Velazquez v. Gmac Mortg. Corp.

Decision Date22 December 2008
Docket NumberCase No. CV 08-05444 DDP (PLAx).
Citation605 F.Supp.2d 1049
CourtU.S. District Court — Central District of California
PartiesMaria and Guadalupe VELAZQUEZ, individually and on behalf of themselves and all others similarly situated, Plaintiff, v. GMAC MORTGAGE CORPORATION, GMAC Mortgage, LLC, Defendants.

DEAN D. PREGERSON, District Judge.

This matter comes before the Court on Defendants' Motion to Dismiss. Plaintiffs, who entered into an Option Adjustable Rate Mortgage loan agreement, bring this suit against GMAC Mortgage Corporation and GMAC Mortgage, LLC for violations of law related to disclosures about the loan. Specifically, the Complaint seeks to allege violations of the Truth in Lending Act, 15 U.S.C. § 1601 et seq., and California's Unfair Business Practices Act, as well as fraudulent omission, breach of contract, and tortious breach of the implied covenant of good faith and fair dealing. Defendants move to dismiss the Complaint in its entirety.

After reviewing the materials submitted by the parties and hearing oral argument, the Court grants in part and denies in part the Motion to Dismiss.

A. The Parties and the Allegations

On January 4, 2007, Plaintiffs Maria and Guadalupe Velazquez ("Plaintiffs") refinanced their existing home loan and entered into an Option ARM loan agreement with Aegis Wholesale Corporation. Compl. ¶ 3. Aegis filed a Chapter 11 bankruptcy petition on August 13, 2007, and therefore any litigation against it has been stayed. Id. & n. 1. Defendant GMAC Mortgage Corporation purchased the Option ARM loans from Aegis Wholesale Corporation. Id. ¶ 4. Defendant GMAC Mortgage, LLC serviced the Option ARM loans. Id. ¶ 5.

Plaintiffs' Option ARM loan ("the loan") has a variable rate feature with payment caps. Id. ¶ 18. Plaintiffs allege that they were promised a low fixed payment resulting from a low interest rate, but were in fact charged a much greater interest rate than promised. Id. Plaintiffs allege that they were told they were being sold a home loan with a low interest rate of between 1% and 3% and that the rate was fixed for the first three to five years of the loan. Id. ¶ 22. In fact, the loan possessed a low, fixed payment but not a low, fixed interest rate. Id. ¶ 25. Plaintiffs received the low interest rate for only one month; immediately thereafter, Defendants increased the interest rates they charged. Id.

Additionally, Plaintiffs allege that the loan documents provided to Plaintiffs promised that Plaintiffs' monthly payments would be applied to both principal and interest, but they were not. Id. ¶¶ 77, 180. Plaintiffs allege that Defendants failed to disclose that the monthly payment amounts they provided to Plaintiffs were insufficient to cover both principal and interest. Id. ¶ 182. Plaintiffs also allege that Defendants informed them that if they made payments based on the promised low interest rate, there would be no negative amortization. Id. ¶ 23. In fact, however, Plaintiffs experienced negative amortization. Id. ¶ 25.

Plaintiffs recorded a Deed of Trust in Aegis Wholesale's Favor in January 2007. Request for Judicial Notice, Ex. A. A Deed of Trust in favor of Golden Empire Mortgage, Inc. was recorded for the same property in March 2007. Id. Ex. B. Reconveyance of the January 2007 deed to Plaintiffs was recorded in June 2007. Id. Ex. C.

B. The Loan Terms

Plaintiffs' suit challenges the disclosures that were provided with the loan. In particular, Plaintiffs plead and argue that the disclosures related to interest rate, payment schedules, APR, and negative amortization were misleading.

The Adjustable Rate Note provided that, in return for the loan, Plaintiffs promised to pay a principal of $ 407,100. Id. Ex. 1, ¶ 1. The principal amount might increase as provided in the Note, but would never exceed 115% of the principal amount Plaintiffs originally borrowed. Id. With respect to interest rate, the Note provided, in relevant part, as follows:

(A) Interest Rate

Interest will be charged on unpaid Principal until the full amount of Principal has been paid. I will pay interest at a yearly rate of 1.950%. The interest rate I pay may change....

(B) Interest Rate Change Date

The interest rate I will pay may change on the first day of March, 2007, and on that day every month thereafter. Each date on which my interest rate could change is called an `Interest Rate Change Date.' ... The interest rate may change monthly, but the monthly payment is recalculated in accordance with Section 3.

