S.Comp.Gen. LEXIS 2116 (Sept. 19, 1977); In re Wahl, 1974 U.S.Comp.Gen. LEXIS 1610 (Oct. 1, 1974); In re Ray, 1973 U.S.Comp.Gen. LEXIS 1960 (March 13, 1973). A tax service fee represents the purported cost of having someone check the real estate records annually to make sure that the taxes on the property securing the loan are shown as having been paid.

20. In re Celona, 90 B.R. 104, 110-12 (Bankr. E.D.Pa. 1988), aff’d, 98 B.R. 705 (ED Pa. 1989) (lender violated TILA by passing on $ 200 fee charged by attorney to review certain documents without including fee in ”finance charge”); Abel v. Knickerbocker Realty Co., 846 F.Supp. 445 (D.Md. 1994) (lender violated TILA because ”origination fee” of $ 290 excluded from ”finance charge”); Brodo v. Bankers Trust Co., 847 F.Supp. 353 (ED Pa. 1994) (lender violated TILA by imposing charge for preparing TILA disclosure documents without including them in the ”finance charge”).

21. Cheshire Mtge. Service, Inc. v. Montes, 223 Conn. 80, 612 A.2d 1130 (1992) (lender violated TILA by imposing fee for assigning the mortgage when it was sold on the secondary market without including it in the ”finance charge”); In re Brown, 106 B.R. 852 (Bankr. E.D.Pa. 1989) (same); Mayo v. Key Fin. Serv., Inc., 92-6441-D (Mass.Super.Ct., June 22, 1994) (same).

22. In re Anibal L. Toboas, 1985 U.S.Comp.Gen. LEXIS 854 (July 19, 1985) (”The relevant part of Regulation Z expressly categorizes service charges and loan fees as part of the finance charge when they are imposed directly or indirectly on the consumer incident to or as a condition of the extension of credit. The finance charge, therefore, is not limited to interest expenses but includes charges which are imposed to defray a lender’s administrative costs. [citation] A messenger service charge paid to the mortgage lender may not be reimbursed because it is part of the lender’s overhead, a charge for which is considered part of the finance charge under Regulation Z.”); In re Schwartz, 1989 U.S. Comp. Gen. LEXIS 55 (Jan. 19, 1989) (”a messenger service charge or fee is part of the lender’s overhead, a charge which is deemed to be a finance charge and not reimbursable”).

23. Decision of the Comptroller General No. B-181037, 1974 U.S.Comp.Gen. LEXIS 1847 (July 16, 1974) (loan closing fee was part of the finance charge under TILA); Decision of the Comptroller General, No. B-189295 1977, U.S. Comp.Gen. LEXIS 2230 (Aug. 16, 1977) (same); In the Matter of Real Estate Expenses — Finance Charges, No. B-179659, 54 Comp. Gen. 827, 1975 U.S.Comp.Gen. LEXIS 180 (April 4, 1975) (same).

24. Abbey v. Columbus Dodge, 607 F.2d 85 (5th Cir. 1979) (purported $ 37.50 ”filing fee” that creditor pocketed was a finance charge); Therrien v. Resource Finan. Group. Inc., 704 F.Supp. 322, 327 (DNH 1989) (double-charging for recording and discharge fee and title insurance premium constituted undisclosed finance charges).

25. Decision of the Comptroller General, B-174030, 1971 U.S. Comp. Gen. LEXIS 1963 (Nov. 11, 1971).

26. 16 F.3d 1142 (11th Cir. 1994).

27. Id. at 1149.

28. 60 FR 16771, April 3, 1995.

29. See Jean M. Shioji, Truth in Lending Act Reform Amendments of 1995, Rev. of Bank. and Finan. Serv., Dec. 13, 1995, Vol. 11, No. 21; at 235. 30. P.L. 104-29, sections 2(a), (c), (d), and (e), to be codified at 15 U.S.C. 1605(a), (c), (d) and (e).

31. P.L. 104-29, section 2(b), to be codified at 15 U.S.C. 1605(a)(6). 32. The amendment broadened the language in 15 U.S.C. 1605(e)(2), which previously excluded ”fees for preparation of a deed, settlement statement, or other documents.”

33. P.L. 104-29, sections 2(a), (c), (d), and (e), to be codified at 15 U.S.C. 1605(a), (c), (d) and (e).

34. P.L. 104-29, section 3(a), to be codified at 15 U.S.C. 1605(f)(2); P.L. 104-29, section 4(a), to be codified at 15 U.S.C. 1649(a)(3); P.L. 104-29, section 8, to be codified at 15 U.S.C. 1635(i)(2); 15 U.S.C. 1606(c). 35. P.L. 104-29, section 7(b), to be codified at 15 U.S.C. 1641(f). The apparent purpose of this provision was to alter the result in Myers v. Citicorp Mortgage, 1995 U.S.Dist. LEXIS 3356 (MD Ala., March 14, 1995). 36. The amendments were applied to existing transactions in Hickey v. Great W. Mtge. Corp., 158 F.R.D. 603 (ND Ill. 1994), later opinion, 1995 U.S. Dist. LEXIS 405 (ND Ill., Jan. 3, 1995), later opinion, 1995 U.S. Dist. LEXIS 3357 (ND Ill., Mar. 15, 1995), later opinion, 1995 U.S. Dist. LEXIS 4495 (ND Ill., Apr. 4, 1995), later opinion, 1995 U.S. Dist. LEXIS 6989 (ND Ill., May 1, 1995); and Cowen v. Bank United, 1995 U.S.Dist. LEXIS 4495, 1995 WL 38978 (ND Ill., Jan. 25, 1995), aff’d, 70 F.3d 937 (7th Cir. 1995).

37. Jonathan S. Hornblass, Fleet Unit Discontinues Overages on Loans to the Credit-Impaired, American Banker, June 9, 1995, p. 8. See also, Kenneth R. Harney, Loan Firm to Refund $ 2 Million in ‘Overage’ Fees, Los Angeles Times, Nov. 6, 1994, part K, p. 4, col. 1 (”Yield spread premiums” or ”overages” are paid ”to brokers when borrowers lock in or sign contracts at rates or terms that exceed what the lender would otherwise be willing to deliver”); Ruth Hepner, Risk-based loan rates may rate a look, Washington Times, Nov. 4, 1994, p. F1 (such fees are paid to mortgage brokers ”to bring in borrowers at higher-than-market rates and fees”); Jonathan S. Hornblass, Focus on Overages Putting Home Lenders in Legal Hot Seat, American Banker, May 24, 1995, p. 10 (giving examples of how the fees affect the borrower).

38. The extra fees — known in the trade as overages or yield-spread premiums — typically are paid to local mortgage brokers by large lenders who purchase their home loans. The concept is straightforward: If a mortgage company can deliver a loan at higher than the going rate, or with higher fees, the loan is worth more to the large lender who buys it. For every rate notch above ”par” — the lender’s standard rate — the lender will pay a local originator a bonus. Kenneth R. Harney, Suit Targets Extra Fees Paid When Mortgage Rate Inflated, Sacramento Bee, Aug. 13, 1995, p. J1.

39. Prior to 1993, according to industry experts, back-end compensation of this type rarely was disclosed to consumers. More recently, however, some brokers and lenders have sharply limited the size of the fees and disclosed them. They often appear as one or more line items on the standard HUD-1 settlement sheets used for closings nationwide. Id.

40. Jonathan S. Hornblass, Focus on Overages Putting Home Lenders In Legal Hot Seat, American Banker, May 24, 1995, p. 10; K. Harney, U. S. Probes Higher Fees for Women, Minorities, Los Angeles Times, Sept. 24, 1995, p. K4. 41. In re Estate of Morys, 17 Ill.App.3d 6, 9, 307 N.E.2d 669 (1st Dist. 1973).

42. Wyatt v Union Mtge. Co., 24 Cal.3d 773, 782, 157 Cal.Rptr. 392, 397, 598 P.2d 45 (1979); accord: Pierce v. Hom, 178 Cal. Rptr. 553, 558 (Ct. App. 1981) (mortgage broker has duty to use his expertise in real estate financing for the benefit of the borrower); Allabastro v. Cummins, 90 Ill.App.3d 394, 413 N.E.2d 86, 82 (1st Dist. 1980); Armstrong v. Republic Rlty. Mgt. Corp., 631 F.2d 1344 (8th Cir. 1980); In re Dukes, 24 B.R. 404, 411-12 (Bankr. ED Mich. 1982) (”the fiduciary, Salem Mortgage Company, failed to provide the borrower-principal with any sort of estimate as to the ultimate charges until a matter of minutes before the borrower was to enter into the loan agreement”); Community Fed. Savings v. Reynolds, 1989 U.S. Dist. LEXIS 10115 (N.D.Ill., Aug. 18, 1989); Langer v. Haber Mortgages, Ltd., New York Law Journal, August 2, 1995, p. 21 (N.Y. Sup.Ct.). See also, Tomaszewski v. McKeon Ford, Inc., 240 N.J.Super. 404, 573 A.2d 101 (1990) Browder v, Hanley Dawson Cadillac Co., 62 Ill.App.3d 623, 379 N.E.2d 1206 (1st Dist. 1978) Fox v. Industrial Cas. Co., 98 Ill.App.3d 543, 424 N.E.2d 839 (1st Dist. 1981); Hlavaty v. Kribs Ford Inc., 622 S.W.2d 28 (Mo.App. 1981), and Spears v. Colonial Bank, 514 So.2d 814 (Ala. 1987) (Jones, J., concurring), dealing with the duty of a seller of goods or services who undertakes to procure insurance for the purchaser. See generally 12 Am Jur 2d, Brokers, Section 84.

43. Wyatt v. Union Mtge. Co., 24 Cal.3d 773, 782, 157 Cal.Rptr. 392, 397, 598 P.2d 45 (1979).

44. Brink v. Da Lesio, 496 F.Supp. 1350 (D.Md. 1980), modified, 667 F.2d 420 (4th Cir. 1981)

45. Wyatt v Union Mtge. Co., 24 Cal.3d 773, 782, 157 Cal.Rptr. 392, 397, 598 P.2d 45 (1979).

46. Martin v. Heinold Commodities, Inc. 139 Ill.App.3d 1049, 487 N.E.2d 1098. 1102-03 (1st Dist. 1985), aff’d in part and rev’d in part, 117 Ill.2d 67, 510 N.E.2d 840 (1987), appeal after remand, 240 Ill.App.3d 536, 608 N.E.2d 449 (1st Dist. 1992), aff’d in part and rev’d in part, 163 Ill.2d 33, 643 N.E.2d 734 (1994).

47. An agreement between a seller and an agent for a purchaser whereby an increase in the purchase price was to go to the agent unbeknownst to the purchaser, constitutes fraud. Kuntz v. Tonnele, 80 N.J.Eq. 372, 84 A. 624, 626 (Ch. 1912). The buyer may sue both his agent and the seller. Id. 48. Starr v. International Realty, Ltd., 271 Or. 296, 533 P.2d 165, 167-8 (1975).

49. Bunker Ramo Corp. v. United Business Forms, Inc., 713 F.2d 1272 (7th Cir. 1983); Hellenic Lines, Ltd. v. O’Hearn, 523 F.Supp. 244 (SDNY 1981); CNBC, Inc. v. Alvarado, 1994 U.S.Dist. LEXIS 11505 (SDNY 1994). Shushan v. United States, 117 F.2d 110, 115 (5th Cir. 1941), United States v. George, 477 F.2d 508, 513 (7th Cir. 1973); Formax, Inc. v. Hostert, 841 F.2d 388, 390-91 (Fed. Cir. 1988); United States v. Shamy, 656 F.2d 951, 957 (4th Cir. 1981); United States v. Bruno, 809 F.2d 1097, 1104 (5th Cir. 1987); United States v. Isaacs, 493 F.2d 1124, 1150 (7th Cir. 1974); United States v. Mandel, 591 F.2d 1347, 1362 (4th Cir. 1979); United States v. Keane, 522 F.2d 534, 546 (7th Cir. 1975); United States v. Barrett, 505 F.2d 1091, 1104 (7th Cir. 1974); GLM Corp. v. Klein, 684 F.Supp. 1242, 1245 (SDNY 1988); United States v. Procter & Gamble Co., 47 F.Supp. 676, 678-79 (D.Mass. 1942); United States v. Aloi, 449 F.Supp. 698, 718 (EDNY 1977); United States v. Fineman, 434 F.Supp. 189, 195 (EDPa. 1977). 50. U.S.C. Section 2607.

51. United States v. Graham Mtge. Corp., 740 F.2d 414 (6th Cir. 1984). 52. Durr v. Intercounty Title Co., 826 F.Supp. 259, 262 (ND Ill. 1993), aff’d, 14 F.3d 1183 (7th Cir. 1994); Campbell v. Machias Savings Bank, 865 F.Supp. 26, 31 n. 5 (D.Me. 1994); Mercado v. Calumet Fed. S. & L. Ass’n, 763 F.2d 269, 270 (7th Cir. 1985); Family Fed. S. & L. Ass’n v. Davis, 172 B.R. 437, 466 (Bankr. DDC 1994); Adamson v. Alliance Mtge. Co., 677 F.Supp. 871 (ED Va. 1987), aff’d, 861 F.2d 63 (4th Cir. 1988); Duggan v. Independent Mtge. Corp., 670 F.Supp. 652, 653 (ED Va. 1987).

53. The Alabama Supreme Court described the ”table funding” relationship as

follows: Under this arrangement, the mortgage broker or correspondent lender performs all of the originating functions and closes the loan in the name of the mortgage broker with funds supplied by the mortgage lender. The mortgage broker depends upon ”table funding,” the simultaneous advance of the loan funds from the mortgage lender to the mortgage broker. Once the loan is closed, the mortgage broker immediately assigns the mortgage to the mortgage lender. The essence of the table funding relationship is that the mortgage broker identifies itself as the creditor on the loan documents even though the mortgage broker is

not the source of the funds. (Emphasis added). Smith v. First Family Financial Services Inc., 626 So.2d 1266, 1269 (Ala. 1993). 54. 57 FR 49607, Nov. 2, 1992; 57 FR 56857, Dec. 1, 1992; 59 FR 6515, Feb. 10, 1994.

55. N. 51 supra. In conjunction with amending regulation X, the Department of Housing and Urban Development made the following statement regarding the Sixth

Circuit’s interpretation of RESPA and regulation X: HUD has consistently taken the position that the prohibitions of Section 8 of RESPA (12 U.S.C. 2607) extended to loan referrals. Although the making of a loan is not delineated as a ‘’settlement service” in Section 3(3) of RESPA (12 U.S.C. 2602(3)), it has always been HUD’s position, based on the statutory language and the legislative history, that the section 3(3) list was not an inclusive list of all settlement services and that the origination, processing and funding of a mortgage loan was

a settlement service. In U.S. v. Graham Mortgage Corp., 740 F.2d 414 (6th Cir. 1984), the Sixth Circuit Court of Appeals stated that HUD’s interpretation that the making of a mortgage loan was a part of the settlement business was unclear for purposes of criminal prosecution, and based and the rule of lenity, overturned a previous conviction. In response to the Graham case, HUD decided to amend its regulations to state clear and specifically that the making and

processing of a mortgage loan was a settlement service. Accordingly, HUD restates its position unequivocally that the originating, processing, or funding

of a mortgage loan is a settlement service in this rule. 57 F.R. 49600(Nov. 2, 1992).

