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13-P-1805 Appeals Court
ELNEDIS A. MORONTA vs. NATIONSTAR MORTGAGE, LLC & another.1
No. 13-P-1805.
Norfolk. December 10, 2014. - November 5, 2015.
Present: Katzmann, Hanlon, & Maldonado, JJ.
Mortgage, Foreclosure. Real Property, Mortgage. Consumer
Protection Act, Mortgage of real estate, Unfair act or
practice. Practice, Civil, Consumer protection case,
Summary judgment.
Civil action commenced in the Superior Court Department on
July 23, 2010.
A motion for summary judgment was heard by John P. Connor,
Jr., J., and a motion for reconsideration was heard by him; a
motion for summary judgment was heard by Thomas A. Connors, J.;
and judgment was entered by John P. Connor, Jr., J.
Irene H. Bagdoian for the plaintiff.
Dean J. Wagner for Signature Group Holdings, Inc.
Jennifer J. Normand for Nationstar Mortgage, LLC.
1
Signature Group Holdings, Inc., successor to Fremont
Investment & Loan. References to Fremont in this opinion
include Signature Group Holdings, Inc.
2
MALDONADO, J. Elnedis Moronta (the borrower) appeals from
final judgments entered following the decisions of judges of the
Superior Court granting motions for summary judgment for the
defendants on the borrower's claims that Fremont Investment &
Loan (Fremont) and its assignee, Nationstar Mortgage, LLC
(Nationstar), (i) violated an injunction imposed on Fremont and
later extended to Fremont's assignees foreclosing on his
mortgage without the approval of the Attorney General, (ii)
violated G. L. c. 93A by structuring a mortgage consisting of
high-cost loans which Fremont had no reasonable expectation the
borrower could repay, and misleading the borrower as to the
viability of the transaction; (iii) violated c. 93A by using
unfair and deceptive loan modification practices; and (iv)
should be enjoined from evicting the borrower from his home.
Because we conclude that the borrower has at least raised a
question of fact on his c. 93A claim, we reverse.
Background. On July 9, 2004, the borrower purchased the
home located at 152 Independence Avenue in Quincy for $348,000
financed with a mortgage loan of $330,600 from Wells Fargo Bank,
N.A. (Wells Fargo). The Wells Fargo loan was an adjustable rate
loan with an initial rate of 5.25 percent and an initial monthly
payment of $2,137.32, including taxes and insurance. The
maximum interest rate was 11.25 percent. After the rate
increased to approximately eight percent and his monthly
3
payments increased to $2,884, the borrower had difficulty making
his monthly mortgage payments along with his credit card debt of
approximately $630 per month. Carrying a total monthly debt of
approximately $3,514, the borrower sought to refinance the loan
to consolidate his debt and reduce his monthly payments. He
engaged a mortgage broker, Popular Mortgage Group, which
submitted his mortgage application to Fremont.
The borrower asserts that his monthly income on his loan
application was inflated to $8,500 from the $6,000 figure he
provided and which, he contends, was supported by documentation
he submitted.2 The parties contest who bore responsibility for
the $8,500 figure.
Fremont structured the refinancing, executed by the
borrower on January 24, 2007, by granting the borrower two loans
totaling $370,000: the "first loan," an adjustable rate note in
the principal amount of $296,000 at an initial rate of 7.9
percent and an adjustable rate feature which would adjust upward
by adding 5.528 percent to the LIBOR index3 at the time of any
2
Fremont contends in the joint statement of material facts
that it has insufficient information to either admit or deny the
allegation that the borrower's income was approximately $6,000,
and therefore it denied the same. Fremont further contends the
borrower's income is not a material fact precluding summary
judgment.
