Myer v. PREFERRED CREDIT, INC.,

• Decision Date: 27 March 2001
• Docket Number: No. 98,98
• Citation: 766 NE 2d 612,117 Ohio Misc.2d 8
• Parties: MYER et al. v. PREFERRED CREDIT, INC. et al.
• Court: Ohio Court of Common Pleas

117 Ohio Misc.2d 8

766 NE 2d 612

MYER et al. v. PREFERRED CREDIT, INC. et al.

No. 98-424-CV.

Court of Common Pleas of Ohio, Harrison County.

Decided March 27, 2001.

Gary M. Smith and Robert C. Johns, for plaintiffs. Robert J. Morje, for defendants.

WILLIAM F. CHINNOCK, Judge.

{¶ 1} This case involves claims for breach of fiduciary duty, violation of the Ohio mortgage brokers Act, and breach of contract. For the reasons specified below, judgment is rendered in favor of plaintiffs and against defendants on all claims.

I. The Claims

{¶ 2} Plaintiffs William and Betty Myer ("the Myers") complain of actions taken between July and October 1995 by defendant mortgage broker Preferred Credit, Inc. ("PCI"). At that time, the Myers were in their mid-60s and had lived all their lives in rural southeastern Ohio. For about six years, they had lived on a farm they inherited from Betty's family. William operated the farm while Betty worked full-time as a cook at the local community hospital. The Myers income for 1994 was about $13,500, consisting of $12,000 earned by Betty as a cook, and $1,500 earned by William as a farmer. Medical expenses caused the Myers to fall behind in their monthly bills, including their $639 residential mortgage payment @ 19% and their $184 payment on the farm pick-up truck @ 16%. These monthly payments totaling $823 left them $302 a month to cover all their other necessities. PCI's representative testified that the Myers were in a "world of hurt" financially. William and Betty have little formal education, neither having graduated from high school. Nor had either of them ever been involved in a mortgage transaction with a mortgage broker. The evidence demonstrates that the Myers are simple and honest rural people who are naive in worldly affairs and unsophisticated in matters of finance.

{¶ 3} In 1995, defendants Preferred Credit and/or Ken Kline d.b.a Preferred Credit, operated a mortgage broker firm out of Columbus, Ohio, that was later incorporated in November 1997 as Preferred Credit, Inc., and which continued to operate as a successor-in-interest company. All defendants are referred to jointly as "PCI."

{¶ 4} The Myers complain that PCI made fraudulent promises regarding the rate of interest on their refinancing loan, and failed to make full disclosure regarding essential terms of the refinancing loan. Specifically, the Myers complain that PCI made fraudulent promises to them by a "bait and switch" method of solicitation, initially promising them an 8.75% interest rate, then increasing it in increments to 9.5%—10.5%, then 9.9%, then 11.6%, with a final interest rate of 13.35%. They also complain that PCI's initial letter of solicitation to them was deceptive in that it implied that they had been pre-approved for a refinancing loan at an 8.75% interest rate, when in fact it had no knowledge regarding their creditworthiness, the availability to them of a refinancing loan, or the interest rate for such a loan if available. They further allege that PCI promised to save them money by refinancing, but that over the life of the refinancing loan, payments totaled about $47,000 more than the two loans it replaced. The Myers further complain that PCI failed to disclose to them certain basic terms of the approximately $50,000 refinancing loan from Ford Consumer Financial ("FCF") that it secured for them as their agent, including (a) the rate of interest, (b) its non-amortization ("interest only") nature, and (c) the ten-year balloon payment that is only about $1,500 less than the original amount of the loan.

{¶ 5} PCI responds that its discussions of various interest rates with the Myers throughout the three-month period of refinancing do not constitute "promises," but merely reflected the best rates available based upon the continuing accumulation of information regarding their creditworthiness. It answers that its letter of solicitation is not deceptive because it does not contain a statement of fact regarding pre-approval for a refinancing loan. It replies that the final interest rate it obtained for the Myers was 11.6%; that without its knowledge and for reasons unknown to it, FCF increased the rate to 13.35% immediately before closing; that the Myers consented to the increased interest rate at closing by initialing the change on the note; that it was unaware of this change because it was not present at closing and the Myers never brought the change to its attention. It rebuts that the Myers should not have agreed to the increased interest rate at closing, and that in any event if they had complained to it even after consenting to the increased interest rate at closing, it would have advised them to rescind the agreement within the three-day rescission period, and then it would have forced FCF to honor the 11.6% interest rate, but it could not do so because the Myers never complained to it after closing.