56. Table Funding Rebuffed Again, National Mortgage News, Feb. 21, 1994, p. 6; HUD May Grant Home Equity Reprieve, Thomson’s International Bank Accountant, Dec. 13, 1993, p. 4; HUD Wants Expansion of Mortgage Broker Fee Disclosure, National Mortgage News, p. 25 (Sept. 14, 1992).

57. Table Funding, Fee Rulings Near, Banking Attorney, Dec. 13, 1993, vol. 3, no. 47, p. 5; Table Funding to Be Disclosed, International Bank Accountant, Dec. 13, 1993, vol. 93, no. 47, p. 4.

58. The current version of regulation X, 24 C.F.R. Section 3500.14, provides,

in part, as follows: Prohibition against kickbacks and unearned fees. (a)Section 8 violation. Any violation of this section is a violation of section 8 of RESPA (12 U.S.C. Section 2607) and is subject to enforcement as such under

Section 3500.19(b). . . (b) No referral fees. No person shall give and no person shall accept any fee, kickback, or other thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a settlement service involving a federal-related mortgage loan shall be

referred to any person. (c) No split of charges except for actual services performed. No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a settlement service in connection with a transaction involving a federally-related mortgage loan other than for services actually performed. A charge by a person for which no or nominal services are performed or for which duplicative fees are charged is an unearned fee and violates this section. The source of the payment does not determine whether or not a service is compensable. Nor may the prohibitions of this Part be avoided by creating an arrangement wherein the purchaser of services splits the fee. (Emphasis added)

59. Robert P. Chamness, Compliance Alert: What Changed the Face of the Mortgage Lending Industry Overnight?, ABA Bank Compliance, Spring 1993, p. 23. Accord, Heather Timmons, U.S. Said to Plan Crackdown on Referral Fees, American Banker, Dec. 20, 1995, p. 10. (”Section 8 [of RESPA] has prompted close scrutiny of back-end points, mortgage fees paid to a broker by the lender after closing. Federal attorneys are concerned that some lenders are improperly hiding referral fees in the rates charged to consumers . . . .”); HEL Lenders May Be Sued on Broker Referrals, National Mortgage News, April 3, 1995, p. 11 supra, (”there no longer is any possible justification for paying back-end points . . . [because] the very essence is that the compensation is paid for referral”).

60. Mary Sit, Mortgage Brokers Can Help Borrowers. Boston Globe, Oct. 3, 1993, p. A13; Jeremiah S. Buckley and Joseph M. Kolar, What RESPA has Wrought: Real Estate Settlement Procedures, Savings & Community Banker, Feb. 1993, vol. 2, no. 2, p. 32.

61. 61 F.R. 7414 (February 28, 1996). See also Kenneth Harney, Nation’s Housing: VA Eyes Home-Loan Abuses, Newsday p. D02 (Mar. 15, 1996). See also See Leonard A. Bernstein, RESPA Invades Secondary Mortgage Financing, New Jersey Lawyer, Aug. 1, 1994. HUD Stepping Up RESPA Inspections, American Banker Washington Watch, May 3, 1993.

62. HEL Lenders May Be Sued on Broker Referrals, National Mortgage News, April 3, 1995, p. 11.

63. 95-D-859-N (MD Ala., Mar. 8, 1996),

64. Fowler v. Equitable Trust Co., 141 U.S. 384 (1891); In re West Counties Construction Co., 182 F.2d 729, 731 (7th Cir. 1950) (”Calling the $ 1,000 payment to Walker a commission did not change the fact that it was an additional charge for making the loan”); Union Nat’l Bank v. Louisville, N. A & C. R. Co., 145 Ill. 208, 223, 34 N.E. 135 (1893) (”There can be no doubt that this payment, though attempted to be disguised under the name of ‘commission, was in legal effect an agreement to pay a sum additional to the [lawful rate of interest], as the consideration or compensation for the use of the money borrowed, and is to be regarded as, to all intents and purposes, an agreement for the payment of additional interest”); North Am. Investors v. Cape San Blas Joint Venture, 378 So.2d 287 (Fla. 1978); Feemster v. Schurkman, 291 So.2d 622 (Fla.App. 1974); Howes v. Curtis, 104 Idaho 563, 661 P.2d 729 (1983); Duckworth v. Bernstein, 55 Md.App. 710, 466 A.2d 517 (1983); Coner v Morris S. Berman, Unltd., 65 Md.App. 514, 501 A.2d 458 (1985) (violation of state secondary mortgage and finders’ fees laws); Julian v Burrus, 600 S.W.2d 133 (Mo.App. 1980); DeLee v. Hicks, 96 Nev. 462, 611 P.2d 211(1980); United Mtge. Co. v. Hilldreth, 93 Nev. 79, 559 P.2d 1186 (1977); O’Connor v Lamb, 593 S.W.2d 385 (Tex.Civ.App. 1979) (purported broker was the actual lender); Terry v. Teachworth, 431 S.W.2d 918 (Tex.Civ.App. 1968); Durias v. Boswell, 58 Wash.App. 100, 791 P.2d 282 (1990) (broker’s fee is interest where broker is agent of lender; factors relevant to determining agency include lender’s reliance on broker for information concerning creditworthiness of borrower, preparation of documents necessary to close and adequately secure the loan, and performing recordkeeping functions; not relevant whether lender knew of broker’s fee, as Washington law provides that where broker acts as agent for both borrower and lender, it is deemed lender’s agent for purposes of usury statute); Sparkman & McLean Income Fund v. Wald, 10 Wash.App. 765, 520 P.2d 173 (1974); Payne v Newcomb, 100 Ill. 611, 616-17 (1881) (where intermediary was agent of lender, fees exacted by the intermediary on borrowers made loans usurious); Meers v. Stevens, 106 Ill. 549, 552 (1883) (borrower approaches A for loan, A directs borrower to B, a relative, who makes the loan in the name of A and charges a ”commission” for procuring it; court held transaction was an ”arrangement to charge usury, and cover it up under the claim of commissions); Farrell v. Lincoln Nat’l Bank, 24 Ill.App.3d 142, 146, 320 N.E.2d 208 (1st Dist. 1974) (”if a fee is paid to a lender’s agent for making the loan, with the lender’s knowledge, the amount of the fee is treated as interest for the purposes of determining usury”).

65. 12 C.F.R. Section 226.4(b)(1), (3).

66. FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 244-45 (1972); Cheshire Mtge. Service, Inc. v. Montes, 223 Conn. 80, 107, 612 A.2d 1130 (1992) (court found a TILA violation to violate the Connecticut Unfair Trade Practices Act because the violation of TILA was contrary to its public policy of accurate loan disclosure).

67. 42 U.S.C. Section 3601 et seq.

68. 15 U.S.C. Section 1691 et seq.

69. Consent decree, United States v. Security State Bank of Pecos, WD Tex., filed Oct. 18, 1995; consent decree, United States v. Huntington Mortgage Co., ND Ohio, filed Oct. 18, 1995.

70. Bank Said to Face Justice Enforcement Action, Mortgage Marketplace, Mar. 25, 1996, v. 6, no. 12, p. 5.

71. M. Hill, Banks Revise Overage Lending Policies, Cleveland Plain Dealer, July 14, 1994, p. 1C; Jonathan S. Hornblass, Focus on Overages Putting Home Lenders in Legal Hot Seat, American Banker, May 24, 1995, p. 10; John Schmeltzer, Lending investigation expands; U.S. wants to know if minorities are paying higher fees, Chicago Tribune, May 19, 1995, Business section, p. 1. 72. 501 F.2d 324, 330-31 (7th Cir. 1974).

73. See also DuFlambeau v. Stop Treaty Abuse-Wisconsin, Inc., 41 F.3d 1190, 1194 (7th Cir. 1994). See Mescall v. Burrus, 603 F.2d 1266 (7th Cir. 1979); Ortega v. Merit Insurance Co., 433 F.Supp. 135 (ND Ill. 1977) (plaintiff’s allegations that a de facto system of discriminatory credit insurance pricing exists, and that defendant is exploiting this system is sufficient to withstand the defendant’s motion to dismiss); Stackhouse v. DeSitter, 566 F.Supp. 856, 859 (N.D.Ill. 1983) (”Charging a black buyer an unreasonably high price for a home where a dual housing market exists due to racial segregation also violates this section . . .”).

74. John D’Antona Jr., Lenders requiring more mortgage insurance, Pittsburgh Post-Gazette, Feb. 18, 1996, p. J1.

75. Duff & Phelps Credit Rating Co. report on the private mortgage insurance industry, Dec. 7, 1995. The figure is for 1994.

76. No Bump in December MI Numbers, National Mortgage News, Feb. 5, 1996, p. 2. The figure is as of the end of 1995.

77. Charting the Two Paths to Profitability, American Banker, September 13, 1994, p. 11; Tallying Up Servicing Performance in 1993, Mortgage Banking, June 1994, p. 12.

78. 15 U.S.C. Section 1692 et seq.

79. 1996 U.S.Dist.LEXIS 3430 (MD Fla., Feb. 23, 1996). 80. One who regularly acquires and attempts to enforce consumer obligations that are delinquent at the time of acquisition qualifies as an FDCPA ”debt collector” with respect to such obligations. Kimber v. Federal Fin. Corp., 668 F.Supp. 1480, 1485 (M.D.Ala. 1987); Cirkot v. Diversified Systems, 839 F.Supp. 941 (D.Conn. 1993); Coppola v. Connecticut Student Loan Foundation, 1989 U.S.Dist. LEXIS 3415 (D.Conn. 1989); Commercial Service of Perry v. Fitzgerald, 856 P.2d 58 (Colo.App. 1993).

81. The FDCPA defines as a ”deceptive” practice — (2) The false representation of — (A) the character, amount, or legal status of any debt; or 15 U.S.C. Section 1692e. The FDCPA also prohibits as an ”unfair” practice the collection or attempted collection of ”any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.” 15 U.S.C. Section 1692f(1).

82. Bloom v. Martin, 865 F.Supp. 1377 (ND Cal. 1994), aff’d, 77 F.31 318 (9th Cir., 1996). See also, Siegel v. American S. & L. Ass’n, 210 Cal.App.3d 953, 258 Cal.Rptr. 746 (1989); and Goodman v. Advance Mtge. Corp., 34 Ill.App.3d 307, 339 N.E.2d 257 (1st Dist. 1981) (state statute construed to permit charge for recording release, at least where mortgage is silent).

83. John Lee, John Mancuso and James Walter, Survey: Housing Finance: Major Developments in 1990,” 46 Business Lawyer 1149 (May 1991).84. Nelson and Whitman, Real Estate Finance Law, Section 11.4 at 816.

85. Thrifts Paying Big Bucks for ARM Errors, American Banker — Bond Buyer, May 23, 1994, p. 8; J. Shiver, Adjustable-Rate Mortgage Mistakes Add Up, Los Angeles Times, Sept. 22, 1991, p. D3.

86. A Call To Arms on ARMs, Business Week, Sept. 6, 1993, p. 72. 87. Hubbard v. Fidelity Fed. Bank, 824 F.Supp. 909 (CD Cal. 1993). 88. The UCCC has been enacted in Colorado, Idaho, Iowa, Kansas, Maine, Oklahoma, Utah and Wyoming. It imposes the same disclosure obligations as TILA, but does not cap classwide statutory damages at the lesser of 1 percent of the net worth of the creditor or $ 500,000.

89. Michaels Building Co. v. Ameritrust Co., N.A., 848 F.2d 674 (6th Cir. 1988); Haroco, Inc. v. American Nat’l Bank & Trust Co., 747 F.2d 384 (7th Cir. 1984); Morosani v. First Nat’l Bank of Atlanta, 703 F.2d 1220 (11th Cir. 1983). 90. Systematic overcharging of consumers in and of itself constitutes an unfair practice violative of state UDAP statutes. Leff v. Olympic Federal, n. 7 supra (overescrowing); People ex rel. Hartigan v. Stianos, 131 Ill.App.3d 575, 475 N.E.2d 1024 (1985) (retailer’s practice of charging consumers sales tax in an amount greater than that authorized by law was UDAP violation); Orkin Exterminating Co., 108 F.T.C. 263 (1986), aff’d, 849 F.2d 1354 (11th Cir. 1988) (Orkin entered into form contracts with thousands of consumers to conduct annual pest inspections for a fixed fee and, without authority in the contracts, raised the fees an average of $ 40).

91. The usury claim is that charging interest at a rate in excess of that agreed upon by the parties is usury. See Howes v. Donart, 104 Idaho 563, 661 P.2d 729 (1983); Garrison v. First Fed. S. & L. Ass’n of South Carolina, 241 Va. 335, 402 S.E.2d 25 (1991). Each of these decisions arose in a state which had ”deregulated” interest rates with respect to some or all loans. There was no statutory limit on the rate of interest the parties could agree upon. However, in each case the court held that a lender that charged more interest than the parties had agreed to violated the usury laws.

92. Barbara Ballman, Citibank mortgage customers due refunds on rate ”maladjustments,” Capital District Business Review, Apr. 5, 1993, p. 2 ($ 3.27 million); Israel v. Citibank, N.A. and Citicorp Mortgage, Inc., No. 629470 (St. Louis County (Mo.) Circuit Court); Englard v. Citibank, N.A., Index No. 459/90 (N.Y.C.S.C. 1991).

93. Whitford v. First Nationwide Bank, 147 F.R.D. 135 (W.D.Ky. 1992). 94. ”A call to arms on ARMs,” Business Week, Sept. 6, 1993, p. 72. 95. Crowley v. Banking Center, 1994 Conn. Super. LEXIS 3026 (Nov. 29, 1994). 96. LeBourgeois v. Firstrust Savings Bank, 27 Phila. 42, 1994 Phila. Cty. Rptr. 15 (CP 1994).

97. Jacob C. Gaffey, Managing the risk of ARM errors, Mortgage Banking, Apr. 1995, p. 73.

98. Preston v. First Bank of Marietta, 16 Ohio App. 3d 4, 473 N.E.2d 1210, 1215 (1983).

99. Baxter v. First Bank of Marietta, 1992 Ohio App. LEXIS 5956 (Nov. 6, 1992).

100. Froland v. Northeast Savings, reported in Lender Liability News, Feb.20, 1996, and American Banker, Jan. 4, 1996, p. 11.

Ok they didn’t mean to screw you but they screwed you anyway !!

