A Major Bank Brought to its Knees: LaSalle Bank NA v. Shearon

Once the court found the loans to be high cost loans, the statutory violations were numerous, including the financing of more than 3% of the principal loan amounts for closing costs.  NY Banking law limits closing cost financing to 3% when the loan is considered a high cost loan.  Further, the court found the Lender’s due diligence to be inadequate to determine whether or not the Shearons had the ability to repay the loan, that certain documents were forged and the disclosures were inadequate.  The penalties for violation of NY’s Anti-Predatory statute are severe – the entire mortgage can be forgiven, all monies paid by the homeowner refunded plus hurts. (see extended post for text of entire NY Slip Opinion)

While this choice is sure to be appealed, it sends a message to the Lenders and the Secondary Mortgage market that they will be held accountable.  It provides an invaluable tool also to those of us representing these homeowners who might have been coerced and tricked into these types of loan programs who are seeking modifications and small sales from these lenders. But, I do not recall closing any high cost loans and if the fees were excessive, most Lenders required the mortgage broker to reduce their fees so as not to fall within this category and trigger the onerous compliance requirements.  But, I am sure that there were mortgage brokers and lenders out there who didn’t quite care and flew in the face of caution – GO GET ‘EM!

 

LaSalle Bank, N.A. v Shearon

2008 NY Slip Op 28032

Chose on January 28, 2008

Supreme Court, Richmond County

Maltese, J.

Published by New York State Law  Reporting Bureau pursuant to Judiciary Law § 431.

This opinion is uncorrected and subject to  revision before publication in the printed Official  Reports.

Chose on January  28, 2008

Supreme Court, Richmond County

LaSalle Bank, N.A. AS TRUSTEE FOR THE MLMI TRUST SERIES, 2006-WMC2, c/o Wilshire Credit Corporation, Plaintiff against David Shearon, COMMERCE BANK, N.A., NEW YORK CITY ENVIRONMENTAL CONTROL BOARD, NEW YORK CITY PARKING VIOLATIONS BUREAU, NEW YORK CITY TRANSIT ADJUDICATION BUREAU, JOHN DOE (Said name being ficticious it being the intention of the Plaintiff to designate any and all occupants or premises being foreclosed herein, and any parties, having or claiming an interest or lien upon the mortgaged premises), Defendants

100255/2007 
Plaintiff is represented by Steven J. Baum, P.C. 
Defendant is represented by Cilmi & Associates, PLLC
Joseph  J. Maltese, J. 

This
court has denied the plaintiff bank’s summary judgment motion in a
mortgage foreclosure action because it has found that the original
lender has violated the "predatory lending" statutes found in New York
Banking Law §6L. As a result of the findings of violations of the
predatory lending sections of the New York Banking Law this court
grants the defendant home owner summary judgment wherein he may be
entitled to hurts to include the voiding of the mortgage and loan,
along with the return of all mortgage payments, the expenses of
obtaining the loans and attorney fees.

Facts

In the summer of 2005, after living in a rental home for three years,
the Shearons, as first time home buyers, chose to buy a house in
Staten Island, New York. After searching for the "right" home, they
executed a contract of sale for real property located at 33 Westport
Lane in Staten Island, New York. [*2] 

To
locate this home, the Shearons utilized the services of a real estate
agent from Coldwell Banker. After finding their home, they utilized the
services of Glen DeLuca and Michael Farber, mortgage brokers associated
with Liberty Capital Mortgage,^[FN1]
to provide them with all necessary financial information and potential
lenders in order to obtain financing for the buy. In August and
September 2005, Michael Farber advised the Shearons that they would
qualify for traditional loan products with fixed interest rates and
that he was "shopping around for the best rates." At the time the
Shearons were applying for financing, as husband and wife, in
connection with purchasing their home, David Shearon’s credit score was
696 and Karen Shearon’s credit score was 760 on a scale where 800 is
the maximum score.

