N.Y. Supreme Court Blocks Foreclosure Due To Predatory Lending Violations

In a recent potentially precedent-setting decision, New York Supreme Court Justice, Joseph Maltese, denied a bank’s motion to foreclose on a sub-prime mortgage due to several predatory lending violations.

In the LaSalle Bank N.A. v. Shearon Case (No.100255/2007, 2008 WL 268449), the lender LaSalle Bank, moved for summary judgment in its foreclosure action against David and Karen Shearon.  Not only did Justice Maltese dismiss the foreclosure action by the lender, but also granted the homeowners summary judgment on their counter claim that the lender violated New York predatory lending law.

The Judge ordered a hearing to assess damages against the bank.  The borrower may be entitled to receive damages including all of the interest paid, the closing costs charged for the loan and a refund of any amounts paid.  Because the bank engaged in predatory lending practices, the  mortgage and loan may be voided, thus stripping the lender of any right to collect, receive or retain any principal or interest.  This also gives the borrower the ability to recover any payments made under the agreement.  

Details of the Purchase

In January 2006, Karen and David Shearon bought their first home in Staten Island New York for $335,000.  The sales contract however, listed a purchase price of $355,100.00, which included a $20,100 "seller’s concession" used to pay closing costs associated with obtaining the loan.  The sale was ultimately financed with two loans.  One loan for $284,000 with a fixed-to-adjustable rate feature, and a second for $71,000 at a fixed rate in excess of 10%.  Total points and fees financed on the loan were approximately 5.4% of the total amount borrowed. 

Although the Shearon’s combined annual income was only $30,000, their mortgage broker assured them that they would qualify for traditional loan products with fixed interest rates and that he was "shopping around for the best rates."  Despite their strong credit scores, and the assurances of their broker, the Shearon’s were given a high-cost loan typically assigned to sub-prime borrowers.

The borrower’s attorney said his clients tried to back out of the loan prior to closing but were told they’d lose their $5,000 deposit and could be sued if they didn’t go through with the agreement.  They had also already given up their apartment lease.  "I feel that I was bullied into accepting the way it was," said David Shearon.  They ended up closing the loan with WMC Corporation. 

Less than two years after closing their loan, when the Shearon’s failed to make their monthly mortgage payments, LaSalle Bank as loan trustee and successor to the original lender began foreclosure action.  In defense of the foreclosure action, Shearon argued that he was the victim of predatory lending practices.

Borrower Claimed Predatory Violations

David Shearon alleged that the original lender had engaged in six predatory lending practices through the loan closing process on his Staten Island home.

1. Excessive financing was approved (106% of the purchase price) to allow closing costs to be financed.
2. Inadequate due diligence regarding Shearon’s ability to repay the loan.
3. The lender intentionally placed Shearon in a sub-prime loan to the benefit of the lender with excessively high interest rates.
4. Failure to provide federally mandated disclosures.
5. Forgeries of numerous loan-related documents.
6. The lender repeatedly employed coercive tactics.

Court Acknowledged Predatory Violations

The New York Supreme Court found that the bank had committed at least three predatory lending violations of the New York Banking Law. 

1. Points and fees financed on the Shearon loan equalled nearly 5.4% of the total loan.  The court held that the original lender, by financing fees and points in excess of the 3% allowed had violated the statute.
2. The court found that the original lender did not even attempt to demonstrate that they had performed their due diligence in determining the borrower’s ability to repay the loan.  Not providing this due diligence is a violation of New York banking law governing high cost loans.
3. The court held that the original lender also failed to comply with the so-called "Counseling Statue" of the banking law by not providing a "Consumer Caution and Home Ownership Counseling Notice" with a list of credit counselors. 

Why This Decision is Important

This court case has been followed closely and will have a significant impact on the future of predatory lending for a number of important reasons. 

Establishes a  Defense for Borrowers Undergoing Foreclosure

This is the first time in New York that a judge has invoked those predatory lending violations against a lender, and it could signal a shifting tide in how foreclosures are handled.  James Tierney director of the National Attorneys General program at Columbia Law School said, "Trial judges across the country are beginning to question banks seeking to foreclose on homeowners in similar situations." 

This decision will encourage other borrowers and their counsel to wave the red predatory lending flag in response to foreclosure proceedings.  One copycat suit, Alliance vs. Dobkin (No. 10625/2006, 2008 WL 1758864), has already received national attention and although this case was unsuccessful because the judge ruled that predatory lending practices were not employed, you can be sure that many more will follow.  Expect for many undergoing foreclosure to use this same tactic.

The Warning Message Has Been Sent

Although damages have not yet been assessed, many are shocked by the extent of the damages that may be awarded to the borrower.  Damages may include returning all mortgage payments and expenses to the borrower, awarding attorney’s fees and voiding the bank’s mortgage and loans.  The scope of the possible relief in this decision makes it very clear that judges are taking predatory lending very seriously.

Margaret Becker, director of the Homeowner Defense Project at Staten Island Legal Services said, "It is very encouraging that judges are clearly taking the issue of predatory lending in the subprime market seriously and are willing to enforce laws to protect people from these kinds of pernicious practices."     

Expanded Scope for Lender Liability

The court’s decision emphasizes the fact that loan originators as well as the subsequent purchasers of a loan have liability for predatory lending practices.  This is particularly important when one considers how often sub-prime loans are packaged, sold and resold.  By the time foreclosure proceedings occur, the original offending lender may be far removed. 

It is notable that LaSalle Bank, was not involved in the original mortgage transaction with the Shearon’s.  Despite this fact, LaSalle Bank is still being held responsible for the predatory lending violations and ultimately will be "left holding the bag." 

Noah L. Pusey of Cilmi & Associates in Mahhattan  who represented David and Kathy Shearon said, "LaSalle Bank certainly aren’t the primary bad guys, but clearly it would have been better for them if they had looked into certain protocol adopted by other banks."

Avoid Costly Predatory Violations

In the midst of the ever-increasing cries of predatory lending, this case highlights again the importance of avoiding violations.  Lenders in the subprime mortgage market, or lenders who acquire these loans must understand how devastating non-compliance can be.

DocuTech offers high cost loan and predatory lending tools to protect lenders from the risks associated with predatory lending violations.  Contact a client support representative today to learn more about protecting your company from this liability.  800.497.3584  www.docutechcorp.com