Smith v. First Family Financial Services, Inc.

Decision Date16 July 1993
Docket NumberNo. 1911535,1911535
Citation626 So.2d 1266
PartiesBillie Jo SMITH and Thomas L. White v. FIRST FAMILY FINANCIAL SERVICES, INC., and Thomas H. Buce, Jr.
CourtAlabama Supreme Court

John A. Taber and Earl L. Dansby of Taber, Dansby, Fazekas & Martin, Montgomery, for appellants.

Champ Lyons, Jr., James B. Newman, and Joseph D. Steadman of Helmsing, Lyons, Sims & Leach, P.C., Mobile, for First Family Financial Services of Alabama, Inc.

Mark A. Newell and Susan L. Gunnells of Barker & Janecky, P.C., Mobile, for Thomas Buce.

SHORES, Justice.

The plaintiffs, Billie Jo Smith and Thomas L. White, appeal from summary judgments entered in favor of the defendants, First Family Financial Services, Inc. ("First Family"); EquiSouth Financial Services, Inc. ("EquiSouth"), 1 Thomas Buce, Jr. (an employee of EquiSouth); and Cambridge Title Agency, Inc., 2 in an action charging them with legal fraud and conspiracy to commit legal fraud in a loan transaction.

Alabama Code 1975, § 6-5-102, codifies the common law and recognizes an action for fraud where one with a duty to disclose conceals or withholds a material fact. The Alabama Consumer Credit Act, § 5-19-1 et seq., makes material all finance charges payable directly or indirectly by the borrower as an incident to credit. Section 5-19-4(g) permits a creditor, by contract in a consumer loan transaction secured by an interest in real property, to charge and collect points, in addition to all finance charges, in an amount not to exceed five percent of the original principal balance. The plaintiffs contend that, under the facts in this case, the defendants had a duty to disclose all finance charges imposed in the loan transaction between the plaintiffs and the defendants, and that the defendants breached that duty by concealing the total amount of finance charges incurred by the plaintiffs in the transaction. They also charge that the defendants violated § 5-19-4(g) by charging them more than the amount permitted by that statute, and that the defendants entered into a scheme to conceal from them that they were doing so. They also contend that the defendants' failure to disclose all finance charges violates the Alabama Deceptive Trade Practices Act, § 8-19-1 et seq.

First Family is a residential mortgage lender. Traditionally, residential mortgage lenders made loans to borrowers directly from offices maintained with employees of the lender that originated, processed, and underwrote such loans. In recent years, a number of wholesale mortgage lending programs have evolved whereby mortgage lenders purchase loans from other lenders or from mortgage brokers who have completed all of the origination work. Mortgage lenders regularly purchase wholesale closed loans made by other mortgage lenders.

In addition to buying closed loans at wholesale, mortgage lenders also acquire loans through mortgage brokers. Mortgage brokers originate and process loans that the mortgage lender then purchases from the mortgage broker. The arrangement between the mortgage lender and the mortgage broker varies, but generally the closing of the loan is arranged by the mortgage broker in the name of the mortgage lender.

Another method reflects the arrangement between EquiSouth and First Family in this case. Under this arrangement, the mortgage broker or correspondent lender performs all of the originating functions and closes the loan in the name of the mortgage broker with funds supplied by the mortgage lender. The mortgage broker depends upon "table funding," the simultaneous advance of the loan funds from the mortgage lender to the mortgage broker. Once the loan is closed, the mortgage broker immediately assigns the mortgage to the mortgage lender. The essence of the table funding relationship is that the mortgage broker identifies itself as the creditor on the loan documents even though the mortgage broker is not the source of the funds.

Beginning in September 1988, First Family began a correspondent lending program utilizing mortgage brokers or correspondent lenders to originate its loans in Alabama. Under this arrangement, the brokers or correspondent lenders do all of the origination work on loans and submit the applications to First Family. First Family, the mortgage lender, does not bear the cost of maintaining offices and employees to originate its loans under this arrangement. If approved by First Family, the loans are closed in the name of the mortgage broker with funds supplied by First Family.