The Shearons presented a joint tax return which shows a combined adjusted  yucky income of $29,567.^[FN2]
On October 17, 2005 the Shearons entered into a contract of sale to
buy the house for $335,000. But, the Contract listed a
buy price of $355,100 with a "Seller’s Concession" of $20,100. At
the execution of the contract, the Shearons deposited $5,000 with the
seller’s attorneys, which would leave a balance of $350,100. But the
financing was for the full $355,000, implying that it would be a "no
money down" buy at closing where arguably that amount should have
reflected a deduction of the $5,000 deposit that the Shearons paid at
the contract signing.

From the time of the contract until
closing in January 2006, Michael Farber advised the Shearons that WMC
Mortgage Corp. would be able to finance the entire $355,100 of the
buy price in two loans. The plaintiff, LaSalle Bank, N.A.,
(hereinafter "lender") was the trustee and successor for WMC. The first
mortgage was for $284,000 and the second mortgage was for $71,000. The
closing for the subject property occurred on or about January 27, 2006.
But, David Shearon was listed as the sole purchaser and sole
borrower on all closing documents.

Shearon, in his answer alleges that he has been the victim of "Predatory  Lending"
practices by the mortgage brokers and the lender regarding  the finance of his home. Shearon
alleges the following six separate and  distinct acts to justify his claim of predatory lending:

1)
Excessive financing was approved and extended to 106% of the buy
price, which permitted Shearon to finance the points, broker fees and
costs;

2) Improper, inadequate or non-existent
lender due diligence regarding Shearon’s ability to repay the high cost
home loan given;

3) The intentional and
improper placement of Shearon into sub-prime loan products with
excessively high interest rates, longer loan terms and impaired
refinancing flexibility to the sole benefit of the lender;

4) Absent or inadequate state and federally mandated  truth-in-lending ("TILA") [*3]disclosures
regarding material elements of the financing being obtained including,
without limitation, matters relating to closing costs and fees,
counseling services, loan terms, amortization schedules and balloon
payment requirements;

5) Forgeries of numerous
loan-related documents, including without limitation the (i)
Residential Loan Application, dated November 7, 2005;

(ii) undated "Addendum to Contract of Sale"; and

(iii)
"Request for Verification of Rent", dated January 3, 2006 (purportedly
signed by Jennifer Ogman) reflecting inaccurate information used to
underwrite the Loans; and

6) The employment of
repeated and continuous coercive and concerted tactics by plaintiff and
other non-parties who stood to benefit from the loan process, which
successfully targeted and forced Shearon to close on the loans and the
property or face significant and dire financial consequences (i.e.
losing the loan commitment, defaulting under the buy contract,
losing the down-payment/deposit).

New York Banking Law

Predatory lending practices are prohibited by both New York State and  Federal laws. Here, the "home loans"^[FN3]
in question are governed by New York Banking Law § 6-L (1)(d) which
governs "High Cost Home Loans" which are classified as such by the
scheme provided for in Banking Law § 6-L(1)(g). New York Banking Law §
6-L(2) prohibits certain practices by lending institutions when
offering High Cost Loans. The statute also provides for a six year
statute of limitations accruing from the origination of the loan,^[FN4]  as well as remedies for violations of the statute.^[FN5]  A court may also award reasonable attorneys fees to the prevailing  borrower.^[FN6]
And the Court may grant the borrower injunctive, declaratory and such
other equitable relief to enforce compliance with this section.^[FN7] 

But,
the most drastic remedies provided are found in Banking Law §§ 10 and
11 of the statute. Banking Law § 6-L(10) states:

"Upon
a finding by the court of an intentional violation by the lender of
this section, or regulation thereunder, the home loan agreement shall
be rendered void, and the lender shall have no right to collect,
receive or retain any principal, interest, or other charges whatsoever
with respect to the loan, and the borrower may recover any payments
made under the agreement."

[*4]
New York Banking  Law 6-L(11) states: 

"Upon
a judicial finding that a high-cost home loan violates any provision of
this section, whether such violation is raised as an affirmative claim
or as a defense, the loan transaction may be rescinded. Such remedy of
rescission shall be available as a defense without time limitation."