CC 1573
Constructive fraud consists:
1. In any breach of duty which, without an actually fraudulent intent, gains an advantage to the person in fault, or any one claiming under him, by misleading another to his prejudice, or to the
prejudice of any one claiming under him; or,
2. In any such act or omission as the law specially declares to be fraudulent, without respect to actual fraud.

Prevent the Foreclosure by using the California Fair Debt Collection Practices Act


77. Plaintiff reallege and incorporates by reference the above paragraphs as though set forth fully herein.
78. California Civil Code §1788.17 requires that Defendants comply with the provisions of 15 U.S.C. § 1692, through their acts including but not limited to, the following:
(a) The Defendants violated California Civil Code § 1788.17 by engaging in conduct, the natural consequence of which is to harass, oppress, and abuse persons in connection with the collection of the alleged debt, a violations of 15 U.S.C. § 1692(d);

(b) The Defendants violated California Civil Code § 1788.17 by misrepresenting the status of the debt, a violations of 15 U.S.C. § 1692(e)(s)(A);

(c) The Defendants violated California Civil Code § 1788.17 by using unfair or unconscionable means to collect or attempt to collect a debt, a violation 15 U.S.C. § 1692(f); and

(d) The Defendants violated California Civil Code § 1788.17 by using deceptive means to collect or attempt to collect a debt from the Plaintiff, a violation of 15 U.S.C. § 1692e(10).

80. The foregoing violations of 15 U.S.C. § 1692 by Defendants result in separate
violations of California Civil Code § 1788.17.
81. The forgoing acts by Defendants were willful and knowing violations of Title
1.6C of the California Civil Code (FRDCPA), are sole and separate violations under California Civil Code § 1788.30(b), and trigger multiple $1,000.00 penalties.
82. California Civil Code § 1788.17provides that Defendants are subject to the remedies of 15 U.S.C. § 1692(k), for failing to comply with the provisions of 15 U.S.C. § 1692(b)(6) and § 1692(c)c.
83. The foregoing acts by Defendants were intentional persistent, frequent, and devious violations of 15 U.S.C. § 1692, which trigger additional damages of $1,000.00 under 15 U.S.C. § 1692(k)(a)(2)(A).

Buy your own house from your lender at todays Value


64. Plaintiff reallege and incorporate by reference the above paragraphs as though set forth fully herein.
65. Defendants’ Pooling and Servicing Agreement (hereinafter “PSA”) contains a duty to maximize net present value to its investors and related parties.
66. California Civil Code 2823.6 broadens and extends this PSA duty by requiring servicers to accept loan modifications with borrowers.
67. Pursuant to California Civil Code 2823.6(a), a servicer acts in the best interest of all parties if it agrees to or implements a loan modification where the (1) loan is in payment default, and (2) anticipated recovery under the loan modification or workout plan exceeds the anticipated recovery through foreclosure on a net present value basis.
68. California Civil Code 2823.6(b) now provides that the mortgagee, beneficiary, or authorized agent offer the borrower a loan modification or workout plan if such a modification or plan is consistent with its contractual or other authority.
69. Plaintiffs’ loan is presently in default.
70. Plaintiffs are willing, able, and ready to execute a modification of their loan on the following terms:
(a) New Loan Amount: insert amount
(b) New Interest Rate: insert amount
(c) New Loan Length: insert amount
(d) New Payment: insert amount

71. The present fair market value of the property is insert value.
72. The Joint Economic Committee of Congress estimated in June, 2007, that the average foreclosure results in $77, 935.00 in costs to the homeowner, lender, local government, and neighbors.
73. Of the $77,935.00 in foreclosure costs, the Joint Economic Committee of Congress estimates that the lender will suffer $50,000.00 in costs in conducting a non-judicial foreclosure on the property, maintaining, rehabilitating, insuring, and reselling the property to a third party. Freddie Mac places this loss higher at $58,759.00.
74. The anticipated recovery through foreclosure on a net present value basis is $525,000.00 or less.
75. The recovery under the proposed loan modification at $insert amount exceeds the net present recovery through foreclosure of $insert amount by over $5,000.00.
76. Pursuant to California Civil Code §2823.6, Defendants are now contractually bound to accept the loan modification as provided above.

Forcelclosure non-enforcable California Commercial Code 3301

Defendants’ Lack of Standing to Enforce A Non-Judicial Foreclosure Pursuant To California Commercial Code § 3301

46. A promissory note is person property and the deed of trust securing a note is a mere incident of the debt it secures, with no separable ascertainable market value. California Civil Code §§ 657, 663. Kirby v. Palos Verdes Escrow Co., 183 Cal. App. 3d 57, 62.
47. Any transfers of the notice and mortgage fundamentally flow back to the note:
“The assignment of a mortgage without a transfer of the Indebtedness confers no right, since debt and security are inseparable and the mortgage alone is not a subject of transfer, ” Hyde v. Mangan (1891) 88 Cal. 319, 26 P 180, 1891 Cal LEXIS 693; Johnson v, Razy (1919)181 Cal 342, 184 P 657; 1919 Cal LEXIS 358; Bowman v. Sears (1923, Cal App) 63 Cal App 235, 218 P 489, 1923 Cal App LEXIS 199; Treat v. Burns (1932) 216 Cal 216, 13 P2d,724, 1932 Cal LEXIS 554.
48. ”A mortgagee’s purported assignment of the mortgage without an assignment of the debt which is secured is a legal nullity.” Kelley V. Upshaw (1952) 39 Cal 2d 179, 246 P2d 23, 1952 Cal. LEXIS 248.

49. ”A trust deed has no assignable quality independent of the debt; it may not be assigned or transferred apart from the debt; and an attempt to assign the trust deed without a transfer of the debt is without effect.” Domarad v. Fisher & Burke, Inc. (1969 Cal. App. 1st Dist) 270 Cal. App. 2d 543, 76 Cal. Rptr. 529, 1969 Cal. App. LEXIS 1556.
50. The Promissory Note is a negotiable instrument.
51. Transferring a Deed of Trust by itself does not allow enforcement of the instrument unless the Promissory Note is properly negotiated.
52. Where an instrument has been transferred, enforceability is determined based upon possession.
53. California Commercial Code § 3301 limits a negotiable instrument’s enforcement to the following:
“Person entitled. to enforce” an Instrument means (a) the holder of the instrument, (b) a nonholder in possession of the instrument who has the rights of a holder, or (c) a person not in possession of the instrument who is entitled to enforce the instrument pursuant to
Section 3309 or subdivision (d) of Section 3418. A person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument.
54. None of the Defendants are present holders of the instrument.
55. None of the Defendants are nonholders in possession of the instrument who has
rights of the holder.
56. None of the Defendants are entitled to enforce the instrument pursuant to section 3309 or subdivision (d) of Section 3418.
57. Defendants have no enforceable rights under California Commercial Code 3301(a) to enforce the negotiable instrument.
58. Since there is no right to enforce the negotiable instrument, the Notice of Default provisions of California Civil Code § 2924 and Notice of Sale provisions of California Civil Code § 2924(f) were likewise never complied with, and there is no subsequent incidental right to enforce any deed of trust and conduct a non-judicial foreclosure.
Plaintiff Suffered Damages As A Result of Defendants’ Conduct:

59. As a direct result of Defendants’ acts, Plaintiff has incurred actual damages consisting of mental and emotional distress, nervousness, grief, embarrassment, loss of sleep, anxiety, worry, mortification, shock, humiliation, indignity, pain and suffering, and other injuries.
60. Plaintiff incurred out of pocket monetary damages.
61. Plaintiff continues to incur monetary damages.
62. Plaintiff will incur the loss of their personal residence if a non-judicial foreclosure is allowed to proceed.
63. Each of Defendants harassing acts were so willful, vexatious, outrageous, oppressive, and maliciously calculated enough, so as to warrant statutory penalties and punitive damages.

They can’t foreclose if they did not get it endorsed and the party they purchase from could not endorse they where out of business!

Defendants Are Not Holders In Due Course Since Plaintiff Was Duped Into An Improper Loan And There Is No Effective Endorsement:

21. Plaintiff incurred a “debt” as that term is defined by California Civil 17 Code §1788(d) and 15 U.S.C. § 1692a(5), when he obtained a Loan on their Personal Residence.
22. The loan is memorialized via a Deed of Trust and Promissory Note, each of which contain an attorney fees provision for the lender should they prevail in the enforcement of their contractual rights.
23. Plaintiff has no experience beyond basic financial matters.
24. Plaintiff was never explained the full terms of their loan, including but not limited to the rate of interest how the interest rate would be calculated, what the payment schedule should be, the risks and disadvantages of the loan, the prepay penalties, the maximum amount the loan payment could arise to.
25. Certain fees in obtaining the loan, were also not explained to the Plaintiff, including but not limited to “underwriting fees,” “MERS registration fee,” “appraisal fees,” “broker fees”, “loan tie in fees,” etc.
26. A determination of whether Plaintiff would be able to make the payments as specified in the loan was never truly made.
27. Plaintiff’s income was never truly verified.
28. Plaintiff was rushed when signing the documents, the closing process provided no time for review and took minutes to accomplish.
29. Plaintiff could not understand any of the documents and signed them based on representations and the trust and confidence the Plaintiff placed in Defendants’ predecessors.
30. Plaintiff is informed and believe that Defendants and/or Defendants’ predecessors established and implemented the policy of failing to disclose material facts about the Loan, failing to verify Plaintiff’s income, falsifying Plaintiff’s income, agreeing to accept a Yield Spread Premium, and causing Plaintiff’s Loan to include a penalty for early payment.
31. Plaintiff is informed and believes that Defendants and/or Defendants’ predecessors established such policy so as to profit, knowing that Plaintiff would be unable to perform future terms of the Loan.
32. Plaintiff was a victim of Fraud in the Factum since the forgoing misrepresentations caused them to obtain the home loan without accurately realizing, the risks, duties, or obligations incurred.
33. The Promissory Note contains sufficient space on the note itself for endorsement whereby any assignment by allonge is ineffective pursuant to Pribus v. Bush, 118 Cal. App. 3d 1003 (May 12, 1981).
34. Defendants are not holders in due course due to Fraud in Factum and ineffective endorsement.

California and everybody else V Countrywide


Plaintiffs, insert Plaintiff, by and through their attorney of record, Timothy McCandless,
allege the following, on information and belief:
1. At all relevant times, Defendant Countrywide Financial Corporation (hereinafter “CFC”), a Delaware corporation, has transacted and continues to transact business throughout the State of California, including in insert county.
2. At all relevant times, Defendant Countrywide Home Loans, Inc. (hereinafter “CHL”), a New York corporation, has transacted and continues to transact business throughout the State of California, including in insert county. CHL is a subsidiary of CFC.
3. At all relevant times, until on or about December 15, 2004, Full Spectrum
Lending, Inc. (hereinafter “Full Spectrum”), was a California corporation that transacted business throughout the State of California, including in insert county, and was a subsidiary of CFC. On or about December 15, 2004, Full Spectrum was merged into and became a division of CHL. For all conduct that occurred on or after December 15, 2004, any reference in this complaint to CHL includes reference to its Full Spectrum division.
4. Defendants CFC, CHL, and Full Spectrum are referred to collectively herein as
“Countrywide” or “the Countrywide Defendants.”
5. At all times pertinent hereto, Defendant Angelo Mozilo (hereinafter “Mozilo”) was Chairman and Chief Executive Officer of CFC. Defendant Mozilo directed, authorized, and ratified the conduct of the Countrywide Defendants set forth herein.
6. At all times pertinent hereto, Defendant David Sambol (hereinafter “Sambol”) is and was the President of CHL and, since approximately September, 2006, has served as the President andChief Operating Officer of CFC. Sambol directed, authorized and ratified the conduct of CHL, and after, September, 2006, the Countrywide Defendants, as set forth herein. Defendant Sambol is a resident of Los Angeles County.
7. Plaintiff is not aware of the true names and capacities of the Defendants sued as Does 1 through 100, inclusive, and therefore sues these Defendants by such fictitious names. Each of these fictitiously named Defendants is responsible in some manner for the activities alleged in this Complaint. Plaintiff will amend this Complaint to add the true names of the fictitiously named Defendants once they are discovered.
8. The Defendants identified in paragraphs 1 through 7, above, shall be referred to collectively as “Defendants.”
9. Whenever reference is made in this Complaint to any act of any Defendant(s), that
allegation shall mean that each Defendant acted individually and jointly with the other Defendants.
10. Any allegation about acts of any corporate or other business Defendant means that
the corporation or other business did the acts alleged through its officers, directors, employees, agents and/or representatives while they were acting within the actual or ostensible scope of their
11. At all relevant times, each Defendant committed the acts, caused or directed others to commit the acts, or permitted others to commit the acts alleged in this Complaint. Additionally, some or all of the Defendants acted as the agent of the other Defendants, and all of
the Defendants acted within the scope of their agency if acting as an agent of another.
12. At all relevant times, each Defendant knew or realized that the other Defendants were engaging in or planned to engage in the violations of law alleged in this Complaint. Knowing or realizing that other Defendants were engaging in or planning to engage in unlawful conduct, each Defendant nevertheless facilitated the commission of those unlawful acts. Each Defendant intended to and did encourage, facilitate, or assist in the commission of the unlawful acts, and thereby aided and abetted the other Defendants in the unlawful conduct.
13. At all relevant times, Defendants have engaged in a conspiracy, common enterprise, and common course of conduct, the purpose of which is and was to engage in the violations of law alleged in this Complaint. This conspiracy, common enterprise, and common course of conduct continues to the present.
14. The violations of law alleged in this Complaint occurred in insert county and elsewhere throughout California and the United States.



