The California Court of Appeal, Fourth Appellate District, recently affirmed the dismissal of a borrower’s allegations that he was defrauded into purchasing the house by statements concerning the property’s future value by the mortgage loan broker, an inflated appraisal, and an alleged scheme by various lenders to inflate real property asset prices. The Court held that statements of future value or a high appraisal cannot form the basis of a cause of action for fraud or unfair competition.
The borrower also alleged that the National Mortgage Settlement entitled him to declaratory relief and a refinance loan. However, the Court held that the borrower, as an individual, did not have standing to enforce the National Mortgage Settlement, and declined to compel a loan refinancing under the National Mortgage Settlement.
A copy of the opinion is available at: http://www.courts.ca.gov/opinions/documents/D063779.PDF
A borrower fell behind in his payments due under two mortgage loans, and foreclosure proceedings ensued. In response, the borrower filed suit alleging (1) fraud, negative fraud, and deceit; (2) a supposed right to declaratory relief for an order terminating foreclosure proceedings and cancellation of the notes, and (3) supposed violation of California’s Unfair Competition Law (“UCL”), California Business and Professions Code section 17200.
The borrower claimed that the defendants misrepresented the "true value of the home" by misrepresenting its future value and preparing an inflated appraisal. The borrower also claimed that the defendants were required by the National Mortgage Settlement to "refinance the property with a fully amortized 30-year, or more, fixed interest rate loan in an amount [that] reflects the current, fair, and true market value of the real property ..."
As you may recall, California’s Unfair Competition Law (“UCL”)defines “‘unfair competition’ as ‘any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising.’" California appellate courts are currently split as to what constitutes “unfair business practices.” The Fourth District applies a more rigorous test for unfairness in consumer UCL actions. Under the Fourth District’s test, where a claim of an unfair act or practice is predicated on public policy, “the public policy which is a predicate to the action must be ‘tethered’ to specific constitutional, statutory or regulatory provisions.” Wilson v. Hynek (2012) 207 Cal.App.4th 999, 1008, quoting Durell v. Sharp Healthcare (2010) 183 Cal.App.4th 1350, 1366.
Here, the Court of Appeal held that an actionable misrepresentation must be made about past or existing facts; statements regarding future events are merely deemed opinions. The Court also relied upon Nymark v. Heart Fed. Savings & Loan Assn., 231 Cal.App.3d 1089, 1099 (1991), for the proposition that “the borrower should be expected to know that the appraisal is intended for the lender's benefit to assist it in determining whether to make the loan, and not for the purpose of ensuring that the borrower has made a good bargain, i.e., not to insure the success of the investment."
Thus, the Court held that the alleged supposedly comments made by the defendants concerning the future value of the borrower’s property and the allegedly inflated appraisal ordered by the defendants as part of the loan origination process could not form the basis for a cause of action for fraud.
The Court of Appeal rejected the borrower’s attempt to apply a more expansive test of unfair business practices which would have required the trial court to "weigh the utility of the defendant's conduct against the gravity of the harm to the alleged victim." The Court affirmed the dismissal because neither opinions about the possible future value of the home, nor statements about the appraisal, constituted conduct "tethered to a violation of a constitutional, statutory or regulatory provision."
The Appellate Court also affirmed the trial court’s ruling that the borrower, as an individual, did not have standing to enforce the National Mortgage Settlement. The Court held that individual borrowers are merely incidental beneficiaries of the National Mortgage Settlement and have no right to bring third-party suits to enforce the Consent Judgment.
Eric Tsai
McGinnis Wutscher Beiramee LLP
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