Discussion

Shearon is alleging that he is the victim of "predatory lending" defined by  New York Banking Law § 6-L, et. seq. Specifically,
Shearon alleges that he was given excessive financing on a High Cost
Loan without the lenders inquiry as to his ability to pay, which is
mandated by NY Banking Law § 6-L(2)(k). The lender alleges that loans
of 7.65% and 10.5 % are less than the 16% usury statute and hence are
not "high cost" loans. But the home loans were considered high cost
loans by the lender because the lender prepared the following forms
dated December 8, 2005: a New York High Cost Loan Disclosure; New York
High Cost Loan Payment Disclosure; and New York High Cost Loan
Insurance.

It is undisputed that Shearon was given
$355,000 to finance the buy of a $335,000 house, where the extra
$20,000 or 6% of the buy price was used to pay points and fees
associated with the closing on the property. Specifically, when
examining the HUD-1 closing statement prepared at the time of closing,
it is apparent that $19,145.69 was used to pay all costs and fees
associated with securing the High Cost Loans. These monies were paid
from financing received above and beyond the contract price of
$335,000. This ultimately left Shearon with negative equity in the
property.

The financing of the fees and points associated with the loan is also a  violation of Banking Law 6-L(2)(m) which states:

"In
making a high-cost home loan, a lender shall not, directly or
indirectly, finance any points and fees as defined in paragraph (f) of
subdivision one of this section, in an amount that exceeds three percent  of the principal amount of the loan" (emphasis added).

Here,
the amount financed to cover the fees are in violation of the statute
because the points and fees exceed 3% of the principal amount of the
loan. Three percent of the loan equates to $10,650. But, the
expenses of the loan were $19,145.69, which equates to about 5.4%
($19,145.69 ÷ $355,000 = .0539) which is more than the 3% allowed by
the statute. What is more egregious is that $19,145.69 in expenses is
5.72% of the original cost of the $335,000 house ($19,145.69 ÷ $335,000
= .0572).

Shearon also alleges that the Lender did not
conduct a "due diligence" or any inquiry into their ability to repay
the High Cost Loan. The plaintiff argues in its motion for summary
judgment that David Shearon stated that he reported $7,200 as monthly
income when [*5]
he first applied for the loan. The plaintiff then states in paragraph
25 of their attorney’s affirmation that Mr. Shearon "cannot argue that
his annual income of $86,400 places him in a category of low-income."

If
David Shearon and his wife stated on the original loan application that
their monthly income was $7,200, the lender’s statutory requirement is
to make an inquiry as to the truth of the statement and the borrower’s
ability to repay the loan. While this court will not condone fraud by
the borrower, New York Banking Law § 6-L(2)(k) states that:

"A
lender or mortgage broker shall not make or arrange a high-cost home
loan without due regard to repayment ability, based upon consideration
of the resident borrower or borrowers’ current and expected income,
current obligations, employment status, and other financial resources
(other than the borrower’s equity in the dwelling which secures
repayment of the loan), as verified by detailed documentation of
all sources of income and corroborated by independent verification."
(emphasis added).

Here, plaintiff’s counsel states in both the moving papers and answer  papersthat

"Based
on Defendant’s income, credit history, and the low interest rate on the
Mortgage loan, along with the Defendant’s lack of evidence supporting
predatory lending, the Defendant is precluded from alleging the same.
As such, the Defendant’s mortgage loan was in compliance with all
applicable laws, including, but not limited to, all anti-predatory
lending laws."

While statements contained in an attorney’s affirmation are not proper  evidence before the court,^[FN8]
the plaintiffs do not offer one scintilla of evidence as to their
required "due diligence" inquiry regarding David Shearon’s ability to
pay, which is a violation of New York’s Banking Law governing High Cost
Loans.

