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From Banking and Finance Law Daily, June 7, 2013

Consumer’s State Predatory Lending Claim Sufficiently Described Unconscionable Loan

By Thomas G. Wolfe, J.D.

In reviewing a consumer’s predatory lending claim under the West Virginia Consumer Credit and Protection Act (West Virginia Act), the U.S. District Court for the Northern District of West Virginia determined that the consumer sufficiently stated plausible allegations of unconscionability against a lender. As a result, while the court separately granted the lender’s request to dismiss all the other counts in the consumer’s complaint against it, the court denied the lender’s request to dismiss the predatory lending count; the consumer’s allegations of the lender’s unconscionable conduct were allowed to proceed (Heavener v. Quicken Loans, Inc. et al., June 5, 2013, Groh, United States District Judge).

Background. According to the court’s opinion, the consumer contended he was “solicited” by the lender about refinancing his existing mortgage loan. During telephone conversations with an individual who purportedly represented the lender, the consumer was of the understanding that his participation in the proposed loan program would involve his paying “interest only for the first five years, and then the loan would automatically roll over into a thirty-year fixed rate not to exceed the rate of 5.75%.”

However, at the actual closing with the lender’s agent for the refinancing of his existing mortgage loan, the consumer received a loan that allowed him to pay “interest only” for 10 years and included finance charges in the principal as well. The consumer further maintained that he was given “little time” to review the loan documents before signing them.

In addition, the consumer contended that, at the arrangement of a mortgage broker, an appraisal company appraised his home for approximately $193,000 even though the actual market value was considerably less than that figure. According to the consumer, the allegedly “fraudulent appraisal ultimately resulted in … [his] receiving a loan in excess of the value of his home and a transferal of additional unsecured debt into home secured debt.”

The consumer’s seven-count complaint involved claims against the lender, the mortgage broker, and the appraisal company. In connection with the lender’s motion to dismiss all of the counts the consumer brought against the lender, the court was called upon to examine four counts: (i) predatory lending; (ii) unauthorized practice of law; (iii) fraud and conspiracy; and (iv) acting in a joint venture, conspiracy, and agency relationship.

Predatory lending claim. The consumer alleged that the lender engaged in “a pattern of home equity predatory lending practices” by making an unfair loan to transfer the home equity from the consumer to the lender. In particular, the consumer alleged that the lender’s conduct violated the West Virginia Act’s provision prohibiting unconscionable contracts. In reviewing the state statutory provision (§46A-2-121) and the unconscionability test recently enunciated by the West Virginia Supreme Court of Appeals, the federal district court noted that, under West Virginia law, “a party claiming a contract is unconscionable must demonstrate both procedural and substantive unconscionability.”

Procedural unconscionability. In determining that the consumer’s complaint satisfied the component of procedural unconscionability, the court underscored the fact that the consumer alleged that he is an unsophisticated consumer and that the lender is a large national lender. In the court’s view, these factual allegations raised “a plausible issue regarding inequities in the bargaining process.” In addition, the court found that the consumer adequately alleged that the lender’s agent “conducted the loan closing in a hurried manner and gave [the consumer] little time to review the loan documents prior to signing them.”

Substantive unconscionability. In determining that the consumer’s complaint satisfied the component of substantive unconscionability, the court emphasized that the consumer alleged the defendants together “significantly inflated the value of his house over its actual market value to induce him into signing the loan.” Likewise, in the court’s view, the consumer adequately alleged that the lender misrepresented the type of loan he received because the consumer thought he was receiving a loan “where he paid interest only for five years but he actually received a loan where he paid interest only for a period of ten years.”

Consequently, for purposes of the lender’s motion to dismiss, the court ruled that the consumer “sufficiently alleged both procedural and substantive unconscionable inducement.” At the same time, for reasons stated in its opinion, the court dismissed the other three counts against the lender.

The case is No. 3:12-CV-68.

Attorneys: Eric S. Black (The Law Office of Eric S. Black, Esquire) for Dwayne A. Heavener, Jr. Carrie Goodwin Fenwick, Joseph M. Ward, and Victoria L. Wilson (Goodwin & Goodwin, LLP) and P. Nikhil Rao and Tracy K. Stratford (Jones Day) for Quicken Loans, Inc.

Companies: Advanced Mortgage Services, Inc.; Orth Appraisals, LLC; Quicken Loans, Inc.

MainStory: TopStory ConsumerCredit Loans Mortgages UDAAP WestVirginiaNews

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