15. This action is brought against Defendants, who engaged in false advertising and unfair competition in the origination of residential mortgage loans and home equity lines of credit (hereinafter “HELOCs”).
16. Countrywide originated mortgage loans and HELOCs through several channels, including a wholesale origination channel and a retail origination channel. The Countrywide employees who marketed, sold or negotiated the terms of mortgage loans and HELOCs in any of
its origination channels, either directly to consumers or indirectly by working with mortgage brokers, are referred to herein as “loan officers.”
17. In Countrywide’s wholesale channel, loan officers in its Wholesale Lending Division (hereinafter “WLD”) and Specialty Lending Group (hereinafter “SLG”) (now merged into the WLD) worked closely with a nationwide network of mortgage brokers to originate loans. In its wholesale channel, Countrywide often did business as “America’s Wholesale Lender,” a fictitious business named owned by CHL. In Countrywide’s retail channel, loan officers employed by Countrywide in its Consumer Markets Division (“CMD”) sold loans directly to consumers. In addition, loan officers employed by Full Spectrum up until December 14, 2004, and thereafter by Countrywide’s Full Spectrum Lending Division (hereinafter “FSLD”), sold loans directly to consumers as part of Countrywide’s retail channel.
18. Countrywide maintained sophisticated electronic databases by means of which corporate management, including but not limited to Defendants Mozilo and Sambol, could obtain information regarding Countrywide’s loan production status, including the types of loan products, the number and dollar volume of loans, the underwriting analysis for individual loans, and the number of loans which were approved via underwriting exceptions. Defendants used this
information, together with data they received regarding secondary market trends, to develop and
modify the loan products that Countrywide offered and the underwriting standards that Countrywide applied.
19. The mortgage market changed in recent years from one in which lenders originated mortgages for retention in their own portfolios to one in which lenders attempted to generate as many mortgage loans as possible for resale on the secondary mortgage market. The goal for lenders such as Countrywide was not only to originate high mortgage loan volumes but
also to originate loans with above-market interest rates and other terms which would attract premium prices on the secondary market.
20. In 2004, in an effort to maximize Countrywide’s profits, Defendants set out to double Countrywide’s share of the national mortgage market to 30% through a deceptive scheme
to mass produce loans for sale on the secondary market. Defendants viewed borrowers as nothing more than the means for producing more loans, originating loans with little or no regard to borrowers’ long-term ability to afford them and to sustain homeownership. This scheme was created and maintained with the knowledge, approval and ratification of Defendants Mozilo and
21. Defendants implemented this deceptive scheme through misleading marketing practices designed to sell risky and costly loans to homeowners, the terms and dangers of which they did not understand, including by (a) advertising that it was the nation’s largest lender and could be trusted by consumers; (b) encouraging borrowers to refinance or obtain purchase money financing with complicated mortgage instruments like hybrid adjustable rate mortgages or payment option adjustable rate mortgages that were difficult for consumers to understand; (c) marketing these complex loan products to consumers by emphasizing the very low initial “teaser” or “fixed” rates while obfuscating or misrepresenting the later steep monthly payments and interest rate increases or risk of negative amortization; and (d) routinely soliciting borrowers to refinance only a few months after Countywide or the loan brokers with whom it had “business
partnerships” had sold them loans.
22. Defendants also employed various lending policies to further their deceptive scheme and to sell ever-increasing numbers of loans, including (a) the dramatic easing of Countrywide’s underwriting standards; (b) the increased use of low- or no-documentation loans which allowed for no verification of stated income or stated assets or both, or no request for income or asset information at all; (c) urging borrowers to encumber their homes up to 100% (or more) of the assessed value; and (d) placing borrowers in “piggyback” second mortgages in the form of higher interest rate HELOCs while obscuring their total monthly payment obligations.
23. Also to further the deceptive scheme, Defendants created a high-pressure sales environment that propelled its branch managers and loan officers to meet high production goals and close as many loans as they could without regard to borrower ability to repay. Defendants’ high-pressure sales environment also propelled loan officers to sell the riskiest types of loans, such as payment option and hybrid adjustable rate mortgages, because loan officers could easily sell them by deceptively focusing borrowers’ attention on the low initial monthly payments or interest rates. Defendants also made arrangements with a large network of mortgage brokers to procure loans for Countrywide and, through its loan pricing structure, encouraged these brokers to place homeowners in loans with interest rates higher than those for which they qualified, as well as prepayment penalty obligations. This system of compensation aided and abetted brokers in breaching their fiduciary duties to borrowers by inducing borrowers to accept unfavorable loan terms without full disclosure of the borrowers’ options and also compensated brokers beyond the reasonable value of the brokerage services they rendered.
24. Countrywide received numerous complaints from borrowers claiming that they did not understand their loan terms. Despite these complaints, Defendants turned a blind eye to the ongoing deceptive practices engaged in by Countrywide’s loan officers and loan broker “business partners,” as well as to the hardships created for borrowers by its loose underwriting practices. Defendants cared only about selling increasing numbers of loans at any cost, in order to maximize Countrywide’s profits on the secondary market.


25. Defendants’ deceptive scheme had one primary goal – to supply the secondary market with as many loans as possible, ideally loans that would earn the highest premiums. Over
a period of several years, Defendants constantly expanded Countrywide’s share of the consumer market for mortgage loans through a wide variety of deceptive practices, undertaken with the direction, authorization, and ratification of Defendants Sambol and Mozilo, in order to maximize its profits from the sale of those loans to the secondary market.
26. While Countrywide retained ownership of some of the loans it originated, it sold the vast majority of its loans on the secondary market, either as mortgage-backed securities or as pools of whole loans.
27. In the typical securitization transaction involving mortgage-backed securities, loans were “pooled” together and transferred to a trust controlled by the securitizer, such as Countrywide. The trust then created and sold securities backed by the loans in the pool. Holders of the securities received the right to a portion of the monthly payment stream from the pooled loans, although they were not typically entitled to the entire payment stream. Rather, the holders received some portion of the monthly payments. The securitizer or the trust it controlled often retained an interest in any remaining payment streams not sold to security holders. These securitizations could involve the pooling of hundreds or thousands of loans, and the sale of many
thousands of shares.
28. Countrywide generated massive revenues through these loan securitizations. Its reported securities trading volume grew from 647 billion dollars in 2000, to 2.9 trillion dollars in 2003, 3.1 trillion dollars in 2004, 3.6 trillion dollars in 2005, and 3.8 trillion dollars in 2006. (These figures relate to the ostensible values given to the securities by Countrywide or investors, and include securities backed by loans made by other lenders and purchased by Countrywide.)
29. For the sale of whole (i.e., unsecuritized) loans, Countrywide pooled loans and sold them in bulk to third-party investors, often (but not exclusively) Wall Street firms. The sale of whole loans generated additional revenues for Countrywide. Countrywide often sold the whole loans at a premium, meaning that the purchaser paid Countrywide a price in excess of 100% of the total principal amount of the loans included in the loan pool.
30. The price paid by purchasers of securities or pools of whole loans varied based on the demand for the particular types of loans included in the securitization or sale of whole loans. The characteristics of the loans, such as whether the loans are prime or subprime, whether the loans have an adjustable or fixed interest rate, or whether the loans include a prepayment penalty, all influenced the price.
31. Various types of loans and loan terms earned greater prices, or “premiums,” in the secondary market. For example, investors in mortgages and mortgage backed securities have been willing to pay higher premiums for loans with prepayment penalties. Because the prepayment penalty deters borrowers from refinancing early in the life of the loan, it essentially ensures that the income stream from the loan will continue while the prepayment penalty is in effect. Lenders, such as Countrywide, typically sought to market loans that earned it higher premiums, including loans with prepayment penalties.
32. In order to maximize the profits earned by the sale of its loans to the secondary market, Countrywide’s business model increasingly focused on finding ways to generate an ever larger volume of the types of loans most demanded by investors. For example, Countrywide developed and modified loan products by discussing with investors the prices they would be willing to pay for loans with particular characteristics (or for securities backed by loans with particular characteristics), and this enabled Countrywide to determine which loans were most likely to be sold on the secondary market for the highest premiums.
33. Further, rather than waiting to sell loans until after they were made, Countrywide would sell loans “forward” before loans were funded. In order to determine what loans it could sell forward, Countrywide would both examine loans in various stages of production and examine its projected volume of production over the next several months.
34. Loans that were sold forward were sold subject to a set of stipulations between Countrywide and the purchaser. For example, in a sale of whole loans, Countrywide might agree on October 1 that on December 1 it would deliver 2000 adjustable rate mortgage loans with anaverage interest rate of 6.0%, half of which would be subject to a prepayment penalty, among other characteristics. (None of these loans would have been made as of October 1.) Based on these stipulations regarding the characteristics of the loans to be included in the pool, an investor might agree to pay a price totaling 102.25% of the total face value of the loans. In other words, the purchaser agreed in advance to pay a premium of 2.25%. Then, if the loans actually delivered on December 1 had a slightly higher or lower average interest rate, the terms of the stipulation would specify how much the final price would be adjusted.
35. The information regarding the premiums that particular loan products and terms could earn on the secondary market was forwarded to Countrywide’s production department, [Redacted description of production department’s responsibilities.]
36. Countrywide originated as many loans as possible not only to maximize its profits on the secondary market, but to earn greater profits from servicing the mortgages it sold. Countrywide often retained the right to service the loans it securitized and sold as pools of whole
loans. The terms of the securitizations and sales agreements for pools of whole loans authorized Countrywide to charge the purchasers a monthly fee for servicing the loans, typically a percentage of the payment stream on the loan.
37. Tantalized by the huge profits earned by selling loans to the secondary market, Defendants constantly sought to increase Countrywide’s market share: the greater the number and percentage of loans it originated, the greater the revenue it could earn on the secondary market. Countrywide executives, including Defendant Mozilo, publicly stated that they sought to
increase Countrywide’s market share to 30% of all mortgage loans made and HELOCs extended
in the country.
38. In its 2006 annual report, Countrywide trumpeted the fact that “[w]hile the overall residential loan production market in the United States has tripled in size since 2000, from $1.0 trillion to $2.9 trillion at the end of 2006, Countrywide has grown nearly three times faster, going from $62 billion in loan originations in 2000 to $463 billion in 2006.”
39. In addition, Countrywide directly and indirectly motivated its branch managers, loan officers and brokers to market the loans that would earn the highest premiums on the secondary market without regard to borrower ability to repay. For example, the value on the secondary market of the loans generated by a Countrywide branch was an important factor in determining the branch’s profitability and, in turn, branch manager compensation. Managers were highly motivated to pressure their loan officers to sell loans that would earn Countrywide the highest premium on the secondary market, which resulted in aggressive marketing of such loans to consumers.
40. The secondary market affected Countrywide’s pricing of products and, in order to
sell more loans on the secondary market, Countrywide relaxed its underwriting standards and liberally granted exceptions to those standards. Countrywide managers and executives, including but not limited to Defendants Mozilo and Sambol, had access to information that provided transparency and a seamless connection between secondary market transactions, the loan production process, and managerial and sales incentives.