(C) Index

Beginning with the first Interest Rate Change Date, my adjustable interest rate will be based on an Index....

(D) Calculation of Interest Rate Changes

Before each Interest Rate Change Date, the Note Holder will calculate my new interest rate by adding THREE and 2/10 percentage point(s) (3.200%) (`Margin') to the Current Index. The Note Holder will then round the result of this addition to the nearest one-eighth of one percentage point (0.125%). This rounded amount will be my new interest rate until the next Interest Rate Change Date. My interest rate will never be greater than 9.9500 %. Beginning with the first Interest Rate Change Date, my interest rate will never be lower than the Margin.

Id. Ex. 1, ¶ 2.

The Note provided a number of terms with respect to monthly payments. The Note provided that the initial minimum monthly payments until the first Payment Change Date would be in the amount of $1,494.56 unless adjusted under Section 3(F). Id. Ex. 1, ¶ 3(B). The Note disclosed that this monthly payment may change as required by Section 3(D) beginning on March 1, 2012 and on that day every 12th month thereafter. Additionally, the payment would change any time Sections 3(F) or 3(G) required Plaintiffs to pay a different monthly amount. Id. Ex. 1, ¶ 3(C). Paragraph 3(D) explained the calculation of monthly payments. It provided that, unless 3(F) or 3(G) applied, the amount of a new monthly payment effective on a payment change date would not increase by more than 7.5% of the prior monthly payment. This limit was known as the "Payment Cap." Id. Ex. 1, ¶ 3(D). Unless 3(F) or 3(G) required payment of a different amount, the new minimum payment would be the lesser of (1) the amount provided by the "Payment Cap" (also known as the "Limited Payment")1 and (2) the amount sufficient to repay the unpaid Principal that Plaintiffs are expected to owe at the Payment Change Date in full on the maturity date in substantially equal payments, also known as the "Full Payment."2 Id. Paragraph 3(G) provided that Full Payment was required as the Minimum Payment on the sixth Payment Change Date and each succeeding Payment Change Date, until the monthly payment changed again. Id. Ex. 1, ¶ 3(G). Paragraph 3(F) provided, in effect, that once the unpaid Principal reached the Maximum Limit (115% of the originallyborrowed Principal), Plaintiffs were required to pay the Full Payment amount as the Minimum Monthly Payment. Id. Ex. 1, ¶ 3(F). Additionally, after the first Interest Rate Change Date, the lender could provide Plaintiffs with up to three additional payment options greater than the Minimum Payment: an interest-only payment, a fully amortized payment, and a 15-year amortized payment.

The Note also disclosed how the unpaid Principal might increase:

Since my monthly payment amount changes less frequently than the interest rate, and since the monthly payment is subject to the payment limitations discussed in Section 3(D), my Minimum Payment could be less than or greater than the amount of the interest portion of the monthly payment that would be sufficient to repay the unpaid Principal I owe at the monthly payment date in full on the Maturity Date in substantially equal payments. For each month that my monthly payment is less than the interest portion, the Note Holder will subtract the amount of my monthly payment from the amount of the interest portion, and will add the difference to my unpaid Principal[.]

Id. Ex. 1, ¶ 3(E). Additionally, a "Disclosure Statement" in Plaintiffs' Loan Origination File explains:

You will have the choice each month of paying the lesser of the two payments, and if the limited payment is less than the full payment, you can choose to pay more than the limited payment up to and including the full payment for your monthly payment. If you pay an amount less than the full payment that would not be sufficient to cover the interest due, the difference will be added to your loan amount. This means that the balance of your loan could increase. This is known as `negative amortization.'

Aguirre Decl. Ex. 1 at 4.3

The loan's "Truth In Lending Disclosure Statement" ("TILDS") stated that the Annual Percentage Rate, "the cost of your credit as a yearly rate," was 8.253%. Id. Ex. 1 at 7. The Payment Schedule provided for 43 payments at $1,494.56 due beginning March 1, 2007; 316 payments at $3,584.47 due beginning October 1, 2010, and a final payment of $3,584.47 due on February 1, 2037.

C. Procedural Posture

Plaintiffs filed this suit on August 19, 2008, on behalf of themselves and all others similarly situated. Plaintiffs allege that Defendants' actions in connection with the sale and servicing of Plaintiffs loans violated the federal Truth in Lending Act and California Business and Professions Code § 17200...

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