The Massachusetts Court of Appeals recently reviewed an action brought by a home mortgage borrower against the lender and its assignee, alleging that they violated the consumer protection statute by modifying his mortgage, among other claims, and that they should be enjoined from evicting the borrower from his home. In Moronta v. Nationstar Mortgage, LLC, the borrower’s primary argument was that the defendants violated G.L. c. 93A by structuring a mortgage consisting of high-cost loans, which the lender had no reasonable expectation that the homeowner could pay, and therefore misleading the borrower as to the viability of the transaction. The lower court granted summary judgment in favor of the defendants, and the decision was appealed by the borrower to the Massachusetts Court of Appeals.
In Moronta, the borrower refinanced his original mortgage of $330,600 to consolidate his debt and lower his monthly payments. At the time he refinanced in 2007, the borrower’s monthly income was $6,000, although the loan application amount stated that it was $8,500. The lender granted two loans, one in the amount of $296,000 with an adjustable interest rate and large balloon payment of $264,963 at the end of 30 years, and a second in the amount of $74,000 at a fixed interest rate of 10.5%. In November 2009, the lender foreclosed on the property.
G.L. c. 93A prohibits the origination of a home mortgage loan that the lender should recognize at the outset that the borrower is not likely to be able to repay. Massachusetts courts have noted that banks have been advised that loans to borrowers who do not demonstrate the capacity to repay the loan, as structured, are generally considered unsound and unfair to borrowers.
The court identified several factors that should have put the lender on notice that the borrower was unlikely to repay the refinanced loans. First, the $296,000 loan is an adjustable rate loan with an introductory period of three years or less, and the introductory rate is at least three points below the fully indexed rate. Second, the $74,000 loan is fixed at a high interest rate of 10.5%. Third, the court found a question of fact existed as to whether the debt to income ratio would have exceeded 50 percent of the borrower’s gross monthly income, particularly if considered at the fully indexed rate and with the enormous balloon payment due at the end of the term. The court also noted that the loans at issue, collectively, approach nearly 100% financing of the property. Therefore, under the circumstances of the record presented, the court found that a material issue of fact existed as to whether the loan is unfair and whether the lender acted unfairly or deceptively under G.L. c. 93A when originating the borrower’s loans.
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