41. Countrywide offered a variety of loan products that were both financially risky and difficult for borrowers to understand, including in particular payment option and hybrid adjustable rate mortgages and second loans in the form of home equity lines of credit.
A. The Pay Option ARM
42. Particularly after 2003, Countrywide aggressively marketed its payment option adjustable rate mortgage (“Pay Option ARM”) under the direction, authorization and ratification of Defendants Mozilo and Sambol. The Pay Option ARM, which Countrywide classified as a “prime” product, is a complicated mortgage product which entices consumers by offering a very low “teaser” rate – often as low as 1% – for an introductory period of one or three months. At the end of the introductory period, the interest rate increases dramatically. Despite the short duration of the low initial interest rate, Countrywide’s Pay Option ARMs often include a one, two or three-year prepayment penalty.
43. When the teaser rate on a Pay Option ARM expires, the loan immediately becomes an adjustable rate loan. Unlike most adjustable rate loans, where the rate can only change once every year or every six months, the interest rate on a Pay Option ARM can change every month (if there is a change in the index used to compute the rate).
44. Countrywide’s Pay Option ARMs were typically tied to either the “MTA,” “LIBOR” or “COFI” index. The MTA index is the 12-month average of the annual yields on actively traded United States Treasury Securities adjusted to a constant maturity of one year as published by the Federal Reserve Board. The LIBOR (London Interbank Offered Rate) index is based on rates that contributor banks in London offer each other for inter-bank deposits. Separate LIBOR indices are kept for one month, six-month, and one-year periods, based on the duration of the deposit. For example, the one-year LIBOR index reported for June 2008 is the rate for a twelve-month deposit in U.S. dollars as of the last business day of the previous month. The COFI (11th District Cost of Funds Index) is the monthly weighted average of the interest rates paid on checking and savings accounts offered by financial institutions operating in the states of Arizona, California and Nevada.
45. Although the interest rate increases immediately after the expiration of the short period of time during which the teaser rate is in effect, a borrower with a Pay Option ARM has the option of making monthly payments as though the interest rate had not changed. Borrowers with Pay Option ARMs typically have four different payment options during the first five years of the loan. The first option is a “minimum” payment that is based on the introductory interest rate. The minimum payment, which Countrywide marketed as the “payment rate,” is the lowest of the payment options presented to the borrower. Most of Countrywide’s borrowers choose to make the minimum payment.
46. The minimum payment on a Pay Option ARM usually is less than the interest accruing on the loan. The unpaid interest is added to the principal amount of the loan, resulting in negative amortization. The minimum payment remains the same for one year and then increases by 7.5% each year for the next four years. At the fifth year, the payment will be “recast” to be fully amortizing, causing a substantial jump in the payment amount often called “payment shock.”
47. However, the loan balance on a Pay Option ARM also has a negative amortization cap, typically 115% of the original principal of the loan. If the balance hits the cap, the monthly payment is immediately raised to the fully amortizing level (i.e., all payments after the date the cap is reached must be sufficient to pay off the new balance over the remaining life of the loan). When that happens, the borrower experiences significant payment shock. A borrower with a Countrywide Pay Option ARM with a 1% teaser rate, who is making the minimum payment, is very likely to hit the negative amortization cap and suffer payment shock well before the standard 5-year recast date.
48. Instead of making the minimum payment, the borrower has the option of making an interest-only payment for five years. The borrower then experiences payment shock when the payment recasts to cover both principal and interest for the remaining term of the loan. Alternatively, the borrower can choose to make a fully amortizing principal and interest payment based on either a 15-year or a 30-year term.
49. The ever-increasing monthly payments and payment shock characteristic of Pay Option ARMs are illustrated by the following example of a Countrywide loan. The loan had an initial principal balance of $460,000.00, a teaser rate of 1%, and a margin of 2.9% (such that after the one-month teaser rate expired, the interest would be the 1-month LIBOR index plus 2.9%, rounded to the nearest 1/8th percent). After the teaser rate expired, based on the 1-month LIBOR rate as of the date the borrower obtained the loan, the interest rate would increase to 7.00%. Assuming the 7.00% interest rate remained in place, and the borrower chose to make the minimum payment for as long as possible, the payment schedule would be approximately as follows:
a. $1,479.54 per month for the first year;
b. $1,590.51 per month for the second year;
c. $1,709.80 per month for the third year;
d. $1,838.04 per month for the fourth year;
e. $1,975.89 per month for the first nine months of the fifth year; and
f. approximately $3747.83 per month for the remaining twenty-five years
and three months on the loan.
50. Once the payments reach $3747.83, this Pay Option ARM will have negatively amortized such that the balance of the loan will have increased to approximately $523,792.33. At that point, the borrower will be faced with a payment more than two-and-a-half times greater than the initial payment and likely will be unable to refinance unless his or her home has increased in value at least commensurately with the increased loan balance. In addition, increases in the LIBOR rate could cause the borrower to hit the negative amortization cap earlier, and also could result in even higher payments. If the interest rate reached 8%, just 1% higher, the negative amortization cap would be reached sooner and payments could reach $4,000.00 per month, or higher.
51. During the underwriting process, Countrywide did not consider whether borrowers would be able to afford such payment shock. Further, depending on the state of the his or her finances, even the interim increases in the minimum payment may well have caused dramatic hardship for the borrower.
52. Even if the borrower elects to make interest-only payments, he or she still will experience payment shock. Again assuming the interest rate stays constant at 7.00% over the life of the loan, the borrower’s initial payments would be approximately $2,683.33 for five years. Thereafter, the payment will increase to approximately $3,251.18 per month, an increase of over 20%.
53. Nearly all Countrywide’s Pay Option ARM borrowers will experience payment shock such as that illustrated in paragraphs 49 through 52 above. As of December 31, 2006, almost 88% of the Pay Option ARM portfolio held by Defendants consisted of loans that had experienced some negative amortization. This percentage increased to 91% as of December 31, 2007.
54. Countrywide sold thousands of Pay Option ARMs, either through its branches or through brokers. For example, on a national basis, approximately 19% of the loans originated by Countrywide in 2005 were Pay Option ARMs. Countrywide made many of these loans in California.
55. These loans were highly profitable. Countrywide had a gross profit margin of approximately 4% on Pay Option ARMs, compared to 2% on mortgages guaranteed by the Federal Housing Administration.
56. Countrywide retained ownership of a number of loans for investment purposes, including thousands of Pay Option ARMs. Countrywide reported the negative amortization amounts on these Pay Option ARMs (i.e., the amount by which the balances on those loans increased) as income on its financial statements. The negative amortization “income” earned by Countrywide totaled 1.2 billion dollars by the end of 2007.
57. Moreover, Pay Option ARMs with higher margins could be sold for a higher premium on the secondary market, because the higher margins would produce a greater interest rate and therefore a larger income stream. To insure an abundant stream of such loans, Countrywide pushed its loan officers to sell Pay Option ARMs and paid loan brokers greater compensation for selling a Pay Option ARM with a higher margin, or above-par rate, thus encouraging them to put consumers into higher cost loans. Countrywide also used a variety of deceptive marketing techniques to sell its Pay Option ARMs to consumers.
58. Countrywide deceptively marketed the Pay Option ARM by aggressively promoting the teaser rate. Television commercials emphasized that the payment rate could be as low as 1% and print advertisements lauded the extra cash available to borrowers because of the low minimum payment on the loan. Television advertisements did not effectively distinguish between the “payment rate” and the interest rate on the loans, and any warnings about potential negative amortization in Countrywide’s print advertisements were buried in densely written small type.
59. Borrowers, enticed by the low teaser rate, were easily distracted from the fine print in the loan documents and did not fully understand the terms or the financial implications of Countrywide’s Pay Option ARMs.
60. When a borrower obtained a Pay Option ARM from Countrywide, the only initial monthly payment amount that appeared anywhere in his or her loan documents was the minimum payment amount. In other words, documents provided to the borrower assumed he or she would make only the minimum payment. Thus, a borrower would not know the monthly payment necessary to make a payment that would, for example, cover accruing interest, until he or she received the first statement after the expiration of the teaser rate, well after all loan documents were signed.
61. Countrywide and the brokers it accepted as its “business partners” misrepresented or obfuscated the true terms of the Pay Option ARMs offered by Countrywide, including but not limited to misrepresenting or obfuscating the amount of time that the interest rate would be fixed for the loan, misrepresenting or obfuscating the risk of negative amortization and the fact that the
payment rate was not the interest rate, and misrepresenting or obfuscating that the minimum payment would not apply for the life of the loan.
62. Countrywide and its business partner brokers also misrepresented or obfuscated how difficult it might be for borrowers to refinance a Pay Option ARM loan. In fact, after making only the minimum payment, because of negative amortization the borrower likely would not be able to refinance a Pay Option ARM loan unless the home serving as security for the mortgage had increased in value. This is particularly true in cases for borrowers whose loans have a very high loan-to-value ratio.
63. Countrywide and its business partner brokers often misrepresented or obfuscated the fact that a particular Pay Option ARM included a prepayment penalty and failed to explain the effect that making only the minimum payment would have on the amount of the prepayment penalty. If a borrower seeks to refinance after having made the minimum payment for an extended period, but while a prepayment penalty is still in effect, the negative amortization can cause the amount of the prepayment penalty to increase. Prepayment penalties typically equal six
months worth of accrued interest. As negative amortization causes the loan principal to increase, it also causes an increase in the amount of interest that accrues that each month, thereby increasing the prepayment penalty.
64. Countrywide and its business partner brokers also represented that the prepayment penalty could be waived if the borrower refinanced with Countrywide. However, Countrywide sells most of the loans it originates, and Countrywide has at most limited authority to waive prepayment penalties on loans it does not own, even when it controls the servicing (and is often required to pay the prepayment penalties on loans it does not own in the instances where it is not able to collect the penalty from the borrower).
B. Hybrid ARM Loans
65. In addition to the Pay Option ARMs, Countrywide offered “Hybrid” ARM loans. Hybrid ARMs have a fixed interest rate for a period of 2, 3, 5, 7, or 10 years, and then an adjustable interest rate for the remaining loan term. The products described below were offered with the approval, direction and ratification of Defendants Sambol and Mozilo.
(1) 2/28 and 3/27 ARMs
6. Countrywide typically offered “2/28” Hybrid ARMs through its Full Spectrum Lending Division. These 2/28 ARM loans have low, fixed interest rates for the first two years (the “2” in “2/28”). The loans often only required interest-only payments during the period the initial rate was in effect, or sometimes for the first five years of the loan.
67. After the initial rate expires, the interest rate can adjust once every six months for the next 28 years (the “28” in “2/28”). During this period, the interest rate typically is determined by adding a margin to the one-year LIBOR index, except that the amount the interest rate can increase at one time may be limited to 1.5%. Because the initial rate is set independent of the index, the payment increase can be dramatic, particularly if the loan called for interest-only payments for the first two or five years.
68. Countrywide also offered “3/27” ARMs, which operate similarly to 2/28 ARMs, except that the low initial rate is fixed for three rather than two years, and the interest rate then adjusts for 27 rather than 28 years.
69. Countrywide underwrote 2/28 and 3/27 ARMs based on the payment required while the initial rate was in effect, without regard to whether the borrower could afford the loan thereafter. And, like Pay Option ARMs, Countrywide’s 2/28 and 3/27 ARMs typically contain prepayment penalties.
70. A borrower with a 2/28 ARM, like a borrower with a Pay Option ARM, is subjected to steadily increasing monthly payments as well as payment shock. For example, a Countrywide borrower obtained a 2/28 ARM for $570,000, with an initial rate of 8.95% for the first two years. Thereafter, the interest rate was to be calculated by adding a margin of 7.95% to the six-month LIBOR index. The promissory note for this 2/28 ARM provides that the interest rate can never be lower 8.95% and can go as high as 15.95%. Based on the LIBOR rate that applied at the time the borrower received the loan and the terms of the note governing interest rate (and therefore payment) increases, the anticipated payment schedule was:
a. $4,565.86 per month for two years;
b. $5,141.98 per month for six months;
c. $5,765.48 per month for six months; and
d. payments of $6,403.01 per month or more thereafter.
71. This borrower’s monthly payments on this 2/28 ARM will thus increase by approximately 40% just during the 12 months between the end of the second year and beginning of the fourth year of the loan.
(2) 5/1, 7/1, and 10/1 ARMs
72. Countrywide also offered 5/1, 7/1, and 10/1 “interest-only” loans. Marketed as having “fixed” or “fixed period” interest rates, these loans carried a fixed interest rate for the first
5, 7, or 10 years respectively. These loans were underwritten based on the initial fixed, interest only payment until at least the end of 2005. However, when the fixed rate period expires, the interest rate adjusts once per year and is determined by adding a margin to an index. The monthly payments dramatically increase after the interest-only period, because payments over the remaining 25, 23, or 20 years are fully amortized to cover both principal and interest.
73. For example, if a borrower had a 5/1 loan for $500,000 that remained constant at 7.5% for the life of the loan, the monthly payments during the five year interest-only period would be $3,125.00. The monthly payment would increase to approximately $3,694.96 for the remaining 25 years of the loan. If the interest rate increased to 8% over the remaining 25 years, the payment would jump to $3,859.08 per month.
74. Collectively, 2/28, 3/27, 5/1, 7/1, and 10/1 ARMs will be referred to herein as “Hybrid ARMs.”
(3) Countrywide’s Deceptive Marketing of its Hybrid ARMs
75. Countrywide marketed Hybrid ARMs by emphasizing the low monthly payment and low “fixed” initial interest rate. Countrywide and its business partner brokers misrepresented or obfuscated the true terms of these loans, including but not limited to misrepresenting or obfuscating the amount of time that the fixed rate would be in effect, misrepresenting or obfuscating the fact that the interest rates on the loans are adjustable rather than fixed, and obfuscating or misrepresenting the amount by which payments could increase once the initial fixed rate expired.
76. Countrywide and its business partner brokers also often misrepresented or obfuscated the fact that Hybrid ARMs, particularly 2/28 and 3/27 ARMs, included prepayment penalties, or represented that the prepayment penalties could be waived when the borrowers refinanced with Countrywide. However, most loans originated by Countrywide are sold on the secondary market and, as described in paragraph 64, above, Countrywide generally cannot waive the terms of loans it does not own, even when it controls the servicing.
77. Countrywide and its brokers also misrepresented or obfuscated how difficult it might be for borrowers to refinance Hybrid ARMs. Although borrowers often were assured that they would be able to refinance, those seeking to refinance Hybrid ARMs after the expiration of the initial interest-only period likely would be able to do so unless the home serving as security for the mortgage had maintained or increased its value. This was particularly true for borrowers whose loans have very high loan-to-value ratios, as there would be no new equity in the borrowers’ homes to help them pay fees and costs associated with the refinances (as well as any prepayment penalties that may still apply).
C. Home Equity Lines of Credit
78. Countrywide also aggressively marketed HELOCs, particularly to borrowers who had previously obtained or were in the process of obtaining a first mortgage loan from Countrywide. Defendants referred to such HELOCs as “piggies” or “piggyback loans,” and referred to simultaneously funded first loans and HELOCs as “combo loans.” The first loan typically covered 80% of the appraised value of the home securing the mortgage, while the HELOC covered any of the home’s remaining value up to (and sometimes exceeding) 20%. Thus, the HELOC and the first loan together often encumbered 100% or more of a home’s appraised value.
79. Under the terms of the piggyback HELOCs, borrowers received monthly bills for interest-only payments for the first five years of the loan term (which could be extended to ten years at Countrywide’s option), during which time they could also tap any unused amount of the equity line. This was called the “draw period.”
80. Because Countrywide offered HELOCs as piggybacks to Pay Option and Hybrid ARMs, 100% or more of a property’s appraised value could be encumbered with loans that required interest-only payments or allowed for negative amortization.
81. Countrywide typically urged borrowers to draw down the full line of credit when HELOCs initially funded. This allowed Countrywide to earn as much interest as possible on the HELOCs it kept in its portfolio, and helped generate the promised payment streams for HELOCs sold on the secondary market. For the borrower, however, drawing down the full line of credit at funding meant that there effectively was no “equity line” available during the draw period, as the borrower would be making interest-only payments for five years.
82. Upon the end of the draw period, the HELOC notes generally require borrowers to repay the principal and interest in fully amortizing payments over a fifteen year period. A fully drawn HELOC was therefore functionally a 20- or 25-year closed-end mortgage. However, Countrywide did not provide borrowers with any documents or other materials to help them calculate the principal and interest payments that would be due after the draw, or interest-only, period.
83. Countrywide HELOCs were underwritten not to the fully amortizing payment, but to the interest-only payments due during the draw period. Countrywide typically charged an early termination fee for HELOCs closed before three years, and sometimes would charge a monthly fee for HELOCs where the balance fell below a specified amount.
84. A borrower with an interest-only or a negatively amortizing loan faces even greater payment shock if he or she also has a fully drawn HELOC. For example, a borrower with fully drawn $100,000 HELOC at a 7.00% interest rate will have monthly interest-only payments of approximately $583.33. At the end of the draw period, the payment will increase to $898.83. This payment increase is in addition to whatever payment increase the borrower is experiencing on his or her first mortgage. This potential dual payment shock is typically obfuscated from or not explained to borrowers. Moreover, a borrower with a piggyback HELOC, particularly a borrower whose first mortgage negatively amortized or allowed interest-only payments, is even less likely to be able to refinance at the time of his or her payment shock unless his or her home has increased in value.

