The campaign against predatory lending practices — a key factor in more than 65,000 housing foreclosures a year in New Jersey (equal to one every 8 minutes) — recently scored a major legal victory.
On December 4, 2013, Chancery Judge Peter Doyne issued his decision in US National Bank Assoc. v. Montesdeoca. In a detailed 28 page opinion, he ruled that Wells Fargo Bank committed “actionable fraud” and “predatory lending” when it persuaded Oscar Montesdeoca — an Ecuadoran immigrant who spoke little English — to borrow more than $600,000 at interest rates of 7.75 percent to 14.35 percent to buy a three-bedroom house in Bergenfield.
This case tells the story of how the American dream metamorphosed into an American nightmare.
Oscar’s mortgage required him to pay the bank some $4,800 per month. At the time he was earning $600 a week laboring for a “cleaning company,” later reduced to $500 after he “took a position as a driver.” (All quoted phrases are from the court’s written opinion.) Added to that income, “his wife worked in a pharmacy earning $7.00 an hour,” the court dryly noted. They were barely getting by even before buying their dream house.
True, for a brief period the family earned an additional $5,000 a year “by importing and selling flowers.” But that business venture soon folded, a casualty of the Great Recession, which, ironically, was largely triggered by banks writing — before foreclosing on – millions of unaffordable mortgage loans even as unemployment soared and home values fell.
In short, Oscar’s family income never exceeded $37,500 a year, or a little over $3,000 a month. Yet they were told to sign documents agreeing to pay Wells Fargo $5,700 monthly on the mortgages. Only by struggling mightily – borrowing, for example, from other family members — did Oscar manage to keep up with the house payments for almost two years.
This was their goal: To sacrifice everything to pay Wells Fargo for the first two years. Because, as the court determined, the loan officer had “promised unequivocally if Oscar timely paid the loan and maintained good credit [for two years], he would receive refinancing” to reduce the high interest rates, if not the principal of the two loans.
The closing on the mortgages reads like something from a Kafka story:
As Judge Doyne describes it, Oscar and his wife were “presented mortgage documents all of which were in English. They could not read them and had not been provided copies prior to the closing which could have been translated. Present at the closing was a lawyer the family had never met before and who did not speak Spanish, who told them to ‘sign, sign, sign’ the loan documents.”
Only after retaining his present counsel — Michael Cassata and Joseph Chang — did Oscar learn that the bank had listed his take home income as $10,150 a month. As the court found, this was “more than four times greater than [Oscar’s family] actual income” for the prior year, 2005.
The court was especially moved by the family’s desperate — and ultimately futile — efforts to refinance the crushing debt that had, among other privations, forced their sons to “drop out of college because their tuition could no longer be afforded.”
After 18 months of somehow making timely payments, one of Oscar’s son — who spoke and wrote English — initiated requests in April 2008 to obtain “the promised refinancing” from Wells Fargo. But he got the proverbial runaround. The bank officer who had written the mortgages and made these promises “never responded.”
Later, this same officer explained why he stonewalled, testifying that “refinancing in 2008 for a 2006 loan would be difficult as home values decreased. Moreover, there was increased scrutiny of lenders and new debt-to-income requirements.”
So much for the promised refinancing that had induced the Montesdeoca’s to sign the mortgage notes and to struggle to avoid default for two years.
According to court records, Oscar’s son resubmitted “loan modification packages to the bank ten times. But each time his application was routed to a different loan manager who told him to “resubmit the paper work” yet again, which he dutifully did — all to no avail.
Now comes the truly Kafkaesque part:
Eventually “Oscar was told if he paid his loan on time he would not get a modification,” as refinancing “is given only to people who cannot make payments.” So, relying on this new policy, “the family stopped payment — only to be informed a few months later that Oscar could not obtain refinancing.” Why? “Because he was falling behind on his payment.”
The key issue to the court was who provided the false income statement on the mortgage notes indicating that Oscar and his wife earned $10,150 a month or $121,800 a year working their two full-time jobs. Did the bank fill in this erroneous figure as part of the mortgage mill it was running? Or had Oscar duped them as the bank witnesses claimed? The case would turn on the answer to these questions.
Suspiciously, Wells Fargo could not produce the loan file because, as a bank officer testified, it was “internal policy to destroy loan files after a loan was closed.” Come again? Why would a bank dispose of a file on a $600,000 mortgage shortly after the ink was dry on the loan documents?
The court was not amused by this answer. Judge Doyne ruled that the bank’s file disposal amounted to “spoilation” of evidence. In other words, the bank was hiding something. The judge reasoned that the bank got rid of the loan documents due to the damaging evidence they might contain.
In the end, the court “categorically rejected” all of the bank’s “caveat emptor” — let the buyer beware — defenses and summarized its holding in ringing terms, as follows:
“Oscar Montesdeoca was offered a loan which he could not conceivably afford. He and his family exemplify the ideas which underlie the basic tenets of opportunity so valued in this country. Together, they struggled to make payments on a loan which inevitably must have, and did, end in default . . .
“If the bank’s behavior is not unconscionable, what is? Whatever it means for a lending institution to engage in predatory lending, that is precisely what occurred here. Defendant was burdened with a monthly loan payment four times in excess of his gross income. Under any scenario, this loan must default . . .
“The effort Oscar and his family exercised in ensuring payment for 18 months and maintaining good credit was beyond commendable. In immigrating to this country, seeking to purchase a home for his family and working as a family unit to ensure they can afford the home, defendant has attempted what the court considers the ‘American Dream.’”
This dream turned into a nightmare that the court tried to remedy by ordering the banks to refinance the loans (as promised), pay Oscar’s legal fees, and treble his damages as mandated by New Jersey’s Consumer Fraud Act.
Judge Doyne’s eloquent opinion should be widely read for the stern message it conveys: That the courts of New Jersey will know an injustice when they see it.