3
As explained in Commonwealth v. Fremont Inv. & Loan, 452
Mass. 733, 737 n.10 (2008), Fremont's variable rate "was based
on the six month London Interbank Offered Rate (LIBOR), a market
4
change date, to a maximum of 13.9 percent, and a "second loan"
in the amount of $74,000 at a fixed interest rate of 10.5
percent (together, the refinance loans). The first upward
adjustment on the first loan was scheduled to occur three years
from the date of the loan, at which time the rate could adjust
upward by as much as three percent. Thereafter, the rate could
adjust every six months, with a maximum 1.5 percent increase at
each change, until reaching a maximum of six percent over the
original 7.9 percent. The borrower was told by the broker that
the two loans would provide 100 percent financing and would be
more convenient for him.4
The initial monthly payment on the first loan was
$2,368.59, including taxes and insurance of $481.16 and the
interest rate, plus a fixed margin (referred to as a 'rate add')
to reflect the risk of the loan. For example, the variable rate
might be expressed as 'LIBOR plus 5,' meaning the LIBOR interest
rate increased by an additional five percentage points as the
rate add."
4
Although the borrower contends he was not given an
opportunity to read the loan documents because Fremont's
attorney told him it would take "weeks," he admits he signed
documents for both loans, including the adjustable rate note;
fixed rate note; balloon payment rider; balloon note addendum;
mortgages; adjustable rate and balloon payment rider; estimated
payment letters; lender's closing instructions; truth-in-lending
disclosure statement; itemization of amount financed; notice of
right to cancel; escrow/impound account agreement; Massachusetts
application disclosures; Massachusetts borrower benefit
worksheet and certifications; appraisal disclosure; mortgage
lender disclosures required by the Attorney General's consumer
protection regulations; consumer's guide to obtaining a home
mortgage; Fremont refinance benefit letter; loan transaction
fees; and credit account reporting disclosure.
5
monthly payment on the second loan was $676.91, for a total of
$3,045.90. If the borrower's monthly income was $6,000, even
the initial payments exceeded fifty percent of his gross monthly
income, and if it was $8,500, the payments constituted thirty-
six percent of that income.
Presumably to keep the monthly payment low, the first note
was amortized over fifty years, although the term of the loan
was thirty years. This resulted in a balloon payment at the end
of the thirty-year term. The balloon rider signed by the
borrower did not reveal the amount of the balloon payment. The
truth in lending disclosure statement reveals that the balloon
payment would be $264,963, which is approximately ninety percent
of the original note. It is not clear whether the balloon
payment includes additional charges and interest which would
bear on any calculation of the actual interest rate.5
The truth in lending disclosure statement also indicates
the monthly payment on the first note would adjust upward after
three years to $2,684.84 for the rest of the thirty-year term.
Thus, the total monthly payment after the first three years for
the two refinance loans and taxes and insurance would be $4,023.
If, however, the interest rate further adjusted to the ceiling
5
The adjustable mortgage loan disclosure indicates the
balloon payment includes a regular monthly payment together with
the remaining unpaid principal balance of the loan, all accrued
and unpaid interest, and all charges due under the loan note.
6
of 13.9 percent, monthly payments would be in the vicinity of
$3,400, bringing the monthly payments to $4,558.6 Even accepting
that the borrower's monthly income was $8,500, the monthly
payment could exceed fifty percent of the borrower's income
after four years, and within three years would exceed by several
hundred dollars the monthly amount that the borrower had already
indicated he could not handle and that had led to his desire to
refinance.
It is undisputed that the refinance loans paid off the
Wells Fargo loan in the amount of $322,118.83 and provided the
borrower with $37,114.23 at closing. The borrower used the
money to pay off his credit card debt and do repair work on the
property.7 Nonetheless, the borrower admits that he was unable
to make his payments because his income was reduced as a result
of the decline in the economy. His last payment on the notes
was made in November of 2008, and his inability to pay preceded
any interest rate increase on the first loan. Nationstar
foreclosed on the property in November of 2009 and purchased the
property at the foreclosure sale for $260,897.06.
6
It is unclear why the truth in lending disclosure does not
reveal these potential payments.
7
Although an appraisal report dated January 5, 2007, valued
the property at $420,000, the parties dispute which of them
obtained the appraisal, and the borrower disputes the appraised
value.
