United Companies Lending Corp. v. Sargeant

• Decision Date: 11 September 1998
• Docket Number: No. CIV.A. 96-12538-WGY.,CIV.A. 96-12538-WGY.
• Citation: 20 F.Supp.2d 192
• Parties: UNITED COMPANIES LENDING CORPORATION, Plaintiff, v. Daisy F. SARGEANT, Individually, and on behalf of all persons similarly situated, Defendants.
• Court: U.S. District Court — District of Massachusetts

20 F.Supp.2d 192

UNITED COMPANIES LENDING CORPORATION, Plaintiff, v. Daisy F. SARGEANT, Individually, and on behalf of all persons similarly situated, Defendants.

No. CIV.A. 96-12538-WGY.

United States District Court, D. Massachusetts.

September 11, 1998.

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Steven E. Snow, Partridge, Snow & Hahn, Providence, RI, for United Companies Lending Corp.

Andrew Troop, Gordon M. Jones, III, Hutchins, Wheeler & Dittmar, Boston, MA, for Daisy F. Sargeant.

Jeffrey D. Clements, Office of the Atty. Gen., Pamela Kogut, Asst. Attys. Gen., Consumer Protection and Antitrust Div., Boston, MA, for Com. of Mass.

MEMORANDUM AND ORDER

YOUNG, District Judge.

This case comes before the Court as a case stated. That is, the parties have stipulated to all material facts and it remains for this Court to review the record, draw such inferences as are reasonable and, applying the governing law, enter such judgment as may be appropriate. See Continental Grain Co. v. Puerto Rico Maritime Shipping Auth., 972 F.2d 426, 429 n. 7 (1st Cir.1992) (noting that the submission of a matter to the court as a case stated increases judicial efficiency); Boston Five Cents Savings Bank v. Secretary of Department of Housing and Urban Dev., 768 F.2d 5, 12 (1st Cir.1985) (same). This procedural device is especially appropriate when the Court is faced with cross motions for summary judgment. The advantage of the case stated procedural device, of course, is that the Court need not draw all inferences against each moving party but, with the entire case stated before it, may instead draw such inferences as are reasonable to resolve the case. A joint statement of undisputed facts ("Joint Statement") has been submitted by the parties. The Court draws from it the factual recitation below.

I. BACKGROUND

United Companies Lending Corporation ("United") makes, sells, and services refinancing, first lien residential mortgage loans which are used primarily for debt consolidation, home improvement, or major household purchases. Joint Stmt. Undisputed Facts ¶ 1. United is licensed to do business in Massachusetts as a mortgage lender. Stipulated Ex. 9. United operates in the subprime market making loans to consumers who have a higher credit risk than borrowers in the prime market.

Subprime loans are more costly to the lender to originate, sell, and service than traditional "A credit" loans. Joint Stmt. ¶ 5. In the subprime market, the lenders evaluate the credit-worthiness of a borrower "by establishing various risk classifications with associated pricing parameters." Joint Stmt. ¶ 3. There is no standard set of credit risk assessment criteria as exists in the prime market. The subprime market typically takes into consideration a potential borrower's 1) credit history; 2) the household debt-to-income ratio if the loan is approved; and 3) the combined loan-to-value ratio for home equity loan and other mortgage debt on the property. "Standards vary, however, within the subprime market, and different lenders may assign different weights for each of these factors, for a given credit grade. (One firm's `B' loans may look like another firm's `C' loans.)" Joint Stmt. ¶ 4.

Subprime loans have higher securitization costs associated with the sale of these loans on the private secondary market compared to loans in the prime market because they are "nonconforming" loans. United loans are also sold "with recourse" in the event of a default by the borrower. As a result of these terms, the risk to the lender on a subprime loan is substantially higher than on a prime loan. "Due to the higher risks and costs associated with subprime loans, the total cost of such loans to the borrower — as reflected in the Annual Percentage Rate ("APR") — is generally higher than the cost of loans by traditional lenders such as banks. Such costs typically include interest, origination fees or `points' and other fees associated with the closing of the loan." Joint Stmt. ¶ 9.

Daisy Sargeant ("Sargeant") is the owner of a New England triple-decker in Dorchester, Massachusetts. She resides on the second floor and rents out the first floor and third floor apartments for $600.00 per month each. Desiring to make improvements to the interior and the exterior of the house, she responded to an advertisement in the Boston Herald regarding the availability of loans. She contacted the toll-free number in the advertisement and received a mortgage application. The advertisement was placed by a California-based mortgage broker, John P. McIntyre ("McIntyre"). McIntyre referred Sargeant's name to David Richard ("Richard"), a United mortgage loan originator located at the Warwick, Rhode Island office. Richard contacted Sargeant. Richard is the United agent with whom Sargeant dealt in obtaining the mortgage loan at issue.

