Deutsche Bank Pays Homeowner $30,000 for NJ Foreclosure on Predatory Loan
Deutsche Bank Pays Homeowner $30,000 for NJ Foreclosure on Predatory Loan
Deutsche Bank is paying a homeowner $30,000 after seeking to foreclose on the homeowner’s $65,000 investment property. The homeowner may retain the property and continue collecting rent for 15-18 months, free of mortgage payment obligations, after which the homeowner will walk away from the property and the bank will retake title to the underwater property.
Deutsche Bank has also agreed to issue a letter to correct credit to the defendant, which will be distributed to the three credit bureaus to repair any credit blemishes caused by the suit.
Claims of fraud and predatory lending motivated the settlement. In this case, the homeowner should have never qualified for this loan. Deutsche Bank inflated the buyer’s income, hid this from him, and then provided a rate and payment vastly different from what he ended up with at the closing table, and pressured him to take the new deal under threat of forfeiting his deposit. The hallmark of the settlement was the bank’s fraud in the origination of the loan.
New Jersey Consumer Fraud Act Lawsuits and Counterclaims
In foreclosure cases, New Jersey Consumer Fraud Act lawsuits are a potent weapon to challenge standing, to create leverage supporting a favorable settlement, and/or to seek monetary damages in settlement. Under the NJ Consumer Fraud Act, N.J.S.A. 56:8-2, consumer fraud is defined broadly as “any unconscionable commercial practice, deception, fraud, false pretense, false promise or misrepresentation . . . ” in connection with the sale of goods, services or real estate.
Raising a claim under the statute requires: (1) an affirmative representation of a material fact (i.e., lying) or unlawful conduct (i.e. approximately 40 topics including, but not limited to, fraud connected to mortgage lending/sale of rea estate, home improvement contracts, gym memberships and children's toys and products. See N.J.S.A. 56:8-1 through 56:8-195), (2) an “ascertainable loss” (i.e., damages that are quantifiable or measurable. Thiedemann v. Mercedes-Benz, USA, LLC, 183 N.J. 234 (2005). Attorney’s fees and costs can be recovered if successful in proving your claim and loss. Cox v. Sears Roebuck & Co., 138 N.J. 2 (1995)., and (3) a causal relationship between the lying/unlawful conduct and the consumers loss.
In Gonzalez v. Wilshire Credit Corp., 207 N.J. 557 (2011), the Supreme Court specifically held that the NJ Consumer Fraud Act applies to mortgage lending practices, including post-default activities and modification fraud in the foreclosure process. The Supreme Court of New Jersey held that the consumer-friendly New Jersey Consumer Fraud Act (“CFA”), N.J.S.A. 56:8-1 to -195, applies to mortgage loans and to, more specifically, a lender’s activities post-foreclosure-judgment, including entering into a forbearance agreement to avoid a sheriff’s sale.
The Court rejected defendants’ argument that any actions post-foreclosure-judgment could not be subjected to the strictures of the CFA. The Court noted that the country is “in the midst of an unprecedented foreclosure crisis in which thousands of our citizens stand to lose their homes, and in desperation enter into agreements that extend credit -- post-judgment -- in the hope of retaining homeownership. Defendants would have us declare this seemingly unregulated area as a free-for-all zone, where predatory-lending practices are unchecked and beyond the reach of the CFA.” Gonzalez, 2011 207 N.J., at 582-583.
The Court continued: “Lending institutions and their servicing agents are not immune from the CFA; they cannot prey on the unsophisticated, those with no bargaining power, those bowed down by a foreclosure judgment and desperate to keep their homes under seemingly any circumstances.” Id. at 584-85. The Court then noted that the attorneys’ fees provision of the CFA provides competent counsel with incentive to represent homeowners seemingly without the necessary resources to pursue such recovery on their own. Id. at 585.
In conclusion, the Court made clear that its holding was intended to be narrow and that the holding was not to be applied to litigation settlement agreements generally. Id. at 586-87. “This case addresses only the narrow issue before us: the applicability of the CFA to a post-foreclosure-judgment agreement involving a stand-alone extension of credit. We hold only that, in fashioning and collecting on such a loan -- as with any other loan -- a lender or its servicing agent cannot use unconscionable practices in violation of the CFA.” Id.
Rampant Fraud by Deutsche Bank in Mortgage Lending
Back in January of 2017, Deutsche Bank agreed to pay $7.2 bn in settlement of claims by the U.S. Government hat it misled investors in the sale of residential mortgage-backed securities (“RMBS”) during the financial crisis.
By its own admission, Deutsche Bank would make a loan to anyone with “half a pulse.” More than 50% of the loans it originated did not meet loan originator’s guidelines. While Deutsche Bank did not vet “ability to repay” honestly and knew its borrowers could not pay these loans back, it “tolerated misrepresentation” and “misdirected lending practices” relative to lying about the creditworthiness of its borrowers. Common practices included blacking out borrower’s pay stubs and actively concealing borrower’s actual incomes to make the RMBS files being sold to the pool appear more attractive than they really were.