7
In July of 2007, Fremont notified the borrower that it was
transferring the servicing of its notes to Nationstar. Fremont
and Nationstar insist, supported by an affidavit of Ralph
Uribarre, "AVP/Secondary and Master Servicer" for Signature
Group Holdings, Inc.,8 that all beneficial interest in the
refinance loans was transferred to Nationstar on March 30, 2007,
and all servicing rights in the loans were transferred to
Nationstar on July 5, 2007.9 The borrower points to the only
transfer recorded in the registry of deeds, MERS's transfer of
the mortgage to Nationstar recorded on May 14, 2009, to support
his positon that Nationstar, as assignee of a Fremont home
mortgage in 2009, was required to give notice to the Attorney
General before foreclosing on his mortgage.10
Discussion. "We review the disposition of a motion for
summary judgment de novo . . . to determine whether all material
facts have been established such that the moving party is
8
Uribarre states that Signature Group Holdings, Inc., is
the successor in interest to Fremont Reorganizing Corporation,
formerly known as Fremont Investment & Loan. See note 1, supra.
9
Uribarre states that Fremont was the payee of the notes
but that Mortgage Electronic Registration Systems, Inc. (MERS),
as nominee of Fremont and/or its assignees, was the mortgagee of
the mortgages executed by the borrower as security for the
notes.
10
See Commonwealth v. Fremont Inv. & Loan, 452 Mass. at
739-741 (Fremont preliminary injunction entered in February,
2008, and was extended to future assignees on March 31, 2008).
8
entitled to judgment as a matter of law . . . [and] [w]e
construe all facts in favor of the nonmoving party." American
Intl. Ins. Co. v. Robert Seuffer GMBH & Co. Kg., 468 Mass. 109,
112, cert. denied, 135 S. Ct. 871 (2014) (quotation omitted).
Because Fremont transferred the loans and servicing rights
to Nationstar in 2007, prior to the imposition of any
injunction, and MERS thereafter held the mortgages for
Nationstar as assignee of Fremont, we agree that Nationstar did
not violate the injunction against Fremont. The assignment of
the notes and servicing rights preceded the injunction imposed
in February of 2008 against Fremont and extended to Fremont's
assigns in March of 2008. Thus Nationstar was not required to
notify the Attorney General prior to pursuing foreclosure
against the borrower in 2009. We also agree that Nationstar's
negotiations with Moronta to modify the loans did not violate
c. 93A. Although it took effort and persistence on the
borrower's part, Nationstar ultimately did offer to reduce the
borrower's payments by $500 per month. That this was not enough
to meet the borrower's reduced monthly income does not mean
Nationstar's refinancing negotiations were unfair within the
meaning of G. L. c. 93A. Moreover, that Nationstar went forward
with foreclosure proceedings while negotiating with the borrower
is not evidence of unfairness where the borrower concedes he was
in default on his note. We agree with the judge that the
9
borrower's claim of unfair and deceptive loan modification
practices must fail.11 Accordingly, we move to the other aspects
of the borrower's c. 93A claim, that are unrelated to the
modification.12
"[General Laws c.] 93A prohibits the origination of a home
mortgage loan that the lender should recognize at the outset
that the borrower is not likely to be able to repay."
Drakopoulos v. U.S. Bank Natl. Assn., 465 Mass. 775, 786 (2013),
quoting from Frappier v. Countrywide Home Loans, Inc., 645 F.3d
51, 56 (1st Cir. 2011). While in Commonwealth v. Fremont Inv. &
Loan, 452 Mass. 733, 739, 747 (2008), the court identified four
11
We reject Nationstar's argument that the borrower cannot
proceed on his G. L. c. 93A claim because he failed to serve a
demand letter pursuant to c. 93A, § 9, on Nationstar. A written
demand is required pursuant to G. L. c. 93A, § 9(3), as
appearing in St. 1979, c. 406, § 2, unless "the prospective
respondent does not maintain a place of business or does not
keep assets within the commonwealth." The borrower alleged in
his complaint that no c. 93A letter was required because the
defendants do not maintain places of business in the
Commonwealth. Nationstar's argument that its mortgages in the
Commonwealth constitute assets, and therefore the notice
requirement does apply even if it does not have a place of
business in the Commonwealth, ignores that the statute is
written in the disjunctive.