On August 9, 1995, Sargeant completed the loan application and executed disclosure documents related to the loan. Joint Stmt. ¶ 21; Stipulated Ex. 1-10. Sargeant was classified as a "C" borrower by United. Joint Stmt. ¶ 33. On August 23, 1995, United approved Sargeant's loan. A title search disclosed an undischarged mortgage on the property, however, as well as unpaid real estate taxes. United states that McIntyre negotiated with the lien holder who agreed to accept $5000 as payment in full. United reapproved the loan, and the closing was held in Warwick, Rhode Island, on September 29, 1995. Closing Documents as Exhibits 14-45.

Sargeant thus obtained a loan from United for $134,700. The mortgage had an adjustable interest rate with an initial rate of interest of 10.99%. The loan provided that the rate could be adjusted upward one percent every six months with a maximum interest rate of 16.99%. The initial annual percentage rate charged on the mortgage was 13.556%. The loan proceeds were disbursed as follows: $15,681 was applied to the home improvements upon their completion; $4,910 was applied to pay off credit card debt; and $93,000 was applied to two prior mortgages on her residence.¹ According to the settlement statement, Sargeant was assessed a brokerage fee payable to United in the sum of $13,461.40. United claims that this entry is incorrect and that the $13,461.40 was paid to United as an origination fee or "points." Sargeant was also charged a broker's fee in the amount of $4,150 made payable to McIntyre. Her total closing costs and fees equaled $23,029.87. Her initial mortgage payments were $1,281. Her previous mortgage payments were $956 per month.

Sargeant fell behind in the repayment of her loan and United initiated foreclosure proceedings against her. Joint Stmt. ¶ 34. Sargeant then filed a consumer complaint with the Consumer Protection and Antitrust Division of the Massachusetts Attorney General's Office. Id.

After the filing of this Complaint, the Attorney General, on behalf of the Commonwealth of Massachusetts, commenced an action against United in the Massachusetts Superior Court sitting in and for the county of Suffolk seeking, inter alia, to enjoin United 1) from making any mortgage loans in violation of Mass. Gen. Laws ch. 184, § 17D and the Mortgage Brokers and Mortgage Lenders Regulations of the Attorney General, 940 C.M.R. § 8.00 et seq., and 2) from making any mortgage loans in violation of Mass. Gen. Laws ch. 183, § 63. A preliminary injunction issued in that case on January 24, 1997, prohibiting United from taking any further action in foreclosing on Sargeant's property and requiring it to notify the Commonwealth thirty days prior to a foreclosure sale on any other residential property. See Commonwealth of Massachusetts v. United Cos. Lending Corp., Civil Action No. 96-7070-F.

At this point, United went forum shopping. Cf. Coady v. Ashcraft & Gerel, 996 F.Supp. 95, 98-99 (D.Mass.1998). It commenced this defendant class action suit against Daisy Sargeant and all persons similarly situated, seeking a declaratory judgment that 940 C.M.R. § 8.06(6) is void and unenforceable, that the mortgage loan origination fee or points charged to Sargeant were lawful and proper, and that a judgment of default against Sargeant on the mortgage note was therefore appropriate. Sargeant counterclaimed, asking for a declaration that the mortgage transaction was an unfair or deceptive act because it was unconscionable pursuant to 940 C.M.R. § 8.06(6), and that rescission of the mortgage loan is therefore permissible.

United has properly invoked the diversity jurisdiction of this Court. Moreover, due to this Court's currently low caseload, I believed I might more speedily address the merits than my equally competent but extremely overworked Superior Court colleague. Accordingly, I first tried to invite the Massachusetts Attorney General to join in this litigation so that a single lawsuit could resolve all matters. He declined, properly citing his preference for the litigation he had commenced in the Massachusetts Superior court and the Eleventh Amendment bar to requiring him to litigate in this forum. I next tried to coordinate this case with its Superior Court counterpart, suggesting a joint hearing to obviate the risk of inconsistent decisions and offering this session's computer-integrated courtroom as a possible site. See letter of May 21, 1997, from Hon. William G. Young to Hon. Thayer Fremont-Smith. The Attorney General would have none of it.

Ultimately, this Court held that the Massachusetts Attorney General was not an indispensable party, that the Burford abstention doctrine did not require this Court to abstain from exercising its jurisdiction over this matter, and that the Court would not decline to exercise jurisdiction under the Declaratory Judgment Act. See Order dated May 8, 1997.

The federal action thus went forward, the parties falling to with a will, promptly filing cross motions for summary judgment and, after a case management conference, a joint statement of facts on which the case can be decided. The Court heard...