The plaintiffs in this case assert that First Family's correspondent lending program, while facially legitimate, was a scheme to avoid the letter and spirit of the 5% cap on mortgage origination fees under § 5-19-4(g). The plaintiffs argue that, under Alabama law, the defendants were required to disclose all material facts; that all finance charges are material facts; that all mortgage origination fees are a material fact; that the failure to disclose those facts amount to fraud under Alabama law under the facts of this case; and that the scheme set up by First Family and EquiSouth violates the Alabama Deceptive Trade Practices Act. The plaintiffs also contend that First Family's correspondent lending program was a combination between First Family and EquiSouth to conceal from borrowers such as the plaintiffs the wrongs alleged, which combination the plaintiffs allege constitutes a civil conspiracy under Alabama law.

EquiSouth was designated a correspondent lender by First Family in August 1989. Sometime thereafter, EquiSouth's employee Thomas Buce and the plaintiff, Billie Jo Smith had discussions regarding a mortgage loan. Smith's house was destroyed by fire on January 4, 1989, and, with proceeds from fire insurance, she had purchased a shell house which was moved onto the lot where her house had previously stood. She needed a loan to enable her to complete the shell house. Buce submitted her loan application to First Family, which initially turned it down. Buce suggested that she get a cosigner on the note. Her brother, the plaintiff Thomas L. White, agreed to cosign the note and loan application. When the loan application was resubmitted to First Family with White's participation, First Family issued a conditional loan commitment. The commitment provided that First Family would lend the money to Smith and White at an interest rate of 16% per annum. Under First Family's arrangement with EquiSouth, EquiSouth was permitted to add an additional 2% as a mortgage broker origination fee. The loan was to be closed with funds furnished by First Family and in the name of EquiSouth, which was to immediately assign the note and mortgage to First Family. This compensation to the mortgage broker of yield spread premiums is a cost of the loan to the borrower, and it was not disclosed to the plaintiffs. An origination fee of 5% of the original principal was disclosed. It is the plaintiff's contention that Alabama law required the disclosure of all finance charges; that the yield spread premium was a part of such charges; and that because it was also an origination fee paid to EquiSouth, EquiSouth collected more than the 5% origination fee permitted by Alabama law.

As agreed, EquiSouth assigned the mortgage to First Family simultaneously with the execution and recording of the mortgage. First Family notified Smith and White to make their payments directly to First Family. Smith and White made very few payments before they defaulted. First Family initiated foreclosure proceedings. Smith and White subsequently filed this action, seeking money damages for alleged fraud, breach of a fiduciary duty, conspiracy, and harassment. 3

The case came on to be tried. Just before the trial began, the trial court entered a summary judgment in favor of EquiSouth's employee, Thomas Buce. Trial commenced on June 8, 1992, and the next day, before the close of the plaintiffs' evidence, the trial court granted First Family's motion for a summary judgment on all remaining claims against First Family. The plaintiffs appealed the summary judgments for the defendants.

The plaintiffs maintain: (1) that the defendants committed legal fraud and conspired to commit legal fraud against them in regard to undisclosed mortgage broker fees and charges incurred by them in the loan transaction; (2) that First Family's correspondent lender program was a scheme to avoid the letter and spirit of the 5% cap on mortgage origination fees under Alabama Code 1975, § 5-19-4(g); (3) that First Family was required to disclose the material facts in that it violates the Alabama Deceptive Trade Practices Act and that, further, First Family was under a duty to disclose because of the particular circumstances of this case; (4) that First Family's correspondent lender program was a combination between First Family and its broker to do the wrongs alleged, which combination constituted a civil conspiracy under Alabama Law; and (5) that the defendants breached their fiduciary duty by seeking a loan for the plaintiffs that contained terms and conditions that would benefit themselves to the detriment of the plaintiffs.

On March 11, 1989, Act No. 88-87 was approved, with an effective date of June 30, 1988. Act No. 88-87 amended § 5-19-4, part of the Alabama Consumer Credit Act ("Mini-Code"), to provide for a five percent limitation on mortgage loan origination fees. The provision is codified at Alabama Code 1975, § 5-19-4(g), as amended. The plaintiffs claim that, a few months after the effective date of § 5-19-4(g), First Family implemented its correspondent lender program with the aim of permitting a mortgage broker participating in the correspondent lender program to receive fees for originating a consumer loan substantially in excess of the five percent limitation. The plaintiffs argue that this was done through means of the yield spread premium, which resulted in the mortgage broker's receiving more than a five per cent...

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