12
Nationstar argues, apparently for the first time on
appeal, that as assignee, it is not liable for c. 93A claims
stemming from Fremont's origination of the loan. We do not
address arguments raised for the first time on appeal. See
Carey v. New England Organ Bank, 446 Mass. 270, 285 (2006). We
note, however, that "as a matter of common law, assignees are
not shielded from liability under G. L. c. 93A by virtue of
their assignee status." Drakopoulos v. U.S. Bank Natl. Assn.,
465 Mass. 775, 787 n.16 (2013).
10
characteristics that rendered the loans at issue there
presumptively unfair pursuant to c. 93A,13 and the loans at issue
here arguably meet only some of those criteria, the Supreme
Judicial Court has clarified that nothing in Fremont "was
intended to suggest that the universe of predatory home loans is
limited only to those meeting the four criteria present in that
case." Drakopoulos v. U.S. Bank Natl. Assn., supra. "[T]he
question is whether the lender should have recognized at the
outset that the plaintiffs were unlikely to be able to repay the
loan." Ibid. Indeed, the Supreme Judicial Court noted that
banks had been advised as early as 2001 that "[l]oans to
borrowers who do not demonstrate the capacity to repay the loan,
as structured, from sources other than the collateral pledged
are generally considered unsafe and unsound" and unfair to
borrowers. Commonwealth v. Fremont Inv. & Loan, 452 Mass. at
744 (quotation omitted). We conclude that there is a genuine
issue of material fact whether Fremont should have recognized at
13
The loans (1) "were [adjustable rate mortgage] loans with
an introductory rate period of three years or less; (2) . . .
featured an introductory rate for the initial period that was at
least three percent below the fully indexed rate; (3) . . . were
made to borrowers for whom the debt-to-income ratio would have
exceeded fifty percent had Fremont measured the borrower's debt
by the monthly payments that would be due at the fully indexed
rate rather than under the introductory rate; and (4) [had a]
loan-to-value ratio [of] one hundred per cent, or the loan
featured a substantial prepayment penalty . . . or a prepayment
penalty that extended beyond the introductory rate period."
Commonwealth v. Fremont Inv. & Loan, 452 Mass. at 739.
11
the outset that the borrower was unlikely to be able to repay
the refinance loans at issue.
Here, there are a number of factors that should have put
Fremont on notice that the borrower was unlikely to have the
ability to repay the refinance loans. The first two criteria
articulated in Commonwealth v. Fremont Inv. & Loan, 452 Mass. at
739, are met: the loan funding eighty percent of the total
amount loaned is an adjustable rate loan with an introductory
period of three years or less, and the introductory rate is at
least three points below the fully indexed rate. In addition,
the loan funding twenty percent of the full amount is a fixed
rate loan at the high interest rate of 10.5 percent.
Moreover, as we construe the record, there is at least a
question of fact whether the debt to income ratio would have
exceeded fifty percent of the borrower's gross monthly income,
particularly if considered at the fully indexed rate and without
ignoring, as the defendants do, the enormous balloon payment due
at the end of the term. First, the borrower contends that all
of the information he provided to the broker indicated his
monthly income was $6,000, and he did not notice that it had
been inflated to $8,500 on the loan application when he signed
it. Neither party developed the record whether the broker was
solely an agent for the borrower or whether it also had an
agency relationship with Fremont. Competing bald assertions
12
that the broker was or was not an agent of Fremont cannot be
resolved on this record. Moreover, even where a borrower signs
a loan application listing a certain monthly income, we have
allowed for the possibility that the borrower can show it was
artificially inflated by the lender or, in this case, by
Fremont's agent. Drakopoulos v. U.S. Bank Natl. Assn., 465
Mass. at 788.
Second, as noted above, the monthly payments exceed fifty
percent of even the $8,500 gross monthly income when the
adjustable rate note is fully indexed. In addition, spread over
the thirty-year term of the note, in order to be able to make
the balloon payment, the borrower would have had to effectively
save some $722 per month. There was no suggestion that Fremont
considered whether, other than by a new loan, the borrower would
be able to make the fully indexed monthly payments or the
enormous balloon payment at the end of the term. When the
balloon payment is factored into the equation, a trier of fact
might well conclude that Fremont should have recognized that the
borrower was unlikely to be able to repay the loan as
structured.
