LaSalle Bank, N.A. v. Shearon
2008 is an election year and every candidate for office has a plan for easing the credit crisis and helping homeowners from losing their homes to foreclosure. One New York State judge isn't waiting around until November to address the problem.
Mortgage underwriting began a drastic transformation with the development of the internet. With wider bandwidth, faster computers and innovative software, banks and brokers began to revolutionize the way people borrowed money. As banks became bigger and began to expand their presence from a regional to a national presence, the amount of loans underwritten by banks and sold to other banks or servicers expanded tremendously.
For hundreds of years, borrowing money was an extremely personal and difficult process. Lack of oversight and speculation often resulted in bank failures, or market collapse. The Stock Market Crash of 1929, the Great Depression and the New Deal brought tight regulations and separations between differing sectors of the financial market in order to bring some stability to the way money was lent, borrowed, invested and saved.
When a potential homeowner applied for a loan, the borrower would have to visit the local branch of the bank loaning the money. The borrower met with a loan officer, an employee of the bank, and filled out an application. The borrower would need to furnish their income tax records, their W-2 and paystubs, and bank statements showing that the borrower had sufficient savings to weather any short-to-medium term financial hardship. The bank officer would turn the application and documents to a lending or credit committee, made up of senior members of the local branch and a member of the regional management. The application was examined by each member who gave an individual opinion as to the borrower’s creditworthiness. The bank would have their appraiser go out to the premises, and since most lending was local, sometimes the bank manager himself would take a drive out to the house to see if it was worth anything. A mortgage application could take weeks. It was not intended to be a hasty, impersonal process.
With the advent of easier credit cards and the development of the telephone, credit became removed from the local savings and loan. Mass mailings and telemarketing began to break down the local bonds between a consumer and their local banker, diverting borrowers to national networks of lenders, most of them out-of-state. Soon, a homeowner did not need to leave their house in order to borrow thousands of dollars with no verification for credit cards. This easy lending spread to auto financing, "zero percent interest" promotions, payday loans, all culminating into impersonal mortgage loan origination practices bound to end in disaster for lenders and borrowers. This proved to be ripe ground for predatory lending.
Today, a potential homeowner can be solicited through the phone, through a mass mailing, over the internet, or even through "friends of the community" who use their positions of trust in order to get a brokers fee on an improvident loan. A loan application is taken over the phone and then typed into mortgage application software, which transmits the borrower's information into a central computer which immediately runs a FICO score and prints a credit report to determine the borrower's debt to income ratio. The addition of W-2s and tax information completes a brief financial X-Ray of the borrower. An appraiser is duly dispatched to the home, and the results then transmitted to the underwriter. Often times, a borrower does not even think to consult with a lawyer before signing on the bottom line. The impersonal pile of numbers and photographs is reduced to a computer entry to a member of the Credit Department, possibly hundreds of miles from the borrower, without ever meeting them, and hundreds of thousands of dollars are dispensed in this fashion; anonymously, sometimes with no double-checking, all in the name of churning out more volume and greater returns on their loans, selling loans to other banks as quickly as they made them, so as to pass off any default onto the next bank, and pocketing the difference. At the end of the day, brokers, banks, lawyers and title companies all take their piece and the homeowner is left with their new home and a vague idea of their loan terms. Only when the payment terms bulge at the end of the teaser term does the homeowner realize that they are in trouble.
The defendant homeowners in La Salle Bank, N.A. v. Shearon (2008 NY Slip Op 28032,19 Misc 3d 433), gave their mortgage broker tax statements which showed an Adjusted Gross Income of $29,567. Nonetheless, they were promptly approved for a mortgage for $355,100 – a no-money-down purchase of a home. Through an accounting dodge, approximately $19,000 was used to pay the closing costs of the home, leaving the defendant homeowners with no equity in the home. Even though the borrowers had excellent credit, the mortgage broker put them in adjustable rate mortgages which caused the payments to become unaffordable after two years. The house fell into foreclosure, and the defendant homeowners argued that they were the victims of predatory lending. The attorneys for the bank argued that as the defendants had represented that they made $7,200 a week on the mortgage application and in doing so had defrauded the bank.
Viewing the totality of the circumstances, the court found that the bank's lack of due diligence in this matter was so egregious that it rose to the level of predatory lending on the part of the underwriter. The court found numerous violations of New York State Banking Law which warranted summary judgment on the part of the defendant homeowners. The judge ordered a hearing as to whether the note and mortgage should be voided and all payments be returned to the borrower including damages and legal fees.
While many candidates have been offering solutions to solve the mortgage crisis, the citizens of the State of New York can turn to the courts and ask them to enforce the banking laws designed to protect its citizens. As long as courts remain vigilant to the abuses of predatory lending schemes, no further taxpayer funds need be expended beyond a well-deserved judicial pay raise.