85. Driven by its push for market share, Countrywide did whatever it took to sell more loans, faster – including by easing its underwriting criteria and disregarding the minimal underwriting criteria it claimed to require. By easing and disregarding its underwriting criteria, Countrywide increased the risk that borrowers would lose their homes. Defendants Mozilo and Sambol actively pushed for easing Countrywide’s underwriting standards and documentation requirements, allowed the liberal granting of exceptions to those already eased standards and requirements, and received reports detailing the actual underwriting characteristics and performance of the loans Countrywide funded.
A. Countrywide’s Low- and No-Documentation Loans
86. Traditionally, lenders required borrowers seeking mortgage loans to document their income, for example by providing W-2s or tax returns, as well as assets. Countrywide, however, disregarded such documentation requirements with respect to its riskiest loan products and introduced a variety of reduced or no documentation loan programs that eased and quickened the loan origination process. The vast majority of the Hybrid ARMs and nearly all of the Pay Option ARMs originated by Countrywide were reduced or no documentation loans.
87. As an example of one of its widespread no documentation programs, Countrywide made Pay Option ARMs, Hybrid ARMs, and piggyback HELOCs, among other loans, pursuant to its “Stated Income Stated Assets,” or “SISA,” program. The borrower’s income and assets were stated but not verified. Employment was verbally confirmed and income was supposed to be roughly consistent with incomes earned in the type of job in which the borrower was employed. Reduced documentation loans, in turn, allowed borrowers to document their income through the provision of W-2 tax forms, bank statements, or verbal verification of employment.
88. These low- and no-documentation programs, such as SISA, enabled Countrywide to process loans more quickly and therefore to make more loans. Stated income loans also encouraged the overstating of income – loan brokers and officers either overstated the borrower’s income without his or her knowledge, or led the borrower into overstating his or her income without explaining the risk of default that the borrower would face with a loan he or she would not actually afford. According to a former Countrywide loan officer, for example, a loan officer might say, “with your credit score of X, for this house, and to make X payment, X is the income you need to make.” Many borrowers responded by agreeing that they made X amount in income.
89. For stated income loans, it became standard practice for loan processors and underwriters to check http://www.salary.com to see if a stated income was within a reasonable range, with more tolerance on the upside for California salaries. Because loan officers knew about this practice, they too would look at salary.com to figure out the parameters ahead of time and know by how much they could overstate (or fabricate) income.
B. Countrywide’s Easing of Underwriting Standards
90. Countrywide also relaxed, and often disregarded, the traditional underwriting standards used to separate acceptable from unacceptable risk in order to produce more loans for the secondary market. Initially, for example, a borrower had to have a credit score of for a stated income loan. As the secondary market’s appetite for loans increased, Countrywide relaxed its guidelines so that a borrower with a credit score of could get a stated income loan with 100% financing.
91. Underwriting standards which Countrywide relaxed included qualifying interest rates (the rate used to determine whether borrowers can afford loans), loan-to-value ratios (the amount of the loan(s) compared to lower of the appraised value or sale price of the property), and debt-to-income ratios (the amount of borrowers’ monthly income compared to their monthly indebtedness).
92. With respect to qualifying rates, while Countrywide offered loans with initial low payments that would increase, loans were underwritten without regard to borrowers’ long-term financial circumstances. Until at least the end of 2005, Countrywide underwrote and approved its Hybrid ARMs based on the fixed interest rate applicable during the initial period of the loan, without taking into account whether the borrowers would be able to afford the dramatically higher payments that would inevitably be required during the remaining term of the loan.
93. In addition, Countrywide’s approach to underwriting and marketing Pay Option ARMs diverged. Countrywide underwrote Pay Option ARMs based on the assumption that borrowers would not make the minimum payment and therefore not experience negative amortization. In contrast, Countrywide marketed Pay Option ARMs by emphasizing the minimum payments. Countrywide continued this underwriting practice even though it knew that many of its Pay Option ARM borrowers would choose to make only the minimum monthly payment and that a high percentage of such borrowers had experienced negative amortization on their homes, as described in paragraph 53, above.
94. Countrywide also underwrote and approved HELOCs based on the borrower’s ability to afford the interest-only payments during the initial period of the loan, not based on the borrower’s ability to afford the subsequent, fully amortized principal and interest payments.
95. Countrywide eased other basic underwriting standards. Starting in 2003, as Defendants pushed to expand market share, underwriting standards and verification requirements became more flexible to enable underwriters to approve loans faster. Countrywide, for example, allowed higher and higher loan-to-value (“LTV”) and combined loan-to-value (“CLTV”) ratios –the higher the ratio, the greater the risk that a borrower will default and will be unable to refinance in order to avoid default. Similarly, Countrywide approved loans with higher and higher debt-to-income (“DTI”) ratios – the higher ratio, the greater the risk the borrower will have cash-flow problems and miss mortgage payments.
C. Countrywide’s “Exception” Underwriting Compromised Standards
96. Countrywide approved loans that it knew to be high risk, and therefore highly likely to end up in default, by ignoring its own minimal underwriting guidelines. Based on the proposed loan terms and the borrower’s financial and credit information, Countrywide’s computerized underwriting system (“CLUES”) issued a loan analysis report that rated the consumer’s credit and ability to repay the loan, and also indicated whether a proposed loan was in compliance with Countrywide’s underwriting guidelines. Based on this analysis, the CLUES report would recommend that the loan be approved, the loan be declined, or that the loan be “referred” to manual underwriting. CLUES, for example, might flag a “rule violation” if the borrower’s LTV, CLTV or credit score fell outside the guidelines for a given loan product. In such instances, CLUES would make a recommendation to “refer” the loan for further analysis by
a Countrywide underwriter.
97. The CLUES result was only a recommendation, not a final decision. The role of the underwriter was basically to verify information and ultimately decide whether to approve a loan based on Countrywide’s underwriting criteria. Underwriters could overcome potential rule violations or other underwriting issues flagged by CLUES by adding on “compensating factors,” such as letters from the borrower that addressed a low FICO score or provided explanations regarding a bankruptcy, judgment lien, or other issues affecting credit status.
98. Underwriters were under intense pressure to process and fund as many loans as possible. They were expected to process 60 to 70 loans per day, making careful consideration of borrowers’ financial circumstances and the suitability of the loan product for them nearly impossible.
99. As the pressure to produce loans increased, underwriters, their superiors, branch managers, and regional vice presidents were given the authority to grant exceptions to Countrywide’s minimal underwriting standards and to change the terms of a loan suggested by CLUES. Even if CLUES had recommended denying a loan, the underwriter could override that denial if he or she obtained approval from his or her supervisor.
100. Because of the intense pressure to produce loans, underwriters increasingly had to justify why they were not approving a loan or granting an exception for unmet underwriting criteria to their supervisors, as well as to dissatisfied loan officers and branch managers who earned commissions based on loan volume. Any number of Countrywide managerial employees could override an underwriter’s decision to decline a loan and request an exception to an underwriting standard. Countrywide employees also could submit a request for an exception to Countrywide’s Structured Loan Desk in Plano, Texas, a department specifically set up by Countrywide, at the direction of Defendants Mozilo and Sambol, to grant underwriting exceptions. According to a former employee, in 2006, 15,000 to 20,000 loans a month were processed through the Structured Loan Desk.
101. Countrywide granted exceptions liberally, further diluting its already minimal underwriting standards for making loans. Countrywide granted exception requests in a variety of circumstances where one or more basic underwriting criteria of the borrower did not meet loan product guidelines, including, for example, LTV or CLTV, loan amount and credit score. Countrywide placed borrowers in risky loans such as Hybrid and Pay Option ARMs, based on stated but not verified income and assets, and then overlooked its few remaining underwriting indicia of risk.
102. To attract more business Countrywide promoted its relaxed underwriting standards and ready grant of exceptions to brokers. For example, Countrywide promoted “Unsurpassed Product Choices and Flexible Guidelines,” including (a) “100% financing for purchase or refinancing” loans; (b) “80/20 combo loans for stated Self-Employed and Non Self- Employed;” (c) “Stated Self-Employed and Non Self-Employed loan programs with as low as a 500 credit score.” Countrywide stated that its “Specialty Lending Group’s experienced and knowledgeable loan experts are empowered to review all loan packages, make sound credit decisions and provide quality lending solutions – yes, even for ‘hard to close’ loans.”
D. Countrywide’s Risk-Layering and Pressure to Sell “Piggyback” Loans
Further Loosened Underwriting Practices

103. Countrywide compromised its underwriting standards even further by risk layering, i.e., combining high risk loans with one or more relaxed underwriting standards. Countrywide was well aware that layered risk created a greater likelihood that borrowers would lose their homes.
104. As early as January 2005, Countrywide identified the following borrower/loan characteristics as having a negative impact on the underwriting evaluation process: [Redacted description of risk factors identified by Countrywide.]
105. Nonetheless, Countrywide combined these very risk factors in the loans it promoted to borrowers. Countrywide introduced, for example, loan programs that allowed for higher LTVs/CLTVs, less documentation and lower credit scores. A high risk loan such as a Pay Option ARM could be sold to borrowers with increasingly lower credit scores. In addition, by accepting higher DTI ratios and combining Pay Option ARMs with second mortgages that allowed borrowers to finance a down payment, Countrywide would qualify borrowers with fewer financial resources, and hence a higher likelihood of default.
106. With a second or “piggyback” mortgage, the borrower could get a first loan for 80% of the purchase price (i.e., an 80% LTV) and a second loan for 20% of the purchase price (a 20% LTV), for a combined loan-to-value ratio of 100%. This allowed the borrower to finance a down payment and also avoid paying mortgage insurance (which typically is required if the LTV
on a first loan exceeds 80%). Such loans obviously were risky as the borrower had contributed no funds whatsoever to the loan and, if the loan required no documentation, had only stated his or her income and assets.
107. The following examples describe risk layering and underwriting exceptions granted to several California borrowers to whom Countrywide sold Hybrid or Pay Option ARMs. These examples represent only a small percentage of the large number of California residents who are likely facing foreclosure due to Countrywide’s widespread practice of risk-layering.
a. Countrywide loan officer convinced a borrower to take a Pay Option ARM with a 1-month teaser rate and a 3-year prepayment penalty, plus a full-draw piggyback HELOC, based on the loan officer’s representation that the value of the borrower’s home would continue to rise and he would have no problem refinancing. The borrower’s DTI was % and FICO was . An exception was granted for . The loan closed in January 2006, and a Notice of Default issued in June 2007. [Redacted example of underwriting exception approved by Countrywide.]
b. The CLUES report issued for a loan applicant in February 2005 stated that [Redacted example of underwriting exception approved by Countrywide.]
c. [Redacted example of underwriting exception approved by Countrywide.]

108. Driven by its push for market share, Countrywide did whatever it took to sell more loans, faster – including by engaging in a number of deceptive marketing practices under the direction and with the ratification of Defendants Mozilo and Sambol.
A. Countrywide Deceptively Lulled Borrowers Into Believing That it Was a
“Trusted Advisor” Looking Out for the Borrowers’ Best Interests

109. Countrywide sought to induce borrowers into believing that it was looking out for their best interest through various types of solicitations. Countrywide published television, radio, and print advertisements, for example, touting itself as “the company you can trust” and urging consumers to “join the millions of homeowners who have trusted Countrywide.” Countrywide capitalized on its status as the “number one mortgage lender” and claimed that it was a mortgage loan expert capable of advising customers. For example, Countrywide claimed that it “had years to perfect [its] craft” and offered “industry leading expertise” and that “[w]ith over 35 years of service and one of the widest selections of loan programs, [it] is an expert at finding solutions for all kinds of situations.” As another example, Countrywide offered “consultation[s] with our home loan experts” and claimed it “would go the distance with you to help secure a loan program to fit your financial needs and goals.”
110. Countrywide also engaged in extensive solicitation campaigns aimed at those borrowers it was easiest for it to find — existing Countrywide customers. Countrywide targeted existing customers with tailored letters and e-mail solicitations, creating the impression that it was a mortgage expert that advised its borrowers, at no cost, regarding the financial mortgage options that were in their best interest. For example, Countrywide took advantage of Pay Option ARM customers’ worries regarding potential future “steep payment adjustments,” by sending them a “special invitation” to talk with “specially-trained consultants” regarding “your current financial situation, at no charge, to see if refinancing may help put you in a better financial position.”
111. Countrywide also created an annual “anniversary” campaign, by sending letters and e-mails to existing customers offering a “free Anniversary Loan Review,” which it touted as a “home loan analysis” with an “experienced Loan Consultant.” Countrywide advertised itself in
these solicitations as, for example, an “expert at finding solutions” and “smart financial options” that would best suit borrowers’ financial needs.
112. Countrywide operated an extensive telemarketing operation, aimed both at new potential customers and existing Countrywide customers, in which it touted its expertise and claimed to find the best financial options for its customers. For example, Countrywide instructed its Full Spectrum loan officers to memorize a script that instructed them to “build rapport” and “gain trust” in conversations with potential customers, and to do so with existing customers by “positioning” telephone calls, the true purpose of which was to sell refinance loans, as a Customer Service loan check-up[s].” On these calls, loan officers were instructed to . [Redacted description of marketing training for loan officers.] Countrywide instructed FSLD loan officers to state, for example, “I’m an experienced mortgage lending professional specializing in helping people improve their financial situation.” Countrywide even instructed loan officers to offer to provide advice on other lender’s mortgage loans and to tell potential customers, that “even if you’re working with someone else and just want a second opinion – mortgages can be very complicated. I’m here for that.”
113. In addition, when handling initial calls from prospective customers, for example, Countrywide instructed its FSLD loan officers to . [Redacted description of marketing training for loan officers.] Contrary to the kinds of representations described in this paragraph and paragraphs 109 through 112, above, Countrywide often did not sell borrowers loans that were in their best interest.
B. Countrywide Encouraged Serial Refinancing
114. In order to constantly produce more loans for sale to the secondary market, Countrywide aggressively marketed refinance loans to those homeowners it had no trouble finding — Countrywide customers. Countrywide misled these borrowers regarding the benefits of
refinancing, including by using the deceptive marketing practices described in paragraphs 119 through 128 below. In addition, Countrywide created a perpetual market for its refinance loans by selling Pay Option and Hybrid ARMs that borrowers would have to refinance in order to avoid payment shock. Countrywide knew that borrowers who could not afford the inevitable payment increase on such loans and who were unable to refinance would be at great risk of losing their homes.
115. Countrywide provided lists of existing customers to its loan officers responsible for outbound marketing. Defendants’ loan officers hounded Countrywide customers by phone, mail, and electronic mail with refinance loan offers. For example, [Redacted description of Countrywide’s marketing plans for soliciting existing Countrywide customers to refinance.] FSLD “leads” – telephone numbers for existing, eligible customers – were uploaded into a telemarketing database on a weekly basis.
116. Countrywide even solicited customers who were having trouble making payments or facing foreclosure, without regard to the risk that the customer would default on Pay Option and Hybrid ARM refinance loans. FSLD solicited existing prime customers who had “recurring” missed payments. Countrywide required its customer service representatives to market refinance loans to borrowers who called with questions, including borrowers who were behind on their monthly payments or facing foreclosure.
117. Countrywide also solicited existing customers on other occasions, including on their annual loan “anniversaries” (see paragraph 111, above) and shortly before a rate or payment was to reset on Pay Option or Hybrid ARMs, without regard to whether the loan had a prepayment penalty period that had not yet expired. In doing so, the Countrywide Defendants refinanced borrowers while the prepayment penalty on their prior Countrywide loan was still in effect, often concealing the existence of the prepayment penalty.
118. Countrywide claims that approximately 60% of FSLD’s business has been comprised of refinancing Countrywide loans.
C. Countrywide Misled Borrowers About the True Terms of Pay Option and Hybrid ARM Loans by Focusing the Borrowers’ Attention on Low Beginning Payments and Teaser Rates

