Pierce v. NovaStar Mortgage, Inc.

Citations: 489 F. Supp. 2d 1206; 2007 U.S. Dist. LEXIS 39041; 2007 WL 1574772Docket: C05-5835RJM

Court: District Court, W.D. Washington; May 30, 2007; Federal District Court

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Cameron Pierce and others, on behalf of a class of similarly situated individuals, filed a lawsuit against NovaStar Mortgage, Inc. in the United States District Court for the Western District of Washington, alleging deceptive practices related to mortgage loan transactions. The plaintiffs, who are borrowers, claimed that NovaStar failed to disclose broker payments, specifically "yield spread premiums," which incentivized brokers to secure loans with higher interest rates for borrowers. This alleged lack of disclosure led to violations of Washington's Consumer Protection Act (CPA).

The court amended the class definition to include individuals who entered into federally-regulated mortgage loans in Washington from December 30, 2001, onward, where NovaStar paid brokers for negotiating higher interest loans without adequate disclosure in good faith estimates. The plaintiffs sought partial summary judgment, arguing that NovaStar's actions constituted violations of the Consumer Loan Act (CLA) and were inherently unfair or deceptive under the CPA concerning two plaintiffs, Larry Brown and Ralph Martinelli.

Larry Brown sought to refinance his home with NovaStar Home Mortgage and was unaware of the relationship between NovaStar Home and NovaStar Mortgage. He alleged that a fee paid by NovaStar to NovaStar Home led to a higher interest rate on his adjustable rate loan, which was set at 8.2%. The court reviewed documents related to Brown's loan approval to evaluate the claims.

A loan analogous to Mr. Brown's, absent points, would have carried an interest rate of 6.45%. On May 21, 2004, NovaStar Mortgage issued a Purchase Commitment to NovaStar Home, which delineated requirements to be fulfilled "Prior to Document" or "Prior to Funding/Closing," including a good faith estimate revealing a yield spread premium range of 0-3%. The Purchase Commitment also specified a payment of 3% of Mr. Brown's loan from NovaStar Mortgage to NovaStar Home. On May 25, 2004, a "Lock-In Confirmation/Broker Demand" for Mr. Brown's loan was issued, indicating a $3,150 premium yield payment. Mr. Brown signed his adjustable rate note on May 28, 2004, when his mortgage was transferred from NovaStar Home to NovaStar Mortgage via an allonge. Mr. Brown claims he did not receive a good faith estimate, a point contested by the defendant, asserting it was NovaStar Home's policy to provide such estimates. The loan was financed through a "UBS warehouse loan" and later transferred to a Wachovia Bank line of credit. The documentation surrounding Mr. Brown's loan often conflates NovaStar Home and NovaStar Mortgage, with various documents listing each as either broker or lender.

In a parallel case, Ralph Martinelli sought to refinance his home with West Valley Mortgage in April 2005, signing a good faith estimate that described his adjustable rate mortgage with an 8.8% interest and a broker fee of 2% payable to West Valley. A Purchase Commitment from NovaStar Mortgage to West Valley was issued on April 27, 2005, detailing requirements similar to those in Mr. Brown's case and indicating a payment of 1.5% of Mr. Martinelli's loan from NovaStar Mortgage to West Valley. Mr. Martinelli signed his adjustable rate note on May 13, 2005, with West Valley listed as the lender, and the mortgage was subsequently transferred to NovaStar Mortgage.

NovaStar Mortgage asserts it acquired Mr. Martinelli's loan through a legitimate secondary market transaction on May 23, 2005. The HUD-1 settlement statement for Mr. Martinelli does not reflect NovaStar Mortgage's 1.5% payment to West Valley. Mr. Martinelli's loan was funded via a warehouse line of credit from NovaStar Capital, which was permitted to sell loans only to NovaStar Mortgage. Plaintiffs argue that the initial funding from NovaStar Capital came from Wachovia, with NovaStar Mortgage acting as a guarantor responsible for repayment to NovaStar Capital for the funds extended to West Valley for Mr. Martinelli's loan. NovaStar Mortgage also guarantees the agreement between NovaStar Capital and West Valley, which stipulates that repayment should first be sought from West Valley before NovaStar Mortgage is approached. 

The excerpt further outlines the standard for summary judgment, stating it is appropriate when there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. A nonmoving party must provide substantial evidence to support their claims. Genuine disputes exist if sufficient evidence supports differing factual claims, necessitating resolution by a judge or jury. The court must favor the nonmoving party on factual controversies but requires specific evidence rather than vague assertions. 

The plaintiffs are seeking a legal ruling that NovaStar Mortgage violated the Consumer Loan Act, constituting unfair and deceptive practices under Washington's Consumer Protection Act regarding Mr. Brown's loan, and that NovaStar Mortgage failed to comply with RESPA concerning loans for both Mr. Brown and Mr. Martinelli.

The Consumer Protection Act (CPA) establishes a private cause of action with five key elements necessary for a violation: (1) an unfair or deceptive act; (2) occurring in trade or commerce; (3) impacting the public interest; (4) causing injury to the plaintiff's business or property; and (5) a causal link between the injury and the unfair act. The first two elements can be proven through direct evidence or by demonstrating that the act is classified as a per se unfair trade practice by statute.