Deutsche Bank engaged in widespread “appraisal fraud” by turning a blind eye to a practice by which mortgage originators were “giving appraisers the value they wanted” without regard to the actual value of the property. Deutsche bank representatives and bankers knew, but withheld the fact from investors, that the value of properties securing its loans was far below the value reflected by the originator’s appraisals. Deutsche Bank also packaged RMBS files with fraudulent FICO scores, using old scores, when borrower’s FICO scores had gotten materially worse after applying for a loan.
“This resolution holds Deutsche Bank accountable for its illegal conduct and irresponsible lending practices, which caused serious and lasting damage to investors and the American public,” said Attorney General Loretta E. Lynch. “Deutsche Bank did not merely mislead investors: it contributed directly to an international financial crisis.
The cost of this misconduct is significant: Deutsche Bank will pay a $3.1 billion civil penalty, and provide an additional $4.1 billion in relief to homeowners, borrowers, and communities harmed by its practices. Our settlement today makes clear that institutions like Deutsche Bank cannot evade responsibility for the great cost exacted by their conduct.”
Deutsche Bank engaged in shoddy mortgage underwriting and improvident lending, but assured investors of the safety of its mortgage derivative products, despite internal evidence to the contrary – in other words, Deutsche Bank engaged in knowing, intentional fraud. With full awareness that its borrowers would lose their homes and investors would lose their investment, Deutsche Bank nonetheless made bad loans to consumers and then sold them into the secondary market to cut off or limit its own risk and earned billions in profit on these subprime mortgages.
“Deutsche Bank knowingly securitized billions of dollars of defective mortgages and subsequently made false representations to investors about the quality of the underlying loans,” said Special Agent In Charge Steven Perez of the Federal Housing Finance Agency, Office of the Inspector General. “Its actions resulted in enormous losses to investors to whom Deutsche Bank sold these defective Residential Mortgage-Backed Securities. Today’s announcement reaffirms our commitment to working with our law enforcement partners to hold accountable those who deceived investors in pursuit of profits, and contributed to our nation’s financial crisis. We are proud to have worked with the U.S. Department of Justice and the U.S Attorney’s Office for the Eastern District of New York.”
Consumer Fraud Claims Usually Must Focus on Foreclosure Practices and Not the Original Predatory Loan Making The Cited Deutsche Bank Case a Standout
In United States Bank Nat'l Ass'n v. Sotillo, 2017 N.J. Super. Unpub. LEXIS 1360 (App. Div. 2017), the Appellate Division held that an assignee of Wells Fargo could not be held responsible for its fraudulent lending practices inducing the original loan. In Sotillo, the Court explained the shenanigans Wells Fargo engaged in to deprive an otherwise qualified borrower of a HAMP modification. “Defendant alleges only one denial of a loan modification, namely the denial of a HAMP modification in 2010. Wells Fargo's April 14, 2010 denial letter was based on the mistaken belief that she did not make the trial-period payments. However, that mistake was soon corrected on May 4, 2010, when Wells Fargo reported she did not qualify for a HAMP modification because her mortgage expenses did not exceed 31% of her monthly gross income.”
Essentially, Wells Fargo denied a final modification after the homeowner made the three (3) trial modification payments on time. Nonetheless, Wells Fargo later changed its reason for denial to a mismatch between gross income and the modified loan balance. Considering one is not granted a trial modification unless this criteria is met through underwriting, this is another example of a bank getting one by the umpire, where the judge simply doesn’t understand the bank’s processes.
The Court stated, “defendant knew the HAMP application was not a binding final agreement, and was contingent on meeting the qualifications for HAMP, which she failed to do. Therefore, Wells Fargo did not commit a breach of the duty of good faith and fair dealing. Arias v. Elite Mortg. Grp., Inc., 439 N.J. Super. 273, 280-81 (App. Div. 2015). "[A] borrower may not sue when a lender denies a loan modification because the borrower failed to meet HAMP's guidelines[.]" Miller v. Bank of Am. Home Loan Servicing, L.P., 439 N.J. Super. 540, 549 (App. Div.), certif. denied, 221 N.J. 567 (2015). Id.
Going further, the Court indicated that an assignee cannot be liable for actions of the assignor that pre-dated the transfer if those are “personal claims” like fraud, so long as the assignee was a holder in due course who took for fair value in good faith without knowledge of the assignor’s fraudulent conduct (presumed). “When a mortgage secures a negotiable instrument, . . . a transfer of the negotiable instrument to a holder in due course to whom the mortgage is also assigned will enable the assignee to enforce the mortgage (as well as the negotiable instrument) according to its terms, free and clear of any personal defenses the mortgagor may have against the assignor.” Id.
