Tuesday, September 19, 2006
Court: Lenders May Be Liable for Secretly Hiking Pass-Through Fees for Services Provided by Others
By a MetNews Staff Writer
Lenders may be liable for secretly charging home-loan borrowers more than the lenders pay for services provided by others, this district s Court of Appeal ruled yesterday.
In a divided opinion, Div. One reversed Los Angeles Superior Court Judge Charles W. McCoy Jr., who dismissed the complaint of Linda McKell, Scott D. Pasnikowski and Susan Nero against Washington Mutual, Inc., after sustaining the bank s demurrer without leave to amend.
Plaintiffs alleged that Washington Mutual led them to believe that it was passing through to them certain fees for services provided by others, when in fact the bank was charging them considerably more than it paid for the services. They alleged that Washington Mutual charged hundreds of dollars for underwriting services which cost it only $20 charged more for the third party vendor services than the vendors charged, without performing any additional services and charged fees to wire money to another bank well above its costs, without performing any additional services and without disclosing the markup to borrowers.
Plaintiff s alleged that Washington Mutual intentionally concealed such practices by reporting the inflated costs of such services on the HUD-1 Settlement Statement which is required by the Real Estate Settlement Procedures Act as to loans underwritten by the Federal National Mortgage Association, better known as Fannie Mae, and the Federal Home Loan Mortgage Corporation, known as Freddie Mac instead of its actual costs.
McCoy reasoned that plaintiffs claims relied upon the existence of an implied requirement that defendant charge them pass-through costs only, and that no such requirement existed.
The judge said:
Printing charges for underwriting services, etc. on HUD-1 statements, without more, does not create a requirement that Defendants charge pass-through costs. The HUD-1 statements reflect what Washington Mutual charges customers for settlement services and not (necessarily) what Washington Mutual pays for those services.
On appeal Plaintiffs argued that McCoy erred in requiring them to plead a contract as the foundation for all their claims, even those based on California s unfair competition law.
The Court of Appeal held that plaintiffs properly alleged claims under the UCL, finding that the bank s acts were unfair, violated federal public policy of expanding opportunities for home ownership by reducing the cost of borrowing, and violated the Real Estate Settlement Procedures Act.
Presiding Justice Vaino Spencer, writing for the majority, said:
Looking at these [HUD-1] documents, plaintiffs reasonably would conclude that the fees charged were the costs Washington Mutual incurred in providing these services. The fees charged were substantially above Washington Mutual s costs, however. . . . Washington Mutual s practice of charging its customers more for services than the actual cost of those services, with no indication to the customers that they were doing so, may constitute a deceptive business practice within the meaning of the UCL . . . as a reasonable consumer likely would believe that fees charged in connection with a home mortgage loan bore some correlation to services rendered.
Spencer also said that plaintiffs stated a cause of action for breach of contract, apparently relying on the deed of trust as the contract.
Justice Robert M. Mallano concurred with Spencer s opinion.
Justice Miriam A. Vogel argued in dissent:
I simply don t understand . . . the majority opinion. It says that Plaintiffs have still failed to identify the contract and contractual provision under which Washington Mutual required them to pay underwriting and wire transfer costs. With regard to the fee for tax services, plaintiffs identify the deed of trust as the contract and set forth verbatim the term requiring them to pay the fee.
The majority opinion concludes the allegations are sufficient to state a breach of contract cause of action because the tax service fee allegedly violated RESPA and that the deed of trust is the contract. A deed of trust is the document by which a borrower gives the lender a lien on property to secure the borrower s loan obligation. . . . Deeds of trust are signed by the borrower (trustor), not the lender (beneficiary). . . . While there are surely other loan documents signed by Washington Mutual, my nickel says the deed of trust isn t one of them.
Vogel also said she believed the entire action was preempted by federal law.
The case is McKell v. Washington Mutual, Inc., B176377.
Copyright 2006, Metropolitan News Company