Shearon also alleges that he and his wife were
intentionally placed into a sub-prime loan product. He bases the
argument upon two facts. First, David Shearon and his wife originally
applied jointly for the loans where he had a credit score of 696 and
his wife had a score of 760 on a scale of 800. The Shearons jointly
were considered "A paper," a term given to those loan applicants that
are deemed to have the highest level of credit-worthiness.^[FN9]
Shortly before the closing, Karen Shearon was removed as a borrower for
the loans. The Lender claimed that since no loan terms were modified,
the application was not subject to any new underwriting or analysis and
the closing occurred without any apparent change to the entire
financing process. But, removing the higher rated borrower from the
loan would require a new underwriting inquiry, but none was conducted.
Therefore, the Shearons argue that they were intentionally placed into
a sub-prime loan product.

The second factor that the Lender used to place the Shearons into a  sub-prime product [*6]was
an adjustable rate mortgage. Throughout the process, Michael Faber from
Liberty Capital stated that the Shearons would be placed into a
traditional loan product with fixed interest rates. But, when
Shearon closed title, he obtained the First Loan with a 7.59% rate for
the first 2 years, which would thereafter re-adjust and rise to no more
than 10.59% in February 2008. But, every six (6) months thereafter
it was subject to increase with a ceiling of 14.09% with anticipated
finance charges over the life of the loan of $682,821.49. The Second
Loan had a fixed rate of 10.750% for the life of the loan with
anticipated finance charges over the life of the loan of $121,861.87.
Therefore, Shearon would be obligated to pay up to $804,683.36 for a
house that sold for $335,000. At the time of closing, these loans were
considered sub-prime products, even though they had qualified for
traditional fixed loan products at lower rates, because of their "A
paper" credit worthiness.

Shearon also alleges a violation of Banking Law § 6-L(2)(l)(I), which has  been dubbed the "Counseling Statute."
This section provides that a lender or mortgage broker must deliver,
place in the mail, fax or electronically transmit the following notice
in at least twelve point type to the borrower at the time of
application: "You should consider financial counseling prior to
executing loan documents. The enclosed list of counselors is provided
by the New York State Banking Department." Banking Law § 6- L(2)(l)(ii)
requires that the lender or mortgage broker within three days after
determining that the loan is a high-cost loan, but no less that ten
days before closing, give the "Consumer Caution and Home Ownership
Counseling Notice" to the borrower. This was  not done.

David
Shearon states in his affidavit that: 1) he has never been provided
with, nor did Liberty Capital ever advise him of the nature of the
loans and or the disclosures regarding counseling services available;
and 2) the repercussions of the loans on his credit or that a balloon
payment was required in connection with the loan. Moreover, the
plaintiff fails to provide any evidence of the required disclosure in
any of their papers. Their attorney simply states that their loans were
sold in compliance with the various regulating statutes including RESPA, TILA, HOEPA, New York State Banking law  and Federal Statutory Law prohibiting predatory lending.

A
motion for summary judgment must be denied if there are "facts
sufficient to require a trial of any issue of fact (CPLR §3212[b]).
Granting summary judgment is only appropriate where a thorough
examination of the merits clearly demonstrates the absence of any
triable issues of fact. "Moreover, the parties competing contentions
must be viewed in a light most favorable to the party opposing the
motion".^[FN10]
Summary judgment should not be granted where there is any doubt as to
the existence of a triable issue or where the existence of an issue is
arguable.^[FN11]  As is relevant, summary judgment is a drastic remedy that should be granted only  if [*7]no triable issues of fact exist and the movant  is entitled to judgment as a matter of law.^[FN12]  On a motion for summary judgment, the function of the court is to issue  findings, and not to issue a determination.^[FN13]
In making such an inquiry, the proof must be scrutinized carefully in
the light most favorable to the party opposing the motion.^[FN14]
Here, the plaintiff has place forth a plethora of documentary evidence
that, at the very least, precludes summary judgment on behalf of the
plaintiff; and accordingly, their motion is denied.

