On January 23, 2012, the United States District Court for the District of Massachusetts issued a rare ruling dismissing so-called “high cost home loan” allegations asserted by two Worcester mortgagors against EquiFirst Corporation, a now-dissolved North Carolina mortgage lender. The case is titled Maldonado v. AMS Servicing et al., No. 11-CV-40044. The decision represents one of the only cases in Massachusetts dismissing high cost home loan allegations on a motion to dismiss, and it provides a roadmap on how lenders can obtain the same result, and save litigation costs, when the facts warrant it.
Maldonado involved two Worcester homeowners who had defaulted on their mortgage loan payments, and the current lender (not EquiFirst, which originated the loan) had instituted foreclosure proceedings. The Plaintiffs filed suit to enjoin the foreclosure, and in such suit asserted claims against EquiFirst under Massachusetts’s predatory lending law, M.G.L. c. 183C, §§ 1 et seq. The law prohibits “high cost home loans,” which are defined as loans with an annual percentage rate that exceeds the interest rate on a comparable U.S. Treasury security by more than 8 points at the time the loan is consummated. A loan is also considered “high cost” if the settlement fees exceed 5% of the total loan amount or exceed a certain dollar amount. The penalty for violating the statute can be rescission of the loan, and is automatically considered a violation of M.G.L. c. 93A, which would entitle a borrower to multiple damages and attorney fees.
Predatory Lending Claims Are Difficult to Dismiss
Predatory lending/high cost home loan claims typically require factually intensive analyses, and are therefore rarely subject to dismissal on a motion to dismiss. At the motion to dismiss stage of a case, the court must take the plaintiff’s allegations as true and is precluded from considering facts outside of such allegations. Determining whether a loan is “high cost” could require a court to consider the terms of the promissory note underlying the mortgage, the HUD-1 Settlement Statement, the mortgage application, U.S. Treasury bond rates, LIBOR, and then, if the mortgage has a variable rate, the court must determine the “fully-indexed” rate before concluding whether the loan is a “high cost home loan.” Given the complexity of the analysis and the factual information necessary to do it properly, courts usually permit plaintiffs alleging predatory lending violations to proceed past the pleading stage of the case.
In Maldonado, EquiFirst relied on the doctrine of judicial notice to convince the Court to dismiss the case by considering facts outside those alleged in the Complaint. Only by doing so could the Court determine that the Plaintiffs’ high cost home loan allegations were without legal merit and should be dismissed. The Court took judicial notice of the underlying loan documents, certain financial indices providing the applicable interest rate on 30-year U.S. Treasury bonds and LIBOR, and even took judicial notice of a calculator on the website of the Office of the Comptroller of Currency that EquiFirst used to present the Court with the fully-indexed APR calculation on the underlying variable rate loan. Taking all of such information into account, the Court determined that the loan at issue was not, and could not be, a high cost home loan. The Court therefore granted EquiFirst’s motion to dismiss.
When mortgage lenders are certain that a loan at issue does not violate Massachusetts’s predatory lending law (compliance tests at origination should establish such certainty), they should not be afraid to take an aggressive approach by moving to dismiss the case. Such motion should attach all of the necessary documents, including loan and settlement documents, that the court needs to understand that the claim could not possibly succeed as a matter of law. Any such motion must contain an explanation of the doctrine of judicial notice, and must cite case law to help the judge feel comfortable taking such notice of facts outside the scope of the complaint. Finally, counsel to the lender should request a hearing on the motion because it is easy for a judge to get lost in the requirements of the law. Counsel should be in front of the judge explaining the steps of the analysis.
In Maldonado, such a strategy worked, and it allowed EquiFirst an early and efficient exit from the litigation.