Geraci v. Homestreet Bank

Decision Date12 April 2002
Docket NumberNo. C01-1465Z.,C01-1465Z.
Citation203 F.Supp.2d 1211
PartiesGregory GERACI, and Beverly Geraci, husband and wife, on behalf of themselves and of all others similarly situated, Plaintiffs, v. HOMESTREET BANK, Defendant.
CourtU.S. District Court — Western District of Washington

John H. Bright, Alexander Perkins, Keller Rohrback, Seattle, WA, Barry G. Reed, Zimmerman Reed, Minneapolis, MN, Hart Robinovitch, Zimmerman Reed, Scottsdale, AZ, for plaintiffs.

Stephen C. Kelly, Kelly & Associates, P.S., Seattle, WA, for defendant.

ORDER

ZILLY, District Judge.

This case is before the Court on defendant Homestreet Bank's ("Homestreet") motion for judgment on the pleadings, docket no. 17. The plaintiffs, a class of individuals who entered into loan transactions with the defendant, have brought this class action alleging three claims against the defendant: breach of contract by charging fees in violation of Department of Veterans Affairs loan regulations, 38 C.F.R. § 36.4312; violation of Section 8 of the Real Estate Settlement Procedures Act, ("RESPA") 12 U.S.C. § 2607 prohibition against the payment of kickbacks and referral fees; and unjust enrichment under state law. The plaintiff subsequently filed a motion for leave to file a surreply brief some 16 days after the defendant's reply brief was filed. See Motion to File Surreply, docket no. 29. Finally, the plaintiffs have requested that the court stay these proceedings pending the outcome of two cases currently on appeal with the Ninth Circuit Court of Appeals. See Plaintiffs' Motion for Stay, docket no. 39. For the reasons set forth below, the Court GRANTS the defendant's motion for judgment on the pleadings, DENIES the plaintiffs' motion for leave to file a surreply brief, and DENIES the plaintiffs' motion to stay the proceedings.

BACKGROUND

This case represents another chapter in the saga of yield spread premium litigation. The plaintiffs, Mr. and Mrs. Geraci, allege that the defendant Homestreet Bank unlawfully paid yield spread premiums to a mortgage broker, Windermere Mortgage Services ("Windermere"), in connection with a lending transaction they were a party to. The Geracis engaged the services of Windermere to secure a loan guaranteed by the Department of Veterans Affairs ("VA") and Windermere secured them a loan in the amount of $161,670.00. First Amended Class Action Complaint ("FAC"), docket no. 4, at ¶ 27. The Geracis were charged a loan origination fee in the amount of $1,616.70, equal to one percent of the principal amount of the loan. Id. at ¶ 28. Additionally, Homestreet paid Windermere a "service fee" in the amount of $1,843.04, equal to approximately 1.14 percent of the principal amount of the loan. Id. at ¶ 31. Thus, Windermere ultimately received fees totaling $3,459.74 or 2.14 percent of the principal amount of the loan. Id. at ¶ 32. The plaintiffs claim that the one percent loan origination fee was intended as full compensation to Windermere for its services. Id. at ¶ 31.

The complaint alleges three related causes of action. The plaintiffs first allege that the payment of the yield spread premium violates the one percent cap on loan charges contained in the VA regulations that the loan is subject to, 38 C.F.R. § 36.4312. See FAC at 12-13. Because the promissory note and deed of trust associated with their loan provide that any fees charged in excess of that permitted by law are to be refunded, the plaintiffs claim that the defendant's payment of the yield spread premium is a breach of the promissory note and deed of trust. Second, the plaintiffs contend that the yield spread premium was not exchanged for goods or services actually provided by the broker, in violation of the anti-kickback and referral fee provisions of Section 8 of RESPA. See id. at 13-18. Finally, the plaintiffs assert that the defendant was unjustly enriched by receipt of the higher interest rates that would not have been charged but for the unlawful payment of the yield spread premium. See id. at 18-19.

The defendant argues that each of these claims should be dismissed as a matter of law under Fed.R.Civ.P. 12(c). As to the plaintiffs' claim for breach of contract, the defendant argues that there was no violation of the one percent cap because Homestreet, rather than the Geracis, paid the yield spread premium to Windermere. Since Section 36.4312 regulates charges assessed against and paid by the borrower, the defendant contends that the yield spread premium should not be counted against the one percent cap on loan charges. In terms of the plaintiffs' RESPA claim, the defendant asserts that the plaintiffs have failed to allege facts that support a conclusion that the yield spread premium was an unlawful referral payment under Section 8. Finally, the defendant claims that the plaintiffs' unjust enrichment count fails because it is totally derivative of the plaintiffs' breach of contract and RESPA claims.