Addressing the fourth Fremont criterion, it is not clear to
us that the loans at issue do not at least approach the 100 per
cent financing the Supreme Judicial Court deemed unfair in
Commonwealth v. Fremont Inv. & Loan, 352 Mass. at 739-740.
13
There, the Supreme Judicial Court noted that Fremont frequently
financed properties 100 percent by dividing the amount financed
into the two piggy-back loans representing eighty and twenty
percent of the loan amount respectively. See id. at 738 n.12.
Fremont used the same piggy-back loan split here. Nothing in
the record explains the reason two loans were issued to the
borrower instead of one. Fremont contends this was not a 100
percent finance of the property because it obtained an appraisal
prior to the loan closing that indicated the property had a
value of $420,000, which means the loan to value ratio was
eighty-eight percent. While we agree that the borrower's
reliance on Zillow, an Internet Web site, is inadequate to
challenge the appraisal, where the piggy-back loan feature of
the refinancing is otherwise unexplained, at least at the
summary judgment stage, its use supports an adverse inference
suggesting the loan to value ratio approached 100 percent or
otherwise caused an underwriting concern that resulted in the
use of two loans. If, as the trial judge noted in Commonwealth
v. Fremont Inv. & Loan, supra at 740, 100 percent financing is
problematic because of its impacts on the possibility of
refinancing in a declining market, we conclude there is at least
a question of fact as to whether eighty-eight percent
refinancing via an adjustable rate loan amortized over fifty
years, with resulting minimal paydown of principal and a ninety
14
percent balloon payment at the end of thirty years, along with a
10.5 percent nonadjustable loan, also raises similar refinancing
concerns.
For each of the loans, Fremont provided a "borrower benefit
worksheet and certification" asserting that the refinance
resulted in a reduction in the borrower's interest rate when
comparing the new home loan with the old home loan, even though
the instructions provided that for comparison purposes for
adjustable rate loans Fremont should use the initial note rate
plus the maximum lifetime cap for comparison purposes. The
initial interest rate of the refinance loans considered together
was 8.42 percent which arguably exceeded the prior interest rate
of "around" eight percent even before the first note adjusted
upward. But even if Fremont's calculations are correct and the
adjusted rate on the original loan was 8.75 percent, certainly
the maximum potential interest rate of 13.22 percent when both
loans are considered together exceeded the original note's 11.25
percent maximum. Moreover, focus on the interest rate alone,
without considering the prolonged amortization schedule and
resulting delayed payment of principal and a net increase in
interest payments, is deceiving. The effective interest rate
paid on a thirty-year note that is amortized over fifty years is
significantly greater than a thirty year note amortized over
thirty years.
15
We are aware that the borrower benefited by being able to
pay off the prior mortgage, pay off his credit cards, and make
improvements to his home. In addition, there was at least a
temporary reduction in his monthly bills. That reduction was to
be relatively short-lived, however, and the enormous balloon
payment at the end of the note casts doubt as to whether it is
possible to say the monthly bills truly were reduced. Moreover,
if the only test were whether the borrower benefited in some way
from a refinancing loan, no loan would violate G. L. c. 93A.
On the record presented, even if the refinancing loans at
issue do not exactly meet the criteria set forth in Commonwealth
v. Fremont Inv. & Loan, supra, in terms of loan to value ratio
and percentage of financing, we conclude that the additional
feature of the amortization over fifty years resulting in a
balloon payment approaching ninety percent of the full amount of
the adjustable rate note after thirty years of payments between
$1,900 and $3,400 per month, along with higher net interest
paid, raises a genuine issue of material fact as to whether the
loan is unfair under G. L. c. 93A.14 As in Drakopoulos v. U.S.
Bank Natl. Assn., 465 Mass. at 787, in these circumstances, "a
determination whether the lender acted unfairly or deceptively,
14
We have considered and rejected the defendants' claim
that there were no damages here.
16
in violation of G. L. c. 93A, when originating the [borrower's]
loan[s] is properly left to the finder of fact."
Judgments reversed.