But,
when making a motion for summary judgment, the movant always runs the
risk that the court may search the record, and in the absence of a
cross-motion, award summary judgment on behalf of the non-moving party.^[FN15]
When doing so, the court must offer the same careful scrutinization of
the proof in the light most favorable to party which summary judgment
is being sought against.^[FN16]
In moving for summary judgment, the plaintiff was required to assemble
and lay bare its proof entitling it to summary judgment.^[FN17] 

Here,
the voluminous documentary evidence demonstrates violations of New York
Banking Law § 6-L(2)(k), which deals with the plaintiff’s due diligence
into the ability of the defendants to repay the loan. The plaintiff has
not offered one scintilla of evidence of any inquiry into the
defendants ability to repay the loan. New York Banking Law § 6-L(2)(k)
requires this inquiry to be "verified by detailed documentation of all
sources of income and corroborated by independent verification." This
failure to inquire is a violation of New York’s Banking Law. Therefore,
summary judgment on this affirmative defense is granted in favor of the
defendant.

The plaintiff apparently also violated NY
Banking Law § 6-L(2)(l)(I), which requires the lending institution to
provide a list of credit counselors licensed in New York State to any
recipient of a High Cost Loan. David Shearon states in his affidavit
that he never received the notice for required counseling. This
document was also not provided to the court by plaintiff, although a
copy of the entire origination file was provided.^[FN18]  Failure to provide this notice is a [*8]violation of  NY Banking Law § 6-L(2)(l)(I).

In
this action, clearly the most egregious violation of NY Banking Law is
the violation of § 6-L(2)(m) which states that no more than 3 percent
of the amount financed is eligible to pay the points and fees
associated with closing the loans on the real property. The amount
financed to cover the fees are violative of the statute because more
than 3% of the amount financed was used to pay the fees and points
associated with the loan. The $19,145.69 in expenses equates to nearly
5.4% of the High Cost Loan and is a clear violation of the statute.

After
searching the record, it is clear that the lending institution, in
providing home financing to David Shearon, violated, at least three
provisions of New York’s Banking Law. Therefore, summary judgment is
granted in favor of the defendant, David Shearon, on his counter claims
for violations of NY Banking Law §§ 6-L(2)(k); 6-L(2)(l)(I); and
6-L(2)(m). Consequently, the finding of these violations now triggers
NY Banking Law § 6-L(7) through § 6-L(10) which is the remedy and
hurts provisions of the statute.

New York Banking Law §
6-L(7) provides in pertinent part that: "Any person found by a
preponderance of the evidence to have violated this section shall be
liable to the borrower for the following:

(a) actual hurts, including consequential and incidental hurts;  and

(b) statutory hurts as follows (i) all of the interest, earned or  unearned, points and

fees, and closing costs charged on the loan shall be forfeited and  any amounts paid

shall be refunded; except that this element of statutory hurts  shall not be awarded

for violations of:

(1) paragraph (i) of subdivision two of this section regarding loan  flipping;

and

(2) paragraph (k) of subdivision two of this section regarding ensuring the 

borrower’s
ability to repay the loan, so long as the lender demonstrates that at
the time of the loan, it verified by detailed documentation all sources
of theborrower’s income and corroborated it with independent
verification;

or

(ii) five thousand dollars per violation or twice the amount of  points and fees and

closing costs as defined in this section, whichever is greater, for  violations of:

(1) paragraph (i) of subdivision two of this section regarding loan  flipping; [*9]

and

(2) paragraph (k) of subdivision two of this section regarding ensuring the 

borrower’s ability to repay the loan, where the borrower is not entitled to 

relief under subparagraph (i) of this paragraph."

In
this case, the defendant David Shearon demonstrated by a preponderance
of the evidence that the Lender violated the anti-predatory lending
statutes of New York’s Banking Law. Therefore, David Shearon may be
entitled to receive: actual, consequential and incidental hurts, as
well as all of the interest, earned or unearned, points, fees, the
closing costs charged for the loan; and a refund of any amounts paid.

This
court will hold a hearing where all parties shall present any evidence
as to actual hurts and any other evidence not otherwise mentioned
herein that may mitigate the findings of this court pertaining to the
alleged intentional behavior of the Lender who violated several
sections of the New York Banking Law § 6-L. The finding of intentional
violation renders the home loan agreement (mortgage) void, and strips
the lender from having a right to collect, receive or retain any
principal, interest, or other charges whatsoever with respect to the
loan, as well as giving the borrower the ability to recover any
payments made under the agreement.^[FN19]  The hearing shall also be used to determine the amount of hurts.