{¶ 6} The Myers also complain that PCI failed to disclose to them that it engaged in a dual agency with them and the lender, and further failed to disclose to them that it received a secret profit or "kickback" of $995 from the lender, Ford Consumer Credit ("FCF"), now known as Associates Financial Services, Inc.

{¶ 7} PCI responds to the "kickback" allegation that it is common practice in the mortgage brokerage industry for a broker to receive several forms of payment from lenders. The first form of payment is called a "yield-spread premium" where the broker has its borrower agree to an interest rate higher than the rate at which the lender is willing to accept, and in return the broker receives a percentage of the difference from the lender, sometimes without the knowledge or consent of the borrower. The second form of payment is called a "servicing premium," which allegedly is received from the lender in return for the broker performing certain services for the lender in connection with the loan, such as providing a "complete loan package."

II. The Trial

{¶ 8} The trial consisted of the testimony of Betty Myers and the representative for PCI with whom the Myers dealt with regarding the refinancing transaction. William Myers was unavailable to testify due to ill health. In the interests of clarity, the court will use approximate rather than actual dollar figures. {¶ 9} The June 1995 letter of solicitation from PCI to the Myers states: "The county courthouse records indicate you may be paying a much higher than market rate of interest on your first or second home mortgage loan. We would like the opportunity to do a free credit analysis and see how much we can save you with an 8.75% interest rate. We have saved people several thousand dollars in the past just by switching debts to lower rates. Please call for a free consultation."

{¶ 10} The July 1995 letter from PCI to the Myers lists their bank debts totaling $42,350, a $3,000 (7%) loan fee, and a $650 appraisal fee, for a total of $46,000. The final gross sum of the refinancing loan was $3,800 higher ($49,800), including about $4,900 in credit life insurance to FCF. It also contrasted their existing $873 monthly payment on their bank debts to a refinanced 9.9% ten-year monthly payment of $604 and a fifteen-year monthly payment of $491.

{¶ 11} The Myers signed the $49,800 refinancing note at closing on October 3, 1995. From the loan proceeds, their mortgage and truck lien were paid, as well as $8,100 in loan costs and expenses, including a $4,900 lump-sum credit life insurance payment to FCF. Loan costs and expenses equaled almost 20% of the sum of the loan. In April 1996, about seven months after closing, the Myers again refinanced with FCF, without the involvement of PCI, paid off the balance of the first FCF loan and added another $6,300 in refinancing costs and expenses, including a loan origination fee of $2,700 and $3,000 for credit life insurance to FCF. In March 1997, about a year after the second refinancing, the Myers refinanced a third time with FCF, without the involvement of PCI, paying off the balance of the second loan and incurring another $8,599 in refinancing costs and expenses, including a loan origination fee of $3,000 and $4,700 for credit life insurance to FCF.

{¶ 12} Thus, through three refinances with FCF over a period of about eighteen months, the Myers increased their mortgage debt by about $18,000— from $41,700 to $59,700—an increase equaling over 43% of their original debt. In addition, the final balloon payment after the third refinancing was $56,600, whereas on the original mortgage there was no balloon payment due at the end of the term. The Myers would have been almost eighty years old when the $39,900 balloon payment of the first refinancing loan would have become due. There is no indication in the record whether FCF returned to or credited the Myers with the unearned portions of the 1995 and 1996 credit life insurance premiums totaling $7,900. Although this court makes no determination regarding the propriety of the FCF loans, since such determination would be irrelevant for the purposes of determining the validity of the complaints made by the Myers against PCI, even a cursory review of these refinancings leads to the inescapable conclusion that the Myers are naive and unsophisticated to an extreme, which determination is relevant to the issues of the case.

{¶ 13} The evidence is undisputed that PCI's representative was acting within the scope of his employment in this transaction. "The general rule is that a principal is liable for frauds of his agent when committed within the scope of employment. It can no longer be disputed that the principal may be held for the fraud of his agent, though wholly ignorant of the fact that fraud was committed, if committed within the scope of his authority."¹

{¶ 14} PCI operates in Ohio and six other states. Its gross annual income from its Columbus office where it employs between 13 and 15 people and annually closes 500 to 700 refinancings was between...