119. Because Pay Option ARM and Hybrid ARMs start with lower monthly payments and interest rates than most other types of loan products, and given their complex nature, Countrywide was able to easily sell such loans to borrowers by focusing on the initial low monthly payments and/or rates and by obscuring or misrepresenting the true risks of such loans.
120. With respect to Pay Option ARMs, the crux of Countrywide’s sales approach was to “sell the payment.” When presenting a borrower with various loan options, for example, Countrywide would “sell the payment” by showing the borrower the minimum monthly payments for the Pay Option ARM in comparison to other loan products with larger payments. Then, Countrywide would ask which payment the borrower preferred without discussing other differences between the loan products. Naturally, in this situation, most borrowers chose the option with the lowest payment, the Pay Option ARM, without realizing that the payment would
last for only a short time before it would begin to increase.
121. If, instead, Countrywide presented the Pay Option ARM as the only option, it would “sell the payment” by emphasizing the low minimum payment and how much the borrower would “save” every month by making such a low payment, without discussing the payment shock and negative amortization that inevitably result when borrowers make minimum payments. Given the complexity of Pay Option ARMs, such a presentation easily misled borrowers regarding the long-term affordability of their loans.
122. Countrywide also represented that the initial monthly payment would last for the entire term of the loan, or for some period longer than that provided for by the loan’s terms.
123. Countrywide engaged in similar deceptive representations with respect to Hybrid
ARMs. For example, Countrywide focused its sales presentation on the interest-only payments during the initial fixed-rate period, i.e. the 2-year period on a 2/28 ARM or the 3-year period on a 3/27 ARM, not on how the payment would adjust to include both principal and interest after the initial fixed-rate period. It also represented that the payments would last for the entire term of the loan, or for some period longer than that provided for by the loan’s terms.
124. When selling Pay Option and Hybrid ARMs, Countrywide engaged in another deceptive practice – rather than selling the payment, it would sell the rate. Countrywide either focused exclusively on the initial one-month, two-year, or three-year “fixed” interest rate, for example, without discussing that the rate would reset after the initial period to a potentially much higher rate, or it represented that the initial interest rate would last for a much longer period than it actually did or for the entire term of the loan.
125. Countrywide’s letter and e-mail solicitations, as well as telemarketing calls, also focused borrowers’ attention on short-term low monthly payments. FSLD loan officers, for example, were required to memorize scripts that marketed low monthly payments by focusing (a) on the potential customer’s dissatisfaction with his or her current monthly payments under his or her current mortgage loan and/or (b) on so-called “savings” that result from minimum monthly payments. As just one of many potential examples, to overcome a borrower’s claim that he or she already has a loan with a low interest rate, Countrywide required FSLD loan officers to memorize the following response: “I certainly understand how important that is to you. But let me ask you something . . . . Which would you rather have, a long-term fixed payment, or a short term one that may allow you to realize several hundred dollars a month in savings? I am able to help many of my clients lower their monthly payments and it only takes a few minutes over the phone to get started.” What the FSLD loan officer did not state was that the borrowers would, in
fact, not save money because the payment on the new loan would ultimately exceed the payment on the borrower’s current loan.
126. Borrowers subjected to any of the deceptive marketing practices described above would not understand the true risks and likely unaffordability of their Pay Option or Hybrid ARMs. Many borrowers did not read their loan documents and disclosures before signing. Countrywide often made borrowers sign a large stack of documents without providing the borrower with time to read them. Other borrowers were unable to read English. And, given the
complexity of Pay Option and Hybrid ARMs, many borrowers who managed to read their loan documents did not understand the terms of the loans they were being sold.
127. As a result, many borrowers who obtained Pay Option and Hybrid ARMs did not understand that their initial monthly payment would at some point “explode,” that their initial interest rate would increase and become adjustable, or that the principal amount of their loans could actually increase. Countrywide received numerous complaints regarding these practices from consumers, including over complaints per year handled by the alone between approximately January 2005 and August 2007. Many borrowers complainted that they did not understand the terms of their Pay Option and Hybrid ARMs, including the potential magnitude of changes to their monthly payments, interest rates, or loan balances. Many borrowers also complained that Countrywide’s loan officers either did not tell them about the payment or rate increases on such loans or promised that they would have fixed-rate, fixed payment loans, rather than adjustable rate mortgage loans with increasing payments.
128. Despite these complaints, Defendants did not alter their deceptive marketing practices and did not address the hardship created by their practice of making Pay Option and Hybrid ARMs with little or no regard to affordability. Defendants cared only about doing whatever it took to sell increasing numbers of loans.
D. Countrywide Misled Borrowers About their Ability to Refinance Before The
Rates or Payments on Their Pay Option and Hybrid ARMs Increased

129. If a borrower was able to figure out that he or she had obtained a Pay Option or Hybrid ARM before signing the loan documents, he or she may still have been misled by Countrywide in another way – Countrywide’s loan officers often overcame borrower concerns about exploding monthly payments or increasing interest rates by promising that they would be able to refinance with Countrywide into a loan with more affordable terms before the payments or rate reset.
130. Countrywide often represented that the value of a borrower’s home would increase, thus creating enough equity to obtain a loan with better terms. However, borrowers with interest-only or negatively amortizing loans that encumbered as much as, if not more than, 100% of their home’s appraised value, were highly unlikely to be able to refinance into another loan if their home did not increase in value. Additionally, any consumers who sought to refinance a Countrywide mortgage would likely incur a substantial prepayment penalty, thus limiting their ability to obtain a more favorable loan.
131. Countrywide loan officers often misrepresented or obfuscated the fact that a borrower’s loan had a prepayment penalty or misrepresented that a prepayment penalty could be waived. Countrywide also promised borrowers that they would have no problem refinancing their Pay Option or Hybrid ARMs, when in fact they might have difficulty refinancing due to the existence of prepayment penalties. Prepayment penalties on Pay Option and Hybrid ARMs essentially prevent many borrowers from refinancing such unaffordable loans before their payments explode or rates reset.
132. Countrywide received numerous complaints from borrowers who claimed that they had not been told about the prepayment penalty or that the loan officer promised they would not have one. Again, despite receiving such complaints, Defendants turned a blind eye to deceptive marketing practices regarding prepayment penalties and the resulting adverse financial consequences to borrowers.

E. Countrywide Misled Borrowers About the Cost of Reduced and No Document Loans

133. Countrywide touted its low documentation requirements, urging borrowers to get “fastrack” loans so that they could get cash more quickly. However, many borrowers who obtained these loans possessed sufficient documentation to qualify for full document mortgages, and some submitted that documentation to their loan officer or to one of Countrywide’s business partner brokers. In emphasizing the ease, speed and availability of reduced or no document loans, Countrywide and its brokers concealed the fact that borrowers could qualify for a lower rate or reduced fees if they elected to apply for a mortgage by fully documenting their income and assets.
F. Countrywide Misled Borrowers Regarding the Terms of HELOCs
134. Countrywide misrepresented the terms of HELOCs, including without limitation by failing to inform the borrower that he or she would not have access to additional credit because he or she was receiving a full draw or that the monthly payment on the HELOC was interest-only and the borrower therefore would not be able to draw additional funds on the HELOC at a later date.
135. Countrywide also misrepresented or obfuscated the payment shock that borrowers would experience after the interest-only payment period on the HELOCs ended. Countrywide’s Call Center received large numbers of calls from borrowers complaining that they did not understand that the payments on their full-draw HELOCs would only cover interest, or that the interest rates on their HELOCs would adjust and increase.


136. Despite touting itself as a lender that cared about its borrowers, Countrywide was, in essence, a mass production loan factory set up to produce an ever-increasing stream of loans without regard to borrowers’ ability to repay their loans and sustain homeownership. In order to provide an endless supply of loans for sale to the secondary market, Defendants pressured Countywide employees involved in the sale and processing of loans to produce as many loans as possible, as quickly as possible, and at the highest prices.
137. Defendants created this pressure through a compensation system, which predictably led employees to disregard Countrywide’s minimal underwriting guidelines and to originate loans without regard to their sustainability. Countrywide’s compensation system also motivated its loan officers to engage in the deceptive marketing practices described in the preceding sections.
138. Defendants incentivized managers to place intense pressure on the employees they supervised to sell as many loans as possible, as quickly as possible, at the highest prices possible. Branch managers received commissions or bonuses based on the net profits and loan volume generated by their branches. In most circumstances, however, branch managers were eligible for such commissions or bonuses only if . [Redacted descriptions regarding minimum requirements for commission or bonus eligibility.] Branch managers were also rewarded for meeting production goals set by corporate management, – or penalized for failing to do so. [Redacted description of the criteria Countrywide used to adjust branch managers’ commissions or bonuses.]
139. Countrywide provided branch managers with access to computer applications and databases that allowed them to monitor loan sales on a daily basis and pressure employees to “sell, sell, sell.” A branch manager could input the type of loan (such as a Pay Option ARM), and determine what price a borrower would pay for that loan, as well as the amount of profit the loan would likely generate for the branch. Branch managers could also monitor their branches’ loan sales performance by tracking loans that were in the process of being underwritten and the prices and characteristics of loans sold by the branch and by particular loan officers, during any specified time period.
140. With such tools available, Countrywide’s branch managers were able to constantly pressure loan officers, loan processors, and underwriters to do their part in increasing loan production – by hunting down more borrowers, selling more loans, and processing loans as quickly as possible, thereby boosting loan production, branch profits, and branch manager commissions and bonuses. This high-pressure sales environment invited deceptive sales practices and created incentives for retail branch managers, other managers, loan officers, loan specialists, and underwriters to jam loans through underwriting without regard to borrower ability to repay.
141. Countrywide created additional pressure to engage in deceptive marketing practices and sell loans without regard to their sustainability by paying its loan officers and managers a modest base salary that could be supplemented by commissions or bonuses. In most circumstances, the employees were eligible to receive these commissions or bonuses only if they, or the employees they supervised, sold a minimum number or dollar volume of loans.
142. Not only did this compensation system create incentives for employees to sell as many loans as possible, as quickly as possible, it also created incentives for retail employees to steer borrowers into riskier loans. For example, Countrywide paid greater commissions and bonuses to CMD managers and loan officers for selling . [Redacted description of loan products.] Countrywide also paid greater commissions and bonuses to FSLD managers and loan officers for [Redacted description of loan products.]
143. Countrywide’s compensation system also created incentives for wholesale loan officers to steer brokers and their clients into riskier loans. Countrywide’s wholesale loan officers worked one-on-one with “business partner” brokers approved by Countrywide. The loan officers cultivated relationships with brokers in order to persuade them to bring their business to Countrywide and, in particular, to work with a particular loan officer so that he or she, and his or her managers, could earn greater commissions. [Redacted description of compensation paid by Countrywide for the sale of particular loan products.]
144. Countrywide’s compensation system also rewarded employees for selling . [Redacted description of compensation paid by Countrywide for the sale of particular loan products.]
145. Countrywide’s high-pressure sales environment and compensation system encouraged serial refinancing of Countrywide loans. The retail compensation systems created incentives for loan officers to churn the loans of borrowers to whom they had previously sold loans, without regard to a borrower’s ability to repay, and with the consequence of draining equity from borrowers’ homes. Although Countrywide maintained a policy that discouraged loan officers from refinancing Countrywide loans within a short time period after the original loan funded (Countrywide often changed this time period, which was as low as months for some loan products), loan officers boosted their loan sales by targeting the easiest group of potential borrowers to locate – Countrywide borrowers – as soon as that period expired.
146. Countrywide management at all levels pressured the employees below them to sell and approve more loans, at the highest prices, as quickly as possible, in order to maximize Countrywide’s profits on the secondary market. Defendant Sambol, for example, monitored Countrywide’s loan production numbers and pressured employees involved in selling loans or supervising them to produce an ever-increasing numbers of loans, faster. Regional vice presidents pressured branch managers to increase their branches’ loan numbers. Branch managers pressured loan officers to produce more loans, faster, and often set their own branch level production quotas.
147. Underwriters were also pressured to approve greater numbers of loans quickly and to overlook underwriting guidelines while doing so. Defendant Sambol pressured underwriters to increase their loan production and to increase approval rates by relaxing underwriting criteria. Regional operations vice presidents, branch operations managers, branch managers, and loan officers all pressured underwriters to rush loan approvals. Countrywide required underwriters to meet loan processing quotas and paid bonuses to underwriters who exceeded them.
148. Customer service representatives at Countrywide’s Call Center also were expected to achieve quotas and received bonuses for exceeding them. Countrywide required service representatives to complete calls in three minutes or less, and to complete as many as sixty-five to eighty-five calls per day. Although three minutes is not sufficient time to assist the confused or distressed borrowers who contacted them, Countrywide required service representatives to market refinance loans or piggyback HELOCs to borrowers who called with questions — including borrowers who were behind on their monthly payments or facing foreclosure. Using a script, the service representatives were required to pitch the loan and transfer the caller to the appropriate Countrywide division. Service representatives also received bonuses for loans that were so referred and funded.
149. Countrywide employees from senior management down to branch managers pressured the employees below them to sell certain kinds of products. Regional vice presidents, area managers, and branch managers pushed loan officers to sell Pay Option ARMs, piggyback HELOCs, and loans with prepayment penalties, primarily because such loans boosted branch profits, manager commissions, and Countrywide’s profits on the secondary market.
150. If any of these employees, including branch managers, loan officers, loan processors, underwriters, and customer service representatives, failed to produce the numbers expected, Countrywide terminated their employment.

151. In California, a mortgage broker owes his or her client a fiduciary duty. A mortgage broker is customarily retained by a borrower to act as the borrower’s agent in negotiating an acceptable loan. All persons engaged in this business in California are required to obtain real estate licenses and to comply with statutory requirements. Among other things, the mortgage broker has an obligation to make a full and accurate disclosure of the terms of a loan to borrowers, particularly those that might affect the borrower’s decision, and to act always in the utmost good faith toward the borrower and to refrain from obtaining any advantage over the borrower.
152. Countrywide paid brokers compensation in the form of yield spread premiums or rebates to induce brokers to place borrowers in loans that would earn Countrywide the greatest profit on the secondary market, regardless of whether the loans were in the best interest of, or appropriate for, the borrowers. In fact, the mortgages that earned Countrywide the highest profit, and therefore would pay the highest rebates or yield spread premiums to brokers, often were not in the best interest of the borrower.
153. For example, Countrywide paid a yield spread premium to brokers if a loan was made at a higher interest rate than the rate for which the borrower qualified and without regard for the services actually provided by the broker. Countrywide paid a rebate to a broker if he or she originated or negotiated a loan that included a prepayment penalty. A three-year prepayment penalty resulted in a higher rebate to the broker than a one-year prepayment penalty. Countrywide would pay this higher rebate even in instances where the loan did not include a provision, such as a more favorable origination fee or interest rate, to counterbalance the prepayment penalty, and where brokers did not perform any additional services in connection with the loan.
154. Countrywide also would pay rebates in exchange for a broker providing an adjustable rate loan with a high margin (the amount added to the index to determine the interest rate). Countrywide would provide an additional rebate to brokers if they were able to induce a borrower to obtain a line of credit.
155. Countrywide accepted loans from brokers in which the broker earned up to points (i.e., percent of the amount of the loan), whether in origination fees, rebates, or yield spread premiums. This high level of compensation was well in excess of the industry norm and encouraged brokers to sell Countrywide loans without regard to whether the loans were in their clients’ best interest. In addition, the compensation paid by Countrywide to brokers was well in excess of, and not reasonably related to, the value of the brokerage services performed by Countrywide’s business partner brokers.
156. In order to maximize their compensation from Countrywide, brokers misled borrowers about the true terms of Pay Option and Hybrid ARMs, misled borrowers about their ability to refinance before the rates or payments on their loans increased, misled borrowers about the cost of reduced and no document loans, and misled borrowers regarding the terms of HELOCs by engaging in the same kinds of deceptive practices alleged at paragraphs 58 through 64, 75 through 77, 108 through 117, and 119 through 135 above.
157. Borrowers often did not realize that their loans contained terms that were unfavorable to them and provided greater compensation to their brokers specifically as payment for those unfavorable terms. An origination fee or other charges imposed by a broker are either

paid by the borrower or financed as part of the loan. In contrast, rebates and yield spread premiums are not part of the principal of the loan and instead are paid separately by Countrywide to the broker. Documentation provided to the borrower might indicate, at most, that a yield spread premium or rebate was paid outside of closing (often delineated as “p.o.c.” or “ysp poc”), with no indication that the payment constituted compensation from Countrywide to the broker for placing the borrower in a loan with terms that were not in the borrower’s best interest, such as a higher interest rate or lengthier prepayment penalty.
158. Countrywide closely monitored and controlled the brokers with whom it worked. Countrywide required brokers it accepted as “business partners” to cooperate and provide all information, documents and reports it requested so that Countrywide could conduct a review of the broker and its operations. In addition, Countrywide required the broker to warrant and represent that all loans were closed using documents either prepared or expressly approved by Countrywide.