Additionally, the defendant is entitled to receive reasonable attorneys  fees in conjunction with the defense of this action.^[FN20] 

Accordingly, it is hereby:

ORDERED, that the plaintiff’s motion for summary judgment is denied in its  entirety; and it is further

ORDERED,
that the foreclosure action shall be stayed until the final
determination by this court as to the extent of the applicability of
New York Banking Law § 6-L(10) as well as the assessment of any
hurts; and it is further

ORDERED, that the defendant,
David Shearon, shall prepare an affidavit outlining his financial
hurts in detail to be exchanged with plaintiff’s counsel by February
15, 2008; and it is further

ORDERED, that counsel for the Defendants, Cilmi & Associates, PLLC,  shall prepare [*10]an
affidavit outlining their attorney’s fees for the defense of this
action and shall serve same upon the plaintiff’s counsel and this Court
on or before February 15, 2008; and it is further

ORDERED,
that all parties shall appear in this court at DCM3, 355 Front Street,
Staten Island, New York 10304, at 1:30PM on Friday, February 29, 2008  for a hearing to determine the extent of any hurts the defendant, David  Shearon, has sustained and for counsel fees.

ENTER,
DATED:January 28, 2008

Joseph J. Maltese

Justice of the Supreme Court

Footnotes

Footnote  1: Liberty Capital Mortgage was doing business as (d/b/a) HCI Mortgage  Company located in Lake Ariel, Pennsylvania.
Footnote  2: 2005 Internal Revenue Service Abstract and Return for David and Karen  Shearon.
Footnote  3: "Home Loans" are defined in NY Banking Law §6-L(1)(e).
Footnote  4: NY Banking Law § 6-L(6).
Footnote  5: NY Banking Law § 6-L(7).
Footnote  6: NY Banking Law § 6-L(8).
Footnote  7: NY Banking Law 6-L(9).
Footnote  8: Jeune v.  O.T. Trans Mix Corp. 29 AD3d 635 [2d Dept 2006]; Pautienis v.  Legacy

Capital  Corp. 36 AD3d 462 [1st Dept 2007].
Footnote  9: See EMC Mortg. Corp. v. Batista 15 Misc 3d 1143(A) [Sup. Ct.  Kings County].
Footnote  10: Marine Midland Bank, N.A., v. Dino, et al., 168 AD2d 610 [2d  Dept 1990].
Footnote  11: American Home Assurance Co., v. Amerford International Corp.,  200 AD2d 472 [1st
Dept 1994].
Footnote  12: Rotuba Extruders v. Ceppos,, 46 NY2d 223 [1978]; Herrin v.  Airborne Freight Corp.,
301 AD2d 500 [2d Dept 2003].
Footnote  13: Weiner v. Ga-Ro Die Cutting, 104 AD2d 331 [2d Dept 1984].  Aff’d 65 NY2d 732
[1985].
Footnote  14: Glennon v. Mayo, 148 AD2d 580 [2d Dept 1989].
Footnote  15: CPLR 3212(b); Gorman v. Town of Huntington, 2007 NY Slip Op.  08186 [2d Dept,
Oct. 30, 2007]; Dunham v. Hilco Const. Co., Inc.  89 NY2d 425 [1996].
Footnote  16: Federal Nat. Mortg. Ass’n v. Katz 33 AD3d 755 [2d Dept 2006];  Lacy v. New York
City Housing Authority 4 AD3d 455 [2d Dept  2004].
Footnote  17: First Nat. City Bank v. Mayes 35 AD2d 922 [1st Dept 1970]. 
Footnote  18: See Answer Affirmation of Heather A. Johnson, Esq. paragraph  3.
Footnote  19: NY Banking Law § 6-L(10).
Footnote  20: NY Banking Law § 6-L(8).