DISCUSSION
I. Legal Standard

The standard for deciding a motion under Rule 12(c) is virtually identical to the standard for a motion to dismiss for failure to state a claim under Rule 12(b)(6). Ludahl v. Seaview Boat Yard, Inc., 869 F.Supp. 825, 826 (W.D.Wash.1994). Judgment on the pleadings may be granted only when "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Enron Oil Trading & Transp. Co. v. Walbrook Ins. Co., Ltd., 132 F.3d 526, 529 (9th Cir.1997) (internal quotations and citations omitted). In other words, a motion for judgment on the pleadings should be granted only when it appears that the moving party is entitled to judgment as a matter of law. Fajardo v. County of Los Angeles, 179 F.3d 698, 699 (9th Cir.1999). Thus, the narrow question presented by the defendant's motion is whether the plaintiffs have failed to plead facts that, even if taken as true, fail to state valid claims for which relief may be granted.

II. First Cause of Action: Breach of Contract

The plaintiffs' first claim for breach of contract depends upon the allegation that Homestreet breached its contractual obligations by charging origination fees in excess of that allowed by VA regulations. Title 38 U.S.C. § 3703(c)(1) provides that VA-guaranteed loans are subject to any regulations issued by the Secretary of the VA. Section 36.4312, Title 38 of the Code of Federal Regulations provides that "[n]o charge shall be made against, or paid by [a] borrower incident to the making of a guaranteed or insured loan other than those expressly permitted under paragraph (d) or (e) of [Section 36.4312]." 38 C.F.R. § 36.4312(a). Paragraph (d) provides a schedule of fees and charges that a lender is permitted to charge a borrower for a VA guaranteed or insured loan. 38 C.F.R. § 36.4312(d). Subparagraph (d)(1) provides a list of nine enumerated fees, which include items other than origination charges. 38 C.F.R. § 36.4312(d)(1). Additionally, subparagraph (d)(2) states that "[a] lender may charge and the veteran may pay a flat charge not exceeding 1 percent of the amount of the loan, provided that such flat charge shall be in lieu of all other charges relating to costs of origination not expressly specified and allowed in this schedule." 38 C.F.R. § 36.4312(d)(2).

The plaintiffs claim that the yield spread premium paid to Windermere exceeds this one percent cap on origination fees that may be charged, when aggregated with the origination fee that Windermere collected from the plaintiffs directly at closing. This claim fails for the simple reason that the yield spread premium at issue here was not charged against or paid by Mr. and Mrs. Geraci, but was instead paid by Homestreet Bank to Windermere. Thus, the yield spread premium does not fall within the plain language of the regulation, which limits only fees "charged against, or paid by the borrower." 38 C.F.R. § 36.4312(a). The VA's interpretation of its own regulation confirms this conclusion. The VA's Lender's Handbook states that in addition to the itemized charges listed in Section 36.4312(d)(1), a lender may charge the borrower a flat charge equal to one percent of the amount borrowed. Lender's Handbook, VA Pamphlet 26-7, § 8.02 at 8-6. Although this flat charge is intended to cover all of the lender's costs and services, "the lender may pay third parties for services." Id., § 8.03 at 8-8. The VA takes the position that its regulations, while limiting charges assessable against the borrower, "do not limit the payment of fees and charges by other parties." Id., § 8.04 at 8-10. Instead, the VA advises lenders to consult RESPA with regard to the legality of lender payments to third parties. See id., § 8.03 at 8-8. Nothing contained within the regulation or the VA's interpretation of the regulation can be construed as including yield spread premiums as part of the charges regulated by the one percent cap. This silence as to yield spread premiums, coupled with a plain reading of the regulation, indicates that Section 36.4312 was not intended to limit any payments made by lenders to mortgage brokers or other parties.

As an official agency interpretation of a rule that the VA administers, the Court holds that the interpretation of Section 36.4312 contained within the VA pamphlet is entitled to substantial deference. See Auer v. Robbins, 519 U.S. 452, 461, 117 S.Ct. 905, 137 L.Ed.2d 79 (1997) (citations and internal quotes omitted) (an agency's interpretation of its own regulation is entitled to substantial deference unless it is "plainly erroneous or inconsistent with the regulation"); Bjustrom v. Trust One Mortg., 178 F.Supp.2d 1183, 1193 (W.D.Wash.2001) (granting some deference to HUD's interpretation of the one percent origination fee cap on FHA loans). The VA's interpretation is reasonable and tracks with a plain reading of the regulation. Although the VA's interpretation of the regulation falls short of expressly excluding yield spread premiums by name, the VA pamphlet clearly...

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