Mortgage Lenders, Play Nice or Suffer the Consequences

Mortgage Lenders, play nice or suffer the consequences. That’s the message which one New Jersey trial judge seemingly wished to impart when he sanctioned Freedom Mortgage for selling a loan which he concluded was designed to “engender fees for the lender and not for the benefit of the borrower”

A mathematical overview of the refinance in question revealed that for a reduction of the interest rate from 5 5/8% to 5%, the borrower paid almost $11,500 in fees, which were added to her prior loan balance and increased her mortgage loan. By lowering her interest rate by five-eighths of a percent, she would pay less each year in interest, but by her having to pay the fees to accomplish that reduction in interest, it would take her 5 plus years to break even. Her monthly payment was lowered by less than $63 a month.

As the Judge observed, the lender was able to take advantage of the then lax requirements of the FHA that permitted use of prior documents that accompanied (or didn’t accompany) an existing FHA-insured loan. The lender did so regardless of the then age of the borrower (70) and/or her employment and future income prospects. Had the lender simply checked the annual income of the borrower from its telephone interview notes, it would have seen the obvious- that her annual income did not support the monthly mortgage payment itself. Apparently, not only did the lender proceed to process the loan using the underwriting data of the existing loan, it never examined those documents. It never made diligent inquiry into her then ability to make the loan payments going forward. As demonstrated, the defendant defaulted within a few months. Such default so soon after the making of the loan suggests her then financial frailty.

The court thus determined that the transaction was effectively one-sided, for the benefit of the lender and the token reduction in the monthly payment for the borrower while substantially increasing her debt provided only token benefit to her.

Such conduct, the court decided, violated New Jersey’s Consumer Fraud Act and, as a consequence, placed limitations of the lender’s right to foreclose which included:

  1. Forfeiture of the fees charged by the lender in the transaction.
  2. Limiting the payoff to the amount refinanced.
  3. Forfeiture of interest attributable to the principal amount since the date of default.
  4. A credit to the borrower in excess of $22k after calculating damages to the borrower based upon the fee charged by the lender and payment of the borrower’s counsel fees and costs, totaling just over 26k.

In addition, the Judge prevented the lender from obtaining judgment for one year to allow the borrower to find a buyer or refinance from other sources.

This outcome clearly sends a message that lenders are required to play nice or suffer the consequences. Such rulings, unfortunately, are uncommon. It is worthy of note, however, that the Consumer Financial Protection Bureau amended Regulation Z to the Truth in Lending Act to require assessment of ability to repay by the mortgage lender. Lenders which subsequently violate this newly minted prophylactic device will no doubt suffer more significant consequences than the lender in this transaction.