It is for this reason that NJ Consumer Fraud Act lawsuits generally focus on the assignees actions in foreclosure and modification review rather than the original fraudulent inducement of a predatory loan, which invariably leads to a string of assignments.
But, consider the holding in Hager v. Citimortgage, Inc., et al, No. 3:2016cv03348 (D.N.J. 2017), on the bank’s motion to dismiss, where United States District Judge Freda L. Wolfson held that U.S. bank was accountable for its Servicer, Selene Financing, LP doing the exact same thing that happened in Sotillo above – making a trial modification, accepting three (3) payments, and then denying the modified loan – and also playing games by offering one amount for the trial modification and then changing terms (i.e., principal balances) on the final modification without explaining the discrepancy, but trying to strong-arm the helpless homeowner into taking the deal despite the clear bait and switch. Id. at 2.
At the time the modification was made, Citi was servicing the loan, but subsequently transferred the loan to Selene Financing, who “refused to honor” the modification offer. Id. at 3. This is among the most common NJ Consumer Fraud Act violations we are regularly seeing today, and one of the most common abusive servicing practices banks engage in to take advantage of homeowners in the modification process. Numerous problems were discovered after-the-fact, including that Selene Financing, LP had a force-placed insurance policy on the subject property. Id. at 4.
There, the Judge stated, “Plaintiff has also at least alleged some ascertainable loss as result of the alleged misrepresentation in the form of having to pay amounts towards his loan that were higher than those contractually agreed upon and paying unnecessary interest to Defendants. See Block, 2016 WL 6434487, at *11 (collecting cases holding that paying overbilled principal and interest payments can constitute actionable fraud damages in mortgage modification cases). Id. at 22. It is really important for anyone involved in a foreclosure case to look out for these kind of overcharges and to assist their attorney in identifying them as they may show that an “ascertainable loss” or other actionable damages are present.
Commentary on the Servicing Violation vs. Innocent Assignee Distinction
There is no reason why a homeowner should lose its right to be compensated for blatant fraud because its loan is sold without its consent, whereas a homeowner whose servicing rights are sold has a cause of action. This is the fork in the road New Jersey cases have taken, but while this is a victory for the banks who like to use sales and other market transactions homeowners have no control over to take away what rights borrowers do have, ultimately the judges are making the wrong call when they throw out borrower claims, but fraud is clearly present.
The purchaser of a non-performing defaulted loan originated during the financial crisis should bear the risk of checking the origination history and servicing to ensure they are not buying a lemon, as they are better situated to undertake that analysis, rather than requiring homeowners to rush to file suit every time a fraud occurs on their loan account. That line of decisions will increase litigation, not save the banks the hassle of dealing with old claims. It will dramatically increase litigation rather than clearing the docket of lingering cases resulting from decade old fraud. It is wrong legally and as a public policy matter to protect assignees in this fashion—because, it ignores the fact they are buying loans that by-and-large were fraudulently originated, and they are therefore not bona fide purchasers for value in the ordinary sense—they do not have clean hands or a lack of knowledge with respect to the violations of their predecessors.
False Claims Lawsuit
Back in 2012, Deutsche Bank settled a False Claims Act lawsuit with the federal government for $202 million dollars. That lawsuit stemmed from Deutsche Bank certifying government insured F.H.A. loans to HUD resulting in defaults of $363 million borne by the U.S. taxpayer, which largely resulted from fraudulent practices by Deutsche Bank’s subsidiary MortgageIT. Under the Direct Endorsement Lending Program set up by HUD, Deutsche Bank and its subsidiaries were qualified to make F.H.A. loans on its own word that quality assurance/quality control was undertaken and loans met plan requirements. Deutsche Bank chose to break this misplaced trust in order to make a buck.
“MortgageIT and Deutsche Bank treated F.H.A. insurance as free government money to backstop lending practices that did not follow the rules,” Mr. Bharara said in a statement. “Their failure to meet these requirements caused substantial losses to the government — losses that could have and should have been avoided.”
The HUD inspector general, David A. Montoya, said in a statement that every Direct Endorsement Lender participant was expected “to adhere to the highest level of integrity and accountability.” When lenders fall short, he said, “the end result will be both unpleasant and costly to the offending party.”
F.H.A. Loans A Growing Problem—And May Be a Feature of Next Housing Crisis
"We're also seeing early evidence of gradually loosening lending standards starting in 2014, specifically for FHA-backed loans," Blomquist, senior vice president of ATTOM data solutions noted in a recent interview. "The foreclosure rate on FHA loans originated in 2014 and 2015 has now jumped above the average FHA foreclosure rate for all loan vintages — the only two post-recession vintages with foreclosure rates above that overall average."
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