The Consumer Loan Act (CLA) violations, including its disclosure requirements, also constitute violations of the CPA’s first two elements. Legislative findings underscore that practices under the CLA significantly affect public interest, deeming any violations as unfair and deceptive acts under the CPA. Remedies under the CPA are cumulative. Each loan to a state resident by a licensee is subject to the CLA unless exempted by other state law.

In this case, plaintiffs allege that NovaStar Mortgage violated the CLA regarding Mr. Brown's loan by paying a 3% fee to the commonly owned NovaStar Home, with a court ruling on this matter pending further briefing. Additionally, the CLA requires compliance with the Real Estate Settlement Procedures Act (RESPA) disclosure requirements. Violation of these requirements by licensees or their affiliates is forbidden.

The plaintiffs argue that the Brown and Martinelli loans should comply with RESPA, claiming the Good Faith Estimates for these loans are inadequate. NovaStar Mortgage asserts that these loans are bona fide secondary market transactions exempt from RESPA, while the plaintiffs contend they are table-funded loans, which are not exempt.

To determine if a transaction is a bona fide secondary market transaction, HUD examines the actual source of funding and the lender's interest. The Court has previously established criteria based on whether the lender closed in its own name and used its own line of credit. The LePage loan was deemed a bona fide secondary market transaction because it was funded by a line of credit for which the lender was solely responsible.

In assessing Mr. Brown's loan, the Court notes that NovaStar Home is listed as the lender, implying a secondary market acquisition. However, it acknowledges that NovaStar Home was not solely responsible for the Wachovia line of credit used to fund the loan, as Wachovia provided the line and NovaStar Mortgage was a signatory to the agreement with Wachovia. The parties dispute whether NovaStar Mortgage shares responsibility for the line of credit. The plaintiffs argue that all NovaStar entities are jointly and severally liable based on the promissory note, while NovaStar Mortgage claims only NovaStar Home is responsible. The Court finds that the promissory note supports the plaintiffs' position, indicating joint liability among the NovaStar companies.

Due to the shared responsibility for the Wachovia line of credit, the Court concludes that Mr. Brown's loan cannot be classified as a bona fide secondary market transaction, despite NovaStar Home closing the loan in its name, as it was not solely responsible for the funding.

Mr. Martinelli's loan identifies West Valley as the lender, suggesting that NovaStar Mortgage acquired the loan in the secondary market. However, West Valley was not solely responsible for the funding, as NovaStar Mortgage provided a performance guaranty for West Valley. Plaintiffs assert that NovaStar Capital utilized a Wachovia line of credit to finance West Valley's funding for the Martinelli loan, a claim unchallenged by the defendants. Consequently, both NovaStar Mortgage and West Valley share responsibility for the loan’s funding, indicating that the Martinelli loan does not represent a bona fide secondary market transaction.

The plaintiffs argue that both the Martinelli and Brown loans were table-funded and, therefore, subject to the Real Estate Settlement Procedures Act (RESPA). Since neither loan qualifies as a bona fide secondary market transaction, there is no need to evaluate this argument further. Additionally, plaintiffs propose that the Court disregard the corporate separation between NovaStar Home and NovaStar Mortgage, viewing them as one entity, which further supports RESPA compliance for these loans.

RESPA mandates that borrowers receive a good faith estimate of settlement charges within three days of a loan application, which must include disclosures such as the yield spread premium (YSP). Mr. Brown claims he did not receive a good faith estimate, although standard procedure indicates that one should have been mailed. This discrepancy raises a genuine issue of material fact for trial. Both Mr. Brown and Mr. Martinelli have documents in their files showing a YSP disclosure. The Court previously recognized that there are material facts in dispute regarding the adequacy of YSP disclosures that begin at zero, thus avoiding a determination on the legal sufficiency of such disclosures for the Brown and Martinelli loans.

Lastly, plaintiffs seek summary judgment based on HUD-1 statements for both loans, arguing that these statements fail to disclose the YSPs charged, violating RESPA's requirements.

NovaStar Mortgage argues that the plaintiffs' claim regarding HUD-1 Settlement Statements falls outside the current class definition, which focuses solely on the adequacy of disclosures in good faith estimates. In their reply, the plaintiffs request a redefinition of the class to include violations related to HUD-1 statements and RCW 31.04.105(4). However, this request, introduced for the first time in the reply, has not allowed the defendant an opportunity to respond. The plaintiffs acknowledge this issue and suggest that the Court should direct both parties to brief the proposed amendment to the class definition. The Court declines to consider this request, deeming it improperly filed and untimely. Consequently, the Court denies the plaintiffs' motion concerning the HUD-1 statements related to the Brown and Martinelli loans, while affirming that this decision does not affect the evidentiary value of those statements in supporting claims within the original class definition. An order is issued granting in part and denying in part the plaintiffs' Motion for Partial Summary Judgment, with instructions for the Clerk to send copies of the order to all relevant parties.