Mortgage Practices Continue to Be Scrutinized by the Courts

The mortgage industry continues to be a subject of heavy scrutiny in both the press and the courts. Some issues, such as the industry’s widespread failure to properly prove ownership prior to foreclosure and the marketing of subprime loans, have made national news. Others, such as lenders’ failure to pay recording fees when mortgages are resold, have recently made headlines within Massachusetts. At the same time, however, numerous cases continue to work through the courts and are clarifying and, in some cases, redefining the obligations of lenders and mortgage brokers.

The Suffolk Superior Court Business Litigation Session, for example, recently denied a lender and mortgage broker summary judgment on claims brought by a borrower alleging unfair and deceptive practices in violation of Chapter 93A, civil conspiracy, and breach of the covenant of good faith and fair dealing. In particular, the plaintiff had alleged that they had not reviewed loan documents prior to signing under the pains and penalties of perjury, and were not aware of inflated income figures in the documents, allegedly placed there by the mortgage broker. They asserted that they had only signed the documents and entered into the loan agreement based on assurances from the mortgage broker that they would be able to refinance after six months.

The Court rejected the lenders’ arguments that since the plaintiffs had signed the loan documents, they were bound by its terms and by the representations they made in the documents. The Court noted that “the problem with this argument is that a party is not bound by the terms of a document signed in reliance upon a fraudulent misrepresentation…Taking the evidence in the light most favorable to the plaintiffs, the court concludes that a reasonable jury could find that representation fraudulent and conclude that the [plaintiffs] relied upon it in entering into the loan transaction to their detriment.” Thelemaque v. Fremont Investment & Loan, C.A. No. 08-5179-BLS1.

Numerous investigations have found that, in the middle of the real estate bubble, oral representations by lenders and brokers concerning loan terms, refinancing options, prepayment penalties, and similar issues were common. Increasingly, Courts have taken a strong line against many questionable practices within the mortgage industry. The Thelemaque decision, like a number of other court decisions, indicates that the Courts will, in the appropriate situation, ignore the terms of the written loan contract and hold lenders to the oral promises made by their agents. Such a possibility, of course, greatly increases the uncertainty facing lenders and means that homeowners facing possible foreclosure may have options available to them.

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