McKell v. Washington Mut., Inc.

Decision Date18 September 2006
Docket NumberNo. B176377.,B176377.
Citation49 Cal.Rptr.3d 227,142 Cal.App.4th 1457
CourtCalifornia Court of Appeals Court of Appeals
PartiesLinda McKELL et al., Plaintiffs and Appellants, v. WASHINGTON MUTUAL, INC. et al., Defendants and Respondents.

Moon, Los Angeles, for Defendants and Respondents.

SPENCER, P.J.

INTRODUCTION

Plaintiffs Linda McKell, Scott David Pasnikowski and Susan Nero appeal from an order of dismissal entered after the trial court sustained defendants' demurrer to their second amended complaint without leave to amend. Plaintiffs challenge the propriety of the trial court's ruling. We reverse the order of dismissal and direct the trial court to overrule defendants' demurrer as to certain of plaintiffs' causes of action.

FACTUAL AND PROCEDURAL BACKGROUND1

Plaintiffs brought this action for damages and equitable relief against defendants2 as a class action. The trial court sustained defendants' demurrer and dismissed the action without ruling on the question whether the case could proceed as a class action.

In their first amended complaint, plaintiffs alleged causes of action for violation of the Unfair Competition Law (UCL, Bus. & Prof.Code, § 17200 et seq.); violation of the Consumers Legal Remedies Act (CLRA, Civ.Code, § 1750 et seq.); unjust enrichment/imposition of a constructive trust; breach of contract; breach of bailment agreement; and conversion. The basis of all causes of action was defendants' overcharging plaintiffs for underwriting, tax services, and wire transfer fees in conjunction with home loans. Defendants charged plaintiffs more for these services than defendants paid the service providers.

The trial court sustained defendants' demurrer with leave to amend. It explained that plaintiffs' causes of action "turn on the alleged existence of an agreement requiring Washington Mutual to charge no more than pass-through costs for underwriting, tax services, and wire transfers." Plaintiffs acknowledged at oral argument that they had "no express contractual statement requiring Washington Mutual to limit charges to pass-through costs," so they were relying "on an allegedly implied requirement." The court found the first amended complaint unclear as to how such a requirement could be implied from plaintiffs' dealings with Washington Mutual.

The trial court allowed plaintiffs to amend their complaint to allege with specificity "(1) why the agreement [to charge plaintiffs only pass-through costs] is implied, (2) how the agreement, as implied, is binding on Washington Mutual, and (3) why the agreement definitively requires Washington Mutual to charge pass-through costs." The court required plaintiffs to amend each cause of action to explain specifically how Washington Mutual's misconduct related to the agreement.

In their second amended complaint, plaintiffs alleged that they obtained "federally related mortgage loan[s] from Washington Mutual" to purchase their homes. As a condition of obtaining the loans Washington Mutual required them to pay the costs of automatic underwriting and wire transfers. It did so "by disclosing on the HUD-1 Settlement Statement the purported costs of these fees." The cost to Washington Mutual of underwriting and wire transfers "is substantially less than the amounts Washington Mutual represents on its HUD-1 Settlement Statement."

Additionally, Washington Mutual required plaintiffs to pay a tax services fee. The deeds of trust provided by Washington Mutual, prior to the close of escrow, stated: "Lender may require Borrower to pay a one time charge for a real estate tax verification and/or reporting service used by Lender in connection with this loan."

The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) were created to expand opportunities for home ownership. They are mandated to increase the affordability of home ownership by reducing the cost of borrowing. According to Freddie Mac, for every $400 reduction in closing costs, another 70,000 families qualify to purchase a home.

In 1995, Fannie Mae and Freddie Mac began requiring lenders who sell loans to them to use automated underwriting software. This software quickly analyzes the borrower's ability to repay the loan and assigns an underwriting score. If the score indicates an acceptable risk, the underwriting process is complete, and Fannie Mae and Freddie Mac guarantee they will purchase the loan on the secondary market.