159. Due to Countrywide’s lack of meaningful underwriting guidelines and risk layering, Countrywide’s deceptive sales tactics, Countrywide’s high-pressure sales environment, and the complex nature of its Pay Option and Hybrid ARMs, a large number of Countrywide loans have ended in default and foreclosure, or are headed in that direction. Many of its borrowers have lost their homes, or are facing foreclosure, because they cannot afford the payment shock and their properties are too heavily encumbered for them to be able to refinance and pay prepayment penalties.
160. The national pace of foreclosures is skyrocketing. In the month of May 2008, approximately 20,000 Californians lost their homes to foreclosure, and approximately 72,000 California homes (roughly 1 out of 183 homes) were in default. This represented an 81% increase from May 2007, at which point the rate was roughly 1 out of every 308 households, while the May 2007 rate represented a 350% increase from May 2006.
161. Countrywide mortgages account for a large percentage of these delinquencies and foreclosures. Countrywide’s 10-K filed in February, 2008, estimated that as of December 31, 2007, a staggering 27.29% of its non-prime mortgages were delinquent. As of that date, approximately 26% of Countrywide’s loans were secured by properties located in California.
162. These numbers have only worsened. As of April, 2008, % of the mortgages owned by Countrywide Home Loans were in some stage of delinquency or foreclosure, including % of originated non-prime loans, and % of Pay Option ARMs.
163. In January and March, 2008, Countrywide recorded notices of default in Alameda, Fresno, Riverside, and San Diego counties alone. Those notices of default represented an aggregate total of delinquent principal and interest of more than dollars. An October 2007 report prepared by Credit Suisse estimated that Countrywide’s delinquency and foreclosure rates are likely to double over the next two years.
164. This may well understate the extent of the crisis facing California homeowners with Countrywide mortgages, as more and more Pay Option ARMs go into delinquency. Approximately 60% of all Pay Option ARMs (made by any lender) were made in California, and many of these were made by Countrywide. Once the thousands of Pay Option ARMs sold by Countrywide to California borrowers reach their negative amortization cap or otherwise reset to require fully indexed principal and interest payments, which will occur over the next two years for many such loans made between 2003 and 2006, the number of such loans in default is likely to skyrocket even above their current high delinquency rate.
165. The People reallege and incorporate by reference all paragraphs above, as though fully set forth in this cause of action.
166. Defendants have violated and continue to violate Business and Professions Code section 17500 by making or disseminating untrue or misleading statements, or by causing untrue or misleading statements to be made or disseminated, in or from California, with the intent to induce members of the public to enter into mortgage loan or home equity line of credit transactions secured by their primary residences. These untrue and misleading statements include but are not necessarily limited to:
a. Statements that Countrywide was a mortgage loan expert that could be
trusted to help borrowers obtain mortgage loans that were appropriate to their financial circumstances, as described in paragraphs 109 through 113, above;
b. Statements regarding the terms and payment obligations of Pay Option
ARMs offered by Countrywide, including statements that the initial payment rate was the interest rate, statements regarding the duration of the initial payment, statements regarding the duration of the initial interest rate, and statements obfuscating the risks associated with such mortgage loans, as described in paragraphs 58 through 64, 119 through 122, and 124 through 128, above;
c. Statements regarding the terms and payment obligations of Hybrid ARMs
offered by Countrywide, including statements regarding the duration of the initial interest-only payment, statements regarding the duration of the initial interest rate, and statements obfuscating the risks associated with such mortgage loans, as described in paragraphs 75 through 77, 119, and 123 through 128, above;
d. Statements regarding the terms and payment obligations of HELOCs, as described in paragraphs 134 through 135, above; and
e. Statements that borrowers with Pay Option and Hybrid ARMs offered by Countrywide would be able to refinance the mortgage loans before the interest rates reset, when in fact they most likely could not, as described in paragraphs 62, 76, 77, and 129 through 132, above;
f. Statements regarding prepayment penalties on Pay Option and Hybrid ARMs offered by Countrywide, including statements that the mortgage loans did not have prepayment penalties, when in fact they did, and statements that prepayment penalties could be waived, when in fact they could not, as described in paragraphs 63, 64, 76, and 131 through 132, above;
g. Statements regarding the costs of reduced or no documentation mortgage loans, as described in paragraph 133, above;
h. Statements regarding the benefits or advisability of refinancing mortgage loans with Pay Option and Hybrid ARMs offered by Countrywide, as described in paragraphs 110 through 118, above; and
i. Statements regarding the existence of prepayment penalties on mortgage loans being refinanced with Countrywide mortgage loans, as described in paragraph 117, above.
167. Defendants knew, or by the exercise of reasonable care should have known, that these statements were untrue or misleading at the time they were made.


168. The People reallege and incorporate by reference all paragraphs above, as through fully set forth in this cause of action.
169. Defendants have engaged in, and continue to engage in, acts or practices that constitute unfair competition, as that term is defined in Section 17200 of the Business and Professions Code. Such acts or practices include, but are not limited to, the following:
a. Creating and maintaining a deceptive scheme to mass produce loans for sale on the secondary market, as described in paragraphs 15 through 164, above;
b. Making untrue or misleading representations that Countrywide could be trusted to sell borrowers mortgage loans that were appropriate to their financial circumstances, as described in paragraphs 109 through 113, above;
c. Making untrue or misleading representations regarding the terms and payment obligations of Countrywide’s Pay Option and Hybrid ARMs, including representations regarding the payment rate, the duration of initial interest rates, the duration of initial monthly payments, the inclusion of prepayment penalties, the waivability of prepayment penalties, the payment shock that borrowers were likely to experience, and the risks associated with such mortgage loans, as described in paragraphs 58 through 64, 75 through 77, and 119 through 132, above;
d. Making untrue or misleading representations regarding the terms and payment obligations of Countrywide’s HELOCs, as described in paragraphs 134 through 135, above;
e. Making untrue or misleading representations regarding the costs of reduced or no documentation mortgage loans, as described in paragraph 133, above;
f. Making untrue or misleading representations regarding the true likelihood or circumstances under which borrowers would be able to refinance Pay Option or Hybrid ARMs offered by Countrywide, as described in paragraphs 62, 76, 77, and 129 through 132, above;
g. Soliciting borrowers to refinance mortgage loans by misrepresenting the benefits of doing so or by misrepresnting or obfuscating the fact that in doing so the borrowers will incur a prepayment penalty, as described in paragraphs 110 through 118, above;
h. Making mortgage loans and extending HELOCs without regard to whether
borrowers would be able to afford monthly payments on those loans or HELOCs after the expiration of the initial interest rates on the mortgage loans, or the draw periods on the HELOCs, as described in paragraphs 85 through 107, above;
i. Aiding and abetting the breach of the fiduciary duty owed by mortgage brokers to California borrowers, as described in paragraphs 151 through 158, above;
j. Failing to provide borrowers with documents sufficient to inform them of their payment obligations with respect to fully drawn HELOCs, as described in paragraphs 81 through 84, above;
k. Paying compensation to mortgage brokers that was not reasonably related to the value of the brokerage services they performed, as described in paragraphs 152 through 155, above; and
l. Violating Section 17500 of the Business and Professions Code, as described in the First Cause of Action, above.
WHEREFORE, Plaintiff prays for judgment as follows:
1. Pursuant to Business and Professions Code section 17535, that all Defendants, their employees, agents, representatives, successors, assigns, and all persons who act in concert with them be permanently enjoined from making any untrue or misleading statements in violation of Business and Professions Codes section 17500, including the untrue or misleading statements alleged in the First Cause of Action.
2. Pursuant to Business and Professions Code section 17203, that all Defendants, their employees, agents, representatives, successors, assigns, and all persons who act in concert with them be permanently enjoined from committing any acts of unfair competition, including the violations alleged in the Second Cause of Action.
3. Pursuant to Business and Professions Code sections 17535, that the Court make such orders or judgments as may be necessary to prevent the use or employment by any Defendant of any practices which violate section 17500 of the Business and Professions Code, or which may be necessary to restore to any person in interest any money or property, real or personal, which may have been acquired by means of any such practice.
4. Pursuant to Business and Professions Code section 17203, that this court make such orders or judgments as may be necessary to prevent the use or employment by any Defendant of any practice which constitutes unfair competition or as may be necessary to restore
to any person in interest any money or property, real or personal, which may have been acquired
by means of such unfair competition.
5. Pursuant to Business and Professions Code section 17536, that Defendants, and each of them, be ordered to pay a civil penalty in the amount of two thousand five hundred dollars ($2,500) for each violation of Business and Professions Code section 17500 by Defendants, in an amount according to proof.
6. Pursuant to Business and Professions Code section 17206, that Defendants, and each of them, be ordered to pay a civil penalty in the amount of two thousand five hundred dollars ($2,500) for each violation of Business and Professions Code section 17200 by Defendants, in an amount according to proof.
7. That Plaintiff recover its costs of suit, including costs of investigation.
8. For such other and further relief that the Court deems just, proper, and equitable.

Dated: December 30, 2008 THE LAW OFFICES OF

By _____________________________
Timothy McCandless, Attorney for Plaintiffs

Information needed for a filing

1. Documents to be examined:
1. Promotional literature, correspondence and borrowers notes from initial contact with mortgage broker of “lender.”
2. Any document purporting to give the terms of a proposed loan including but not limited to Good Faith Estimate
3. The Good Faith Estimate and documents supporting affordability and benefits
4. The settlement statement
5. The name and contact information and appraisal report including the actual person and license number of the appraiser, the amount of the previous sale, any prior appraisals available to borrower, and the borrower’s estimate of current value decreased by 12% for broker’s fees (6%) and current average discount from asking price (6%).
6. The name and address of the mortgage broker, and the specific person the borrower dealt with, whether the mortgage broker is still in business.
7. Identification of the loan originator
8. Determination if FNMA or Freddie MAC were actually involved or if the standard forms were used from those or any other (HUD) GSE. (Government Sponsored Entity)
9. Identification of title agent with name and address
10. Identification of title insurance company with name and address
11. Identification of the escrow agent with name and address
12. Identification of the closing agent with name and address
13. Identification of the Trustee with name and address
14. The set of closing documents given to the borrower: the ones provided before closing, the ones provided after closing and any documents that were transmitted appointing servicer or substitution of Trustee or assignment etc.
15. SEC reports and annual reports of any of these entities or affiliates
16. If available, Sampling investigation to determine if Pooling and Services Agreement, Assignment and Assumption Agreement, Insurance, Credit Default Swaps, Cross Collateralizing, Over-collateralizing, reserves, and bailouts from Federal Reserve or U.S. Treasury can be produced for examination.
17. Documents, if available, showing authority of any party alleging rights to enforce, collect or perform modifications, issue notices of delinquency, default, sale or file foreclosure actions, unlawful detainer (eviction) actions etc.
2. Basic Required Services — For expediency and cost purposes, the initial “analysis is presumed to be using a “sampling technique” that identifies probably information that is applicable but does not guarantee accuracy or completeness)
1. Retainer Agreement in Writing for analysis, collection etc., that allows for attorney tot ake over relationship on certain conditions.
2. Written authroization form Borrower executed in triplicate and notarized (each copy)
3. Analysis of disclosures and promotional literature to determine the nature of the deal the borrower thought he/she/they were getting and comparison with the actual result.
4. Analysis of GFE etc. and comparison with actual deal, disclosures of third party funding, table funding, surprise fees, undisclosed fees, undisclosed parties, etc.
5. Analysis of settlement statement to determine the representation of the parties at closing to the borrower and comparison with actual deal.
6. Appraisal Sampling analysis to determine negnligence or fraud based upon comparables of time, geography and whether developer asking prices were used to inflate the appraisal. Calculation of potential claim for inflated appraisal. Determination of the expected life of the loan based upon adjustments, expected market conditions etc. Calculation of probable effect on APR over the expected life of the loan.
7. Analysis of whether the closing conformed to GSE guidelines as industry standards
8. Analysis of conduct of the mortgage broker to determine potential claim for negligence or fraud
9. Analysis of conduct of the title agent to determine potential claim for cloud on title, negligence or fraud
10. Analysis of conduct of the title insurance company to determine potential claim for cloud on title, negligence or fraud
11. Analysis of conduct of the escrow agent to determine potential claim for negligence or fraud
12. Analysis of conduct of the closing agent to determine potential claim for negligence or fraud
13. Analysis of results of investigation for compliance with TILA, RESPA, HOEPA, RICO, Deceptive Business, Deceptive Lending, usury etc.
14. Analysis of conduct of the Trustee or successor Trustee on Deed of Trust, if applicable to determine potential claim for negligence or fraud
15. Sampling analysis to identify potential successor trustees (Pool, SIV, SPV etc.)
16. Sampling analysis to determine where the borrowers payments have been sent and how they have been applied, if available.
17. Sampling analysis to determine if the the named entity as Payee on the Promissory note has been paid in full by a third party — and preliminary abalysis as to whether the note became non-negotiable, whether the borrower owes anyone any amount, and if so who that might be and how much it might be, if it is possible to make such determinations in the preliminary investigations.
18. Issuance of Preliminary Findings Report to be sent to servicer or whoever the borrower is sending payments to or otherwise in communication with.
19. Challenge letter to each party seeking to enforce, whether lawyer or party, raising defensive positions concerning their authority to act.
20. Extensive Qualified Written Request with suggestions for resolutions, coupled with Notice and contract for appointment of Borrower or Borrower’s designee as attorney in fact for reconveyance as per RESPA.
21. Demand letter and notice if Lender fails to comply.
22. Challenge letter if Lender denies claims or requires additional written authorization
23. If available, counsel’s recommendation of next steps
3. Extended Services:
1. Appointment of agent for reconveyance
2. Recording reconveyance
3. Recording other instruments in property records
4. Expert Affidavit
5. Expert testimony
6. Exhibits prepared for court
7. Form complaints, motions and affidavits
8. Legal ghost Writing
9. Consultation with Borrower’s attorney
10. Appearances in Court
11. Forensic Review
1. Basic, non sampling
2. Full audit including examination of servicer’s ledgers etc.

Lost note they can’t legally foreclose


This is how the Big Boys evict you from your house


You should never be evicted


No License No loan Indymac bought it


Opossing the giant in the federal court


Countrywide and truth in predatory lending


California v Countrywide


Litigate truth in lending or be evicted


Lets go to federal court


They agree but foreclose anyway


Get the injuction and stop the sale


Sample class action

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