The automated underwriting software significantly decreases the cost and risk of underwriting to the lender as well as the time for closing a loan. Fannie Mae and Freddie Mac charge just $20 to underwrite a loan, and they can issue a purchase guarantee in 20 minutes. Freddie Mac estimates that the automated software should save $400 to $650 in closing costs. Loans close in five days rather than 30 to 60 days.

Rather than passing on the savings resulting from the automatic underwriting program, Washington Mutual charged borrowers hundreds of dollars for underwriting services which cost only $20. It charged plaintiff McKell $400, and plaintiffs Pasnikowski and Nero $250, for underwriting services. It did not disclose to borrowers that in many cases it was performing no underwriting services, it was charging them significantly more than the cost of those services and it was retaining the difference. "Washington Mutual intentionally concealed and continues to conceal these practices from borrowers by listing the inflated underwriting charge on the HUD-1 Settlement Statement while failing to disclose that this is not the actual cost incurred. Such a practice deceives consumers by leading them to reasonably conclude that the amount listed is the amount incurred."

Washington Mutual also requires borrowers to pay third party vendors to obtain information about property taxes on the property being purchased. Washington Mutual charges borrowers more for the third party vendor services than the vendors charge, without performing any additional services, and retains the difference, unbeknownst to the borrowers.

Similarly, Washington Mutual pays a flat fee to wire money to another bank or title company. It charges borrowers fees for this service well above its costs, without performing any additional services and without disclosing the markup to borrowers.

The foregoing practices, plaintiffs alleged, violated the UCL prohibition against unlawful business practices, in that they defrauded and misled plaintiffs in violation of the Civil Code and common law; violated the California Residential Mortgage Lending Act (CRMLA, Fin.Code, § 50000 et seq.); violated the Real Estate Settlement Procedures Act (RESPA, 12 U.S.C. § 2601 et seq.) and Housing and Urban Development (HUD) regulations and policy statements interpreting RESPA; they violated Regulation X (24 C.F.R. § 3500.1 et seq.); violated CLRA; unjustly enriched defendants; constituted an unconscionable provision in violation of Civil Code section 1770, subdivision (a)(19); and violated 18 United States Code sections 1001 and 1010 prohibiting knowingly making a false statement on a HUD-1 Settlement Statement. The practices also violated the UCL prohibitions against unfair and fraudulent business practices, in that they were likely to deceive the public and did, in fact, defraud and mislead plaintiffs and frustrate the public policy behind the aforementioned state and federal laws and regulations.

In their breach of contract cause of action, plaintiffs alleged that "Washington Mutual requires its borrowers to pay the cost of automatic underwriting and wire transfers . . . by disclosing on the HUD-1 Settlement Statement the purported costs of these fees." Additionally, "[a]s a condition to obtaining a loan, pursuant to the deed of trust supplied by Washington Mutual, Washington Mutual also requires its borrowers to pay a tax services fee. The deed of trust states that the `Lender may require Borrower to pay a one time charge for a real estate tax verification and/or reporting service used by Lender in connection with this loan.'" Washington Mutual breached its contract "because instead of charging plaintiffs . . . for underwriting, tax services and wire transfer services, Washington Mutual charged plaintiffs . . . amounts in excess of those services."

Plaintiffs' breach of bailment agreement cause of action was based on Washington Mutual's wrongful use of fees plaintiffs paid it for underwriting, tax services and wire transfer services. Their cause of action for conversion was based upon Washington Mutual's overcharging for the services and refusing to return the money it overcharged plaintiffs.

Defendants again demurred. The trial court sustained the demurrer without leave to amend.

The court explained that plaintiffs' causes of action relied on an implied requirement that defendant charge them pass-through costs only. "Printing charges for underwriting services, etc. on HUD-1 statements, without more, does not create a requirement that Defendants charge pass-through costs. The HUD-1 statements reflect what Washington Mutual charges customers for settlement services and not (necessarily) what Washington Mutual pays for those services."

While the court did not address each individual cause of action, it noted that Washington Mutual's arguments as to these causes of action "appear[ed] meritorious." For example, RESPA applies when a lender charges fees for...

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